You are a practising attorney and insolvency expert. Mr Broke approaches you for

Question

advice.
During your consultation with Mr Broke the following comes to light:
• Mr Broke is married out of community of property to Mrs Broke (née
Havalotamoney)
• Mr Broke has the following liabilities: (i) a home loan from RobBanks Bank valued
at R500 000 and secured by a mortgage bond; (ii) several smaller unsecured
loan from We Loan Everyone Money Bank to the value of R450 000.00, (iii) a
loan from a loan shark, Mr Shark, valued at R40 000.00; and (iv) a small loan
from a Family Member Littlemoney to the value of R10 000.00.
• Mr Broke’s assets comprise of the following: (i) a house valued at R450000; (ii)
a car valued at R50 000; and (iii) smaller loose assets valued at R25 000.
• Mr Broke has a business in his personal name the business has no assets, 1
employee whom is owed a salary of R20 000
• Mrs Broke is completely solvent, having an estate worth R300 000 consisting of
a bank account containing inheritance money she got in terms of a will that states
this amount is to be excluded from insolvency and various smaller assets with a
total value of R50 000.00. Mrs Broke has no liabilities at all.
Your instruction is that Mr Broke does not want to go under debt review and has heard
that sequestration may be an option for him to explore to escape the crushing debt he
finds himself in. Advise the Broke’s on the following matters:
Question 3.1: (15 marks)
Advise Mr Broke about the sequestration options are available to him.
Your advice should include what is required for him to be considered insolvent and the
different types of sequestration processes that exist. Your advice should include
details on every kind of process and its nuisances.
Mr Broke heard his family member may also launch the application. You are further to
advise on any criticism or caution to it and the commentary by our courts.
Mr Broke further mentions he has received letters from his creditors already
threatening sequestrtaion proceedings
Your advice should include who would launch the applications and a detailed
discussion related to the requirements of each type of sequestration. Also include
references to authority, including but not limited to the Insolvency Act and court cases
with the full citations.

Answer 1

Advice to Mr. Broke on Sequestration Options

1. Understanding Insolvency:

Before considering sequestration, Mr. Broke must understand what constitutes insolvency under South African law. According to the Insolvency Act 24 of 1936, a person is deemed insolvent if their liabilities exceed their assets, meaning they cannot pay debts as they become due.

Mr. Broke’s situation illustrates insolvency as follows:

• Total Assets: R450,000 (house) + R50,000 (car) + R25,000 (loose assets) = R525,000
• Total Liabilities: R500,000 (home loan) + R450,000 (unsecured loans) + R40,000 (loan shark) + R10,000 (family loan) = R1,000,000

Mr. Broke’s liabilities far exceed his assets, identifying him as an insolvent individual.

2. Sequestration Types:

There are two primary types of sequestration proceedings:

• Voluntary Sequestration: Initiated by the debtor.
• Involuntary Sequestration: Initiated by creditors.

Voluntary Sequestration:

• Mr. Broke can submit a voluntary sequestration application if he believes that his estate is in distress and he cannot pay debts.
• The application must include:
  • An affidavit confirming his state of insolvency.
  • A detailed statement of assets and liabilities.
  • The required sequestration notices to creditors.

Involuntary Sequestration:

• Creditors may seek to initiate sequestration by applying to the court. Mr. Broke’s creditors have already threatened legal action, which could lead to involuntary sequestration.

3. Application Process:

• For Voluntary Sequestration:

  • Mr. Broke must appear in court and prove that he is indeed insolvent.
  • The court will appoint a trustee to administer the estate.

• For Involuntary Sequestration:

  • One or more creditors, collectively owed R100 or more (as per section 9 of the Insolvency Act), may launch the application.
  • They must establish Mr. Broke’s inability to satisfy their claims.

4. Family Member Initiating Application:

• A family member, such as Littlemoney, could indeed initiate this process, provided that they are a creditor of Mr. Broke.
• However, there can be reluctance in the courts to allow family members to commence sequestration proceedings against relatives unless they can demonstrate a genuine intention to recover debts, not merely punitive measures.
• Legal precedent indicates that courts favor the use of sequestration proceedings for legitimate reasons, emphasizing the necessity for creditors to act in good faith (see Creswell v Tothill, 1937 AD 318).

5. Criticism/Caution:

• If Mr. Broke approaches sequestration, he must be aware that it may affect his credit rating and financial standing for the foreseeable future.
• The process can also entail associated costs, including fees for the trustee and the legal applications.
• A cautious approach would involve exploring all avenues to manage debts before proceeding with sequestration, as it is a form of last resort.

6. Conclusion:

• Mr. Broke is in a position to apply for voluntary sequestration based on his insolvency.
• Involuntary proceedings could commence by his creditors, especially given the threats received.
• It’s prudent for Mr. Broke to consult a legal practitioner to assist in drafting the necessary application and to explore whether alternative arrangements may provide a more beneficial outcome than sequestration.

7. Relevant Legislation and Case Law:

• Insolvency Act 24 of 1936, sections 9, 21, and 31.
• Creswell v Tothill, 1937 AD 318, addressing issues surrounding the initiation of sequestration by creditors, including family members.
• Taitz v Rapa, 1942 AD 45, on the judicial discretion exercised in sequestration matters.

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This comprehensive overview provides Mr. Broke with insights into his options regarding sequestration, ensuring he is well-equipped to make informed decisions moving forward.