It is an unfortunate likelihood that the number of liquidations and sequestrations will increase during the COVID-19 pandemic. It is therefore important for creditors to at least have a rudimentary understanding of the ranking of creditors’ claims in the estate of an insolvent person.
There are three types of creditors in any insolvent estate:
- Secured Creditors
- Preferred Creditors
- Concurrent Creditors
A secured creditor holds security over an asset of the insolvent for his claim which gives him a preference with regards to the net proceeds of the asset over which he holds security.
Examples of secured creditors would be the holder of a mortgage bond, the landlord in terms of his landlord’s hypothec, as well as the bank in respect of a credit agreement such as a vehicle purchased on credit in which case the financier will hold security over such financed vehicle until the financed amount has been repaid, to name a few.
Preferred creditors are creditors who do not hold any security for their claims, but who are entitled to the proceeds of estate assets in preference over other unsecured creditors. Since the assets which make up the security for the secured creditors is used to pay the secured creditors, the preferred creditors are only able to rely on the free residue (i.e. that portion of the estate which is not subject to any right of preference by reason of any special mortgage, legal hypothec, pledge or right of retention) in the insolvent estate to settle their claims.
Preferred creditors would include the South African Revenue Services, the salaries and wages of employees, the costs of sequestration/liquidation, the costs of execution, general and certain special notarial bonds, etc.
Concurrent creditors are the creditors who do not have any security for their claims and who are not entitled to payment of the proceeds in preference to other creditors. These creditors rely on the balance of the free residue in the insolvent estate, after payment of all preferent creditors and costs. The concurrent creditors are last in line for payment. The payment of the concurrent creditors is made on a pro rata basis based on what remains of the free residue.