Summary of previous presentation

 A sole proprietorship is business entity owned and managed by an individual.

 It is not a legal person. Hence, the owner is personally liable for the debts and
liabilities of the business.
 Under the Income Tax Act, a sole trader is required to file two tax returns
 1. Individual tax return (ITR 12)
 2. Provisional Tax return
Exercise 1.
1. With reference to J C Van der Merwe v Anastaci Projects (A668/07) [2012]
ZAGPPHC 288 (13 November 2012) discuss the legal personality of a sole
proprietorship. 10
2. State and explain the tax implications arising from operating a sole
proprietorship business. Refer to case law. 10
Sole proprietorship in financial distress

 Financial distress means that the business is failing to generate revenue to meet its
obligations. In other word, the business is on the verge of insolvency.
 Insolvency means that the liabilities of the business exceed its assets.
 When a sole proprietor is in financial distress, there are two avenues to rescue the
business:
 1. Apply for an administration order at the magistrate court
 2. Apply for debt review in terms of the National Credit Act.
Administration orders

Magistrates’ Courts Act 32 of 1944

Only applies to debts must not exceed R50 000
 An administration order is an order granted by the Magistrate Court instructing the
debtor to pay its debts in instalments.
 Documents to be submitted
 Read section 74 A subpara (a)- (l) of the Magistrates’ Court Act.
• The process
A. Submit application to the clerk of court
B. Serve each creditor with the notice of the
application at least 3 days before the hearing
C. Attend the hearing: Creditors are allowed to
provide evidence of their claims
D. Court order and appointment of administrator.
Order specifies when the debts will be paid (weekly
or monthly) and administrator collects the money
and distributes to creditors.
 Debt review
Debt reviews are regulated in terms of Part D Chapter 4 of the National Credit Act
34 of 2005. ---Only applies to credit agreements.
1. A debt review may be commenced in two ways either by the court or the
consumer. In both ways, the debt counsellor may be called upon to review the
consumer’s financial situation and make recommendations either to declare
the credit agreement reckless or to restructure the credit agreement.
2. The counsellor may recommend a debt-rearrangement (interests, postpone or
partial write off)
3. When a consumer is under debt review any credit provider is restricted from
commencing legal proceedings against the consumer. Section 88(3) states that a
credit provider who has received a notice of court proceedings as envisaged in
section 85 or a notice in terms of section 86 may not enforce its right or security
by litigation or any other judicial process. The purpose of the moratorium is that it
“freezes the rights” of the credit providers listed on the application allowing the
consumer to restructure its debts and effecting payment.
4. Section 88: A consumer who has filed an
application in terms of section 86(l), or who has
alleged in court that the consumer is over-
indebted, must not incur any further charges
under a credit facility or enter into any further
credit agreement, other than a consolidation
agreement, with any credit provider until one of
the following events has occurred.
5. Debt review and administration orders do not
prevent creditors from commencing
sequestration proceedings in terms of the
Insolvency Act.
• Dissolution of sole proprietorships
1. Registration of the business as a company
2. Sequestration of the owner
3. When the owner dies and does not live a Will.
4. Inheritance, when the owner dies but lives the
business to another person.
Read: Gradus v Sport Helicopter also known as
Sport Aviation (19879/2008) [2012] ZAWCHC
365 (28 November 2012).
Gradus v Sport Helicopter also known as Sport Aviation, (Gradus). In this case it was a common cause that ESD
MacDonald owned and operated a sole proprietorship under the trade name Sport Aviation/Sport Helicopter. The main
business of the enterprise was to facilitate tours of the Cape peninsula for tourists. The business owned several helicopters.
During one of the tours, the helicopter crashed on the beach of Cape Point Nature Reserve. The plaintiff and other
passengers were injured. In the same year ESD MacDonald died without any personal injury claims being instituted against
him or the business. The deceased left a valid will and in terms of the Will one of his sons was bequeathed with the business
as a going concern. The will read as follows:

To my son Robert Graham MacDonald I .., bequeath the business concern known as Sport Aviation together with all its assets and
liabilities.The plaintiffs sued the beneficiary and son, Robert McDonald for personal injuries. However, the deceased’s
estate was not cited as defendant. The plaintiff alleged that the heir was liable for the damages arising from the accident
as he inherited Sports Helicopters including all its assets and liabilities from his late father, the former owner and
proprietor of the business. The legal question before the court was whether Robert MacDonald inherited delictual liability
arising from the accident. The basis of the plaintiff’s argument was that after his father’s death Robert MacDonald adiated
the bequest. He then went on to commence a sole proprietorship under the name Robert MacDonald t/a Sport Aviation.
The plaintiff further submitted that the will was clear and unambiguous, the deceased intended the beneficiary to carry on
Sport Helicopter as a going concern. Thus by accepting the benefit he also inherited the assets and liabilities of the
business which included the plaintiff’s claim.
Robert MacDonald contended that there was no adiation of the business concern on his part. Upon receiving a letter of
executorship the executor entered into a preservation agreement with the heir concerning the helicopters. The executor
did not have the expertise to deal with the sole proprietorship business and the estate was experiencing liquidity
problems. Thus the agreement between the executor and the heir was that the heir undertook to continue running the
business to financially assist the estate. A few days after entering into the preservation agreement Robert McDonald
established a sole proprietorship. To this end, he opened an account specifically for the business, registered with South
Africa Revenue Services and entered into employment contracts with employees and negotiated a lease agreement with
V & A Waterfront for the helicopter business. The court accepted the argument that Robert MacDonald’s motive was that
in the interim he would do what is necessary to keep the business profitable until he tool ownership when the estate was
finally wound up. With regards to liabilities, MacDonald submitted that liabilities predating the forming of sole
proprietorship were supposed to be directed to the deceased estate and he was only responsible for liabilities and
expenses arising from maintaining the business. The court held that it made no sense that the beneficiary would accept
responsibility for unspecified liabilities. On the contrary, it made sense that he agreed to run the business for purposes of
assisting the estate. Although the preservation agreement was oral, evidence supports the contention that the liabilities
predating the incorporation of the sole proprietorship were not the beneficiary’s responsibility.
Exercise 2
1. Define the term financial distress and provide
a possible solution for a debtor on the verge
of insolvency. (10).
2. What are the consequences of debt review?
(2).
3. State and explain the different ways a sole
proprietorship can be dissolved. (5)