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Sequestration and Insolvency

Sequestration is a legal process of surrendering your personal estate when you are no longer in a positive financial position to pay your debts. In simple terms – when your debts or liabilities exceed the value of your assets and income, and you are unable to meet your monthly financial commitments.

The purpose of sequestration

The sequestration process is used to “freeze” the insolvent’s estate (or the debtor’s estate as it is also called), where after the estate is placed in the ‘hands’ of a trustee or curator, who will administer the estate on behalf of the insolvent (debtor).  This means that all the assets are frozen and creditors are prevented from attaching or executing against any of the assets, so that they may be distributed between all creditors.

The trustee/curator, who is appointed by a court order, has a legal obligation to administer the estate fairly, in order for all creditors to benefit from the sequestration, as stated above. Once a court grants the sequestration order, and the debtor’s estate is settled by the trustee (all claims are settled on a pro rata basis), the debtor is ‘free’ from his/her creditors’ claims.  This means that the claims will be deemed to be settled even though the creditors’ full claim is not paid.

Although this seems like an unfair trade-off, which generally it is, it ensures that whatever assets the debtor has are liquidated (sold), and the money received from the sale is distributed among the creditors in accordance with a predetermined order of preference (pro rata according to the size of the claim).  Essentially this ensures that all the debtor’s creditors are given some form of payment instead of nothing.

What this also means is that the debtor is now an insolvent and is precluded from incurring further debt in the estate and until he or she is rehabilitated, which is also done through a court order.

Different methods of Insolvency/sequestration

Voluntary Sequestration

This is exactly what it sounds like – the debtor himself makes an application to Court requesting that his estate be sequestrated (also known as surrendering an estate). In this instance it is important to note that there are certain legal requirements before a Court will accept a debtor’s application to surrender his estate.

Firstly, the debtor must actually be insolvent.  This means that the total liabilities or debts must be more than the value of his/her assets. Secondly, the debtor must have sufficient assets in order to cover the costs of the sequestration application, which is payable from the “free residue” of the debtors estate. “Free residue” is the part of the estate that is not subject to any right or preference – meaning distributable cash. Thirdly, and most importantly, the Court will have to decide whether the sequestration will be to the advantage of creditors.  Even though this method of sequestration is brought by the debtor himself, the sequestration must be beneficial to all the creditors in some way – meaning they must get something out of the sale of assets.

This requirement means that it is not always possible for anyone to apply for sequestration if their debts exceed their assets. It is the duty of the debtor to prove that the sequestration will be to the benefit of all creditors. A proper analysis of the debtor’s affairs would need to be carried out by your attorney in order to determine whether sequestration is the best option to take.

Involuntary/Compulsory Sequestration

This method of sequestration involves an application to Court by one of the debtor’s creditors.  Firstly, the creditor will have to satisfy the Court that there is a valid claim. i.e.: that the debtor legally owes the creditor money and is in default of paying.  Secondly, the creditor will have to prove that the debtor has committed an “act of insolvency” or that the debtor is in fact insolvent.  

There are various “acts” of insolvency, one of them being where the debtor has indicated in writing that he is unable to pay the outstanding debt due to the creditor.  The creditor in this case may decide to apply for the debtor’s sequestration in order that the debtor does not proceed to sell all his remaining assets behind closed doors, thus making it more difficult for the creditor to collect the outstanding debt.  

Lastly, the creditor must also allege that there are reasons to believe that if the debtor’s estate is sequestrated, it will be beneficial to all creditors, and will prevent the debtor from selling off valuable assets.