Concursus creditorum is a Latin term used in the legal system of South Africa to describe the process of distributing the assets of an insolvent estate among its creditors. It is an important concept to understand if you are involved in liquidation proceedings, either as a creditor or as a company going through the process.
If your company should be liquidated, it is important to understand that creditors are blocked from taking any legal action against a company once it is liquidated. In the liquidation process concursum creditorum mean the creditors "come together". They must wait for the liquidator to be appointed and once appointed they must deal with the liquidator and the liquidator only. The liquidation causes that creditors must stop harassing the director/member and only deal with the liquidator.
How does concursus creditorum work in practice
In simple terms, concursus creditorum means that all creditors who have claims against the insolvent estate must be treated equally in the distribution of assets. This means that each creditor must receive a share of the assets that is proportionate to the amount of their claim in a certain order of preference.
Otherwise put, interests of the creditors as a group has preference over the interests of an individual creditor. This means that instead of one creditor taking legal action against the company before everybody else and maybe sell the assets of the company to satisfy its cleam to the detriment of other creditors, in liquidation all creditors must stop with legal action and deal with the liquidator as a group. (Creditors refer to only debt that was incurred before liquidation).
Further explanation of concursus creditorum
Although a concursus creditorum is established with liquidation (“the creditors come together as a group”) not all claims are equal in the eyes of the law. Certain claims are given priority over others, and these claims are paid out first before the remaining assets are distributed to the other creditors. The South African Insolvency Act sets out the order of priority for claims against an insolvent estate. (Once the company is liquidated, its estate is insolvent).
What is order of preference
In terms of the definitions unders Section 1 of the Insolvency Act, “preference” means in relation to any claim against an insolvent estate, means the right to payment of that claim out of the assets of the estate in preference to other claims; and ‘preferent’ has a corresponding meaning.
The definition of “security” means that in relation to the claim of a creditor of an insolvent estate, means property of that estate over which the creditor has a preferent right by virtue of any special mortgage, landlord’s legal hypothec, pledge or right of retention
What does preference and security really mean
Preference means that if a creditor has a security, the creditor will rank first when it comes to the paying out of monies by the liquidator in an insolvent estate. The security part means that if a creditor’s claim is ” secured”, it is a preferential creditor. A creditor is secured when it has a claim for a bond over an immovable property (certain bonds are excluded), if it is a landlord, if there is a pledge or if there is a retention right (like a mechanic that is in possession of a vehicle that had to be fixed but was not paid) or a landlord. These type of creditors are actually referred to as ” secured” creditors and will be paid first.
Different type of creditors
From Section 95 to Section 102 of the Insolvency Act 24 of 1936 sets out the order of preference of different creditors.
- The first priority claim is for the costs of administering the estate, including the fees of the liquidator and any legal fees incurred during the liquidation process.
- The second priority claim is for any secured creditors, who have a right to be paid out of the proceeds of any assets that were used as security for their debt.
- The third priority claim is for preferential creditors, which includes employees who are owed unpaid salaries, wages, and other benefits. After these priority claims have been settled, the remaining proceeds are distributed among the unsecured creditors, who are typically at the bottom of the priority list and who are referred to “concurrent creditors”.
Proving claims against the insolvent estate
Sections 39, 40, 41 and 42 of the Insolvency Act 24 of 1936 sets out how the meetings of creditors must be set by the liquidator, what happens at the meetings and what should be done.
The purpose of the creditors meetings is to inter alia allow creditors to prove their claims. If they do not prove a claim they may not be acknolwedged as a creditor and may not get paid even if there are proceeds available to pay to creditors.
The amount of each creditor’s claim must be determined before the assets can be distributed. Creditors must submit proof of their claims to the liquidator, who will verify the claims and determine the amount that each creditor is owed. This process can be complicated, especially if there are disputes about the validity of certain claim.
Proving a claim will take place at one of the creditors’ meetings
Summary
Concursus creditorum is established when a company is liquidated so that creditors can stop taking individual legal action against the company. They come together as a group and must then take part in the winding up process that is conducted by the liquidator.
If the company owns assets and there are proceeds to pay to creditors, the creditors will be paid in a certain order of preference. If there are sufficent funds, the secured creditors will be paid first. Second the preferential creditors will be paid if there are funds left and lastly the concurrent creditors will be paid if there are still funds left. If there are no funds, no creditor will be paid anything and they must write the debt off. If there is some funds but not enough, the secured creditors will be paid first and if there is nothing left, no other creditors will be paid and they must write all the debt off.