When you are unable to pay your debts
Reproduced with permission from Readers Digest ‘You and Your Rights’
When you are unable to pay your debts
When you cannot pay your debts (because they exceed your assets), you are said to be insolvent.
Although insolvency itself is not a crime, criminal charges can often follow the sequestration of an estate. These may be for not having kept proper records of transactions or for common law crimes such as fraud (for instance, by obtaining credit by claiming that you can pay for goods when you know that you cannot).
If you’re insolvent, you can seek an out-of-court settlement with your creditors, surrender your estate, or in some cases apply to the magistrate’s court for an administration order. In certain circumstances, your estate may be sequestrated as insolvent at either your own initiative or that of a creditor.
Sequestration proceedings are designed to freeze an insolvent estate and to place it in the hands of a trustee, who liquidates it and distributes the proceeds among its various creditors.
If your estate is sequestrated after you have become insolvent, you may, subject to certain conditions, apply for rehabilitation. If your application is successful (if you are rehabilitated), the court will declare that you are no longer an insolvent and that you are free to trade and contract.
Because a private arrangement with creditors – known as a composition or voluntary distribution – is not governed by formalities, fewer expenses are incurred than in formal court proceedings. If you intend seeking an out-of-court settlement, supply your attorney with details of your debts, income and assets and ask him or her to propose (in writing) to your creditors a distribution on the basis of monthly instalments. If all your creditors do not agree to your proposal, it may have to be abandoned in favour of an administration order or sequestration.
Although nothing stops you from writing to your creditors yourself and proposing the distribution, your attorney is more likely to be successful in negotiating with a dissenting creditor.
Quick Tip – information that must accompany your application for an administration order.
Your application for an administration order must be accompanied by a statement containing details of:
- The name and business address of your employer or your reasons for being unemployed, if applicable;
- Your occupation;
- Your gross weekly or monthly income (and that of your spouse);
- All deductions from that income (supported, as far as possible, by documentary proof from your employer and spouse);
- All your assets (with their current market values);
- Any interest you have in any property;
- Any claims in your favour (for example, money owed to you);
- Savings, bank or other accounts;
- Your weekly/monthly expenses (and those of any dependants);
- All your creditors, their addresses, the amounts due to them and whether these are payable in instalments or as a result of a court order;
- Any security held by a creditor;
- Any goods subject to hire purchase – their purchase price, instalments and balance due (and reasons why provision should be made for payment of the remaining instalments);
- Any mortgage bond, the size of instalments, the balance due and, again, why provision should be made for balance of instalments;
- The number and ages of your spouse’s dependants and their relationship to you;
- The instalments you offer to pay towards settlement of your debts.
Your statement (which must be verified by an affidavit) must indicate whether your attorney or any other person has consented to being appointed as your administrator.
An administration order
If your debts do not exceed R50000, you can apply to the magistrate’s court for an administration order. This gives you a degree of breathing space by allowing you to pay off your debts, usually in instalments. Only the debts that are due or overdue for payment on the date of your application are included in the total. If, therefore, you owe money on, say, a mortgage bond or a motorcar, include only the amounts of the instalments that are due. Ensure that a copy of your application is delivered or posted to each creditor. In certain circumstances you may be eligible for a moratorium (a legal postponement of payment of your debts) – for example, if you’re a farmer or if you’re performing obligatory military service. The amount a court may order you to pay will not exceed the difference between your income and reasonable expenditure. Once an order has been issued for the administration of your estate, you may not incur further debts, or raise credit, without explaining to the other party that you are under an order of administration.
While an administration order is in force, no creditor has any legal remedyI against you or your property for collecting money owing, subject to some exceptions (for instance, a mortgage bond), without the permission of the court.
Your creditors are entitled to attend a hearing of an application for an order of administration and may question you on matters such as your assets, standard of living and the possibility of cutting down on expenses. The order may specify that certain assets should be sold. Failure to comply with the terms of the order may result in prosecution.
Even if an order of administration has been granted, a creditor may apply at any time for sequestration of your estate. In practice, however, this is unlikely to happen if you do not default on agreed payments. It is advisable to ensure – by stop order, for example – that the amount to be distributed is paid directly to your administrator. If you have any difficulty maintaining the agreed rate of payment, consult your administrator.
The law recognises three classes of creditors of an insolvent estate:
- Secured creditors are those who have the right to control particular assets in the estate as security for their debts and include the holders of mortgage bonds as well as sellers of goods under the credit agreements Act (hire purchase). They have a first claim to full settlement out of the proceeds of the relevant assets;
- Preferent creditors are defined by the Insolvency Act and have the right to settlement before so-called concurrent creditors. This category includes auditors and accountants, employees and state departments such as the Department of Finance and the Receiver of Revenue;
- Concurrent creditors are any others who are able to prove claims against the estate. When the assets of the estate have been realised, and the secured and preferent creditors have been paid, the remainder is divided among the concurrent creditors in proportion to their claims.
Warning – Protecting a spouse’s property
In the case of a couple married in community of property (see marriage and property), the joint estate can be sequestrated for insolvency.
If, however, the marriage was out of community of property, the spouse of the insolvent should produce as much evidence as possible – for example, the antenuptial contract itself, receipts, paid cheques and affidavits – to show which property does not form part of the insolvent person’s estate.
The property of the solvent spouse also vests in the trustee until the spouse obtains its release on providing the required proof.
What is a sequestration order?
A sequestration order places an insolvent person’s estate in the hands of a trustee, who must sell the assets and distribute the cash among the creditors.
The creditors or the debtor may apply for the order. An existing administration order cannot prevent sequestration from taking place.
If a compulsory sequestration order (in which a creditor has applied to the court) is made against you, you will be given an opportunity to show cause why your estate should not be sequestrated.
A sequestration order is not granted automatically. For instance, it is unlikely to be granted if an administration order is in force and working satisfactorily.
Any creditor who is owed R100 or more may apply for an order of sequestration. The application must show, however, that sequestration will be to the advantage of the creditors as a whole and that either you have committed an act of insolvency or are, in fact, insolvent.
Although you can voluntarily surrender your estate by applying for a sequestration order against yourself, you cannot do so simply to avoid payment of debt. For voluntary sequestration to succeed you must show that:
- Your estate is insolvent;
- You own sufficient realisable property to meet all the costs of sequestration; and
- Sequestration will be to the advantage of your creditors as a whole.
A court will not grant an order of sequestration at your own instigation or that of a creditor if you have so few assets that your sequestration would lead to your creditors receiving a negligible dividend.
Before seeking voluntary sequestration, you should first consult your attorney, providing him or her with all relevant information regarding your income, liabilities and assets. If the attorney agrees that you should surrender your estate, you may have to pay a deposit to meet initial legal expenses. Furthermore, you must publish a notice of intention of going into voluntary sequestration, in the government gazette not more than 30 days and not less than 14 days before your application is to be heard in court. The notice must also be published in a newspaper circulating in the area in which you live or, if you are a trader, the area in which your principal place of business is located. You must send a copy of the notice within seven days of its appearance in the Government Gazette to each of your creditors.
Before the notice is published, you must comply with the formalities required by law – for example, prepare a full statement of income, liabilities and assets in a standard form, which must be verified by affidavit (similar to the one required for an order of administration). The form must be made available for inspection by your creditors at the office of the Master of the Supreme Court and the magistrate’s court for the area in which you live or carry on business. All your possessions, including bonded property, must be declared and given an estimated value.
Warning – Acts of insolvency
Acts of insolvency that would entitle a creditor to apply for sequestration include:
- A debtor leaving South Africa or moving to another address with ‘intent by so doing to evade or delay the payment of debts’;
- Failure of a debtor to satisfy a court judgment;
- Written notice by a debtor informing a creditor of the inability to pay a debt;
- The disposal or removal of property by a debtor that has the effect of prejudicing creditors or preferring one above the other; and
- If a debtor makes or offers to make an arrangement with one of the creditors in order to be released wholly or partly from debts.
Assets that may not be realised
When the sequestration order is issued, the sheriff will ‘attach’ and make an inventory of your moveable property. Thereafter the property will either be taken and stored in a sealed room or someone else will be appointed to take custody of it.
Once sequestration is granted, a trustee will be appointed to attend to the collection, realisation and distribution of your assets. Certain property may not be included in an insolvent estate. This includes:
- Pension money;
- Compensation payable for loss or damage suffered by reason of defamation or personal injury;
- Clothes, bedding, household furniture, tools and any other essential means of subsistence; and
- Certain insurance policies in terms of the Insurance Act and certain benefits that are protected by Acts, such as the Compensation for Occupational Injuries and Diseases Act and the Unemployment Insurance Act.
You are obliged to inform your trustee of any change in your address. You are also obliged to assist the trustee in certain respects.
Your period of sequestration ends when all your debts are discharged (in other words, when you are rehabilitated). If the conditions of a rehabilitation order have been met, no pre-sequestration debt other than one arising from fraud may be presented for payment. The period that must elapse before you can apply for rehabilitation depends on the severity of the insolvency and other factors.
You must apply for a rehabilitation order to the same court that granted the sequestration order.
Because creditors are entitled to oppose an application for rehabilitation, you will be required to lodge a security of R500 with the court’s registrar towards the payment of possible legal costs.
If you do not apply for rehabilitation within 10 years from the date on which your estate was sequestrated, you will be deemed to be rehabilitated, unless, of course, a court orders to the contrary before the expiry of the 10-year period. A court may do this on application by an interested person.