WEEK THREE

CHAPTER 4: THE LEGAL POSITION OF THE INSOLVENT:

✓ An Order Sequestrating the debtor’s estate will result in

reducing their status

✓ How?????

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 Contracting:

The Act restricts the debtor’s capacity to contract in order

to protect the creditors

Prohibited contracts:
o Debtor prohibited from contracting where the result is disposing of property in the insolvent estate

o Debtor needs written consent of the trustee

o Debtor may not contract enter into contracts which adversely affects or is likely to affect his estate, or any

contribution which they are obliged to make towards the estate

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o Mervis Brithers (PTY) Ltd v Hanekom – Appeal Court held: the trustees consent was not necessary at that

point and Hanekom’s undertaking was binding.

The effect of a contract which is not prohibited:

o Contract is valid and binding if: consent of trustee is not required or where it has been given

o De Polo & Another v Dreyer & Others: even if the contract is binding, the insolvent is only able to enforce

the performance if the Act gives him the right to do so.

o BUT WHAT IF THE ACT IS SILENT?????

❖ The correct person to enforce the enforce the claim is the: TRUSTEE

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 The effect of a prohibited contract:

o What happens if an insolvent enters into a contract which has the result of disposing the assets in the

insolvent estate????

❖ The contract is not VOID

❖ The contract is VOIDABLE at option of trustee

❖ WHAT DOES THIS MEAN???????

▪ The trustee can enforce the contract or choose to set it aside

o Is the situation the same if insolvent enters into a contract but does not obtain consent from the trustee?

❖ YES

❖ HOW SO?

▪ The trustee may elect to set aside the contract or enforce it. If it is enforced, the contract is

binding on both parties.

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o WHAT HAPPENS IF THE OTHER PARTY TO THE CONTRACT REFUSES TO PERFORM????

❖ Insolvent may only sue for performance on his own if the Act affords them the right to enforce the

contract.

❖ If the contract is set aside – recovery of performance of insolvent – return of that received to the third

party

o BUT WHAT IF THE THIRD PARTY DID NOT KNOW THE INSOLVENT WAS INSOLVENT???????????

❖ PROTECTION in terms of Section 24(1) only if they did not know the insolvent was insolvent

❖ If an insolvent tries to alienate an asset for valuable consideration and without the consent of the

trustee, or the right to such a thing, which was acquired after the sequestration of his estate to a third

party who did not know and had no reason to believe estate of insolvent was under sequestration - the

alienation is valid.

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❖ NOTE:

▪ applies to new assets which came into insolvent estate after sequestration NOT assets acquired by

insolvent in exchange for or in replacement of, property in the estate at the time of sequestration.

▪ WESSELS V DE KLERK & ANOTHER: sale of the notes not validated by section 24(1) and accordingly

was voidable at the option of the trustee.

▪ Third Party bears the onus to prove that they were not aware nor had any reason to suspect, that

the insolvent was insolvent.

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 Earning a livelihood:

❖ May follow profession or occupation and make applicable contracts

❖ MAY NOT, without trustee’s consent in writing, carry on or be employed in any capacity or have any

interest, direct or indirect, in the business of a trader who is a general dealer, or a manufacturer.

o “Trader” carries on business whereby movables or immovables are sold or bought or manufactured

for the purpose of sale or building operations.

o “Manufacturer” not defined in the Act, but its been held that a milk depot selling only milk is not a

general dealer.

❖ Consent to trade in a specified business only allows the insolvent to trade in accordance with the nature

of the business

❖ WHAT IF INSOLVENT DOES NOT OBTAIN CONSENT AND PURSUES A VOCATION??

o Criminal offence

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 o Contracts entered into in this vocation are voidable at option of trustee

❖ WHAT IF THE TRUSTEE REFUSES TO CONSENT??

o Creditors can appeal to the Master – who will make a final decision

Instituting or defending legal proceedings:

When can an insolvent bring or defend legal proceedings?

❖ Divorce

❖ Right to receive maintenance from the insolvent

❖ Claim for reward for work done

❖ Claim is for a pension for work done

❖ Compensation for loss/damage in respect of defamation or personal injury or where a delict committed

after the sequestration

❖ Litigation for maladministration of estate

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❖ Interdict to prohibiting sale of assets by trustee where sufficient assets have been sold to yield creditor

claims

❖ Claim for damages against trustee for loss incurred due to maladministration of the estate.

❖ If insolvent brings an action in the Magistrate’s Court: if defendant requests it, they are obliged to give

security for the costs. Defendant may apply for the action to be dismissed if insolvent fails to produce the

security

❖ If insolvent brings action in the High Court: If the Act permits Insolvent to sue, insolvent cannot be forced

to produce security for costs.

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 Holding office:
Unrehabilitated insolvent:

❖ Is disqualified from being a trustee of an insolvent estate

o If they are appointed and subsequently sequestrated: must vacate office

❖ May not be a member of the National Assembly or National Council of Provinces or the Provincial

Legislature.

❖ May not be a director of a company or take part in the management of a close corporation (unless

exempted by the Court)

❖ May not be a member of governing board of National Credit Regulator or be a registered credit provider

❖ May not be a business rescue practitioner or attorney or hold a fidelity fund certificate (estate agent)

❖ May not be registered manufacturer / distributor of liquor

❖ May not be executor of deceased estate

❖ May be removed as Trustee for a Trust

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