Advantage for creditors in South African insolvency law - a comparative investigation

Abstract

The main aim of the sequestration process, in terms of the Insolvency Act, is to provide for a collective debt collecting process that will ensure an orderly and fair distribution of the debtor’s assets in circumstances where these assets are insufficient to satisfy all the creditor’s claims. This is to make sure that the interests of the group of creditors are protected and that one creditor is not favoured before another. The insolvent estate of a debtor may be sequestrated by himself voluntarily or one or more of his creditors may apply for the compulsory sequestration of his estate

Under present South African law, the only way in which an insolvent debtor can obtain a discharge of his debts and make a fresh start is by the sequestration of his estate. Providing the debtor with debt relief is not the main aim of the Insolvency Act, but debt relief is an indirect consequence as the debtor receives a discharge of all pre-sequestration debt after rehabilitation. However, in order to obtain this discharge the sequestration of the insolvent debtor’s estate must be to the advantage of his or her creditors. In establishing this advantage for creditors in order to sequestrate one’s estate, the question is whether the balance between all the parties involved is achieved as more and more weight is being placed on this requirement.

This benefit for creditors requirement has also led to abuse of the insolvency law through the development of the so called “friendly” sequestration process where the sequestrating creditor and the debtor collude together in order to bypass the stringent requirements of a voluntary surrender application. Many other jurisdictions have witnessed large scale reform of their insolvency law systems in order to address the problem of insolvencies. Notwithstanding the worldwide trend to accommodate overburdened debtors seeking debt relief, the South African insolvency system has remained largely creditor orientated.

The research will discuss the current state of affairs with regard to the advantage for creditors requirement in South Africa and its impact on insolvency law.