6._Uncompleted_contracts__unfinalised_legal_proceedings - 1 6 EFFECT OF SEQUESTRATION ON UNCOMPLETED CONTRACTS AND LEGAL PROCEEDINGS NOT YET FINALISED

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6. EFFECT OF SEQUESTRATION ON UNCOMPLETED CONTRACTS AND LEGAL PROCEEDINGS NOT YET FINALISED 6.1 Uncompleted contracts (general contracts) If an insolvent has entered into a contract(s) with a third party before he went insolvent and has not performed in terms of that contract or has not performed in full ; and thereafter went insolvent, what happens to that contract? This section considers the legal issues surrounding this question. In the absence of a statutory provision stating otherwise, a contract is generally not terminated automatically by the sequestration of one of the contractants (see Bryant & Flanagan (Pty) Ltd v Muller ). When a GENERAL contract is uncompleted, the situation is governed by the general principles under the COMMON law. [By “general contracts”, I mean every contract except those (specific) contracts which are governed by legislation or which are governed by other (special) rules of common law – see below.] The effect that sequestration has on an uncompleted contract (general) is that because the insolvent estate vests in the trustee, he steps into the shoes of the insolvent and must decide whether to perform in terms of the contract or not (see Bryant & Flanagan (Pty) Ltd v Muller ). This means that the trustee has the choice to render specific performance (as stipulated in the contract whatever that may be) or not. He will make this decision depending on whether it will benefit the general body of creditors. [Performing in terms of the contract = specific performance] If the trustee decides TO PERFORM in terms of the contract he steps into the shoes of the insolvent and is bound to fulfil all the insolvent’s obligations as if he were the insolvent (see Bryant & Flanagan (Pty) Ltd v Muller - trustee cannot accept the contract on the one hand, but act in a manner that disregards the rights of the third party on the other. If the trustee accepts the contract he is obliged to honour it.). If the trustee accepts the contract, not only must he honour it by rendering performance himself, but he is entitled to demand from the other contractant any performance which that party is obliged under the contract to make. Further, any defects in the rights that the insolvent held are taken over by the trustee and are now rights with defects in the hands of the trustee and any defences that the other contractant had against the insolvent can similarly be used against the trustee. Thus, the trustee takes the rights under the contract as they are, he is afforded no better rights by virtue of his position as trustee. (see Bryant & Flanagan (Pty) Ltd v Muller ). The cost of making this performance is considered to be an administration cost to be paid out of the insolvent estate (the free residue). If it eventually turns out that the insolvent estate cannot carry this cost then the creditors (who have proved their claims against the insolvent estate) must contribute to the cost. The trustee must therefore think very carefully before deciding whether to perform in terms of an uncompleted contract or not, as it may have a negative impact on the creditors.
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