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THIS MONTH:

1) SEQUESTRATION – A GENERAL OVERVIEW

2) YOUR LAST WILL:  AN IMPORTANT DOCUMENT

3) THE DUTIES OF A TRUSTEE COME AT A PRICE

4) ABOUT US

1) SEQUESTRATION – A GENERAL OVERVIEW

Sequestration is the legal process whereby application is made for an individual (the “debtor”) to be declared insolvent when such an individual’s liabilities exceed his/her assets and, as a result, they cannot pay their debts to creditors.

The sequestration application may be brought by the debtor personally (voluntary surrender of his/her estate) or by a creditor of the debtor (forced sequestration).

Sequestration also applies to trusts.

Once a sequestration order is granted by court, the Master of the High Court must appoint a trustee for the insolvent estate of the debtor. It is the duty of the trustee to manage the distribution of the proceeds from the sale of assets vesting in the insolvent estate between the creditors of the insolvent estate.

Creditors are ranked and receive payment of their claim/s against the insolvent estate in a hierarchy of the following three distinct type of creditors:

Secured creditors:

Hold security for their claim over a specific asset or assets, such as a bondholder’s claim i.r.o. its mortgage bond registered over immovable property.

Preferent creditors:

Claims are not secured but nevertheless rank above the claims of concurrent creditors. A claim for the costs of sequestration is a preferent claim.

Concurrent creditors:

Do not hold any form of advantage over other creditors and are paid out of the balance of the free residue of the insolvent estate.

Once a person’s estate has been sequestrated, he/she remains sequestrated until an application is made to court and an order granted for rehabilitation of the person’s estate and thus his/her status to again participate in economic activity and build up a new estate. Should no such application be made an insolvent is automatically rehabilitated 10 years from date of sequestration of their estate. The 10-year period runs from date of the provisional sequestration order.

The debtor may not give preferential treatment to one creditor over another. In other words, the debtor may not pay certain of his/her creditors to the exclusion of others prior to sequestration. Once the sequestration process begins, the debtor must stop payment of debt to all of his/her creditors.

It is possible, and in practice it often happens, that the courts refuse the sequestration application on the grounds that the debtor doesn’t have enough money. The reason for such a refusal being that the Insolvency Act stipulates that a sequestration can only be allowed if it is to the benefit of the body of creditors. Current rulings hold that Creditors must receive a minimum of 20 cents out of the rand in respect of their claim against the insolvent.

Where the debtor does own immovable property, he/she must have enough other unencumbered assets that can be surrendered and sold to ensure sufficient benefit for the creditors.

The trustee will sell assets and use the money to pay the administration costs and creditors of the insolvent estate. If the proceeds from the sale of the assets are insufficient to pay all creditors in full, the money will be divided pro-rata to their claims, between the creditors and in the order of preference of payment. Any outstanding debt that remains thereafter must be written off by the creditors.

Items such as firearms and jewellery forms part of the insolvent estate and must be sold by the trustee for the benefit of the creditors.

By law, the trustee must attach all the furniture of the debtor, though there are certain exceptions. It is possible for the debtor to negotiate for the exclusion of furniture from the insolvent estate, with the allowance that the debtor can buy back the furniture from the estate at an appreciated value.

For further advice on the pro’s and con’s of sequestration, the consequences and the procedures feel free to communicate with us for guidance.

Annelize Joubert - Senior Associate

2) YOUR LAST WILL:  AN IMPORTANT DOCUMENT

Two things in life are certain: death and taxes. The latter is unavoidable, unpredictable and its timing, unknown. Just consider the thousands of people currently succumbing to Covid-19 where they have been caught off-guard, put into quarantine or seclusion, and perhaps never had the opportunity under their circumstances to even consider “what if?”.

Many people adopt the attitude that the administration of their estates would not be their problem after their demise, or they reason that they have (possess) nothing and why bother about a Will.

How simplistic or “poor” your estate may be, there are always matters to attend to. There are accounts to be closed, accounts to pay (such as an overdue credit card and car payments) or medical expenses or claims to attend to or to be processed through your Medical Aid.

Not only do you burden the loved ones you leave behind to sort out this mess, but it is also a burdensome, time-consuming and costly process to have an executor appointed in the absence of a will, to sort out the administrative issues, which most of the time can only be defined as “a mess”.

Without a Will and the appointment of an executor, the Master of the High Court may appoint an executor on behalf of your estate.

We recently consulted a widow for assistance where her husband passed on without leaving a Will. He reasoned that he possessed little and therefore had no reason to have a Will. What the deceased did not consider, is that he and his wife were married Out of Community of Property with the application of the Accrual System. The widow’s estate accrued during their marriage, whereas the husband’s estate showed no growth since their marriage 30 years ago. The accrual to which the deceased husband’s estate became entitled to as accrual claim against the surviving spouse were calculated to be the sum of R2,500 000-00. This created a big problem, as this inheritance does not revert to the surviving spouse, but is shared between her and four children in terms of the laws of intestate succession, meaning that the assets of the deceased husband are distributed in accordance with legal prescriptions. The surviving spouse will have to dispose of her assets to effect payment of the accrual claim.

A further problem the aforesaid widow faced is that the deceased left children all over the globe, whom will have to complete documentation to nominate an executor, which documentation must be submitted to the Master’s office in duplicate and must be originals. This means that courier services must be appointed and, where applicable, air mail.

Even if you have a Will, it may be time to consider revision thereof due to changed circumstances and/or events that can be foreseen.

A simple Will is not expensive and even a more expensive Will, as a result of appropriate investigation and estate planning, may be one of the best, if not the best, investments you may ever make.

Feel free to communicate with us should you require assistance or further advice.

Elmo Stuart - Director

3) THE DUTIES OF A TRUSTEE COME AT A PRICE

Trustees, like directors of a company, are appointed to manage the affairs of a trust. The trust assets do not belong to the trustee(s). Hence, trustees function as guardians of trust assets and are to act in the best interest or to the advantage of all beneficiaries. This is also known as a “fiduciary duty” which requires trust, good faith and honesty of any person or entity appointed in the capacity as a trustee.

The trust instrument, also known as a trust deed, must clearly set out the powers and duties of trustees. This will guide trustees to abide by the provisions of the trust deed as well as applicable legislation to fulfil the objectives and purpose of a trust.

The Trust Property Control Act 57 of 1988 does not prescribe qualifications for a trustee to be appointed save for section 9 of the Act which stipulates:

“(1) a trustee shall in the performance of his duties and the exercise of his powers act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another

(2) any provision contained in the trust instrument shall be void in so far as it would have the effect of exempting a trustee from or indemnifying him against liability for breach of trust where he fails to show the degree of care, diligence and skill as required in subsection (1).”

This essentially means that the onus is upon appointed trustees to well acquaint themselves with the trust deed and what his/her responsibilities are against the intentions of the founder and the rights of the beneficiaries. Failure to act in the best interests of the beneficiaries can subject trustee(s) to civil and criminal action, as taken by the trust beneficiaries for maladministration.

The onus of proof rests on the trustee to prove that he/she acted with the necessary diligence, care and skill pertaining to the trust assets and the distribution of benefits. Boyes NO v Bloem 1960 (3) SA 855 (T) states that mere fact that the trustee acted in good faith and on the wrong legal advice from a legal practitioner will not necessarily be sufficient to escape liability. If the court finds that the actions of the trustee(s) were indeed to the detriment of trust assets and beneficiaries, trustees may be held personally liable for pecuniary losses and/or any economic benefits received by the trustee at the time.

Hence, the title of “trustee” should not be taken lightly or for granted.

In full view of the section 16 of the Act, the Master of the High Court may call upon the trustees to account, to the Master’s satisfaction, for the administration of the trust. Thus, proper record with documentary proof of all decisions made concerning the disposal, acquiring and investment of trust assets must be kept by trustees. Furthermore, accountability between trustees is key to ensure that one or more trustees do not act in bad faith.

The success of managing a trust hinges on a well- comprehensively drafted trust instrument, informed trustees that acquire the relevant skills and knowledge on trust matters and sound legal advice.

When in doubt, consulting a legal practitioner specialising in trust law will ensure that trustees act in accordance with their fiduciary duties. Schedule an appointment with us and we can guide you through the trust registration process and beyond as a trust remains an important instrument in estate planning and to safeguard your assets against unforeseen events and creditors.

Bianca van Wyk - Director

4) ABOUT US

To view our previous newsletters, please visit our website on www.eyslaw.co.za.
Kind regards,

EY STUART INC.

Disclaimer: The information disclosed herein is not intended to constitute legal advice and is not guaranteed to be correct, complete, or up-to-date. You should not act or rely on any information emanating from this Newsletter without seeking the advice of an Attorney, as the facts relating to your circumstances may influence any advice or information conveyed herein. Should you require legal representation, then please do not hesitate to communicate with us for further information and our standard mandate terms.