THE EFFECT OF SEQUESTRATION
What is the effect of sequestration on a person once he/she is sequestrated? What can or can’t he/she do? What about income and assets and in general, how does sequestration affect a person’s life? This article will set out briefly what the life of the sequestrated person looks like after the final order is granted.
The Effect of Sequestration
A person remains under sequestration, either until ten years have lapsed, or until a person has successfully applied to Court for a rehabilitation order after four years. Whilst being sequestrated and before rehabilitation, there are certain things that the person who has been placed under sequestration can and cannot do.
CAN I ENTER INTO CONTRACTS?
After sequestration the creditors of the insolvent person needs to be protected. The insolvent can therefore not enter into certain contracts, but his/her hands are not completely tied.
PROHIBITED CONTRACTS
- The insolvent cannot enter into any contract that sells any property that forms part of the insolvent estate. (The property will be sold by the trustee of the insolvent person to the benefit of all creditors)
- The insolvent cannot sell moveable assets. All the assets of the insolvent person form part of the insolvent estate and must be sold to the benefit of all creditors. (normally the insolvent buys back the moveable assets from his/her own estate)
- The insolvent cannot enter into any other type of contract that will adversely affect his/her estate.
- No further debt can be incurred by the insolvent. The trustee can give permission to incur further debt if, for example, the insolvent needs a car and can afford it without negatively affecting the rest of the creditors.
OTHER CONTRACTS
The insolvent can enter into employment agreements or agreements to do business.
EFFECTS OF CONTRACTS WHICH ARE NOT PROHIBITED
If the insolvent entered into a contract after date of sequestration and the contract is not prohibited, the contract will be binding and valid on the parties who entered into the contract. There are instances where the contract may be binding, but the insolvent may not collect payment of money due in terms of such a contract, unless the Insolvency Act allows him/her to do so.
The insolvent may collect payment for work done for his/her own benefit in terms of an agreement he/she entered into either before or after date of sequestration. (This means that the money does not have to be into the insolvent estate to be used to the benefit of other creditors and the insolvent can keep it for him/herself).
EFFECTS OF A PROHIBITED CONTRACT
Any agreement that the insolvent entered into after date of sequestration that is prohibited, the contract is voidable and not necessarily void. In this instance the curator can choose to either proceed with the agreement or cancel it. If the curator proceeds with the agreement, the contract will be binding on the parties. Where the curator chooses to proceed with the agreement, the proceeds will be paid into the insolvent estate for the benefit of all creditors and not the insolvent.
If the curator chooses not to proceed with the agreement, any monies that the insolvent has received must be returned to the other party. The insolvent will have to repay the monies back to his/her own insolvent estate.
Where an insolvent enter into an agreement with another party and the other party does not know or is not aware that the person he/she is contracting with is insolvent, the contract is still binding. But this only applies to new assets that the insolvent purchased after sequestration. The third party will have to prove that he/she did not know or had no reason to suspect that the person was insolvent.
EARNING AN INCOME
The person who was sequestrated can still earn an income. The insolvent person can follow any profession or other employment and enter into contracts for these purposes.
The insolvent can however not be a trader who is a general dealer or a manufacturer and cannot have any interest in such a business. (A trader is somebody that sells all kinds of wares at a fixed address.) The curator can however grant permission for the insolvent to trade as a general dealer or a manufacturer. Any income the insolvent earns from contracts entered into for his/her employment, is received by the insolvent for his/her own benefit.
LEGAL PROCEEDINGS
The insolvent may not enter into legal proceedings (sue or be sued), except for:
- Divorce
- Maintenance
- Recovering of remuneration for work done or professional services rendered by the insolvent after date of sequestration
- Pension
- To claim compensation for damages suffered by the insolvent because of defamation or personal injury or as a result of an edict
- The insolvent may also bring action against the curator(s) of his/her estate if the estate is mismanaged.
The insolvent cannot sue any person for money except for the above reasons; cannot bring a sequestration or liquidation application against another person; and cannot be sued either.
This article written by Nanika Prinsloo of Prinsloo & Associates.