Introduction

“The only man who sticks closer to you in adversity than a friend is a creditor.” – Unknown 

Consumer debts are not a problem, they are one of the greatest dynamic factors in our economy, the issue arises when debtors are unable to pay what is due without having to seek professional help. Insolvency law is a common practice throughout the world because debt management is difficult for everyone. When a person is unable to pay their creditors it means that they are insolvent. In South Africa, only High courts can declare you insolvent. Once you are declared insolvent your assets are sequestrated. The Insolvency Act provides for two types of sequestrations and the friendly sequestration is controversial in South African insolvency law here’s why.

What is sequestration?

Sequestration is a High court order that declares that the estate of the debtor be surrendered into an insolvent estate where it shall be distributed to creditors by a trustee. In South Africa, there are two types of sequestrations voluntary surrender and compulsory sequestration. Section 2 of the Insolvency Act defines a debtor as a person (or partnership, or estate of a  person, or partnership and or company) that is placed under liquidation. The South African insolvency law aims to provide for an equitable distribution of the debtor’s property to the advantage of his creditors. It is not meant to benefit the debtor. 

The controversy surrounding friendly sequestration

The friendly sequestration process forms part of the 8 acts of insolvency. Friendly sequestrations occur when a debtor notifies their creditors in writing that they are unable to pay their debt. When the debtor becomes insolvent, he or she usually notifies a relative, friend, or close associate who is also that they are unable to pay, so that such a creditor can enforce compulsory sequestration against the debtor based on this act of insolvency.

Friendly sequestrations are allowed in our law. On the surface, it appears to not be sinister, coming off as a way in which the debtor can evade the need to apply for voluntary surrender of their estate. The Insolvency Act developed the sequestration process from a creditor-oriented to a debtor-friendly model. It is so controversial because often the debtor would collude with relatives, friends, and/or close associates to attempt at their level best to rescue another from the clutches of creditors. The courts would be abused and be provided with false and/or unreliable evidence. The main way in which the abuse can occur with friendly sequestration is through a provisional sequestration order which has the sole aim of prolonging the rule nisi through repeated extensions which leads to obstructing a judgement or sale in execution. The debtor may want to avoid the proceedings instituted against them; in certain circumstances, some of the major creditors that have security for their claims may be required to contribute to the costs of the sequestration if they should prove their claims against the insolvent estate.

Challenges Arising from a Lack of Residue in an Insolvent Estate where Friendly Sequestration Has Taken Place

One of the greatest challenges that can be seen in friendly sequestration is a lack of residue in the debtor’s estate. Often the free residue can be insufficient to meet the costs of sequestration. In terms of s106 of the Act,  it establishes that the sequestering creditor must contribute to the sequestration order. Section 106  illustrates that if the free residue is insufficient, then all creditors who have proved claims against the estate are liable to make good any deficiency.

The case of Snyman v the Master 2003 (1) SA 239 (T),  illustrates the issues arising from a lack of residue in an insolvent estate. In  Snyman, ABSA Bank had to contribute to the costs of the sequestration because of the lack of residue. The case highlighted that this is not only unfair to the creditor but also unjust as it is not benefiting them as sequestration should. it is causing the creditor to spend their finances for the cost of the debtor’s sequestration.

Conclusion

Due to the increased abuse, courts are strict toward friendly sequestration it is not uncommon to see the court reject friendly sequestration and order debtors to simply pay off their debts. This could have a worse outcome for creditors as often they may have to contribute to the costs of sequestration.