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The art of law - an insolvent debtor may be entitled to voluntarily surrender his estate in order to be relieved of his debts and make a fresh financial start

An insolvent debtor's right to make a voluntary surrender of his estate

Up to the middle of the 19th century in western Europe, a person who could not pay his creditors was regarded as deserving of punishment and could be sentenced to confinement in the debtors' prison.

In the modern era, a mere inability to pay one's debts is not, in and of itself, regarded as calling for punishment.

Indeed, many modern legal systems, including that of South Africa, provide a legal process whereby a person who is hopelessly insolvent can surrender his assets to his creditors and have the slate wiped clean, financially, so that he can make a fresh start.

Where individuals are concerned, this process is called voluntary surrender and involves an application to the High Court as provided for in section 6(1) of the Insolvency Act 34 of 1936.

Proving an advantage to creditors

The core requirements as set out in section 6 of the Insolvency Act are as follows:

'If the court is satisfied that the estate of the debtor in question is insolvent, that he owns realisable property of a sufficient value to defray all costs of the sequestration which will in terms of this Act be payable out of the free residue of his estate and that it will be to the advantage of creditors of the debtor if his estate is sequestrated, it may accept the surrender of the debtor's estate and make an order sequestrating that estate.'

Thus, a court will approve an application for voluntary surrender only if it will be to the advantage of creditors. All creditors must be given notice of the application and can oppose the application on the grounds that there would be no advantage to creditors.

As the court noted in the judgment discussed below, a dividend of twenty cents in the rand is regarded as an adequate benefit to creditors.

A further core requirement is that the applicant must be insolvent.

In the recent judgment reported as Absa Bank Limited v Ackerman, In Re Ex parte Ackerman [2014] ZAGPPHC 787 the North Gauteng High Court had to consider what insolvent means in this context and whether, in determining a person's solvency, his assets should be valued at market value (which assumes a willing buyer and a willing seller) or, alternatively, at their forced sale value (meaning the price that the property is likely to fetch if sold after repossession by creditors) which as a rule of thumb, said the court, is about 70% of market value.

The court held that, in the context of the voluntary surrender of an estate, the forced sale value is the appropriate measure to determine whether the applicant is insolvent.

Thus, even where the market value of a debtor's assets exceeds his liabilities, a core criterion for a voluntary surrender of his estate will be satisfied if the person's liabilities exceed the forced sale value of his assets.

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