GET HELP: ANSWERS ON QUESTIONS ABOUT SEQUESTRATIONS AND REHABILITATION PROCESSES
We can expect to see even more applications for compulsory and voluntary sequestrations with the return to limits on operating hours, strict curfews, a ban on the sale of alcohol, limiting the number of people that can gather, and the closure of beaches, as announced recently. Thousands of people in South Africa have already lost their income or a large part of their income as a result of lockdown regulations, and many more may have no other choice, as creditors in an effort to recoup some of the money owed to them apply for sequestrations of debtors.
When it comes to voluntary sequestrations, the court must be satisfied that the applicants are truly insolvent and not just applying for the surrendering of their estates in an effort not to pay debts due. To be truly insolvent, a party must not be able to pay debts when due and their liabilities must exceed their assets. Courts can reject applications for voluntary sequestrations if the sequestrations cannot realise sufficient funds from the sale of the debtor assets to pay for the legal process and realise at least 20 cents out of the rand for each of the creditor claims against the estates.
However, where a shortfall does exist, the insolvent party can arrange for paying off the remainder over a period without having to deal with increases in interest. This is so because the interest is frozen and the creditors are dealt with as a collective.
WHAT HAPPENS ONCE A PERSON IS SEQUESTRATED?
A trustee is appointed to oversee the sale of the insolvent party’s assets. The proceeds are distributed among the creditors according to a prescribed manner. The secured creditors receive their benefits first and then the unsecured creditors. The person receives a new tax number, as they now have a new estate. However, if they inherit assets or money after sequestration, but before being rehabilitated, those assets form part of the sequestrated estate.
WHICH ASSETS ARE EXCLUDED FROM SEQUESTRATIONS?
Pension income, money from personal injury claims, and the salaries of the insolvent parties do not form part of sequestrations.
ARE THERE ANY BENEFITS TO SEQUESTRATIONS?
Although it may not feel like it for most insolvent parties, there are a few benefits with sequestrations. For one, the moment a notice of the intention to voluntarily sequestrate has been published, the debtor must stop all payments to creditors. The creditors must wait until the trustee’s appointment, sale of assets, and distribution of the proceeds to receive their benefits. This also means no harassment of the debtor. The insolvent party can simply refer them to their insolvency attorney and does not have to engage with the creditors. It is thus possible to have the calls and harassment stop. The debtor cannot make payment to a creditor, as it benefits one creditor over the others.
Not only does it bring an end to creditor harassment, but it provides the insolvent party with a period up to the sale of assets in which no credit instalments are made, leaving the debtor with cash in hand. This money can be used to pay the legal costs or to save up for rehabilitation.
The debtor can get rid of up to 80% of their debt almost immediately. They start fresh and can regain financial control over their affairs once they have rehabilitated.
HOW DO SEQUESTRATIONS AFFECT EMPLOYMENT?
An insolvent party can still work, and their salary is safe. Certain government positions are excluded while under sequestration and sequestrated parties cannot be directors of companies. It is thus best to rehabilitate as soon as possible after the requirements have been met.
WHY DO THE INSOLVENT PARTIES NEED TO ATTEND THE TRUSTEE AND CREDITOR MEETINGS?
The insolvent party is in the best position to help the trustee determine the validity of the creditor claims. These meetings are not interrogations and the insolvent parties can ask their lawyers to be present where needed. It is, however, crucial for the sequestrated parties to attend the meetings as non-cooperation with the trustees can hinder their ability to rehabilitate at the soonest possible date.
DO BOTH SPOUSES NEED TO APPLY FOR SEQUESTRATION?
If the insolvent party is married in community of property, then the spouse shares an estate with them. This means both must apply for the voluntary surrendering of their estate. In the case of a compulsory sequestration, the application affects both parties.
CAN A PERSON UNDER DEBT REVIEW APPLY FOR VOLUNTARY SEQUESTRATION?
Yes. Many South Africans under debt review find that even with the consolidated monthly instalment, they cannot make ends meet and risk the creditors taking judgment against them if they miss a single payment. Some South Africans face years of being under debt review. In these instances, sequestrations can help to bring an end to the debt burdens. The voluntary sequestration application also means that all legal action against the applicant is stayed.
WHAT HAPPENS TO THE APPLICANT’S FURNITURE AND WEAPONS?
Furniture has little value unless the furniture pieces are antiques. As such, it is possible to negotiate for the buyback of the furniture at the low auction value. The furniture is written up, but not removed from the insolvent party’s house. The party then buys the pieces back from the estate. The same process is followed with weapons. The South African weapon laws make it difficult for the trustee to remove, store, sell, and have ownership of the guns transferred. To this end, the insolvent party can buy back the gun/s from the estate in the same manner.
WHICH AGREEMENTS CAN AN INSOLVENT PARTY ENTER INTO?
Employment agreements are allowed. Certain agreements, such as sale of property, forming part of the sequestrated estate are not allowed. This also pertains to movable property forming part of the sequestration. The insolvent party requires the written permission of the trustee to enter into a credit agreement. Note that an insolvent party cannot operate as a general dealer or have a business interest in such an operation. The party can also not operate a liquor outlet, as they may not hold a liquor license while sequestrated.
WHAT IS REHABILITATION?
It is the legal action that brings an end to the effects of sequestration. Although insolvent parties can wait out the ten-year period to be automatically rehabilitated without a court application, such a period is excessively long. With the help of insolvency attorneys, an insolvent party can apply for rehabilitation as soon as the time and other requirements have been met. Once rehabilitated, the person has full legal control over their financial affairs and thus does not need the permission of the trustee to enter into agreements and can, once again, be a director. The sequestrated notice on their credit record is replaced by rehabilitated. This notice is automatically removed after five years.
It is possible to become rehabilitated before the required time lapse if all the creditor claims have been paid in full or when the creditors accept a composition offer. In the latter instance, the majority of creditors must accept the composition offer, and if payment has been done, or the security has been given for the intended payment.
It is also possible to become rehabilitated if there are no proven claims against the insolvent estate, provided it is the first sequestration of the applicant. If, however, it is a second or third sequestration, then the time lapse before the rehabilitation application is longer.
WHY DOES THE INSOLVENT PARTY NEED THE HELP OF AN ATTORNEY TO APPLY FOR REHABILITATION?
As with sequestrations, rehabilitations are legal processes. The applications are heard in the High Court and thus the need for legal help.
WHAT DOES THE REHABILITATION PROCESS ENTAIL?
An application is brought to the High Court that has jurisdiction in the area where the applicant stays. A notice of the intention to rehabilitate is first published in the Government Gazette and one is submitted to the Master of the Court. A provisional order for rehabilitation is granted, and one month after the date, the case is heard in court. If no objections have been received, the provisional order becomes the final order. This brings an end to the effects of the sequestration. The notice on the applicant credit record is changed to rehabilitated.
DO BOTH PARTIES THAT ARE MARRIED IN COMMUNITY OF PROPERTY NEED TO APPLY FOR REHABILITATION?
Since they share an estate, it is the rehabilitation of their shared estate. However, they are both insolvent and experience the effects of the sequestration. To bring an end to the sequestration, they must both be rehabilitated in terms of the shared estate.
WHERE TO GET HELP WITH SEQUESTRATIONS AND REHABILITATION APPLICATIONS
There is hope after a compulsory sequestration. If you have been sequestrated and wish to regain financial control, seek legal guidance from our insolvency attorneys on how to rehabilitate. Our team of insolvency practitioners also help with voluntary sequestration applications.
Disclaimer: This article is for informational 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.