Abuse of Sequestration Proceedings in South Africa Revisited

• Jurisdiction: South Africa
• Citation: (2014) 26 SA Merc LJ 651
• Published date: 16 August 2019
• Pages: 651-667
• Author: Zingaphi Mabe
• Date: 16 August 2019

ABUSE OF SEQUESTRATION PROCEEDINGS

IN SOUTH AFRICA REVISITED

ZINGAPHI MABE*

Lecturer, Department of Mercantile Law, University of South Africa

RG EVANS**

Professor, Department of Mercantile Law, University of South Africa,

Pretoria

I INTRODUCTION

‘While seeking to portray international society in its totality, I have

striven hard not to fall into the trap which sometimes swallows

social historians — that is, to leave out chronology and show a

world which appears static. I hold strongly that chronology forms

the bones of history on which all else is built. The world changed

substantially in those f‌ifteen years. In 1815 reaction seemed trium-

phant everywhere; by 1830 the demos was plainly on its way.’

1

If one considers these words and applies them to insolvency legislation

in South Africa, this legislation appears to show a world which is static.

South African insolvency law today is regulated by the Insolvency Act 24

of 1936.

2

It can be described as a creditor friendly system, a system that

has remained essentially static since 1936.

3

The pre-eminent policy is

* LLB LLM (Pret). Lecturer, Department of Mercantile Law, University of South Africa,

Pretoria.

** BLC LLB LLM LLD (Pret). Professor, Department of Mercantile Law, University of

South Africa, Pretoria.

1

Paul Johnson The Birth of the Modern World Society 1815 — 1830 (1991) xviii. Hereafter

the male gender will be used as a matter of convenience. It is not meant to discriminate in any

way.

2

Hereafter ‘the Act’ or ‘the Insolvency Act’.

3

A study of the history of insolvency law of South Africa will also show that this system has

always been static in the sense that it has always been creditor-friendly, with little concern for

the state of the debtor. See E Bertelsman, RG Evans, A Harris, M Kelly-Louw, A Loubser,

M Roestoff, A Smith, L Stander & L Steyn Mars The Law of Insolvency in South Africa 9ed

(2008) (ed C Nagel) 6 (hereafter ‘Mars’); DA Burdette A Framework for Corporate Insolvency

Law Reform in South Africa LLD Thesis (UP) 2002 Part 2 Chapter 2; M Roestoff ’n Kritiese

Evaluasie van Skuldverligtingsmaatreëls vir Individue in die Suid-Afrikaanse Insolvensiereg LLD

thesis (UP) (2002) (hereafter ‘Roestoff Thesis’); RG Evans A Critical Analysis of Problem Areas

in Respect of Assets of Insolvent Estates of Individuals LLD Thesis (UP) (2008) Part II Chapter 4

(hereafter ‘Evans Thesis’); JC Calitz A Reformatory Approach to State Regulation of Insolvency

Law in South Africa LLD Thesis (UP) (2009) Part II at 1.6; L Steyn Statutory Regulation of

Forced Sale of the Home in South Africa LLD Thesis (UP) (2012) (hereafter ‘Steyn Thesis’).

651

(2014) 26 SA Merc LJ 651

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that the sequestration of a debtor’s estate must be to the advantage of

creditors.

4

In this respect recent court judgments

5

in South Africa have

focused on sequestration applications that attempt to circumvent this

requirement of advantage to creditors. This practice then results in an

abuse of the process of the courts. Recently it was pointed out that

dishonesty in insolvency proceedings places a burden on creditors and

the South African economy in general.

6

This abuse may occur where the

costs of sequestration exceed the alleged shortfall between assets and

liabilities; where the costs reduce the amount available for distribution

to creditors; and where the costs favour administrators rather than

creditors.

7

A question considered in this article is to what extent the

courts may go in setting requirements to be complied with beyond those

in the provisions of the Act, in voluntary surrender of debtors’ estates

and in compulsory sequestration proceedings. In respect of the require-

ment that advantage to creditors must be shown in these procedures,

Leveson J has been referred to

8

regarding this question when he said that

he would not set guidelines to assist practitioners in ascertaining an

acceptable dividend for creditors, as this would be encroaching on the

functions of the legislature.

9

In this article this question of encroach-

ment, amongst others, is re-visited in an analysis of two recent

judgments where insolvency proceedings were abused, namely Arntzen

and Plumb.

10

The South African Insolvency Act provides for two different methods

by which a debtor’s estate may be sequestrated, namely voluntary

surrender of a debtor’s estate, and compulsory sequestration of a

debtor’s estate. Voluntary surrender

11

of a debtor’s estate is where the

4

A Loubser ‘Ensuring advantage to everyone in a modern South African insolvency law’

(1997) SA Merc LJ 325 at 326. See generally Alastair Smith ‘Cast a cold eye’ (1997) 5(2) Juta’s

Business Law 50 (hereafter ‘Smith ‘‘Cast a cold eye″’) and RG Evans ‘Unfriendly consequences

of a friendly sequestration’ (2003) SA Merc LJ 437.

5

See amongst others Ex parte Mark Shmukler-Tshiko and Emma Shmukler-Tshiko and 13

other cases 2012 SA (GSJ) (hereafter ‘Shmukler’); for an international perspective on the

dictum like that in Shmukler see A Keay ‘Balancing interests in bankruptcy law’ (2001)

Common Law World Review 206 at 208. See also Ex parte Arntzen (Nedbank Ltd as Intervening

Creditor) 2013 (1) SA 49 (KZP) (hereafter ‘Arntzen’) and Plumb on Plumbers v Lauderdale and

Another 2013 (1) SA 60 (KZD) (hereafter ‘Plumb’).

6

Shmukler supra note 5 at 3.

7

See generally Shmukler and Arntzen supra note 5.

8

By Roger G Evans ‘Friendly sequestrations, the abuse of the process of court, and possible

solutions for overburdened debtors’ (2001) 13 SA Merc LJ 485 at 494 (hereafter ‘Evans

‘‘Friendly sequestrations″’).

9

See Evans ‘Friendly sequestrations’ op cit note 8 at 494.

10

Supra note 5.

11

Also referred to as ‘voluntary sequestration’.

(2014) 26 SA MERC LJ652

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