MONDAY BULLETIN DEBT CRISIS SOLUTIONS – 3 PART SERIES PART 1 - SEQUESTRATION Last week I said I would write about Sequestration, Debt review and Administration Orders. When I started putting fingers to keyboard I realised that this was a bit of a tall order for one FB bulletin so I decided to do a three part series, starting with sequestration. I spend a good deal of my time helping consumers out of crisis situations. Many of them enquire about insolvency as an option and I have found that there are many misconceptions out there. In the ordinary sense, a person is insolvent when their liabilities exceed their assets. In the legal sense, a person would, in addition to being factually insolvent, need to be sequestrated in order to become insolvent. A sequestration application needs to be made to court. This can be brought either voluntarily by the person themselves, or by a creditor. The different applications are referred to as voluntary or compulsory sequestration. A third type, friendly sequestration, takes place when a creditor agrees to make application. Courts are wary of this last type as there is a probability of collusion between the person wanting to be sequestrated and the creditor making the application, which can be to the detriment of the other creditors. The first hurdle to cross when considering sequestration is that the applicant will need to show firstly, that there will be enough residue (money left over after paying secured claims) to at least cover the costs of sequestration (generally about R50 000). After this the applicant will need to show (by producing evidence) that there will be an advantage to the general body of creditors. This means that concurrent creditors will receive a dividend (after the sequestration costs have been paid) of a minimum number of cents in the rand. The number of cents in the rand that a court will consider reasonable would depend on the circumstances of each application but, generally speaking, case law has indicated that the figure would need to be upwards of 3c in the rand. In the case of compulsory sequestration, the applicant creditor will only need to show that there is reason to believe that advantage to creditors exists. Note however that compulsory sequestration can only be applied for where the creditor’s claim is liquidated (based on a liquid document and not e.g. something like damages) There are three types of creditors: 1. Secured creditors – where a loan is secured by an asset e.g. a mortgage bond or motor vehicle loan. 2. Preferent creditors e.g. costs of sequestration, SARS, claims for wages/salaries etc. and 3. Concurrent creditors are those creditors that are left over who are identified by the fact that their claims are unsecured and do not inherently enjoy any preference. Slightly different procedures need to be followed for the different types of sequestration applications and an attorney would definitely need to be appointed to attend to this. Generally, the court first grants a provisional order of sequestration which is made final at a later date, after all the creditors have been given an opportunity to oppose the application should they wish to do so. All assets in the insolvent vest in the Trustee of the Insolvent Estate as soon as the provisional order of sequestration is granted. However the actual, winding up process usually only begins when the final order is granted. During the winding up process, the secured assets are sold and the secured creditors paid the value of their claims. If there is any money left after the secured creditors have been paid the value of their claims, it is used to pay preferent claims (including the costs of sequestration). The residue left over after this process will be paid to concurrent creditors and usually works out to X number of cents in the rand. If there is no residue over after secured creditors are paid, the preferent creditors will receive nothing and the concurrent creditors will be called upon to make a contribution towards the cost of sequestration. The same applies where there is very little residue, in which case the preferent creditors will receive a dividend and the concurrent creditors will then have to pay whatever is due in terms of costs. There is usually a claim filing procedure and a number of meetings of creditors during the winding up process where creditors often decide not to file a claim because there appears to be a danger that they may have to pay a contribution towards the sequestration costs. Once a person is legally insolvent, his or her contractual capacity becomes restricted and the Trustee has to give consent to every contract that involves an asset in the insolvent estate. In addition to this, there are certain offices that an insolvent person cannot hold, e.g. director of a company or managing member of a close corporation. He or she may also not carry on business as a trader (although he or she may pursue his or her usual occupation or profession) and cannot hold a liquor licence (which will then be vested in the Trustee). Everything the insolvent person owns becomes part of the insolvent estate (with the exception of personal items, basic household furniture and tools of trade). The insolvent estate remains vested in the Trustee until such time as the insolvent becomes rehabilitated. One needs to apply to court for Rehabilitation. A specific procedure needs to be followed and the court has a discretion to grant an Order for Rehabilitation in certain circumstances e.g. where an insolvent has managed to get creditors to agree to a settlement of at least 50c in the rand and has paid all these creditors the agreed amount. If no such rehabilitation is applied for, an insolvent person is automatically rehabilitated after a period of 10 years of the date of the provisional order. He or she may then start over with a clean slate and debt free. There are variations to the above but what I have described are the basics. If you are factually insolvent and under serious financial stress but have enough asset value to cover your secured and preferent claims (including costs of sequestration) and a little left over to pay your concurrent creditors, sequestration may be the best option as you will be able to start afresh after 10 years. Next week’s bulletin – Part 2 – Debt review and re-arrangement
Posted on: Mon, 02 Sep 2013 15:14:01 +0000