By Joubert Galpin Searle Associate - Shakira Ahmed (Commercial Division)
In South Africa, the insolvency process for corporate entities differs from that which applies to individuals or Trusts.
Individuals and Trusts, who are in an insolvent position, i.e., their liabilities exceed their assets or cash flow available, would be sequestrated in terms of the provisions of the Insolvency Act 24 of 1936 (the Insolvency Act). Whilst corporate entities, such as Companies and Close Corporations, etc. would be liquidated in terms of the Companies Act 61 of 1973 (the Companies Act) together with the Insolvency Act.
Only the High Court has jurisdiction to hear an application for sequestration of an individual or Trust. Sequestration may be voluntary or compulsory.
If an Individual or Trust itself takes the decision to sequestrate, the application process of voluntary surrender would be followed. This process requires that information is provided to enable creditors to consider opposing the application and entails the following formal steps:
- The publication of a Notice of Surrender in the Government Gazette and a local newspaper circulating in the district in which the applicant resides. The notice should not be published more than 30 days or less than 14 days before the date on which the application for voluntary surrender will be heard;
- A Statement of Debtor’s Affairs must be prepared and must be verified by affidavit. The Statement of Debtor’s Affairs must be handed in at the Master’s Office and must be made available for inspection for a period of 14 days before the date on which the application for voluntary surrender will be heard;
- An application for surrender is brought by Notice of Motion supported by affidavits
The Court may accept the surrender if the formal steps have been met, the applicant’s estate is insolvent, the surrender will be to the advantage of creditors and there is sufficient realizable property to defray all costs of sequestration.
An application for compulsory sequestration is brought by one or more of the creditors of an individual or trust. The application is brought by way of Notice of Motion supported by an affidavit and a provisional order will be issued ordering the individual or trust to advance reasons why his estate should not be sequestrated.
Further requirements for an application for compulsory sequestration are:
- The creditor(s) bringing the application must have a liquidated claim of not less than R100.00;
- The creditor(s) bringing the application must provide security for costs to the Master of the High Court, not more than 10 days before the date on which the application will be heard;
- The individual or Trust must have committed an act of insolvency as set out in the Insolvency Act;
- The sequestration should be to the advantage of creditors
If the requisite formalities are met and if the Court is satisfied that the sequestration would be to the advantage of the individual or Trust’s creditors, a Final Order of sequestration will be granted.
The liquidation of corporate entities is primarily dealt with in terms of the Companies Act.
As with sequestrations, applications for liquidations may be brought inter alia by the corporate entity itself, by one or more creditors or by a member or shareholder of the entity.
Where an insolvent corporate entity resolves to be liquidated, an ex parte application may be made to Court for the liquidation of that entity. The application is brought by way of Notice of Motion accompanied by an affidavit setting out all the facts relating to the financial position of the entity as well as the background setting about how the entity came to find itself in financial difficulty. As the application is being made by the corporate entity itself, as much information as is available must be placed before the Court. The application is served on SARS, the employees and any trade unions, as well as the Master of the High Court.
Where a creditor, member or shareholder applies for the liquidation of the corporate entity, a similar procedure is followed. A Notice of Motion accompanied by an affidavit setting out the reason why the entity should be liquidated is issued. The application is then served on the corporate entity, employees and known trade unions, as well as SARS and the Master.
In both instances, security for payment of all costs until the appointment of a provisional liquidator must be provided to the Master of the High Court. This security must be provided not more than 10 days before the date of the application being heard in Court.
If the Court is satisfied that there are sufficient grounds to liquidate the corporate entity, a Provisional Order with a return date will be issued, provisionally liquidating the entity and directing how the order should be served on creditors, employees and SARS. In the event of the entity not having resolved to apply to Court to liquidate, the corporate entity will also be called on to provide reasons why the provisional liquidation order should not be made final.
On the return date, if the Court is satisfied that all directions regarding service have been met and that there are no acceptable reasons why the corporate entity should not be liquidated, a final liquidation order will be granted.