What are the Effects of Insolvency and Rehabilitation?

When the liabilities of a business exceed its assets, and the business is unable to pay its debts when due or is likely to be unable to do so within the next six months, it is insolvent. It must liquidate or enter business rescue. When it comes to individual insolvency, a person’s liabilities must exceed their assets and they must be unable to pay their debts when due. As the application for sequestration is quite a process, an individual needs the help of insolvency practitioners to apply for voluntary sequestration.

insolvency implicationsFor this article, we focus on the effects of insolvency on an individual debtor (thus natural person), rather than a business. In both instances, more information can be obtained on the process and costs from our insolvency practitioners. We briefly answer some of the questions that you may have for insolvency practitioners to help you gain a better understanding of the effects of voluntary sequestration.


Which Act Governs the Effects of Insolvency in South Africa?

Voluntary sequestration as the result of being insolvent is governed by the Insolvency Act 24 of 1936 and its amendments.


What Are the Requirements for Voluntary Sequestration?

Since sequestration is aimed at the protection of the creditors, the sale of the insolvent party’s assets must realise enough funds to pay the cost of sequestration, the trustee’s fee, and the minimum benefits as required by law to the creditors with claims against the insolvent estate.


What is The Minimum Benefit?

It is the minimum amount that each creditor must receive. Although percentages differ according to whether the debt has been secured or is unsecured, a rough guide is that the creditor must receive at least 20 cents out of the rand. This means that where the debtor owed R200 000 to a creditor, that creditor must receive at least R40 000 from the sale of the assets.


How do Insolvency Practitioners Help the Debtor?

The insolvency practitioners provide the debtor with information about the process and the effects of the sequestration. They also assess the debtor’s financial situation to determine whether the debtor qualifies for voluntary sequestration or not.

If the debtor does not qualify, the practitioners recommend the appropriate alternative debt-management solutions. They also handle the application on behalf of the applicant. This includes preparing the statement of affairs, affidavit, notice of the intention to sequestrate, and other relevant documents. They ensure that all the formalities are met and represent the applicant in court. Once the sequestration application is approved, they help to negotiate the buyback of assets, such as the debtor’s firearm and furniture.

The practitioners also advise the debtor about the soonest date and procedures for rehabilitation. Insolvency practitioners provide guidance on how to ensure the protection of the spouse’s assets if the party is married out of community of property. Indeed, they deal with creditor claims and help to minimise the effects of insolvency on the debtor.


What Are the Effects of Insolvency on The Debtor’s Property?

All immovable and movable property belonging to the insolvent party form part of the insolvent estate. This includes any inheritances after the sequestration, but before rehabilitation.


What About the Insolvent Party’s Furniture?

With furniture usually selling at exceptionally low prices on auction, it is often not worth it to sell the furniture to cover the debts. Instead, the insolvent party’s insolvency practitioners negotiate with the trustee for the insolvent party to buy the furniture from the estate. This can usually be done at the low reserved auction price. Although the furniture is written up as part of the estate, the items are not removed from the insolvent party’s house. Instead, the person gets the opportunity to buy it back.


What Are the Effects of Insolvency on The Pension or Personal Injury Claims Money of The Insolvent Party?

Fortunately, pension fund and personal injury claim funds are excluded from the insolvency proceedings.


What Are the Effects of Sequestration on The Party’s Salary?

All existing garnishee orders against the party’s salary are cancelled. Because the creditors are seen as a collective, the debtor must stop payments to creditors the moment that the practitioners have published the notice of the intention to sequestrate. The insolvent party may not benefit one creditor over another. As such, the creditors must wait until they can dispute the sequestration in court or until the assets have been sold and the trustee has been able to distribute their minimum benefits.


What Are the Effects of Sequestration on Civil Proceedings Against the Applicant?

All civil proceedings are stayed. If creditors harass the debtor for payment or attempt to collect on debt in any form, the applicant can refer them to his or her insolvency practitioners. Keep in mind that criminal proceedings are not stayed. However, judgments are stayed the moment the Sheriff receives notification about the intended sequestration.


What Are the Effects of Sequestration on The Employment Status of The Insolvent Party?

In this regard, it is best to seek legal guidance from insolvency practitioners for a comprehensive explanation of how being sequestrated excludes the applicant from certain employment positions. For one, the insolvent party may not act as a director of a company or be involved in the management function if the person is a member of a close corporation until rehabilitated.

The insolvent party may not operate as a real estate agent, as he or she cannot hold a fidelity fund certificate. Being registered as liquor manufacturer or distributor is also not allowed. The insolvent party may not act as a trustee of a trust and may not be a member of the NCR, provincial legislature, National Council of Provinces, and the National Assembly of Parliament. The employer is not notified of the sequestration. The practitioners handle the process discreetly and the applicant does not have to appear in court.


What is The Effect of Insolvency on The Spouse?

As mentioned earlier, the spouse’s assets are originally included in the surrendered estate even when married out of community of property. The spouse must provide proof that the assets belong to them. Consult with our insolvency practitioners regarding the procedure to follow in this regard. If married in community of property, then the partners share an estate, and both are thus sequestrated.


How Does Rehabilitation Affect the Sequestration of the Insolvent Party?

With the help of insolvency practitioners, an individual can apply for the rehabilitation of their status and thus estate as soon as the minimum requirements and time lapse have been met. The rehabilitation brings an end to the sequestration. The party is therefore no longer bankrupt and regains full control over their estate. The party can fill the employment, trustee, and director roles not possible while still under sequestration. A notice of rehabilitated is placed on the credit record of the party. This stays in place for a period of five years whereafter it is automatically removed without a court order.


What if a Person Does Not Apply for Rehabilitation?

It is not recommended as the sequestration stays in place for ten years before it is automatically removed.


Where to Get Help?

Get in touch with our insolvency practitioners for more information on the effects of surrendering your estate and help in applying for voluntary sequestration or rehabilitation.


Disclaimer: Information in this article is not intended as legal advice and is only for informational purposes. Please seek legal guidance from our attorneys before relying on this information to make any legal decisions.

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