The Anatomy of Friendly Sequestration in South African Insolvency Law

Understanding Friendly Sequestration in South Africa

Insolvency occurs when a person’s liabilities exceed their assets, regardless of their ability to pay debts immediately. However, legal insolvency requires a court-ordered sequestration declaring the debtor insolvent. This can happen in two ways, i.e., through voluntary surrender or compulsory sequestration.

Voluntary sequestration is a legal process initiated by a debtor (or their authorised agent, executor of a deceased estate, or curator bonis) who applies to the High Court for the acceptance of the surrender of their estate. The primary purpose for the debtor choosing this path is to obtain a discharge from pre-sequestration debts through eventual rehabilitation, as this is currently the only available legal avenue for comprehensive debt discharge in South Africa.

Compulsory sequestration, on the other hand, is a formal legal process in insolvency law where one or more creditors apply to the court for a declaration that a debtor is insolvent. If successful, this leads to the sequestration of their estate. The main goal of such an order is to distribute a debtor’s assets fairly among all creditors. This happens when the assets are not enough to cover all claims. It shifts debt collection from individual efforts to a collective process. Unlike voluntary surrender, which the debtor initiates, compulsory sequestration is initiated by creditors. The creditor applying for sequestration must prove the required conditions.

Sometimes, a debtor can arrange sequestration with a cooperative creditor. For example, a debtor unable to pay a friend might intentionally commit what is referred to as “an act of insolvency” (like writing to admit inability to pay), enabling the friend to apply for compulsory sequestration based on that act. This is known as a friendly sequestration.

Friendly sequestration is a type of compulsory sequestration initiated by a debtor’s amicable creditor, often with the debtor’s cooperation. It occurs where a creditor, often someone close to the debtor, applies for the debtor’s sequestration not out of hostility or to recover debt, but to assist the debtor in obtaining debt relief. This process is frequently chosen by debtors to achieve a temporary respite from creditors, such as preventing sales in execution, and ultimately to obtain a discharge from pre-sequestration debts through eventual rehabilitation.

Such applications commonly feature a small, unsecured loan as the basis of the claim, often between related parties, and are initiated after the debtor commits a formal act of insolvency, such as writing a letter stating an inability to pay the debt. While the mere fact of goodwill between the parties does not preclude a sequestration order, courts are acutely aware of the significant potential for collusion and malpractice in friendly sequestrations. They therefore scrutinise these applications with particular care to ensure that the statutory requirements are not subverted and that the interests of the general body of creditors are not prejudiced.

As mentioned above, the creditor’s motive is typically to assist the debtor. Collusion between debtor and creditor involves agreements to suppress facts or manufacture evidence to create false impressions of legal causes of action. Common malpractices include relying on non-existent claims, overvaluing assets, underestimating costs to suggest significant dividends, and repeatedly extending return dates. The case of Huntrex 337 v Vosloo¹ exemplified extreme collusion, involving manufactured debts, chosen domicile to avoid service, and withheld material evidence. Likewise, Mthimkhulu v Rampersad² illustrated systematic abuse of friendly sequestrations.

The process has become a “cottage industry” among certain attorneys, typically triggered by imminent property sales by banks. The pattern involves finding a purported creditor for an insignificant unsecured oral loan, drafting standardised letters confessing inability to repay, and presenting applications with identical wording across cases. These applications often feature the same valuers and are moved urgently just before property sales. After obtaining provisional orders, debtors suddenly become difficult to serve, leading to multiple extensions until genuine creditors lose interest. Alternatively, if orders are confirmed, friendly creditors make no effort to appoint trustees or prove claims.

Friendly sequestrations are frequently employed solely to stay civil proceedings, particularly approaching execution sales. Debtors prefer friendly compulsory sequestration over voluntary surrender because it can be obtained urgently without preliminary formalities, requires a less stringent burden of proof (merely establishing reason to believe sequestration benefits creditors), and initially results in provisional orders that can be postponed or discharged.

Some debtors exploit friendly sequestrations to eliminate debts entirely. When sequestration costs exceed the estate’s free residue, creditors who prove claims must contribute to these costs. If genuine creditors believe there’s significant risk of required contributions due to insufficient known assets, they refrain from proving claims. When no claims are proved within six months, debtors can apply for immediate rehabilitation and debt release.

Due to these risks, courts rigorously scrutinise friendly sequestration applications to ensure compliance with the Insolvency Act and protect creditors’ interests.³ Specific requirements imposed on the sequestrating creditor include:

Full particulars of the debt (nature, origin, date), the creditor-debtor relationship, circumstances necessitating the loan, and repayment terms (Craggs; Meyer v Batten 1999; Mthimkhulu; Esterhuizen).⁴
If the debt is an unsecured loan, a credible explanation for why no security was taken.⁵
Evidence substantiating the debt and its performance (e.g., receipts, bank records).⁶
Comprehensive details of realizable assets supported by cogent evidence (not mere opinion) of their forced sale value. Valuations must be based on properly proven facts and include the valuer’s reasoning.⁷
If another creditor has attached property, proof that they received notice of the sequestration application.⁸
Proper reasons must be provided in an affidavit if an extension of the rule nisi return date is sought.⁹

In Plumb on Plumbers v Lauderdale,¹⁰ courts expressed concern about markedly similar affidavit allegations when prepared by the same attorney. The court emphasised that affidavits must correctly represent facts the deponent believes true and warned practitioners against using precedents without ensuring deponents believe all factual allegations. The court stressed the gravity of oath-making and consequences of untruthful statements. While Stratford v Investec Bank Ltd¹¹ suggested that specifying exact dividend percentages might be unhelpful in hostile sequestrations with multiple creditors, courts retain unfettered discretion to evaluate each case individually. The emphasis remains on preventing encroachment by the legislative function while maintaining judicial flexibility to address unique circumstances.

When all is said and done, friendly sequestrations occupy a legitimate space in insolvency law. While cooperation between debtors and creditors is permissible and often beneficial, courts have learned to scrutinise these arrangements with suspicion. The judicial system has developed a healthy scepticism toward applications featuring the same attorney, the same valuer, and suspiciously identical wording. When friendly sequestrations become formulaic, it is usually the tell-tale sign that something has gone decidedly awry. As Conradie J astutely observed in Craggs, these cases may be “hard to define” but are “easy to recognise.” The balance requires thorough documentation, transparent procedures, and honest representation of facts by all parties involved, because even in the most amicable of insolvencies, the devil, as they say, remains stubbornly in the details.

You can read a discussion on the brilliant Huntrex 337 v Vosloo case here.

Written by Theo Tembo

citation: Tembo, T. “The Anatomy of Friendly Sequestration in South African Insolvency Law.” (17 Nov 2025). The Legal Desk. Available at: https://wp.me/pfvcwT-mL.