Guide to Sequestration under the Insolvency Act

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1. Introduction

 

Sequestration is the legal process through which the estate of an insolvent individual is placed under the supervision of the High Court and administered for the benefit of creditors. Governed by the Insolvency Act 24 of 1936, the procedure ensures the orderly realisation of assets, the fair distribution among creditors, and, ultimately, the opportunity for the debtor to obtain a legal fresh start through rehabilitation.

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Sequestration applies to natural persons, partnerships, and certain trusts. It does not apply to companies or close corporations, which are subject to liquidation proceedings under company legislation.

Because sequestration affects contractual capacity, control of assets, and long term financial standing, a clear understanding of the legal requirements and consequences is essential before any application is launched or defended.

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2. When Can Sequestration Be Applied For?

 

Sequestration may take two forms:

• Voluntary sequestration, initiated by the debtor;

• Compulsory sequestration, initiated by a creditor.

 

A creditor applying for compulsory sequestration must establish:

• A liquidated claim meeting the statutory minimum threshold;

• That the debtor is unable to pay debts as they fall due, supported by financial evidence; or

• That the debtor has committed an act of insolvency as defined in section 8 of the Insolvency Act;

• That sequestration will be to the advantage of creditors.

 

The requirement of advantage to creditors is fundamental. The court must be satisfied that creditors will receive a meaningful dividend after administration costs are deducted.

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3. The Eight Acts of Insolvency

 

Where factual insolvency cannot be conclusively proven, reliance may be placed on one of the statutory acts of insolvency under section 8 of the Insolvency Act. These acts create a legal presumption of insolvency. They include:

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Absconding (Section 8(a))
Departing South Africa or remaining outside the country with the intention of evading or delaying payment of debts.

 

Failure to Satisfy Judgment (Section 8(b))
A sheriff’s nulla bona return following a court judgment, indicating that there are insufficient disposable assets to satisfy the debt.

 

Prejudicial Disposition (Section 8(c))

Disposing of property in a manner that prejudices creditors or unlawfully prefers one creditor over another.

 

Removal of Property (Section 8(d))

Removing assets with the intention of placing them beyond the reach of creditors.

 

Offer of Arrangement (Section 8(e))

Proposing a compromise or arrangement to creditors due to an inability to pay debts in full.

 

Failed Voluntary Surrender (Section 8(f))

Publishing a notice of intention to surrender an estate without completing the statutory process required for voluntary sequestration.

 

Written Notice of Inability to Pay (Section 8(g))

Providing written confirmation, including by letter, email, or electronic message, acknowledging an inability to pay a debt.

 

Trader’s Notice (Section 8(h))

Publishing notice of the sale of a business in terms of section 34 of the Act, and thereafter being unable to pay outstanding debts.

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4. The Two Stage Court Process

 

Sequestration proceedings unfold in two judicial stages.

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Stage 1: The Provisional Order

The High Court may grant a provisional sequestration order together with a rule nisi. This interim order calls upon the debtor to show cause on a specified return day why a final order should not be granted.

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At this stage, the court considers whether a prima facie case has been established.

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Stage 2: The Final Order

On the return day, the court evaluates the evidence on a balance of probabilities. If all statutory requirements are satisfied, a final sequestration order is granted. If not, the provisional order is discharged.

 

Once a final order is granted:

• The estate vests in the Master and thereafter in the appointed trustee;

• The debtor loses control of assets.

• A trustee administers the estate and distributes proceeds according to statutory ranking.

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5. Legal Consequences of Sequestration

 

A final sequestration order has significant implications:

• Assets vest in the trustee;

• The insolvent’s contractual capacity is restricted;

• Legal proceedings against the insolvent are generally stayed.

• Creditworthiness is severely affected.

 

Rehabilitation restores legal status and contractual capacity. It may occur automatically after ten years or earlier by court application, often after four years, depending on statutory compliance.

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6. Common Defences to Compulsory Sequestration

 

A debtor facing sequestration may raise recognised legal defences, including:

• Demonstrating that the creditor’s claim is genuinely disputed on reasonable grounds in accordance with the Badenhorst Rule;

• Proving solvency by showing that assets exceed liabilities;

• Establishing that sequestration will provide no real advantage to creditors;

• Raising a counterclaim exceeding the creditor’s claim effectively extinguishes the alleged debt.

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7. Frequently Asked Questions

 

How long does sequestration last?
An individual remains insolvent until formally rehabilitated. Rehabilitation may occur automatically after ten years or earlier by court application, often after four years.

 

May assets, such as a vehicle, be retained?
Generally, assets vest in the trustee and may be sold. Limited exemptions may apply, including essential tools of trade and basic household necessities.

 

Does sequestration clear all debts?
Upon rehabilitation, the individual is released from pre sequestration debts, providing a lawful financial reset.

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8. Practical Considerations

 

Before instituting or opposing sequestration proceedings:

• Carefully assess factual or commercial insolvency;

• Evaluate whether sequestration truly benefits creditors.

• Consider negotiated settlement or restructuring;

• Understand the long term financial implications.

 

Sequestration is a collective remedy designed to balance creditor recovery with structured debt resolution.

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9. Seek Legal Assistance

 

Sequestration is a technical and procedurally demanding area of law with serious financial and personal consequences. Whether bringing an application, defending one, or considering voluntary surrender, strategic legal assessment is essential.

 

Early professional guidance ensures compliance with statutory requirements, proper evaluation of defences, and protection of your financial interests. A consultation provides clarity, mitigates risk, and ensures that any steps taken are legally sound and strategically appropriate.