THE NEGATIVE EFFECTS OF SEQUESTRATION: CLEARING UP CONFUSION
As with every solution to debt problems, there is a positive and a negative side to sequestration. For you to make an informed decision on whether or not sequestration is the most appropriate solution for your debt problems, it is imperative that you also consider the negative effects.
Distinguishing between a fact and myth is also crucial. We thus look at the true negative effects of sequestration and clear up some of the confusion surrounding negative effects. First, let us consider the positive effects, which do put the negative ones in perspective.
POSITIVE EFFECTS OF SEQUESTRATION
The most important effect is that you become debt free. True, this is possible in a number of ways. However, if all other solutions have been considered, including debt review, and are no longer viable, you definitely have the benefit of becoming debt free within a short period of time. It is not a question of years of possible debt claims still hanging over your head after the process has been completed. You start fresh with a new financial estate and tax number. If money owed to SARS has contributed to your financial distress, you will thus be relieved to know that all the outstanding taxes forming part of the insolvent estate become something of the past once you have been sequestrated.
Once a notice of your intention to sequestrate is published, you must stop with all payments to creditors. They cannot demand any further payments and must wait for the distribution of proceeds from the sale of assets to receive their benefits. It is not a payment holiday, but it does give you some stress relief. The interest on the debt is also frozen. This means that you do not have to deal with ever-increasing debt. The cycle can be broken.
All garnishee orders against your salary are cancelled. No more creditor harassment and no sleepless nights about debt. Once you have rehabilitated, you regain full financial control and start with zero debt to your name. Your income is thus your own.
NEGATIVE EFFECTS OF SEQUESTRATION
Here it is vital that you consider the true negative effects and not base your decision on hearsay. The effects are discussed in no particular order.
NOT BEING ABLE TO HOLD CERTAIN EMPLOYMENT POSITIONS
You may not be a director of a company. You may also not participate the management of a close corporation of which you are a member. If you thus own a company or are one of the directors in one, you must resign when you sequestrate. Only once you have rehabilitated can you act a director again. It may be problematic if your management is crucial for your company. However, you can resign and have someone you trust take your director position in the company. You can become an employee of the company and thus still receive income during the period of sequestration.
Several employment positions are excluded while you are under sequestration. For one, you cannot get a liquor licence, as you may not be a distributor or manufacturer of liquor during the period. In set circumstances, you may not act in the capacity of a trustee of a trust and the Master of the High Court can remove you from such a position. You cannot act as an estate agent since you may not hold a fidelity certificate when sequestrated. Other member positions that are excluded include:
- Board member of the NCR
- National Council of Provinces
- National Assembly of the Parliament
- Provincial Legislature
It implies that you will need to resign your membership, also implying that you will need to find another employment position.
NEGATIVE EFFECTS ON YOUR ABILITY TO ENTER AGREEMENTS
You may not enter certain agreements without the written consent of the trustee. If you do not have a car and require it to earn an income, the trustee can, at their discretion, provide written permission for you to enter into a vehicle finance agreement. You may otherwise not enter into any credit agreements without express written permission from the trustee. Any contract that will negatively affect the estate, forming part of the sequestration, is off limits. You also have no right to sell your assets, as these form part of the estate and must be sold to ensure the cost of the sequestration can be paid and that the creditors can receive their benefits. The trustee oversees the process.
However, you are still free to enter employment agreements without written permission from the trustee and can enter contracts for the purpose of conducting business. Where you have completed work in relation to an agreement, whether before or after you have been sequestrated, you can use it to your benefit. The money from the agreement thus does not have to form part of the surrendered insolvent estate. Your earnings are thus safe. The terms of the allowable contract are binding on all the parties to it.
In terms of entering a prohibited agreement after sequestration, one of the effects is that the agreement becomes voidable. Note that this not the same as void. It is not automatically invalid. The trustee or curator can, at their discretion, decide whether or not to proceed with the contract. If they do decide to honour the terms of the agreement, then it is binding on all the relevant parties to the agreement. However, the proceeds of the contract are to the benefit of the surrendered estate and the creditors. You will not be entitled to any of it.
Should the trustee or curator decide not to proceed with the agreement, then all the income from that agreement that you already received must then be returned to the relevant parties. You will have to pay the money back to the surrendered estate. With consideration of these terms, it is best to avoid entering into prohibited agreements. If unsure, rather ask our insolvency attorneys or the trustee.
Where you have signed a contract without having informed the other party of your insolvent status, the contract stays valid. Note that this does not apply to assets that you have bought before the sequestration. It only applies to assets gained by agreement after you have been sequestrated. However, the party to the agreement must have proof that they did not have knowledge of your insolvent status.
ABILITY TO EARN AN INCOME IS NOT NEGATIVELY AFFECTED BY SEQUESTRATION
Although you may not hold a director or any of the positions mentioned earlier, sequestration is not aimed at limiting your ability to earn a living. You can enter employment contracts and can, for instance, offer plumbing, electrical repair, and more services in return for payment. You cannot be a general dealer, trader of a variety of goods from one address, general goods manufacturer, or have interest in the dealership or manufacturing business. We recommend seeking legal guidance as to what is allowed. You can still get permission from the trustee or curator to act in the capacity of a manufacturer or general dealer. All is thus not lost, as long as you get the required permission.
LIMITATIONS ON YOUR ABILITY TO INITIATE LEGAL PROCEEDINGS
You may enter legal proceedings related to divorce, pension, personal injury or defamation, maintenance, and getting payment for work completed after the sequestration date or to take legal steps against the trustee or curator for mismanagement of your surrendered insolvent estate. That said, you cannot apply for the liquidation or sequestration of another party.
INHERITANCE AFTER SEQUESTRATION
Any inheritance after the sequestration forms part of the insolvent estate. Unless you decline the inheritance, it will be sold and the benefits will be distributed to the creditors.
PENSION AND PERSONAL INJURY MONIES ARE SAFE
Any income from a personal injury claim and your pension are excluded from the sequestrated estate. Your children’s assets are also safe.
We recommend speaking to our attorneys about the positive and negative effects of sequestration and for help in determining whether or not you qualify. Get in touch for all matters relating to insolvency proceedings.