In this article the legal position pertaining to claims for maintenance in sequestration proceedings under the Insolvency Act is investigated. International trends are also discussed and the South African legal position is measured against such trends to eventually make proposals for law reform.
The facts and decision in LMV v MV 2018-07-07 case nr. 7833/2016 (GP) provide a good illustration of the applicable legal principles and are therefore discussed and evaluated. In this case, the applicant (who is the ex-wife of the respondent) brought an application for the provisional sequestration of the estate of the respondent, who at the relevant time was subject to debt review under the National Credit Act. The applicant used the sequestration process to enforce her claim for arrear maintenance, because she could not succeed in recovering the maintenance due to her by way of the usual execution procedures. The court granted a provisional sequestration order and held that sequestration would be to the advantage of the creditors.
The main enquiry of the article is whether compulsory sequestration is an appropriate remedy to enforce a claim for arrear maintenance. Although the real aim of the sequestration process is not to enforce a claim, case law confirms that it is perfectly legitimate for a creditor to utilise sequestration proceedings as a debt collection tool. As is clear from die decision in LMV, a claim for arrear maintenance may satisfy the first factum probandum in terms of section 10 of the Insolvency Act, namely that the applicant (creditor) is required to have a liquidated claim against the respondent (debtor). Furthermore, arrear maintenance which has accrued before sequestration in terms of an agreement or court order may be proved as a claim against the insolvent estate. However, although it is legitimate to use the sequestration process to collect debt, the creditor (applicant in casu) is still required in terms of the Insolvency Act to prove that prima facie there is reason to believe that it would be to the advantage of the respondent’s creditors if his estate were to be sequestrated.
Case law indicates that the term “creditors” in the phrase “advantage to creditors” relates to the “general body of creditors” and that this requirement assists the court in its determination as to whether application of the sequestration process would be cost-effective. In LMV, the court based its decision that advantage for creditors was proved on the mere fact that a small number of creditors received payment under the debt review arrangement, while the applicant did not benefit at all. It is not clear from the judgment who the respondent’s other creditors were or who the creditors were whose debts were not based on credit agreements as defined in terms of the National Credit Act. It is also not clear what the size of the other creditors’ claims compared with the claim of the applicant was, and consequently whether implementation of the sequestration process would necessarily have been to the advantage of the general body of creditors and thus cost-effective.
Concerning the term “advantage” in the phrase “advantage to creditors”, the Constitutional Court decision in Stratford v Investec Bank Ltd 2015 3 SA 1 (KH) is discussed. This judgment confirmed that “advantage” entails a reasonable prospect that some financial benefit would eventually be available to the general body of creditors. The Constitutional Court emphasised that the meaning of the term “advantage” is broad and should not be rigidified. The court further stated that a requirement with reference to the size of the dividend, especially in the context of a hostile compulsory sequestration where there may be many creditors, is not useful and that the courts should rather exercise their independent discretion.
It is submitted that the term “advantage” in the phrase “advantage to creditors” also tests whether application of sequestration proceedings would be cost-effective from the perspective of the group of creditors. Therefore the collective debt-collecting procedure of the insolvency law should be applied only if the creditors as a group would be in a better position when sequestration proceedings are applied than would otherwise be the case. It is submitted that the court in LMV did not consider the question as to whether implementation of the expensive sequestration process was justified. As mentioned, the court based its decision that advantage to creditors was shown on the mere fact that a small number of creditors received payments in terms of the debt rescheduling arrangement, while the applicant received nothing. Nevertheless, the court eventually granted the provisional sequestration order.
The next question that the article addresses relates to the effect that sequestration of the respondent’s insolvent estate may have for the applicant. With reference to international trends the research indicates that sequestration was probably not the appropriate remedy to enforce the applicant’s claim for maintenance. Firstly, the applicant’s claim for arrear maintenance which accrued after sequestration of the respondent’s estate would be a mere concurrent claim against the estate, while the international trend is to afford priority treatment to these types of claims. Moreover, the applicant, being the so-called petitioning creditor, may be liable to contribute if the proceeds of the free residue of the insolvent estate were eventually found to be insufficient to cover the costs of sequestration. The latter would be the position even where the applicant did not prove a claim against the insolvent estate. After rehabilitation of the insolvent, all his debts, including the arrear maintenance debts which became due before sequestration, will, in terms of the Insolvency Act, be discharged. On the contrary, the international trend is to render maintenance debts non-dischargeable and hence exclude them from the eventual debt discharge, which is usually granted at the conclusion of insolvency proceedings.
The research indicates that the applicant may have been in a better position if the maintenance debt had rather been paid in terms of the debt review process under the National Credit Act. However, the debt counsellor had not complied with the guidelines which are currently prescribed by the National Credit Regulator in respect of the debt review process. Among other things, these guidelines state that a consumer’s liability for maintenance in terms of a court order or agreement should be taken into account when the consumer’s surplus income which would eventually be available for repayment in terms of a debt rescheduling order, is calculated. However, these guidelines are currently not binding on debt counsellors and it is therefore submitted that lawmakers should address this issue by implementing the recent proposals of the Department of Trade and Industry to amend the National Credit Regulations made in terms of the National Credit Act. These proposed amendments would, when introduced, require debt counsellors to comply with specified rules prescribed by the National Credit Regulator in respect of debt rescheduling.
It is submitted that claims for maintenance should enjoy priority directly after the sequestration costs, as is the case in the United States of America. Such priority claims should not be limited to a period for which it can be claimed or to an amount which enjoys priority.
It is unacceptable that creditors with claims for arrear maintenance could be held liable for contribution where the free residue is insufficient to cover the sequestration costs. It is submitted that the legislator should amend the Insolvency Act to exempt these creditors from the liability to contribute towards the costs of sequestration. Furthermore, such creditors should be relieved of the obligation of proving claims in the usual way prescribed by the Act.
In line with the modern trend to emphasise the fresh-start goal of consumer insolvency, the World Bank Report on the Treatment of the Insolvency of Natural Persons supports the European approach in terms of which a comprehensive discharge should be afforded to insolvent debtors. The idea is that too many exceptions to a discharge may prevent a meaningful rehabilitation. However, it is submitted that such a comprehensive discharge should not include “sensitive debt” such as arrear maintenance debt. With reference to German law it is argued that a discharge of maintenance debt may be unconstitutional, because it may constitute an infringement of certain fundamental human rights. Therefore it is submitted that South African lawmakers should, following the American example, amend the Insolvency Act to exclude arrear maintenance debt from the eventual discharge which occurs after rehabilitation. The wide application of the relevant provisions of American bankruptcy legislation in respect of the type of debt, the sources of its origin and the beneficiaries who would qualify for this exclusion is particularly applauded. It is submitted that a similar provision in South African law would help to bring South African insolvency legislation in line with international best practices.
Keywords: act of insolvency; advantage to creditors; concurrent claim; consumer insolvency; contribution; creditor; debt collection; debt discharge; debtor; debt restructuring; debt review; insolvency; Insolvency Act; maintenance claims; National Credit Act; rehabilitation; sequestration