De facto insolency

What is the factual enquiry in determining de facto insolvency and concursus creditorum?

The factual enquiry is: whether a debtor can be declared insolvent and have their estate sequestrated when their statement of affairs reflects a technical balance‑sheet surplus of assets over liabilities. This matter requires the determination of factual insolvency under Section 2 and Section 6(1) of the Insolvency Act 24 of 1936 because the debtor, despite possessing immovable properties that on paper exceed their debts, has defaulted on multiple immediate claims and lacks cash reserves to pay creditors.

What is the issue in determining de facto insolvency?

The issue is: whether a debtor is factually insolvent despite a paper surplus, and whether sequestration should be granted to establish the concursus creditorum.

What is the applicable law in determining de facto insolvency?

The applicable law is: Section 2 and Section 6(1) of the Insolvency Act 24 of 1936, together with case law such as Walker v Syfret NO 1911 AD 141, Voltex v First Strut 2022 (3) SA 550 (GP), and Naidoo v Absa Bank Ltd 2010 (4) SA 597 (SCA).

What is the justification for sequestration in cases of factual insolvency?

The justification is: sequestration is a judicial act that divests the debtor of control over their estate, vests it in the Master and trustee, and establishes the concursus creditorum — the collective “coming together of creditors.” The purpose is equitable distribution of insufficient assets among all creditors.

What are the routes for establishing insolvency?

The routes are: either proving factual insolvency or showing the commission of an act of insolvency under Section 8. In this matter, factual insolvency is relevant because the sequestrating party must demonstrate that despite a superficial surplus, the debtor’s estate is objectively insolvent in that assets are illiquid and incapable of being realised to pay debts.

What principles apply when a paper surplus exists?

The principles are:

• Ex parte Harmse 2005 (1) SA 323 (N): A paper surplus creates a prima facie inference of solvency, rebuttable only by admissible valuation evidence.
• Ex parte Deemter 1962 (2) SA 228 (E): Insolvency accepted despite paper surplus because assets were illiquid and debtor faced lawsuits.
• Stratford v Investec Bank Ltd 2015 (3) SA 1 (CC): Advantage to creditors must not be rigidified into a fixed dividend; investigative benefit may suffice.

How are these principles applied in practice?

The application is: the debtor’s paper surplus is not decisive. Following Harmse, the surplus creates a prima facie inference of solvency, but this is displaced by admissible expert evidence showing immovable assets are illiquid and unlikely to realise sufficient value. Like Deemter, the debtor faces multiple lawsuits, has no liquid funds or income, and cannot sell property. Sequestration is appropriate because it establishes a concursus creditorum, halts individual execution, and ensures systematic winding‑up for the benefit of all creditors.

What is the conclusion in determining de facto insolvency?

The conclusion is: the debtor is factively insolvent on a balance of probabilities because liquid assets are non‑existent and illiquid holdings cannot be realised to pay debts in full. The technical surplus is rebutted, Section 6(1) is satisfied, and the application for sequestration should be granted.