Insolvency refers to a status of diminished legal capacity imposed by the courts on persons, companies, close corporations or trusts that are unable to service their debt obligations and where total liabilities exceed total available assets.

The aim of insolvency process is mainly to protect the estate’s creditors. This is achieved by realizing all the assets of the insolvent estate and using the proceeds to contribute towards payment of all or part payment of all outstanding liabilities. From an SA Home Loans perspective the outcome of the insolvency process is that the property in question must be sold.

How is an Insolvency Application Brought?

Insolvency application can be brought about in a number of ways:

  1. Voluntary Surrender (Natural Persons/Trusts) – is brought about by a Debtor and the burden of proof lies on this party to show that liabilities exceed the assets.
  2. Compulsory Sequestration (Natural Persons/Trusts) – is brought about by a Creditor, who must show that they have a liquidated claim, that the debtor is insolvent (or committed an act of insolvency) and that an advantage exists to creditors to have the debtor’s estate sequestrated.
  3. Forced Liquidation (Companies and Close Corporations) – A forced liquidation occurs when a creditor or a member of the company brings an application to the High Court for the company to be liquidated.
  4. Liquidation by special resolution (Companies and Close Corporations) – The members of the company make a decision to liquidate the company by special resolution.

Final Order Is Granted

Once the final order is granted by the court the individual or trust is sequestrated and the company or close corporation is liquidated. If an individual has been sequestrated, a Trustee will be appointed to attend to the administration of the estate. Similarly, if a company or CC has been liquidated a Liquidator would be appointed.

More Information About Insolvency

The role of the Trustee or Liquidator is to assume the financial responsibilities of the insolvent party. This entails the following:

  1. To investigate and list all the movable and immovable assets of the insolvent estate;
  2. To determine the extent of the liabilities of the insolvent estate;
  3. To realise (sell) all the movable and immovable assets of the insolvent estate.

Obligations Of Bondholders In The Event Of Insolvency

In the event of insolvency, the obligations and responsibilities of bondholders and sureties are influenced by their legal relationship with the insolvent party:

Bondholders married in Community of Property

By virtue of the fact that the spouses are married in Community of Property both spouses will be declared insolvent and a Trustee will then deal with a joint insolvent estate.

Bondholders married in terms of an Ante Nuptial Contract

SA Home Loans will determine if there is a solvent bond holder associated with the bond. If so, then it is the responsibility of the solvent bond holder to ensure that the bond repayments remain up to date. If the bond is not up to date, SA Home Loans can proceed with legal action against the solvent bond holder to cure the default.

The consent of the solvent bondholder is required before the property can be sold privately as an asset in an insolvent estate. The solvent bondholder remains responsible for any outstanding liability after the property is sold.

A Company or CC Is Liquidated

With regards to a SA Home Loans mortgage bond, sureties will be held liable for any shortfall which is outstanding on the mortgage bond after the sale of the property. Furthermore, in the interim, whilst the liquidation process is underway, home loan repayments must still be met. If the bond falls into arrears, SA Home Loans can proceed with legal action against the sureties to cure the default.