Roodt Inc South Africa
Block A 7 Eton Road Sandhurst Johannesburg
Tel +27 11 685 0000
info@roodtinc.com
Johannesburg Office
JOHAN ROODT
jaroodt@roodtinc.com
UK Office
JOHN COHEN
jcohen@roodtinc.com

The court will not order sequestration unless it is in the interests of creditors

“Friendly sequestrations” may be an abuse of the process of the court

In Victorian England (and many other countries of that era) being unable to pay one’s debts was a crime, punishable by incarceration in a debtor’s prison. It was only with the passing of the Debtors’ Act in 1869 that imprisonment for debt was abolished.

The philosophy in the modern era is that a person who is hopelessly in debt should be given the opportunity to surrender what he has to his creditors in part-payment of their claims, and then begin afresh with a clean slate, released of all his debts.

The first step in this process is an application to the High Court for the sequestration of the debtor’s estate. Following on sequestration, the insolvent person is – after a period of time, provided for in the Insolvency Act –cleared of all debt by way of rehabilitation.

In the present day, therefore, sequestration is often welcomed by a hard-pressed debtor who sees no prospect of ever getting out of debt – so much so, that he will not infrequently call on friends or family to take the initiative in commencing sequestration proceedings against him.

In order to do this, however, an ostensible debt has to be generated, and it does not take much imagination for a co-operative relative or friend to claim that a loan had been made to the debtor which the latter has failed to repay, and to use such non-payment as the pretext for asking the court to make a sequestration order.

However, a court will refuse to grant a sequestration order unless it is persuaded that such an order is in the interests of creditors. In other words, sequestration is seen as primarily aimed at securing a benefit to creditors, rather than the release of a hard-pressed debtor.

Thus, even where the insolvency of the individual in question is beyond doubt, a court will not order the sequestration of his estate unless evidence is laid before the court that sequestration will probably result in what the courts have called a “not negligible” liquidation dividend.

Meskin on Insolvency Law states that the court will not grant an order of sequestration –

where the sole or predominant motive or purpose of the applicant is something other than the bona fide achievement of the sequestration of the estate for its own sake’.

In Craggs v Dedekind 1996 (1) SA 935 (C) Conradie J said –

“Friendly sequestrations seem to share certain characteristics [and] are easy to recognise. The debt which the sequestrating creditor relies upon is almost always a loan. It is usually quite a small loan, very often made in circumstances where it would have been apparent to the whole world that the respondent was in serious financial difficulty. Despite this, the loan is customarily made without security of any sort. It is seldom evidenced by a written agreement, or even subsequently recorded in writing. The only writing that is produced to the Court is the letter stating, with appropriate expressions of dismay, that the debt cannot be paid and, sometimes, for good measure, setting out details of the respondent’s assets and liabilities. Very often, debtor and creditor are related: fathers commonly sequestrate sons, wives sequestrate husbands and sweethearts sequestrate each other, without, I am sure, any damaging effect on their relationship.

Co-operation between debtor and creditor, which is fine, can easily turn into collusion which is not. A Court should, I consider, be on its guard against it. Because of this, and when the signs are there, a Court may be forgiven for requiring rather more from a friendly petitioner in the way of establishing his claim than it might otherwise do. He should, I believe, present sufficiently detailed evidence to satisfy a sceptical Court that he indeed has a claim against the respondent.”

The most recent decision in which the High Court has refused to grant a sequestration order on the grounds that no benefit to creditors had been shown is Nedbank Ltd v Abrahams [2013] ZAECPEHC 11. This case was a textbook example of a “friendly sequestration”, in that the application to court was made by the insolvent’s brother.

The applicant for the sequestration order gave no explanation as to why he had not tried to secure repayment of his alleged loan by way of deductions from the insolvent’s salary (given that he was also the latter’s employer) or by instituting proceedings in the Small Claims Court.

All in all, the facts of the case raised a clear inference of collusion between the insolvent and the creditor who was applying for the sequestration order. Such collusion has been held to constitute an abuse of the process of the court, and the High Court has inherent jurisdiction to prevent such abuse.

Quoting from an earlier judgment, the court in this case said that an application for sequestration of a debtor’s estate –

‘entails the careful scrutiny thereof by the Court in order to protect the interests of creditors, and to satisfy itself that the application is not brought primarily for the relief of a harassed debtor.’

Back

 
Copyright © 2019 Roodt Inc.  Designed and Developed by Fyre Interactive home | newsletter| contact us