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Sequestration information – Part 3

For consumers who cant pay all their debts Debt Counselling (Debt Review) is many times the key to solving their financial problems. Others can benefit from the legal process of Sequestration. I you meet with a Debt Counsellor you should discuss this option. Most of us know very  little about what is involved in insolvency and sequestration. Industry expert Nanika Prinsloo of Prinsloo & Associates helps Debtfree readers tolearn more about insolvency. Let’s discuss the 8 Acts of insolvency.

ACTS OF INSOLVENCY

The Insolvency Act refers to 8 acts of insolvency that can be committed.
It is not a criminal act, but certain things that are done from which it can be deduced that the person is insolvent.

If a creditor wants to bring a sequestration application (not voluntary surrender) against a debtor and the creditor can prove that the person he/she wants to sequestrate has committed an act of insolvency, the application can be brought. We will discuss these acts below:

1) “Offer of settlement” Letter to a creditor that the person would like to be released from the debt
This is where a debtor writes a letter to a creditor and offers a settlement amount. For example where the debtor owes R10 000 and offers to pay R5 000 in settlement if the creditor writes the R5 000 shortfall off. This is an act of insolvency and a creditor can use it as a basis for sequestration.

2) A letter to a creditor that the debtor cannot pay the debt
The most common act of insolvency is where a debtor writes a letter to a creditor to say that the debtor cannot pay the debt. Most of the time the letter states that the person cannot pay the debt, but can pay it is instalments of Rx per month. We also know that debt counseling is considered by some to be an act of insolvency, and the reason for this is based on this section in the Insolvency Act.

3) The debtor leaves his house/country with the intent to evade paying debt
If one leaves the country or one’s house with the intent to not pay one’s debt, one commits an act of insolvency. One must have the intent not to pay one’s debts, but I guess it is difficult for a creditor to prove a person’s intent.

4) Judgment was granted and the debtor fails to pay the judgment AND/OR judgment was granted and the debtor does not have sufficient assets to sell in order to pay the debt amount of the judgment
This occurs daily. If a judgment granted is not paid, or where there are not sufficient assets, which there usually are not, the debtor commits an act of insolvency and any creditor can bring a sequestration application. It does not only have to be the creditor that obtained the judgment who can bring the sequestration application, it can be any creditor of the debtor.

5) Selling/removing assets with the intent to benefit one creditor over another or to avoid his assets being sold to pay any/all of his creditors
This is the “6-month” and “two year” rule that most debt collectors are aware off. This means that a debtor cannot sell/alienate his/her assets 6 months before date of sequestration. The trustee can go back as far as two years and reverse transactions that the debtor has entered into before the date of sequestration. The debtor must have the intent to prejudice his/her creditors or to benefit one over the other. This does NOT apply where the person is not being sequestrated. Then a debtor can sell/alienate his/her assets on the same day that a Warrant for Execution is issued.

6) Where the debtor benefits one creditor over another
A person who benefits one creditor over another commits an act of insolvency and can be sequestrated. If the effect of payment of the debt or sale of assets to one creditor benefits that creditor over another, then that is considered an act of insolvency. One does not have to prove intent here.

7) Where a debtor has published a notice of surrender of his estate, but does not proceed
This is very important to take note of. There are companies who help debtors to stop execution sales of their properties by placing an advertisement in the Government Gazette of the debtor’s intention to proceed with sequestration, with the intent of stopping the sale of the property, but then do not proceed with the sequestration application. Such a notice, where the person does not proceed with sequestration, is an act of insolvency.

8) Sale of business is advertised and after the advertisement does not pay debt
When somebody sells a business, there should be a clause in the sale agreement that an advertisement will be placed in the newspaper in terms of Section 34(1) of the Insolvency Act. This advertisement is to let all creditors of the business know that the business is being sold. If a person places such an advertisement but then does not pay the debt of the business, then the deduction is made that the debtor cannot pay any of his debts. This will therefore be an act of insolvency.

Be careful of the wording in letters that you write to the creditors of your clients and caution your clients likewise.

This article written by Nanika Prinsloo of Prinsloo & Associates. It is a general discussion of the acts of insolvency and does not purport to be legal advice. Please contact writer for a consultation on your case as each case will receive the appropriate advice based on its merits.
www.empowerlaw.co.za
email: nanika@vodamail.co.za