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The art of law - sequestration by the High Court is not available to a bankrupt person simply for the asking.

In the Dickensian era, for a person to be declared bankrupt was a disgrace, a scandal and a catastrophe. Failure to pay a debt could result in the debtor's being incarcerated in a debtor's prison.

Sequestration is the first step to wiping the debtor's slate clean

In these more enlightened times, the sequestration of an individual's estate is the first step in a legal process that can culminate in rehabilitation, where the bankrupt person emerges with the slate wiped clean, set free from his debts, and at liberty to make a fresh start, financially.

The law imposes hurdles to be cleared before a person's estate can be sequestrated by order of court on the application of an unpaid creditor, or where his estate is voluntarily surrendered by the debtor himself.

The requirement of an advantage to creditors

The most significant of the legal hurdles imposed by the Insolvency Act 24 of 1936 is that the court must be persuaded that the sequestration or voluntary surrender of the debtor's estate will be to the advantage of creditors, and not merely to the advantage of the debtor himself.

The most obvious advantage to creditors is the prospect that the process of sequestration will result in the debtor's remaining funds and assets being made available for at least the partial payment of creditors' claims.

What is the situation where the debtor has no assets?

The difficulty comes where the debtor has, or claims to have, no money or assets at all.

Even where there are no apparent assets in a bankrupt person's estate, a potential "advantage to creditors" may lie in the investigation into the debtor's affairs that is part and parcel of the sequestration process, which may unearth funds or assets that can then be made available to his creditors.

However, there must be some basis for believing that the investigation will - or at least may - unearth funds or assets belonging to the debtor; and this must not be mere conjecture or speculation.

An unexplained loss of valuable assets may be grounds for suspecting concealment of assets or unlawful disposal

For example, in In Commissioner, South African Revenue Service v Hawker Aviation Partnership 2006 (4) SA 292 (SCA) the South African Revenue Service was applying for the sequestration of a defunct partnership that allegedly owed the South African Revenue Service some R73 million in value-added tax. The partnership had previously been the owner of an aircraft, valued at some R175 million, which the partnership had purportedly disposed of to a new partnership, but without receiving any apparent consideration.

Cameron JA, giving the judgment of the court said (at para [29]) -

"The question is whether the Commissioner has established that sequestration would render any benefit to creditors, given that the partnership is now defunct. The answer seems to lie in those decisions that have held that a Court need not be satisfied that there will be advantage to creditors in the sense of immediate financial benefit. The Court need be satisfied only that there is reason to believe - not necessarily a likelihood, but a prospect not too remote - that as a result of investigation and inquiry assets might be unearthed that will benefit creditors." (Emphasis added.)

Cameron JA went on to say (at para [30]) that, in the case before him, there would be an advantage to creditors -

"if it were found for instance that the transfer to the new partnership involved a voidable disposition, or a disposition without value or was, as SARS contends, a simulated transaction in fraud of the Revenue."

In the earlier case of Meskin & Co v Friedman 1948 (2) SA 555 (W) Roper J said that an investigation into a debtor's affairs followed automatically in the case of every sequestration, and that some additional advantage to creditors, over and above the mere investigation itself, had to be shown. He said that -

'In my opinion, the facts put before the Court must satisfy it that there is a reasonable prospect - not necessarily a likelihood, but a prospect which is not too remote - that some pecuniary benefit will result to creditors. It is not necessary to prove that the insolvent has any assets. Even if there are none at all, but there are reasons for thinking that as a result of enquiry under the Act some may be revealed or recovered for the benefit of creditors, that is sufficient.'

Roper J said that in the case before him, it seemed that very considerable funds had passed through the debtor's hands and had then completely disappeared. On this ground, amongst others, Roper J said that in his view there was "a reasonable prospect" that an investigation in terms of the Insolvency Act might result in the discovery of assets which would then be available to creditors, and he issued a provisional order of sequestration.

Affirmation by the Constitutional Court

These principles have very recently been affirmed by the Constitutional Court in Stratford v Investec Bank Limited [2014] ZACC 38 where judgment was handed down on 19 December 2014.

Giving the judgment of the court, Leeuw AJ said that, given the potentially impeachable transactions in this case totalling over R37 million, evidence of which had been laid before the court, there was reason to believe that there would be an advantage to creditors in issuing an order of sequestration. In other words, if those transactions were declared void, that money could perhaps be recovered.

This decision of the Constitutional Court thus affirms that, where evidence is laid before the court from which it appears that the debtor recently possessed cash or assets that an investigation may reveal to be have been concealed or to be legally recoverable, the requirement of a potential advantage to creditors will be satisfied.

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