ANSWER TO THE QUESTION: “WHAT IS SEQUESTRATION ORDER?”
Understanding insolvency and how it affects your financial position is important in deciding a course of action to take in addressing your debt problems. You may have contemplated various debt solutions, including how to declare bankruptcy in South Africa. To this end, we briefly answer the question of “what is sequestration order?” and related questions below to help you make an informed decision.
WHAT IS A SEQUESTRATION ORDER?
It is when the court rules that a debtor’s estate must be placed under trustee/curator control for the sale of assets on auction, from which the proceeds are distributed among the creditors to pay off the debt owed. The debtor must be insolvent and unable to pay their debts. The debtor’s estate must have sufficient assets to ensure the sale thereof on auction can realise enough funds to guarantee the minimum benefit to each of the creditors and to pay the cost of the process.
WHAT IS INSOLVENT?
It is the legal status a court imposes on a person who is unable to pay their debt and/or where their liabilities exceed their assets. It is a diminished legal capacity in the sense that the debtor no longer has control over their financial estate and may not enter credit agreements during the time of being sequestrated without the written permission of the court-appointed trustee/curator. The debtor may not hold certain government positions and may not be a director of a company, act as a trustee, or be a member of a closed corporation.
Even if a person is insolvent, unless the person is declared bankrupt or insolvent by means of a sequestration order, that person is not legally seen as insolvent. What is important is to understand that only when a voluntary sequestration order has been granted does the debtor have legal protection against further claims or legal actions from creditors.
The debtor is not sequestrated, only his/her estate. The estate, as well as the debtor can be insolvent. Insolvent can thus mean a debtor’s liabilities far-exceed the assets, but the debtor, though technically bankrupt, does not have the legal relief brought about through the sequestration order. To have such, the debtor’s estate must be sequestrated.
WHAT IS THE RESPONSIBILITY OF THE DEBTOR ONCE SEQUESTRATED?
The debtor may not add more debts to their estate. The debtor may not do anything that can diminish the value of the assets in the estate.
WHAT IF THE DEBTOR SELLS ASSETS OR HIDES SUCH BEFORE THE SALE OF ASSETS?
It is fraud. The debtor may not hide, give away, or sell any of the assets. Note that even actions before the intention to sequestrate notice has been published are important. If a debtor is unable to pay his debt, it is best to seek legal guidance immediately. Paying one creditor in full in the hopes to have fewer creditors is not a good idea if the debtor can still not pay the other creditors. Indeed, the creditor may even be required to pay back all the money to the surrendered estate should the debtor’s estate be sequestrated to ensure fair distribution of proceeds among the creditors.
WHAT IS THE PURPOSE OF THE SEQUESTRATION ORDER?
The reason a sequestration order is given is to ensure orderly distribution of the proceeds of sale from the debtor’s assets to ensure the creditors with valid claims against the insolvent estate receive their minimum benefits. It ensures a fair order of preference. Instead of just one creditor getting the money from the sale of the debtor’s property, the creditors with valid claims receive their portions according to a fair and predetermined formula. In this way, all the creditors are protected. The debtor may not pay creditors from the moment the intention to sequestrate has been published. The debt is frozen and no more interest applies.
Only from the proceeds of the sale can creditors receive their benefits. This also means that a creditor cannot approach the debtor during the period to pay them, as this means unfair advantage to one creditor to the disadvantage of the others. In a sense, the debtor thus gets immediate relief from creditor harassment and legal action, as the creditor must wait for the sale of assets to receive benefits.
WHAT TO DO NEXT?
If your liabilities exceed your assets and you are unable to pay your debts, call on the expertise of our insolvency lawyers in determining the best course of action in addressing your debt problems and, where relevant, to seek a voluntary sequestration order.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.