LIHLE SILWANE

21913178

LIS500
Question 1

1.1

According to Prinsloo (2024)1A person is considered insolvent when their liabilities

exceed their assets, and in this situation, they may apply for the voluntary surrender
of their estate. Anyone who is insolvent can apply for voluntary surrender at any time,
even if they are or have been under debt counselling.

To initiate the sequestration process, the individual must submit an affidavit explaining
why they believe they are insolvent which includes evidence of the debtor’s insolvency
and non-payment. This affidavit is prepared by attorneys handling the application.
Once the affidavit is signed, the necessary documents are filed with the court, and a
court date is set. The applicant (debtor) does not need to appear in court, as an
advocate will represent them (Prinsloo,2024).

On the initial court date, if the court grants the order, it will be a provisional
sequestration order, and the case will be postponed for about a month. During this
period, creditors will be notified, and if there are no objections by the return date, the
order will be made final, resulting in the person being officially sequestrated
(Prinsloo,2024).

When it comes to involuntary sequestration the creditor filing the application must have
a valid claim against the debtor—in other words, the debtor must genuinely owe the
creditor money. The creditor can prove this claim by providing documentation, such
as an invoice for services rendered or a copy of a contract. If the creditor cannot
substantiate their claim, they cannot proceed with the sequestration application
against the debtor (Prinsloo, 2024).

Prinsloo (2024) states that a second requirement is that sequestration must provide
a benefit to the creditors—in other words, it must be in the best interest of all
creditors for the debtor to be sequestrated. If no such benefit exists, the court will not
issue a sequestration order. For instance, if the debtor owns a house, the benefit lies
in selling the property and distributing the proceeds among the creditors. If there is

1Prinsloo, N. 2024. Voluntary surrender vs compulsory sequestration.

https://www.findanattorney.co.za/content_insolvency-voluntary-surrender
no house, there must be some form of cash or assets to divide. If neither exists, the
debtor cannot be sequestrated, and the court will deny the order.

Thirdly, the debtor must have committed an act of insolvency. There are various ways
a debtor can do this, but the most common example is when a debtor sends a letter
to a creditor stating that they are unable to pay the debt. This act constitutes insolvency
and gives the creditor grounds to file for a sequestration application (Prinsloo, 2024).

1.2 According to Prinsloo (2024)2 an individual may submit an application to have

themselves placed under sequestration; a process referred to as voluntary surrender.
In this case of Thabo and Sibongile either spouse can submit the application for
voluntary surrender but if its compulsory surrender then a creditor must submit the
application to the court.

1.3 According to Griebenow (2023)3 Voluntary surrender takes place when a person
willingly declares that their liabilities exceed their assets and applies to place
themselves under a sequestration order. This application can be made at any point in
time. Compulsory sequestration, in contrast, occurs when a creditor files an application
with the court to have an individual declared insolvent. The application is based on the
creditor’s belief that the individual is unable to meet their debt obligations as they fall
due, has committed an act of insolvency as outlined in the Insolvency Act No. 24 of
1936, and that, in most cases, the individual's liabilities surpass their assets.

Voluntary sequestration is therefore simpler in that the individual is initiating and

cooperating with the process and no need for the other party to start court proceedings
which can be complex and time consuming.

1.4

The voluntary surrender can allow the person who is in debt to avoid a thorough
inspection of their financial records whereas in compulsory sequestration he/she will
not be afforded that opportunity.

2Prinsloo, N. 2024. Voluntary surrender vs compulsory sequestration.

https://www.findanattorney.co.za/content_insolvency-voluntary-surrender
3Griebenow, Z. 2023. Voluntary Surrender vs. Compulsory Sequestration: Understanding the Difference.
https://cklaw.co.za/voluntary-surrender-vs-compulsory-sequestration-understanding-the-difference
Question 2

Encumbered Asset An encumbered asset is property that has been used as security
for a specific debt, meaning it is subject to a creditor's claim, typically through a
mortgage, lien, or pledge. Free residue refers to the remaining assets of the insolvent
estate that are not subject to any specific creditor’s claim or security (Sharrock, 2007)4.

(1) R80 000 – FMB instituted a claim for a debt secured under a first mortgage
bond over the immovable property of Thembani. This will be encumbered asset.
(2) R5 000 - Advertising costs made by the trustee as legally prescribed. This is
free residue.
(3) R3 000 - Trustees remuneration. This is free residue.
(4) R7 000 - master’s fees, this is dealt with as free residue.
(5) R10 000 – Sequestration costs. This is dealt with as free residue.

Question 3

According to Ikpesu, Vincent and Dakare (2019)5 firm is considered financially

distressed when it experiences consistent losses, breaches loan agreements, and
struggles to meet its organizational commitments. The financial distress arises when
a company's operating cash flows are insufficient to cover its current obligations, often
leading to measures such as mergers and acquisitions, raising additional capital,
restructuring, or renegotiating loan terms. Financial distress can be categorised into
four stages: performance decline, failure, insolvency, and default. While insolvency
and default are primarily linked to liquidity issues, performance decline and failure
impact a firm's profitability.

4Sharrock, R. 2007. Business Transactions Law. South Africa: Juta.

5Ikpesu, F., Vincent, O. & Dakare, O. 2019. Financial Distress Overview, Determinants, and Sustainable
Remedial Measures: Financial Distress.
https://www.researchgate.net/publication/335631981_Financial_Distress_Overview_Determinants_and_Sustaina
ble_Remedial_Measures_Financial_Distress
The Hole-In-One Ltd case:

As of 30 June 2023, the company’s had assets of 10 million and liabilities of 8 million.
On 31 August 2023, due to the closure of the two Sandton Golf Courses, the
company’s assets are expected to decrease to R4 million while its liabilities will remain
at R8 million. This will result in the company having liabilities that exceed its assets,
putting it in a state of factual insolvency (where liabilities exceed assets).Additionally,
if the company continues operations, it is unlikely to be able to pay its debts as they
become due, especially if there is no change in income or restructuring of liabilities.

Question 4

According to Brits and Boraine (2022)6A lease agreement is not automatically

terminated by the sequestration of the tenant (lessee). However, the trustee has the
right to terminate the lease by providing written notice to the landlord (lessor). If the
trustee fails to notify the landlord within three months of their appointment, the lease
will continue under its existing terms.

The "landlord's legal hypothec," also referred to as the "lessor's tacit hypothec," is one
of the four security rights outlined in the definition of "security" in section 2 of the
Insolvency Act. This hypothec originated in Roman law and was incorporated into
Roman-Dutch law, making it part of South African common law. Under common law,
the landlord’s hypothec provides real security for a landlord if the tenant fails to fulfill
their rent payment obligations under the lease agreement. This security right extends
to the movable property on the leased premises. The hypothec automatically arises
by operation of law when rent becomes overdue and remains in effect for as long as
the rent is unpaid. However, the security is only "perfected" and becomes enforceable
against third parties once the landlord has attached the property or obtained an
interdict against its removal (Brits & Boraine, 2022).

Landlord's Hypothec: The landlord has a common law hypothec over the
movables of the tenant found on the property for the rent arrears. This means the

6Brits, R. & Boraine A. 2022. the nature and extent of the landlord’s tacit hypothec in insolvency law as
differentiated from the position under common law, Journal for
Juridical Science 2022:47(1):27-51
landlord has a secured claim to the extent of the value of the movables on the
property (Brits & Boraine, 2022).

Secured Portion of the Claim: If the inspection reveals that the movables on the
property are sufficient to cover the full arrear rent of R40,000, then this amount will be
the secured portion of the landlord's claim (Brits & Boraine, 2022).

In this case, the rent that is owed by My tenant is R40 000 and the movables that can
be used to cover are equal to R40 000 and because of this, the entire R40 000 is
secured because the property in the premises is sufficient to cover the rent owed.

Question 5

1. Candidate 1: Qualified attorney with impeccable track record but is the

nephew of the insolvent

The risk with this candidate is that he is the nephew of the insolvent and that
the issue of conflict of interest or nepotism can be challenged. This is relative
disqualification due to conflict-of-interest issue.

2. Candidate 2: Qualified attorney residing in France with experience in

trusteeship.

The issue here is the fact that the candidate is based in another country and
practising law in France not in South Africa. He might have difficulty applying or
understanding South African legal procedures. This is relative disqualification
due to the practicality of managing the trustee and use of foreign law.

3. Candidate 3: Qualified attorney previously convicted of embezzlement.

The issue here is misconduct that was committed by the candidate which
questions his moral compass. Integrity is vital for this role. This is absolute
disqualification to lack of trust.
4. Candidate 4: Legal prodigy admitted as an attorney at age 15

The issue with this candidate is experience that he possesses. The position
might require a candidate with certain years of experience as a requirement.
This is relative disqualification due to him being inexperienced.

5. Candidate 5: Experienced auditor who advised the insolvent debtor until

recently.

Here we have another conflict of interest between the candidate and the
insolvent debtor. This is relative disqualification due to the prior involvement
between the parties.

6. Candidate 6: Qualified attorney experienced in insolvency law but currently

being sequestrated.

The risk with this candidate is that he is insolvent and will not be financial
stable as required for the trusteeship. This is absolute disqualification due to
the insolvency affecting credibility.

7. Candidate 7: Agent of a majority creditor

Conflict of interest again, the fact that the candidate is associated with a major
creditor is an issue. Relative disqualification due to conflict of interest.

8. Candidate 8: Recently qualified attorney, first appointment as trustee

No experience in dealing with trusteeship. This is also relative disqualification

due to inexperience.

9. Candidate 9: Qualified attorney removed from trusteeship due to misconduct.

The issue with this candidate is the history of misconduct this portrays the
candidate as ill-disciplined and not professional. Absolute disqualification due
to the misconduct committed by the candidate.

10. Candidate 10: Company with over 100 years of legal experience
 Risk is if the company is not recognised as an entity that can be a trustee, if
the rules state that a company cannot be a trustee then it will face automatic
disqualification. Not disqualified if it is allowed to be a trustee.

I personally feel that if candidate 10 is permitted to be a trustee, then they

would be more suitable, and one would be more comfortable with an entity
with 100 years of legal experience.

Candidate 2 might also be suitable based on experience, assuming practical

issues related to residency can be managed. If local law permits and the
logistical issues can be handled, the experience in managing insolvent
estates is crucial.

Question 6

Order of Payment to Creditors:

1. Sequestration Costs (Statutory Preferent)

o R400
2. ASBA Bank (Secured)
o R400,000
3. SARS (Statutory Preferent)
o R10,000
4. Deathbed Expenses of Minor Child (Statutory Preferent)
o R200
5. Quality Fitness Gym (Concurrent)
o R500

Question 7

In general terms, business rescue is a legal procedure designed to assist in the

recovery of a company facing financial difficulties. According to Section 128 of the
Companies Act, No. 71 of 2008 (the "Companies Act"), a company is considered
"financially distressed" if it (i) seems reasonably unlikely to meet its debt obligations
as they fall due in the next six months, or (ii) is likely to become insolvent within that
same period.
According to Mello (2023)7 The recovery of a financially distressed company involves
three key steps. First, the company, along with its business, property, and
management, is placed under the temporary oversight of a business rescue
practitioner (BRP). Second, a temporary moratorium is imposed on the rights of
claimants, such as creditors. Finally, the rehabilitation is carried out through the
creation and execution of a business rescue plan. If approved, this plan aims to
restructure the company's business operations, assets, debts, other liabilities, and/or
equity. The legal framework governing business rescue and these steps is outlined in
Chapter 6 of the Companies Act.

Requirements for Voluntary Commencement of Business Rescue Proceedings

According to Mello(2023) business rescue can be done by way of a voluntary board

resolution, with a majority vote. This can be done if the board has reasonable grounds
to believe that the company is financially distressed and there appears to be a
reasonable prospect of rescuing the company. The company must therefore be able
to achieve the goals of a business rescue. This is dealt with in section 129(1)(a) and
(b). Once the board has resolved to place a company under business rescue it is their
duty to implement it. The board resolution must also be filed with the Companies and
Intellectual Property Commission to be of effect. If there are reasonable grounds to
believe that a company is financially distressed and the board does not take a
resolution to commence with business rescue proceedings, the board has to deliver a
written notice to all affected parties with the relevant reasons for not adopting a
resolution (see s129(7)).

An affected person may also apply to court to set aside a resolution to commence with
business rescue proceedings if there is, for example, no reasonable basis for believing
that the company is financially distressed (see s130(1)(a)(i)–(iii)) (Mello,2023).

7Mello, L. 2023. A beginner’s guide to business rescue in South Africa.

https://www.fasken.com/en/knowledge/2022/04/26-a-beginners-guide-to-business-rescue-in-south-africa
Case Law Discussion

Newcity Group (Pty) Ltd v Pellow NO and Others [2014] ZAGPJHC 68

• Issue before the court: The court had to decide whether the voluntary
commencement of business rescue by Newcity Group was in good faith and
whether the company genuinely believed it could be rescued.
• Court’s decision: The court found that the resolution for business rescue was
passed in good faith, as the company demonstrated efforts to restructure its
debts and operations. The voluntary commencement was upheld, indicating a
genuine attempt to rescue the business.
• Impact: This case reinforced the principle that the court would support
voluntary business rescue proceedings if the company's intentions are
genuine and there's a clear strategy to restructure and rehabilitate the
business.

Conclusion

The aim of business rescue is to enable the effective recovery and rehabilitation of
financially distressed companies while balancing the rights and interests of all involved
stakeholders. Small businesses that engage in transactions with companies and close
corporations undergoing or about to start business rescue are advised to seek legal
guidance to understand their rights as creditors in these proceedings.
References

Brits, R. & Boraine A. 2022. the nature and extent of the landlord’s tacit hypothec in
insolvency law as differentiated from the position under common law, Journal for
Juridical Science 2022:47(1):27-51.

Griebenow, Z. 2023. Voluntary Surrender vs. Compulsory Sequestration:

Understanding the Difference. https://cklaw.co.za/voluntary-surrender-vs-
compulsory-sequestration-understanding-the-difference

Ikpesu, F., Vincent, O. & Dakare, O. 2019. Financial Distress Overview,

Determinants, and Sustainable Remedial Measures: Financial Distress.
https://www.researchgate.net/publication/335631981_Financial_Distress_Overview_
Determinants_and_Sustainable_Remedial_Measures_Financial_Distress

Mello, L. 2023. A beginner’s guide to business rescue in South Africa.

https://www.fasken.com/en/knowledge/2022/04/26-a-beginners-guide-to-business-
rescue-in-south-africa

Prinsloo, N. 2024. Voluntary surrender vs compulsory sequestration.

https://www.findanattorney.co.za/content_insolvency-voluntary-surrender

Sharrock, R. 2007. Business Transactions Law. South Africa: Juta.