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Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003)

Chapter 13 : Resolution of Financial Problems

Part 3 : Debt relief and restructuring

155. Termination of financial obligations and settlement of claims


(1) Before issuing an order for the termination of a municipality’s financial obligations to creditors in terms of section 153(1)(c), the court must be satisfied that—
(a) the municipality cannot meet its financial obligations to its creditors and is not likely to be able to do so in the foreseeable future;
(b) all assets not reasonably necessary to sustain effective administration or to provide the minimum level of basic municipal services have been liquidated in accordance with the approved financial recovery plan for the benefit of meeting creditors’ claims; and
(c) all employees have been discharged except those affordable in terms of reasonably projected revenues as set out in the approved financial recovery plan.


(2) If the court issues an order referred to subsection (1), the MEC for finance in the province must appoint a trustee to prepare a distribution scheme for the proportional settlement of all legitimate claims against the municipality as at the date of the order. Those claims must be settled against the amount realised from the liquidation of assets referred to in subsection (1)(b).


(3) A distribution scheme must—
(a) determine the amount available for distribution;
(b) list all creditors with claims which qualify for the purposes of the distribution scheme, indicating which of those are secured and the manner in which they are secured; and
(c) provide for the distribution of the amount available amongst creditors in the following order of preference:
(i) First preference must be given to the rights of secured creditors as to the assets with which they are secured in terms of section 48, provided the security in question was given in good faith and at least six months before the mandatory provincial intervention in terms of section 139 began;
(ii) thereafter the preferences provided for in the Insolvency Act, 1936 (Act No. 24 of 1936), read with the necessary changes as the context may require, must be applied; and
(iii) thereafter non-preferent claims must be settled in proportion to the amount of the different claims.


(4) A distribution scheme may not be implemented unless approved by the court.