SESSION 2 NOTES

VOLUNTARY LIQUIDATION

Historical Overview

a. Roman Law
▪ Under the 12 Tables, if a debtor was unable to pay his debts, his creditors
could seize him and sell him into slavery (manusiniecto) or, cut his body
into pieces.
▪ Between 362 and 313 BC, the lex Poetelia was passed, which prohibited
the sale of a debtor into slavery in execution of a judgment debt. After that,
imprisonment in a public prison replaced sale into slavery as the
punishment for inability to pay debts.
▪ Missio in possessionem, execution against the debtor's property was only
introduced in 167 or 104 BC. The process was in three distinct stages
which had to be sanctioned by the praetor:
i. The 1st decree authorised one or more creditors to take possession of,
protect, and advertise for sale all the assets of the debtor.
ii. The 2nd decree empowered creditors to choose from their number a
manager (magister bonorum) to supervise the sale of the assets.
iii. The 3rd decree authorised the sale, which was held a few days later.
▪ The whole of the debtor's estate or universitasiuris was sold and transferred
en bloc to the person who offered creditors the largest dividend on their
claims. The process was known as bonorumempti.
▪ In later times, a modified process was introduced; instead of a magister, a
curator was appointed by the creditors, subject to the sanction of the
praetor. The curator sold the property in lots, as was most convenient or
advantageous to creditors. This process was called bonorumdistractio.
▪ Relief came to the debtor in the form of the lex Julia (circa 48 BC), which
allowed a debtor to make cessiobonorum, i.e., to surrender his estate to his
creditors. Surrender exempted the debtor from arrest, imprisonment,
slavery, and infamia. Property which he subsequently acquired could be
sold to pay his debts, but he was entitled to keep as much as was necessary
for his subsistence.
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b. Roman-Dutch law
▪ Cessiobonorum, in its main features, was introduced into Dutch law,
probably towards the latter part, of the 15th century.
▪ The granting of a cession was regarded as a privilege which the court could
in its discretion confer upon a debtor, and then only if his insolvency was
due to misfortune.
▪ A cession was initially administered under the supervision of a local
magistrate, but during the 18th century, chambers were established,
known as 'Desolate Boedelkamers', which had the function, inter alia, of
administering insolvent estates.
▪ The Ordinance of Amsterdam, passed in 1777, formed the basis of much
of the South African law of insolvency (Fairlie v Raubenheimer 1935 AD
135 146).

OBTAINING A LIQUIDATION ORDER

▪ A debtor can only be liquidated if unable to pay debts. In that regard,

section 3 of the Act becomes applicable.
▪ Subsection 1, a debtor is deemed unable to pay debts upon proof that the
debtor is generally unable to pay his debts which are due and payable or
proof that the debtors liabilities exceed the value of the debtor's assets.
Implicit in that is that the assets must have value.
▪ Subsection 4, in determining whether a debtor is unable to pay his or her
debts, the Court must also consider the contingent (suretyship) and
prospective liabilities of the debtor.
▪ There are two ways in which debtor's estate may be liquidated: the debtor
himself (or his agent) may apply to court for acceptance of the surrender
of his estate (sections 4 and 5) aka Voluntary surrender, or a creditor or
creditors (or his or their agent) may apply to court for the liquidation of the
debtor's estate (compulsory surrender), section 6.
▪ Although the consequences are the same, the procedure and requirements
for each method differ in material respects.
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SESSION 2: VOLUNTARY LIQUIDATION

Natural person or partnership s(4)

▪ According to S4(1) the following persons can apply for the voluntary
liquidation of the estate of a debtor:
i. natural person
ii. a partnership,
iii. an agent - In the case of an agent, he must be duly authorised,
and a general power of attorney is insufficient unless the power
expressly or by necessary implication accords it to him. Also, the
application by the agent must be in the name of the debtor. See
Ex parte Brown 1951 (4) SA 246 (N). Who can apply for the
liquidation of an estate for a person incapable of managing his
own affairs? Curator bonis. In Ex parte 1958 (1) SA 448 (N) the
Court allowed a curator bonis to surrender the estate of a
businessman who had disappeared without trace.
iv. the executor of a deceased person's estate.
v. What of the spouses married in community of property? What
obtains if one of the spouses is uncooperative?
▪ For the procedure to be followed refer to sections 2 to 7.
▪ Refer to Hockly at page 27 for the substance of the application.
▪ In terms of subsection 8, upon receipt of an application for voluntary
liquidation in the prescribed form, the Court may, in terms of
subparagraph (a), grant a Provisional Order (s14) or a Final Order (15) if:
a) the debtor satisfies s3 i.e., unable to pay his debts. In Ex parte Van
den Berg 1962 (4) SA 402 (O) 404 the court may make a finding of
insolvency even if the statement shows that assets exceed liabilities.
According to Ex parte Harmse 2005 (1) SA 323 (N) 326 the test is
if the debtor is without funds to pay his debts and it is improbable
that disposing his assets will realise enough for this purpose. For
example, in Ex parte Deemter 1962 (2) SA 228 (E) the debtor was
failing to sell his major assets at the time when debts had become
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due and payable as such the Court deemed him insolvent and
accepted his application for surrender.
b) The liquidation of the estate is to the advantage of the creditors. The
debtor must prove that his liquidation will be to the advantage of
the creditors whereas in compulsory liquidation, the creditor must
prove that there is reason to believe that it will be. The onus shifts
because of access to financial information, see Botha v Botha 1990
(4) SA 580 (W) 581. Also, in a particular case, in deciding whether
advantage to creditors has been proved, the Court may consider that
the use of the machinery for surrender is not to be preferred above
that of execution in the ordinary course. The fact that the debtor
may consider that such execution constitutes "harassment" of him
has no relevance in relation to the merits of his application for
surrender, see Ex parte Pillay 1955 (2) SA 309 (N) at 311.
c) A pre- or post-liquidation composition, where applicable, would not
be more appropriate than a liquidation order. In Ex parte Kruger
1928 CPD 233 the Court refused granting the application because
the creditors were not pressing the debtor for payment and they were
willing to accept instalment payments. The same logic extends here
where a composition, in modern law, is an agreement among the
creditors of an insolvent debtor to accept an amount less than they
are owed, in order to receive immediate payment. If the debtor does
not fulfil the agreement, then the creditors may demand only what is
due them under it, rather than the full amount.
d) Dismiss it, or postpone it, or make any other order it regards just in
the circumstances.

Voluntary liquidation of trust, company, private business corporation,

co-operative or other debtor other than a natural person s(5)

▪ These entities can act through themselves, persons identified in the

section, and members as per s2.
▪ Similarities: s2, 5, and 7 of s4 applies to s5 as well s5(4)(a) & (b) is like
s4(4)(a) & (b).
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▪ Differences: you will note that in relation to entities other than a natural
person or a partnership the test goes beyond S3 to factor in situations that
might be to the detriment of the creditors in the long term.
▪ E.g., Investigation by the Registrar of Companies s5(e)(i), Consider the
replacement provision in the new Companies Act and the provision exists
because it seeks to realise advantage to the creditors, s42(b)(i) [its business
is being conducted with intent to defraud its creditors or the creditors of any
other person or otherwise for a fraudulent or unlawful purpose or in a
manner oppressive of any part of its members or that it was formed for any
fraudulent or unlawful purpose] & removal of directors under s193 replaced
by s202.
▪ S8 [abuse of process], s5(3) [resignation or removal of directors
responsible for deadlock], and s5(7) [persons seeking liquidation are
being unreasonable and there is another remedy outside liquidation].

Liquidation of partnership estate s7

▪ The provisions of s4 apply in so far as possible s7(2).

▪ An application for the surrender of the estate of a partnership must be
made by all the partners therein who are resident in the Republic (or their
agent). The agent must be authorised by all of them jointly: an individual
partner as such has no authority to apply for the surrender of the estate
of the partnership: Ex parte the Bester and Another 1937 CPD 45.
▪ When seeking to liquidate a partnership estate, one must simultaneously
seek to liquidate the individual estate of every partner except one who is
not liable for the partnership debts or one upon whom there is a lawful bar
to the liquidation of his estate for a reason such as an order for pre-
liquidation composition. However, see Commissioner for SARS v
Hawker Air Services (Pty) Ltd [2006] 2 All SA 565 (SCA) at 575 for the
exception to 'every'.
▪ The consequent court order must also reflect the same as regard
liquidation of individual estates of partners.
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▪ The meaning of the proviso in s7(3): where a partner provides security to

pay off the debts of the partnership his individual estate must not be
liquidated only in so far as the liquidation of the partnership is concerned,
this means that nothing prohibits his individual estate to be liquidated in
a different suit.
▪ There might not be an individual estate of partner owing to a lawful
reasoning barring liquidation of said estate.
▪ Also, a partnership estate comprises of all the assets and or liabilities in
the name of the partnership.
▪ In terms of s7(4), in the event that no individual estates are liquidated but
the partnership estate is, the natural persons forming such partnership
and the directors of juristic persons forming such partnerships will be
regulated by the law as though their individual estates are liquidated.
▪ Meaning of s5: remember that one must deposit with the master security
for the payment of costs of liquidation until the appointment of a
liquidator; ergo this provision regarding the payment of costs from the
partnership estate and from the individual estates of other partners.

Instances the Court may refuse to grant a liquidation order regardless of

an applicant satisfying the s3 test

Even if the court is satisfied that the requirements have been met and that
the preliminary formalities have been observed, it still has a discretion to
reject the voluntary surrender. The following are examples of factors that may
influence the Court towards refusing the application:
▪ The debtor displayed gross extravagance and ran up debts on a
pretentious scale, even after judgment had been granted against
him (Ex parte Logan 1929 TPD 201).
▪ The debtor’s creditors are not pressing him for payment and are
willing to give him time or to accept payment in monthly
instalments (compromise).
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▪ The debtor had an ulterior motive in applying for surrender e.g.

to avoid paying or to defeat the rights of a particular creditor. (Ex
parte Van den Berg 1950 (1) SA 816 (W)).
▪ The debtor failed to give a full and frank account of his financial
position.
▪ The debtor’s papers were deficient in a number of respects (Ex
parte Harmse 2005 (1) SA 323 (N) 332).

General

▪ A creditor has the right to oppose the application even if his claim is less
than the amount required to entitle him to apply for compulsory
sequestration of the debtor’s estate, see Ex parte Berson; Levin and
Kagan v Berson 1938 WLD 107. The same applies even if his claim is
disputed by the debtor, see Ex parte Berman 1972 (3) SA 128 (R).