MISBRUIK VAN DIE INSOLVENSIEWET
April 17, 2014
WEES BEWUS VAN DIE VOORWAARDES IN JOU HUIS SE TITELAKTE
April 17, 2014

A MISUSE AND ABUSE OF THE INSOLVENCY ACT

A2blOn the 4th of March 2014, Cape Town High Court Justice Binns-Ward granted an interdict against a company for exploiting the Insolvency Act (hereafter referred to as ‘the Act’). This is what the Company did:

Every week the Company’s employees scanned the ‘green gazette’ for advertisements of sales in execution of residential properties. The Company employs consultants all over the country. The consultants then canvass the business of the execution debtors concerned. The debtors are told by the consultants that a cancellation of the sale in execution can be achieved by availing of the provisions of the Insolvency Act. The Company offers to arrange the publication of a notice of surrender in terms of Section 4(1) of the Act for the payment of a fee. They further indicate to the debtor that there will be no consequences if an application to court does not follow.

This buys the debtor 30 days. In the 30 days the Company, if the debtor so wishes, will at an additional fee conduct a forensic audit in which it will demonstrate with great probability that the execution creditor (often banks) miscalculated its claim and afford the debtor an opportunity to reach a compromise with the execution creditor. When debtors default on their payments the banks instruct attorneys to take action against them. The bank can get these attorney fees back from them in a separate account with different interest rates, but they are not allowed to add it to the balance of their bond with higher interest involved; they can only add entries pertaining to their bond account, not legal fees. The Company then argues that the bank is in breach of contract, and applies to court for setting aside of default judgement.     

What does the Insolvency Act say?

Section 4(1) of the Act requires a notice to be published not more than thirty days but not less than fourteen days before application is made for surrender of the estate of the debtor. Section 5(1) of the Insolvency Act provides that it is unlawful to sell any property in the debtor’s estate in question which has been attached under writ of execution, after the publication of a notice of surrender (in terms of Section 4(1) in the Gazette (this provision is for bona fide voluntary surrender application, not fraudulent applications), unless the person charged with the execution writ did not know of publication and the property is valued at less than R5000.

The decision to publish a notice of surrender by a debtor involves intention of the debtor to eventually apply to court for the acceptance of surrender and to carry out the necessary steps involved in order to obtain such sequestration order. One can withdraw a notice of surrender (in terms of Section 7) by applying to the Master of the Court for written consent, or in terms of Section 6 the notice of surrender lapses if no application for surrender is made after 14 days of the date specified in the notice of surrender. However this provision is intended for the benefit of creditors and not debtors. Section 6 makes it clear that no legitimate purpose can be served by the publication of a notice of surrender if the estate in question is not actually insolvent, and if it cannot be shown, sequestration costs can be paid and sequestration will be advantageous to creditors.

This case involved an application to court, where the applicant sought an interdict against the respondent for engaging in business of publicising notices of surrender (unlawfully) in terms of Section 4(1) of the Act. The Court held that the Company is interdicted from carrying on this sort of business. It is unlawful and fraudulent and a misuse of the provisions of the Act. It is clear from the facts of the case that in virtually all the cases the debtors never had the intention to go through with the surrender; it was merely done with the object of frustrating sales in execution. A notice of surrender is not an acceptable device for gaining time to undertake forensic audits of client’s accounts with the execution creditor, or to find a basis to apply for the rescission of the judgement that is in the process of being executed.

In conclusion it is therefore important to note that the publishing of notices in terms of Section 4(1) of the Act should only be done with the intention of a subsequent sequestration. 

References:

FirstRand Bank Limited (Applicant) v Consumer Guardian Services (Pty) Ltd & 9 Others (Case no: 10978/2012)

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

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