LAW OF INSOLVENCY

Introduction
Plunging oneself into a debt can be catastrophic in these harsh economic times. There is need to
carefully manage debts otherwise the debtor will consequently fall in the embarrassing snare of
being publicly declared insolvent.

This paper will highlight major points relating to the law of insolvency that is, defining
‘insolvency’ itself, voluntary surrender and sequestration, rights and types of creditors, duties of
the trustee and the rehabilitation of the insolvent.

Objectives
By the end of this unit, one should be able to converse with:
• Definition of Insolvency;
• Voluntary surrender and sequestration
• Rights and types of creditors
• Duties of the trustee
• Rehabilitation

DEFINITION OF INSOLVENCY
Roy (2011) defined insolvency as “a status of diminished legal capacity (capitis diminutio)
imposed by the courts on persons who are unable to pay their debts, or (which amounts to the
same thing) whose liabilities exceed their assets”.

Vanessa (2002), asserts that insolvency is the legal term describing the situation of a debtor who
is unable to pay his/her or its debts.

The law thus balances the interests of debtors and creditors by providing methods for the
collection of debts as well as mechanisms by which a debtor who is unable to pay his or her
debts could enjoy a degree of relief.
Bankruptcy Cases (Examples)
• Former Harare businessman, Eric Rosen, was declared bankrupt after his company ran
into debts. Rosen’s company, Eric Rosen (Pvt) Ltd, which traded as Motor Action, filed
for bankruptcy as lawsuits and writs of execution threatened to ground the 30-year old
business. Rosen and the company’s co-owner, his wife Elizabeth resolved to file for
voluntary sequestration after suffering losses.

• Founded in 1841, parent company Thomas Cook filed for bankruptcy after failing to
secure emergency funding of £200m from the UK government recently. Almost 100,000
holidaymakers are travelling with the German affiliates Condor, and it is not clear what
the bankruptcy proceedings will mean for them.

SEQUESTRATION
Sequestration refers to an order of court declaring a debtor insolvent, that is, unable to pay his
debts because his liabilities exceed his assets, (Paul, 2008). Such orders are granted by the High
Court as it is the court with jurisdiction to entertain matters of status.

The debtor in this case is a natural person or a partnership. There are two kinds of sequestration,
namely VOLUNTARY SEQUESTRATION AND COMPULSORY SEQUESTRATION.

VOLUNTARY SURRENDER
Avinash et al (2007), avers that voluntary surrender is a legal process whereby a debtor applies
for a court order that a trustee be appointed to manage the debtor’s assets and liabilities because
he is insolvent.

A court may accept the surrender if the debtor proves among other things that his liabilities
exceed his assets.

The debtor’s aim in surrendering the estate is as a rule, to escape a financial position which has
become intolerable. The court therefore, has to be satisfied that the surrender will be to the
advantage of creditors.
Section 3 of the Insolvency Act Chapter 6.04 highlights that the debtor has to draw up a
statement of affairs together with a verifying affidavit. These documents are presented to the
Master of High Court and a notice of surrender is published in the Government Gazette and a
local newspaper so as to notify any creditors of the insolvent person and allow them an
opportunity to take action.

COMPULSORY SEQUESTRATION
Compulsory sequestration is sequestration which is obtained at the instance of a creditor or
creditors. The first practical step by the creditor in the process leading to compulsory
sequestration is the exhaustion of reasonable steps to recover the debt owed by the debtor who is
sought to be declared insolvent.

The legal requirement is that the creditor must have a liquidated claim against the debtor, which
cannot be paid. A liquidated claim is an undisputed claim sounding in money, which has been
ascertained or is capable of easy and prompt ascertainment.

Purpose of Sequestration Order

The main purpose of a sequestration order is to secure the orderly distribution of a debtor’s
assets where they are insufficient to meet the claims of all his creditors.

The law proceeds from the premise that, once an order of sequestration is granted, a concursus
creditorium (a coming together of the creditors) is established, and that the interests of creditors
as a group enjoy preference over the interests of individual creditors.

Who may apply

• In the case of the estate of a natural person, the debtor himself or his agent may apply. If an
agent applies he must be expressly authorized to do so.
• In the case of the estate of a deceased debtor the executor may apply.
 • In the case of the estate of a debtor who is incapable of managing his own affairs, the party
entrusted with administering the estate may apply.
• In the case of a partnership estate all the members of the partnership or their agent may
apply.
• In the case of the joint estate of spouses married in community of property, both spouses
may apply.
• Requirements for the court to grant order
• Debtor must prove that he is indeed insolvent.
• The surrender must be to the advantage of creditors.
• There are sufficient assets to cover costs of sequestration.

NB ;- An application for a sequestration order may be turned down by the court if it is of the
opinion that the application was made to defeat the claims of the creditors. There is a decided
case law to this effect (Ex parte Berman 1972)

Acts of Insolvency
• These are some act or action by a debtor that the law and practice has accepted or
recognized as proof that the debtor cannot pay his debts.

• In terms of section 11 of the Insolvency Act, conduct which amount to acts of insolvency
are:-
• Remaining outside the jurisdiction of the courts of Zimbabwe or being unavailable at one’s
dwelling house for purposes of evading payment of debts.
• In Rothmans of Pallmall (Zimbabwe) Ltd v Jackson, the respondent stole money from the
applicant and fled Zimbabwe. This was recognised as an act of insolvency.
• Failing to satisfy a valid warrant or writ of execution.
• Making or attempting to make any disposition of property which can have the effect of
prejudicing creditors or giving preference to one creditor or creditors over others.
• Removing or attempting to remove assets from the reach of the law with intent to prejudice
creditors or giving preference to one creditor or creditors over others.
 • Making or offering to make any arrangement with a creditor or creditors for releasing the
debtor wholly or partially from his debts other than in terms of an assignment in terms of
the Act.
• Giving written notice to any creditor of an inability to pay debts.
• Failing to meet liabilities of the business after giving notice of disposing the business.
• Failing to lodge his statement of affairs after publishing the outcome of assignment
attempts by notice in the gazette.

RIGHTS AND TYPES OF CREDITORS

Creditors' rights are the procedural provisions designed to protect the ability of creditors;
persons who are owed money; to collect the money that they are owed. These provisions vary
from one jurisdiction to another, and are as follows;
a) the ability of a creditor to put a lien on a debtor's property,

b) to effect a seizure and forced sale of the debtor's property,

c) to effect a garnishment of the debtor's wages, and

d) to have certain purchases or gifts made by the debtor set aside as fraudulent
conveyances. 

The rights of a particular creditor usually depend in part on the reason for which the debt is
owed, and the terms of any writing memorializing the debt.

TYPES OF CREDITORS
There are different types of creditors from whom you can borrow money. Your trustee will need
to know the details of all your creditors, including the security each creditor holds.

According to Craig, (2017), there are three different types of creditor’s are as follows:
Secured Creditors:
• a person holding a mortgage, lien, charge, pledge, or privilege against an asset of the
bankrupt person as a security for a debt due. This type of creditor is not usually affected by
a bankruptcy or proposal.

Unsecured Creditors:
• These creditors are entitled to the remaining assets after the secured creditors are paid.
Many debts such as credit cards, personal lines of credit or overdrafts fall into this
category. These creditors are not guaranteed repayment.

Preferred Creditors:
• Although preferred creditors are unsecured, they are paid first. Funeral expenses in the
case of a deceased bankrupt person are usually a preferred claim. This also includes unpaid
wages, commissions, remunerations of an employee of a debtor, and obligations to support
a spouse or child.

DUTIES OF THE TRUSTEE

• A Trustee is an officer of the court in whom ownership of a debtor's property is vested for
the benefit of the creditors and who administers the property for the purpose of making
payments to the creditors according to the priority of their claims.
• A Trustee is appointed by the Master of the High Court. A person who is to be so appointed
should be registered under the Estate Administrators Act [Chapter 27:20].
• take into his possession or under his control all the movable property, books and
documents belonging to the insolvent estate.
• open an account in the name of the insolvent estate with a bank in Zimbabwe and shall
deposit therein to the credit of the insolvent estate from time to time all sums received by
him on behalf of the estate.
• Immediately after his appointment, a trustee of an insolvent estate shall open books or
other suitable records wherein he shall enter as soon as possible a statement of all moneys,
 goods, books, accounts and other documents received by him on behalf of the insolvent
estate.
• obtain legal advice on any question of law affecting the administration or distribution of
the insolvent
estate;
 
• on the directions of the creditors or, failing such directions, with the approval of the Master
employ a legal practitioner for the institution or defence of legal proceedings on behalf of
or against the insolvent estate;
• investigate the affairs and transactions of the insolvent and shall report thereon to the
creditors.
• after the second meeting of creditors, proceed to sell all the property of the insolvent estate
in such manner and on such conditions as the creditors may direct or, where no such
directions have been given, in such manner and on such conditions as the Master may
direct.
• The trustee is in charge of challenging creditors' claims, where appropriate;
• The trustee is in charge of distributing proceeds to creditors;

2.7.6 Rehabilitations

One of the purposes of sequestration is to enable the debtor to overcome his or her financial
difficulties and to make a fresh start. The Insolvency Act therefore provides for the rehabilitation
of insolvent persons.

Rehabilitation means that the insolvent’s status is restored; e.g the insolvent may resume doing
business as a general dealer. Application to the court for rehabilitation may be made in five
circumstances, namely:-

If the insolvent has obtained a certificate from the Master that his creditors have accepted a
composition. The insolvent must give three weeks’ notice of his application for rehabilitation in
the Government gazette;
  If twelve months have lapsed since the confirmation of the trustee’s first account or two
years from the final sequestration order, whichever is earlier, unless the insolvent has
been sequestrated on a previous occasion or has been convicted of a fraudulent act in
relation to his existing or any previous insolvency.

 If the insolvent has been sequestrated on a previous occasion and three years have
elapsed from the confirmation of the trustees’ first account, unless the insolvent has
been convicted of a fraudulent act in relation to his existing or of any offence under
sections 166-168.

 If the insolvent has been convicted of a fraudulent act in relation to his existing or any
previous insolvency or of any offence under section 166-168 and five years have elapsed
from the date of his conviction; and

 At any time after confirmation of a plan of distribution providing for payment in full of
all proved claims, with interest, and the costs of sequestration.

Conclusion

To wrap up the Unit, it can therefore be deduced that the law of insolvency is there for the
benefit of both parties, that is, the creditor and the debtor. To the debtor, it relieves him from his
obligation of debts owed to creditors while it is beneficial to the creditor in that he gets his
money back.