The effect of sequestration or winding-up on a creditor
who has already obtained
judgment against the debtor
Nothing is more common in the commercial world than for an individual businessperson or a trading company to become insolvent and unable to pay creditors.
When it appears that a person or company is getting into financial trouble, a frenzy can erupt amongst the creditors, all seeking to be paid before the guillotine falls and the individual’s estate is sequestrated by order of court or the court makes a winding-up order against a company.
What is the position of a person who manages to take judgment against a person or company prior to the date of such a court order? Can that person proceed to execute (enforce) the judgment by selling the debtor’s property and thereby secure payment of the debt while other creditors are left out in the cold?
Section 20(1)(c) of the Insolvency Act 1936, provides that (emphasis added) –
“The effect of the sequestration of the estate of an insolvent shall be –
...
(c) as soon as any sheriff or messenger, whose duty it is to execute any judgment given against an insolvent, becomes aware of the sequestration of the insolvent’s estate, to stay that execution, unless the court otherwise directs.”
It is clear from this provision that, unless the court otherwise directs (which it will do only in exceptional circumstances), the effect of sequestration is that, even if a creditor has obtained judgment against the debtor before sequestration, the sequestration order stays the execution proceedings to enforce that judgment, in other words, brings those proceedings to a halt.
The purpose of freezing the estate of a person who has been sequestrated by order of court, is to ensure that all unsecured creditors are treated equally. If there are insufficient proceeds for them to be paid in full, then each will receive the same proportion of his claim.
Secured creditors, such as a creditor whose claim is secured by a mortgage over the debtor’s property, will be paid from the sale of that particular property and may thus receive full payment of their claims.
In the recent case of Legh v Nungu Trading 353 (Pty) Ltd [2007] SCA 122 (RSA) the Supreme Court of Appeal shed valuable light on the legal aspects of this situation.
In this case, a creditor of the company had obtained judgment against it and the company’s immovable property had been sold in execution before the court made an order that the company be wound up.
The purchaser wanted to take transfer of the property that he had bought in the sale in execution, and applied to the Johannesburg High Court for an order that he was entitled to take transfer. It was not in dispute that selling price would go into the kitty to be shared amongst all the creditors.
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