What is sequestration? (Part 1)
A PERSON IS INSOLVENT IF HIS OR HER LIABILITIES (DEBTS) ARE GREATER
THAN HIS OR HER ASSETS. FOR LEGAL PURPOSES, A PERSON WHOSE LIABILITIES
ARE GREATER THAN HIS OR HER ASSETS WILL ONLY BE TREATED AS INSOLVENT
ONCE HIS OR HER ESTATE (IN OTHER WORDS HIS OR HER COLLECTION OF
ASSETS AND LIABILITIES) HAS BEEN SEQUESTRATED BY THE COURT. A
SEQUESTRATION ORDER IS A FORMAL DECLARATION THAT THE DEBTOR IS
INSOLVENT. THE DEBTOR HIM- OR HERSELF CAN APPLY TO COURT FOR A
SEQUESTRATION ORDER (VOLUNTARY SEQUESTRATION). ALTERNATIVELY, THE
DEBTOR'S CREDITORS, (PERSONS TO WHOM THE DEBTOR OWES MONEY) CAN
APPLY TO COURT TO SEQUESTRATE THE DEBTOR (COMPULSORY SEQUESTRATION).
The aim of the law of insolvency is to protect the creditors of the debtor, not the debtor
him or herself. The court will therefore only agree to sequestrate the debtor's estate
if sequestration will be to the advantage of the creditors. The insolvent debtor does not
have enough assets to pay all his or her creditors everything they are owed, and the main
aim of a sequestration order is to make sure that whatever assets the debtor does have
are shared among the creditors in an orderly and fair way. The Insolvency Act sets out
the order in which creditors of a person who is under a sequestration order are to be paid.
Once a sequestration order is granted by the court, an independent person is appointed
to act as the insolvent's trustee. The trustee takes charge of all the assets of the insolvent and
has the job of working out who the insolvent's creditors are and in what order they are
to be paid. The insolvent is not allowed to increase the debts of the sequestrated estate.
The debtor him or herself may apply to court for the acceptance of the "surrender of his
estate". This is known as "voluntary surrender". A court can accept the surrender of
a debtor's estate and grant the sequestration order only if it is satisfied that - the debtor's
estate is in fact insolvent (in other words liabilities exceed assets), the debtor's estate
will be able to pay for the costs of sequestrating the estate, and sequestration will be
to the advantage of creditors. There are also some formalities which have to be followed.
Even if the court is satisfied that the requirements set out above have been met and
that the formalities have been followed, it may still refuse to give the sequestration
order. Factors which may influence a court to refuse an application include - that the
debtor's aim in applying to have his or her estate sequestrated is to avoid paying a
particular creditor or to prejudice the rights of a particular creditor, that creditors are
not in a rush for payment and are prepared to give the debtor time to pay or are willing
to accept payment in instalments.
The second way in which a debtor's estate may be sequestrated is called "compulsory
sequestration". An application for compulsory sequestration is made by one or more of
a debtor's creditors. A court may grant an application for the sequestration of a debtor's
estate if it is satisfied that:
- the applicant (i.e. the creditor) has established a claim against the debtor;
- the debtor has committed an act of insolvency or is insolvent;
- there is reason to believe that it will be to the advantage of creditors of the
debtor if his estate is sequestrated.
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