Drowning in debt? Voluntary surrender and what you need to know

1. INTRODUCTION

• With the Covid-19 pandemic taking the world by storm, more individuals are facing economic hardship than ever before. It is thus no secret that various South African households have also fallen on hard times due to a collapsing economy amid this worldwide pandemic.
• The ensuing financial crisis have caused individuals to become trapped in a vicious cycle. Despite many job losses and reductions of income across the country, individuals’ debt keeps on skyrocketing.
• Unfortunately, the means of many individuals do not allow them to successfully repay their creditors without completely putting their livelihood at stake, which leaves them with very few options.
• Whilst this type of situation might sound dire, it is not entirely hopeless. In this article, we will closely consider the possibility of the voluntary surrender of an individual’s estate, which may be a solution for debt-ridden individuals.

2. VOLUNTARY SURRENDER IN A NUTSHELL

• Voluntary surrender of an individual’s estate is a legal process, governed by Section 6 of the Insolvency Act, Act 24 of 1936 (“the Insolvency Act”), which can be utilized by an over-indebted individual[1] or a partnership in order to be declared insolvent by a relevant Court.
• In this article, focus will be given to the voluntary surrender of an individual’s estate.
• The most important purpose and aim of voluntary surrender is to equally distribute the proceeds of an individual’s assets to his/her creditors, in the event where he/she is not able to pay all his/her creditors in full. The distribution of the proceeds to the insolvent’s estate is done in accordance with a pre-determined ranking of creditors.  However, a court will not declare an individual’s estate insolvent if it is not to the benefit of creditors.  Currently, there must be at least 22 cents in a Rand available for distribution to creditors, to prove the required benefit.
• For example, if an individual owes a total amount of R100 000.00 to his/her creditors, an amount of approximately R22 000.00 must be derived from the individual’s assets (immovable property, movable property, available cash, etc), for the benefit of his/her creditors.
• The court may accept the surrender of an individual’s estate and make an order sequestrating that estate if the court is satisfied that:
• the individual has complied with all the statutory formalities;
• the individual’s estate is indeed insolvent (i.e. he/she is unable to pay his/her debt and/or his/her liabilities exceed his/her assets);
• the individual owns realisable assets of a sufficient value to defray all costs of the sequestration which will be payable out of the free residue of his/her estate; and
• it will be to the advantage of the creditors of the individual if his/her estate is sequestrated.
• After an individual’s estate has been declared insolvent by a relevant court, the individual loses control of his/her estate, which is then declared insolvent and vests in the Master of the High Court until a trustee is appointed, whereafter the insolvent estate will vest in the trustee.
• The appointed trustee will oversee the winding-up of the insolvent estate, which inter alia includes the sale of the debtor’s assets.
• The sequestration of an individual’s estate also affects the individual’s spouse. In accordance with Section 21 of the Insolvency Act, the assets of both spouses vest in the Master of the High Court and thereafter in the appointed trustee.
• If the individual is married in community of property, the individual and his/her spouse have one joint estate. Both will have to apply for the voluntary surrender of their joint estate and both will consequently be sequestrated if the relevant court grants the order.
• If the individual is married out of community of property (whether with the application of the accrual system or not), Section 21 of the Insolvency Act places a burden of proof on the solvent spouse to prove that all assets in his/her estate are indeed his/her assets and are therefore excluded from the insolvent spouse’s estate. Proof that the solvent spouse funded the purchase of the assets should be sufficient is this regard.
• Section 82(6) of the Insolvency Act determines that certain items are exempt from an individual’s voluntary surrender, namely:
• Clothing;
• Bedding;
• Whole or part of the individual’s household furniture;
• Tools of trade; and
• Other essential means of subsistence.

3. CONSEQUENCES OF VOLUNTARY SURRENDER

• Although a successful voluntary surrender releases the individual from its obligations towards his/her creditors by ultimately causing the individual to become debt-free, the fact that he/she has been declared insolvent affects the legal position of the insolvent.
• An unrehabilitated insolvent is disqualified to hold certain positions, including the following:
• member of the National Assembly, the provincial legislator or municipal council;
• director of a company (except with leave of the court);
• trustee of a trust;
• trustee of an insolvent estate; and
• liquidator of a company or close corporation.
• An unrehabilitated insolvent may not register as a manufacturer or distributor of liquor and is also is not entitled to a fidelity fund certificate in terms of the Estate Agency Act, Act 112 of 1976.
• An insolvent may be rehabilitated by the passing of time or by a formal application to the court. An insolvent is automatically rehabilitated once 10 years from the date of sequestration have lapsed.  However, an insolvent can apply to the court for a rehabilitation order prior to the lapsing of the 10 year period, but has no certain right of rehabilitation before the expiry of 10 years, as sequestration and his/her rehabilitation fall solely within the discretion of the relevant court, which has to decide if he/she is suited to be rehabilitated.

4. CONCLUSION

Considering the aforesaid, voluntary surrender holds various consequences for an individual, has advantages and disadvantages and is dependent on each individual’s personal circumstances.  Therefore, it is advisable for an individual to seek the advice of an attorney prior to proceeding with an application for the voluntary surrender of his/her estate.   It can however be a way in which to start afresh without dragging unpayable debt around for years.

JACO WILLEMSE

ASSOCIATE

[1] An over-indebted individual refers to a person who is no longer able to honour the repayment of his/her debts due to strain on his/her financial position.