UNDERSTAND THE BASICS OF WHAT SEQUESTRATION ENTAILS
We’ve answered the question, “What is sequestration?” and related questions below to help you understand the full extent of what sequestration is and when it is applicable in South Africa.
The short answer to the question, “What is sequestration?” is that it entails the bankruptcy of a natural person, though it can also be applied to a trust. The process entails the surrendering of the natural person’s estate, whereby the person applies to court to be declared insolvent. Once the court approves the application, a trustee is appointed to manage the distribution of benefits from the sale of assets in the natural person’s estate. The creditors receive the benefits and the person remains sequestrated until an application is made to court and approved for rehabilitation of the person’s estate and thus financial status.
Through the sequestration process, the applicant’s debt is written off. However, it doesn’t mean a payment holiday. The insolvent party’s assets are sold and the debt paid. The remainder is paid in cash or by means of a down-payment agreement. The debtor then pays the remaining debt off over a period of 18 to 24 months. Once the debt is paid in full, the debtor can apply for rehabilitation, provided certain requirements are met, best discussed with attorneys at law. One question often asked is whether the creditors can still take legal steps against the debtor before the sequestration process is completed. Fortunately, the answer is no. Once the notification of the applicant’s application for sequestration is published in the Government Gazette and a local newspaper, the creditors must submit their objections to court. They cannot harass the debtor, attach any asset, demand payment, or add interest to the debt.
By law, the applicant may not give preferential treatment to one creditor over another. As such, once the application process begins, the debtor must stop payment of debt to all the creditors. The period from the date of deciding to sequestrate to the advocate appearing in court on behalf of the applicant is usually about seven weeks. During the entire period, the applicant is protected against further prosecution by any of the creditors. That is, provided the debtor didn’t wait too long, making it difficult to have the notifications published in time to prevent legal action from the creditors.
Another question sometimes asked is whether it is possible for the court to refuse the sequestration application on the grounds that the applicant doesn’t have enough money. The answer is yes, simply because the Insolvency Act states that the sequestration can only be awarded if it is to the benefit of the creditors. However, the creditors must at minimum receive 20 cents out of the rand. If the applicant doesn’t have immovable property, the applicant must have enough other unencumbered assets that can be surrendered and sold to ensure sufficient benefit for the creditors.
One of the client’s concerns may be what happens to their furniture when they apply for sequestration. By law, the trustee must attach the furniture, though there can be exceptions. It is possible for the insolvency lawyers to negotiate for the furniture to be excluded from the insolvent estate or to have the furniture appraised, but with the allowance that the applicant can buy back the furniture from the estate at the lower value. Keep in mind that jewellery normally forms part of the insolvent estate. The applicant must have enough assets or money to make sure that the administrative costs related to the sequestration can be paid.
Where to get more information
The best advice is to make use of experienced insolvency attorneys who will help understand exactly what sequestration entails and will negotiate on your behalf to minimise your losses.
Disclaimer: The article is for informative purposes only. It does not serve as legal advice nor is it intended as such. Please speak to our attorneys before relying solely on the information herein to make any decisions.