Lecture Slides for Law of

Business Entities (LBUE3704)

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 Supplementary notes for Sole
Proprietorship in Financial Distress Unit 1B

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RECAP OF PREVIOUS LECTURE
• 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)
 Practice Questions
• 2. Provisional Tax return
• 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.
 Sole Proprietorship in Financial
Distress
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 34 of 2005.
 Administration orders
• Magistrates’ Courts Act 32 of 1944
• Only applies to debts not exceeding 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
 Administration orders
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
 Administration orders
• 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
 Debt review
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)
 Debt Review
• 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.
 Debt Review
• 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.
• Section 88 provides: A consumer who has filed an application in
terms of section 86(l), or who has alleged in court that the consumer is
overindebted, 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 occur
 Debt Review
• 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
 Dissolution of sole proprietorships
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
• 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:
 Gradus v Sport Helicopter
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.
 Gradus v Sport Helicopter
• 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.
 Gradus v Sport Helicopter
• 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.
 Gradus v Sport Helicopter
• 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.
 Gradus v Sport Helicopter
• 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.
 Practice Questions
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?
[20]
3. State and explain the different ways a sole
proprietorship can be dissolved. [5]
Sole Proprietorship

THE END