Legal Articles

Consequences of sequestration

Upon sequestration of a debtor’s estate, the Master of the Supreme Court will appoint a curator to collect and realise the debtor’s assets in an orderly and efficient manner in order to ensure that payment to creditors are made.

From the date of sequestration all assets; movable and immovable; vests in the trustee of the estate and the insolvent debtor may under no circumstances deal with such assets.

Spouses married in community of property will have their joint estate declared insolvent, and accordingly both spouses will be insolvent.

A major provision of the Insolvency Act is where spouses are married out of community of property. The Act provides that all assets (movable and immovable) belonging to the solvent spouse, also vests in the trustee of the insolvent estate and the solvent spouse may not deal with it.

The solvent spouse must first prove to the trustee that the property is not part of the insolvent estate and only when the trustee formally releases the asset(s) may the solvent spouse again deal with it.

If an estate holds immovable property, the Registrar of Deeds must attach an interdict against the title deeds of all immovable properties registered in the name of the estate in the Republic.

The same interdict must also be attached against the solvent spouse’s property. This interdict determines that only the trustee may deal with the properties so attached.

What happens where immovable property is registered in the names of both spouses and they get divorced prior to sequestration?

Where property is registered in both spouses’ names (married in or out of community of property) and the parties get divorced, the deed of settlement will determine what should happen to the property.

What however, is the position where the deed states that the property should be transferred to one spouse, but before the property can be transferred, one of the parties’ estates is sequestrated?

Because the property is at this time still registered in the names of both parties’, the question arises whether the estate will go to the spouse who is entitled to it in terms of the deed of settlement or to the curator, who is appointed to administer the estate?

In the case of Corporate Liquidators (Pty) Ltd v MA Wiggill it was held that if a party, on the date of the divorce order being granted, is entitled to asset(s) as set out in the deed of settlement, even if the property has not been transferred in said party’s name, the curator of the other party can be obligated to effect the transfer and the property which will then not vest in the insolvent estate.

What happens if the seller of property is sequestrated before the property is registered in the buyer’s name?

In this instance we are dealing with an “incomplete contract” and in such a case the curator has the option to continue with or cancel the contract.

If the curator chooses to continue with the contract, he must fulfill all obligations in terms of the contract, i.e. he steps into the shoes of the seller.

Where the curator decides to cancel the contract (this will happen, for example where the curator is of the opinion that the purchase price is not a true reflection of the actual value of the property and that a higher price can be obtained) the buyer cannot claim that the property should be transferred to him – in legal terms, the buyer may not claim for specific performance.

Where the buyer has already paid the full purchase price to the seller prior to the latter’s sequestration, the buyer is in the disadvantageous position of losing the purchase price and only having a concurrent claim for it.

If the purchase price has not yet been paid he will only have a concurrent claim for any damages caused as a result of the cancellation of the contract of sale.

Does a lease agreement in respect of immovable property automatically terminate upon sequestration?

The general principle is that lease agreements do not automatically terminate upon sequestration of the tenant or landlord. A provision in a lease agreement stipulating that the contract will be terminated upon sequestration of one of the parties is void and unenforceable.

Where the tenant is sequestrated, the curator can immediately terminate the agreement by giving written notice to the landlord and will the landlord have a concurrent claim for damages.

If the curator does not terminate the lease, it will automatically come to an end within 3 months after his appointment, unless the curator informed the landlord within this period that he intends to continue with the lease.

The landlord has a tacit hypothec over all the movable property on its premises if there is rent in arrears and owed at the date of sequestration and the proceeds thereof will be used to cover arrears up to the date of sequestration.

There may also be additional rent owed by the estate after the date of sequestration.

Where the landlord is sequestrated the position is as follows: The sale of the property by the trustee will be subject to the lease as a result of the principle “huur gaat voor koop“. The buyer will then be bound by the terms of the lease.

If however, a mortgage is registered over the property before the lease was entered into, the property will first be auctioned subject to the lease.

The property may be sold free of the lease only if the proceeds are not sufficient to repay the mortgagee’s claim and a better offer can be obtained if the property were to be sold free of the lease.

The tenant will then have an unliquidated concurrent claim against the estate for damages as a result of breach of contract.

There may be exceptions to the cases discussed above and it is recommended that you consult an attorney for advice if any of the above situations are relevant to you.

A legal practitioner can also assist you in discussions with a curator, the proving of claims against the estate as well as preparing the necessary application for release of property should you be the solvent spouse whose assets have fallen into the insolvent estate.