Sequestration Without Assets in South Africa—is it Possible?

Sequestration is a formal legal process in South Africa that allows an insolvent individual to be declared bankrupt, so that a court-appointed trustee can take control of their estate. The goal of sequestration is to ensure that creditors receive a fair and orderly distribution of what an insolvent person can offer. But one of the most common and most misunderstood questions is whether sequestration is possible when a debtor has no assets at all. Is Sequestration possible without assets in South Africa?

Now, the short answer is that it is entirely possible and it dependent on various factors. The answer heavily depends on the circumstances of the debtor and the amount the debtor owes to their creditors. Let's understand the answer to this question.

Sequestration without Assets in South Africa

Let's begin with understanding how Sequestration works.

It is a court order that allows the creditors (compulsory sequestration) or the debtor (voluntary sequestration) to surrender their estate to a court-appointed trustee. This trustee determines the ranking of creditors, distributes the assets impartially and fairly, and achieves the purpose of sequestration. Distribution of assets requires that the assets be sold and the proceeds acquired from the sale of those assets be distributed equally among the creditors - in line with their legal priority.

If no assets exist then there must still be a benefit to the creditors. This can be in the form of a retrenchment package, assistance from friends or family members and pension payouts that can cover the 20% benefit to be paid to each creditor. Meaning, that you need to pay each creditor 20 cents for every rand that you owe.

Related: How to Apply for Bankruptcy in South Africa?

Understanding the meaning of "Estate"

An estate is the collection of a person's assets and liabilities. Importantly, the law has accepted that an estate may consist of liabilities only; and even then it can be sequestrated. Because the estate can theoretically contain "only debts" during sequestration.

There is an interesting case regarding this matter, if you wish to give it a read: Miller v Janks. This case also implies that lack of assets does not automatically prevent sequestration. However, whether the court will 'grant' sequestration is a different question.

Even with zero assets, the estate legally exists once a sequestration order is granted by the High Court, triggering the legal process. The process aims to administer these debts, halt creditor actions (like attaching property), and facilitate the debtor's financial rehabilitation.

Why does Sequestration Happen?

The Insolvency Act 24 of 1936 states that sequestration, whether voluntary or compulsory, can only be granted if it is to the advantage of creditors. On the ranking, it would primarily be for the creditors with security.

This is exactly how sequestration is able to write off a big portion of a debtor’s unsecured debt as well. Anyway, this means the court must confirm that (secured) creditors shall receive a better return through sequestration than they would through ordinary debt-collection efforts. 

To this reason, a court usually requires evidence that there will be either realisable assets, or free residue after costs, or some form of contribution or income from which creditors can benefit. If creditors would receive nothing, or less than what they might receive outside sequestration, the court is unlikely to approve the application.

Sequestration without Assets: 2 Main Scenarios

1. Voluntary Surrender Without Assets

To apply for voluntary sequestration, an individual must prove that they are insolvent, their estate offers a benefit to creditors, and they have no questionable records. Here, the sequestration option must offer a better outcome for creditors than if no sequestration occurred.

This creates a problem for individuals with no assets, as you can see. However, there are ways around it. A debtor may be granted sequestration if they can fulfil one of the conditions as listed below.

• A stable income from which a trustee can produce value for creditors; or

• Guaranteed payment arrangements; or

• A reliable third-party takes responsibility to pay your costs.

Without such assurances, a court would consider rejecting applicants due to insufficient advantage to creditors.

2. Compulsory Sequestration without Assets

If a creditor forces a debtor to undergo sequestration, regardless of minimal or no assets, it has a better chance of getting accepted. Here’s why.

The creditor believes that they will be able to yield a better profit for them and other creditors, if any via the sequestration route. Here, the debtor also commits the act of insolvency.

If the debtor has no assets and yet they force the debtor to undergo sequestration, it implies that the creditor can demonstrate receiving better profits than not going via the sequestration route. As the sequestration process is designed for the benefit of creditors, their words weigh more value. Thus, compulsory sequestration offers slightly more flexibility than voluntary surrender in a ‘no-asset’ scenario.

Conclusion: Practical Reality and Legal Advise

Although the law does not require a debtor to possess assets, the real-world practicality of sequestration without assets remains challenging. Without a workable solution to repay the debts, the court will likely refuse the sequestration order, thus making sequestration without assets in South Africa difficult.

If you are in neck-deep debt and are finding yourself in the ‘no-asset’ situation, you should consider seeking professional legal advice. In such situations, alternative debt solutions, such as administration, debt counselling, or negotiated settlements may be more appropriate.

At Solvendi, we will assess your situation for free and help you make informed decisions about your next financial steps. Contact us today for more information!

Disclaimer: This article is intended for general informational purposes only and should not be interpreted as legal advice. Any actions taken based on the information provided are done so at your own discretion. Solvendi cannot be held liable for any outcomes resulting from such actions. We encourage you to consult with us directly before making decisions solely based on the content of this article.

Contact us to discuss your current situation and receive a free detailed assessment of how the process works and what your costs will be. We have legal experts with 20 years experience that can guide you through the process. Our main aim is to be as informative as possible. Let's Chat.

If you require advice with regards to Sequestration, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:

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Email: consultations@solvendi.co.za 

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