The position regarding sequestration is often unclear to Joe Public, and the perception can easily arise that it’s an easy way to escape your responsibilities.
Firstly, it is important to understand that sequestration can only take place by way of a court order. A person cannot declare themselves bankrupt in order to bypass their responsibilities. A sequestration order can be granted on either the debtor’s request – known as voluntary surrender of your estate – or through one of a person’s creditors – known as compulsory sequestration.
The test a court applies to determine if someone’s estate is insolvent, is to ascertain whether a person’s reasonably calculated liabilities exceeds his reasonably appraised assets, which then means the person is “factually insolvent.” A sequestration order can also be granted when a person’s assets exceed his liabilities, but where a person cannot settle his debts due to for example a problem with cash flow, such a person will be regarded as “commercially insolvent.” But the fact that a person cannot pay his debts or accounts, is just one of the indicators that a person is possibly insolvent. A sequestration order will only be granted when the court is convinced that it will benefit the concurrent creditors, and therefore sequestration is a process for the benefit of creditors, and not necessarily the insolvent.
The purpose of a sequestration order is to liquidate an insolvent’s assets and to, according to the ranking of creditors, divide the revenue from the sale of assets pro rata among the creditors, as determined by the Insolvency Act.
As soon as a provisional sequestration order is granted, a curator takes charge of the insolvent’s estate and affairs, and may the insolvent no longer take on any further responsibilities or debts upon himself, or deal with his estate assets. The insolvent may then also not do certain things himself (or only to a limited extent), may only conclude certain contracts and may not hold certain positions. For dealings he may not conduct himself, the insolvent will require his curator’s written consent, and will not be able to act without such consent. The curator will only only consider providing consent if it does not disadvantage the creditors of the estate.
Insolvency is not permanent. An insolvent can be rehabilitated and then act and transact as before. An insolvent is automatically rehabilitated after 10 years, calculated from the date on which the provisional order has been granted. In addition there are different circumstances and periods within which the insolvent can approach the court for rehabilitation. In the case of the insolvent bringing an application to court, the court has to be convinced that the person is indeed rehabilitated, and can the curator or a creditor object against the granting of a rehabilitation order, which will be taken into consideration by the court.
The benefit of sequestration, though not the primary purpose thereof, is that once the insolvent has been successfully rehabilitated, he is free from all debt that existed prior to his sequestration order (with some exceptions). This means that, even though a person will no longer have his previous assets, he can start again from scratch. A sequestration order is therefore not the end of the world, but it is certainly not a pleasant experience, and can for as much as 10 years have a dramatic effect on a person’s life.