The Income of an Insolvent and Sequestration under the Insolvency Act 24 of 1936
| Jurisdiction | South Africa |
| Published date | 20 August 2019 |
| Author | M Roestoff |
| Pages | 478-514 |
| Date | 20 August 2019 |
THE INCOME OF AN INSOLVENT AND
SEQUESTRATION UNDER THE INSOLVENCY
ACT 24 OF 1936
M ROESTOFF*
Professor, Mercantile Law, University of Pretoria
Abstract
In a recent case, the question arose as to whether the applicant in an
application for the voluntary surrender of his or her estate may forfeit
his or her salary with a view to establishing the requirement of advantage
for creditors as envisaged by the Insolvency Act. Such forfeiture is
impermissible, for example, because of the constitutional challenges that
may arise should the insolvent in future require the forfeited amount for
his or her basic needs. However, to exclude debtors from a debt relief
measure because they do not have sufficient assets to prove advantage,
may also be unconstitutional. It is argued in this article that the current
system must be reviewed in order to afford these debtors relief in terms
of an alternative discharge procedure.
A comparative investigation into the manner in which certain foreign
consumer insolvency systems deal with income contributions indicates
that the Act does not regulate this issue fairly or adequately. However,
income contributions as part of the sequestration process are not truly
appropriate and it is submitted that the American approach, which
provides for an exclusively asset-liquidation procedure and a separate
income-restructuring procedure should be followed. It is concluded that
an unconditional exclusion of an insolvent’s income from his or her
insolvent estate could provide a mechanism through which the insolvent
could be assisted to rebuild a new estate and eventually return to
economic productivity.
I INTRODUCTION
Section 23(9) of the Insolvency Act
1
provides that an insolvent person
may recover for his or her own benefit, any remuneration or reward for
work done or for professional services rendered by or on his or her
*BLC LLB LLM LLD (Pretoria). Professor, Department of Mercantile Law, Faculty of Law,
University of Pretoria.
1
Insolvency Act 24 of 1936.
478
(2017) 29 SA Merc LJ 478
© Juta and Company (Pty) Ltd
behalf after the sequestration of his or her estate. An insolvent’s income
is therefore in principle excluded from his or her insolvent estate.
However, section 23(9) is subject to section 23(5), which provides that
the trustee shall be entitled to any surplus income that in the opinion of
the Master is not necessary for the support of the insolvent and his or her
dependants.
In a recent case, Ex parte Van Dyk,
2
the question arose as to whether
the applicant in an application for the voluntary surrender of his estate,
may forfeit his salary with a view to establishing the requirement of
advantage for creditors as envisaged in section 6(1) of the Insolvency
Act.
3
Van Dyk came before the court on the unopposed motion roll and
stood down to the next unopposed roll to allow counsel for the applicant
to file heads of argument as to whether there is any modern authority
4
on the question.
5
From the facts and decision
6
it is clear that the
applicant made the undertaking as to the forfeiture of his salary
specifically to increase the value of his estate in order to establish
advantage for creditors and obtain the debt relief provided by the Act.
7
The aim of this article is, first, to investigate the legal position in
respect of whether an insolvent’s available surplus income could estab-
lish advantage for his or her creditors. In this regard, Van Dyk and other
relevant cases are analysed and evaluated.
Secondly, the aim is to analyse section 23(5) and related provisions of
the Insolvency Act in order to determine whether the issue of income
contributions is adequately regulated by the Act. A further question is
whether it is appropriate to require an insolvent to make income
contributions as part of the sequestration process in terms of the
Insolvency Act. It should be noted that by requiring an insolvent to
surrender his or her assets and, in addition, to make income contribu-
tions, his or her ability to build a new estate and to become economically
productive again is negatively affected.
8
It should also be remembered
that the sequestration process in terms of the Insolvency Act is mainly
aimed at the liquidation and eventual distribution of the proceeds of an
insolvent’s assets, and not at the restructuring of his or her income as a
2
Ex parte Van Dyk (1869/2015) [2015] ZAGPPHC 154 (26 March 2015) SAFLII, available
at http://www.saflii.org/za/cases/ZAGPPHC/2015/154.html, accessed on 3 May 2017.
3
Van Dyk para 1.
4
Other than Ex parte McKechnie 1938 WLD 45, referred to in Bertelsmann et al, Mars: The
Law of Insolvency 9 ed (Juta 2008) 75.
5
Van Dyk para 1.
6
Van Dyk para 21.
7
See s 129(1)(b) of the Insolvency Act in terms of which rehabilitation of an insolvent has
the effect of discharging all his or her pre-sequestration debts.
8
Compare Miller, ‘Income payment orders’ (2002) 18(2) Insolvency Law and Practice 43.
THE INCOME OF AN INSOLVENT AND SEQUESTRATION 479
© Juta and Company (Pty) Ltd
measure to satisfy creditors’ claims. Therefore, the question arises as to
whether income repayments should not rather be dealt with in terms of
the current alternative procedures to sequestration, namely, administra-
tion
9
and debt review,
10
as these procedures are specifically designed for
the restructuring of an insolvent’s income as a measure to satisfy claims.
In order to achieve the second aim of the article, section 23(5) and
related provisions of the Insolvency Act, as well as the alternative
procedures are analysed and evaluated. This is followed by a compara-
tive investigation into how certain foreign consumer insolvency systems
deal with income contributions. The aim is to detect possible lessons
regarding the adequacy and appropriateness of the South African
Insolvency Act’s provisions on income contributions. The South African
legal position is compared with the position in a number of foreign
jurisdictions, before concluding remarks are offered.
II SURPLUS INCOME AND ADVANTAGE TO CREDITORS
(a) Advantage to creditors
In current South African consumer insolvency law, a debtor’s estate may
be sequestrated by voluntary surrender
11
or after a successful application
by a creditor, or two or more creditors, for the compulsory sequestration
of the estate.
12
Before a court can grant a sequestration order, the
applicant is, inter alia, required to prove an ‘advantage for creditors’.
13
The phrase ‘advantage for creditors’ is not defined in the Insolvency Act.
According to case law, it entails a ‘reasonable prospect of some
pecuniary benefit to the general body of creditors’.
14
To show advantage,
a court must make a decision on the evidence presented that there are
sufficient assets in the estate with sufficient value to pay the costs of
sequestration and a ‘not-negligible’
15
dividend to creditors.
16
9
See s 74 of the Magistrates’ Courts Act 32 of 1944 (MCA).
10
See s 86 of the National Credit Act 34 of 2005 (NCA).
11
Sections 3–7 of the Insolvency Act.
12
Sections 9–12 of the Insolvency Act.
13
See ss 6(1), 10(c) and 12(1)(c) of the Insolvency Act.
14
See, eg, Meskin & Co v Friedman 1948 (2) SA 555 (W) at 559; Ex parte Bouwer and similar
applications 2009 (6) SA 382 (GNP) para 13.
15
See London Estates (Pty) Ltd v Nair 1957 (3) SA 591 (N) at 591G; Absa Bank Ltd v De Klerk
and related cases 1999 (4) SA 835 (E) at 840B; Ex parte Anthony en ’n ander en ses soortgelyke
aansoeke 2000 (4) SA 116 (C) para 11; Ex parte Mattysen et Uxor (First Rand Bank Ltd
Intervening) 2003 (2) SA 308 (T) at 316B–C; Ex parte Kelly 2008 (4) SA 615 (T) para 3.
16
The Act does not prescribe the size of the dividend. In recent times, a dividend of 20 cents
in the rand is generally regarded as the minimum benefit that would have to be established
before a sequestration application may be granted (Ex parte Ogunlaja & others [2011] JOL
(2017) 29 SA MERC LJ
480
© Juta and Company (Pty) Ltd
To continue reading
Request your trial