From the moment a partnership is sequestrated, its creditors are mostly confined to the partnership assets and inevitably deprived of any recourse against the partners individually. According to Michalow v Premier Milling Company Limited 1960 (2) SA 59 (W) (“Michalow case”), a partnership is treated, for purposes of insolvency law, “as a separate entity as soon and as long as its liabilities exceed the value of its assets”.
In South African common law, a partnership is viewed according to the ‘aggregate theory of partnership’, which treats a partnership as a collection of individual parties. The basic principle is that a partnership is not a legal entity separate from its members. It has no existence in itself distinct from the partners composing it. The rights and duties of the partnership are the rights and duties of the partners, its property is owned in common by the partners in undivided shares, and the partners are ultimately liable for the partnership debts in a personal capacity.
Exception to the Common Law – Sequestration
Section 13(1) of the Insolvency Act No. 24 of 1936 (“Act”) provides an exception to the aggregate theory, by stating that “[i]f the court sequestrates the estate of a partnership… it shall simultaneously sequestrate the estate of every member of that partnership.” Section 49(1) of the Act further provides that when the partnership estate and the separate estates of the partners are under sequestration simultaneously, the creditors of the partnership are not entitled to prove claims against the separate estates of the partners and the creditors of a partnership are not entitled to prove claims against the estate of a partnership.
In the Michalow case, the court held that sequestration of a partnership estate is treated as distinct from the estates of the individual partners of the partnership, and that initially, partnership creditors have to prove their claims against the partnership estate only. Private creditors of the individual partners are similarly prohibited from proving claims against the partnership estate. The trustee of the partnership estate is only entitled to the residue (if any) of a partner’s estate after all the claims of the private creditors of the partner have been paid in full, if that residue is required to pay the partnership’s debts. Likewise, the trustee of a partner’s estate is entitled to the residue (if any) in the partnership estate after the claims of partnership creditors have been paid in full, in so far as that partner would have been entitled to it, if his/her estate had not been sequestrated. The court went on further to provide justification for the Act’s dramatic departure from the common law aggregate theory: “those who deal with and grant credit to a partnership, do so in reliance on the partnership assets only; they must be taken to have looked, throughout their dealings with it, on the partnership as a separate entity. It is, of course, a fiction but a fiction that is indispensable in justifying the provisions operating against partnership creditors”.
The Act provides a radical departure from the common-law position, since it prevents partnership creditors from instituting their claims against the partners’ estates. This exception obviously does not have the effect that a partnership is indeed a separate entity, but merely that it is treated as having a separate personality for a certain limited purpose.