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[2011] ZAKZDHC 21
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First Rand Bank Ltd v Evans (4229/10) [2011] ZAKZDHC 21; 2011 (4) SA 597 (KZD) (18 March 2011)
REPORTABLE
IN THE KWAZULU-NATAL HIGH COURT
DURBAN
REPUBLIC OF SOUTH AFRICA
CASE NO.4229/10
In the matter between
FIRSTRAND BANK LIMITED
…....................................................
Applicant
and
KEVIN EVANS
…............................................................................
Respondent
J U D G M E N T
Del.18March 2011
WALLIS J.
[1] Mr Evans borrowed substantial
amounts from FNB, a division of the applicant, First Rand Bank
Limited. In April 2005 he acknowledged
his indebtedness, in an amount
of R1 200 000, in a mortgage bond registered over the
property in which he and his family
reside. On 13
September 2006
he acknowledged a further indebtedness of R1 000
000,
in a subsequent mortgage bond over the same property. On
28 November 2007 he entered into a Commercial Property
Finance Loan Agreement under which he borrowed a further amount of
R724 500. That amount, together with an additional R2 000 000
in respect of his existing indebtedness, was secured by way of a
sectional mortgage bond over a section in a development situated
in
Umhlanga Rocks. Overall by June 2009 he owed FNB some
R2 800 000. It is that indebtedness that gives rise to
this
application for the provisional sequestration of his estate. The
application was brought on two bases. First it was said that
Mr Evans
had committed the act of insolvency described in s 8(g) of the
Insolvency Act by giving written notice of his inability
to pay his
debts. Second it was said that he was factually insolvent.
[2] The grounds upon which Mr Evans resists the
application for his sequestration flow from his invocation of the
debt review provisions
under the National Credit Act 34 of 2005 (“the
NCA”) and from certain events that have occurred subsequent to
the commencement
of these proceedings. To appreciate his contentions
it is necessary to set out a history of the relevant events.
[3] The starting point is an application for debt review
made by Mr Evans on 29 January 2009. FNB was advised that
he
was under debt review. On 17 April 2009 Mr Evans
addressed the letter to FNB that is alleged to be a section 8(g)
notice. I will revert to this in due course. Thereafter on
18 May 2009 FNB gave notice in terms of s 86(1) of the
NCA that it was terminating the debt review in respect of the
‘account/s in our books which are now in arrears’. It
appears to be accepted that notwithstanding this rather vague
description the notice applied to all the debts owed by Mr Evans
to
FNB. There is, however, a dispute as to its effectiveness in the
light of its terms and the address to which it was sent.
[4] On 16 July 2009 FNB issued summons
claiming a little over R2 000 000 under the two mortgage
bonds. Service
was effected on 22 July 2009 but at the
wrong address and default judgment was taken on 18 August 2009.
Mr
Evans only learnt of this on 12 March 2010, when the
Sheriff served a notice of attachment at his residence. In terms
of
the notice of attachment a sale in execution of the residential
property was to take place on 28 May 2010.
[5] On 8 April 2010 FNB launched this
application for the sequestration of Mr Evans’ estate. It
relied on both the
judgment and on the then outstanding indebtedness
of R841 940.99 in respect of the loan agreement. It contended
that Mr Evans
had committed an act of insolvency by sending the
letter of 17 April 2009 and also that he was in any event
factually
insolvent. The sequestration application made no mention of
the attachment order and the sale in execution of the residential
property.
[6] On 6 May 2010 attorneys representing Mr
Evans wrote to FNB’s attorneys claiming that the judgment was
void because
it was obtained without proper service. The letter
indicated that an application for the rearrangement of Mr Evans’
debts
had been issued in the Durban Magistrates’ Court on
3 July 2009 and an order made on 24 July 2009.
Contrary
to the allegation in the founding affidavit that very few
payments had been made, details were given of regular monthly
payments
in respect of both the two mortgage bonds and the loan
agreement from 28 August 2009 to 29 April 2010 in
terms
of the debt rearrangement order. In those circumstances Mr
Evans’ attorneys said:
‘
We cannot understand your client’s
persistence in prosecuting its claim against our client. In this
regard we also refer to
the ill-conceived sequestration application
…’
There being no response to that letter Mr Evans launched
an urgent application to stay the sale in execution and seek the
rescission
of the judgment. An opposing affidavit was delivered in
the sequestration application relying on these matters as grounds for
resisting
a sequestration order and contending both that there was a
valid defence to the claims under the bonds and the loan agreement
and
that the NCA precluded resort to sequestration.
[7] FNB served a replying affidavit in which it
contended that the NCA does not preclude an application for
sequestration of a debtor’s
estate and that, insofar as the
judgment debt was concerned the debt review process had been
terminated. In effect therefore FNB
contended that the debt
rearrangement order had been improperly made, insofar as it purported
to cover Mr Evans’ indebtedness
to it. The point was also made
that the amounts payable to FNB in terms of that order – some
R21 390 per month –
were insufficient to service the
loans, the aggregate monthly interest on which was approximately
R25 270. In the result payments
in terms of that order would not
discharge the indebtedness to the bank. Some criticism was directed
at Mr Evans on the basis that
according to the documents attached to
his affidavit he was making payment of R23 397 per month to his
creditors on a net
income of R22 408. In addition it was alleged
that he had expenses over and above this amount of R58 791, but
that is
incorrect as this figure included the bond instalment of
R22 638. Nonetheless, even if one allows for this, his claimed
income
and expenses were impossible to reconcile.
[8] Had matters rested there the outcome of this
application would have revolved around Mr Evans’ contentions in
regard to
the effect of the NCA. However they did not rest there.
Shortly before the application was due to be argued in October 2010
Mr
Evans delivered a further affidavit. In it he said that he had
sold the sectional title unit in Umhlanga for an amount of
R1 400 000,
which was significantly more than the value of
R600 000 attributed to it by FNB. His conveyancers were
attending to the transfer
but this required co-operation from FNB in
view of its sectional mortgage bond over the property. Some issues
had arisen in regard
to FNB’s guarantee requirements before
they would consent to the cancellation of the mortgage bond.
[9] This further affidavit brought forth a brief
supplementary affidavit from FNB in which it contended that the
issues raised therein
were irrelevant to the application. However,
when the application came before the court on 15 October 2010
it was adjourned
for further hearing on 11 February 2011.
That delay enabled Mr Evans to file a further supplementary opposing
affidavit
on 17 January 2011. That affidavit disclosed the
following further information. Firstly the judgment granted against
Mr Evans had been rescinded by consent. Secondly the amount owing to
FNB under the loan agreement had been fully discharged on
3 December 2010 after Mr Evans had brought an urgent
application against FNB to compel it to cancel its bond so as to
enable the transfer to take place. A consent order had been granted
in those proceedings on 19 November 2010. Thirdly
the
amount paid to FNB from the proceeds of the sale was R1 260 208.64,
which was significantly more than was outstanding
under the loan
agreement. The difference was credited to the loan agreement secured
by the two mortgage bonds. There is apparently
some dispute between
the parties as to the allocation of the surplus. Mr Evans says that
an amount of R328 133.60 ought to
have been credited to the two
mortgage bonds and that only R122 529.62 has been credited. FNB
has not responded to this.
[10] According to FNB Mr Evans’ indebtedness to it
on 6 January 2011 amounted to R1 922 914.06. According to
Mr
Evans, if he is given proper credit for the balance of the
proceeds from the sale of the sectional title unit and certain debits
to the account are reversed, his indebtedness on that date was
slightly more than R1 600 000. On that basis he calculates
the current interest accruing on the two bonds as a little less than
R12 000 per month whilst the instalments provided for in the
debt
rearrangement plan were some R15 500 per month. On FNB’s
figures the monthly repayments should be around R16 500
per
month. However, if Mr Evans were to take the full amount that he had
been paying under the debt rearrangement plan in discharge
of both
this indebtedness and the indebtedness under the loan agreement he
would have some R20 000 available to pay off the
two bonds. This
would cover the interest and repay the capital in less than the 16
years that would remain if the bonds were to
run for the original
terms of 20 years. The bank did not seek to challenge those figures.
[11] Against that background FNB continues to seek a
provisional sequestration order, although counsel confined his
argument to
the contention that Mr Evans had committed the act of
insolvency referred to in s 8(g) of the Insolvency Act. Mr Evans
resisted
the application on three grounds. First, he contended that
the letter of 17 April 2009 is not a section 8(g)
notice.
Second, he contended that the provisions of the NCA bar this
application. Third, he contended that the court should exercise its
discretion to refuse a provisional sequestration order.
[12] The act of insolvency contained in
s 8(g)
of the
Insolvency Act 24 of 1936
is committed if a debtor gives a notice in
writing to any one of his creditors that he is unable to pay any of
his debts. The letter
relied on by FNB as constituting this act of
insolvency is that of 17 April 2009 addressed to FNB
Commercial Loans by
Mr Evans and it reads as follows:
‘
Subject : Cancellation of Debit Order.
Account No.00 00 30 00 01 11 03 714.
To Whom it may Concern.
I have a commercial loan on the account number above. Your records
should show that I am under Debt Review. Ref#F12437.
As a result, the bond repayment is being renegotiated and
administered through the Courts. The repayments will be made via the
Attorneys Trust Account shortly.
With this in mind, please cancel the Debit Order on the old
arrangement against my Standard Bank account 25-254-694-6.
Please contact me if this cannot be done as I have requested.’
[14] The letter states that Mr Evans is under debt
review. That means that he must have applied for debt review in terms
of s 86(1)
of the NCA. The purpose of his application was to obtain a
declaration that he was over-indebted because that is always the
purpose
of applying for debt review. In terms of s 79(1) of the NCA:
‘
A consumer is over-indebted if the
preponderance of available information at the time a determination is
made indicates that the
particular consumer is or will be unable to
satisfy in a timely manner all the obligations under all the credit
agreements to which
the consumer is a party, having regard to that
consumer’s
(a) financial means, prospects and obligations; and
(b) probable propensity to satisfy in a timely manner all the
obligations under all the credit agreements to which the consumer
is
a party, as indicated by the consumer’s history of debt
repayment.’
It follows from this statement of what constitutes
over-indebtedness for the purposes of the NCA that a debtor who
informs his creditor
that he has applied for, or is under, debt
review is necessarily informing the creditor that he is over-indebted
and unable to
pay his debts.
[15] The proper approach to adopt in determining whether
a letter such as this constitutes a notice of inability to pay in
terms
of s 8(g) is to consider how it would be understood by a
reasonable person in the person of the creditor receiving the letter.
In construing it the knowledge that the creditor would have of the
debtor’s circumstances must be attributed to the reasonable
reader.
1
In view of the fact that nearly a year had elapsed
between the receipt of the letter and the launch of the sequestration
proceedings
I asked counsel for submissions whether this exercise is
to be undertaken at the date of receipt of the letter or at the date
when
the sequestration application is launched, when intervening
circumstances could be taken into account. Their views diverged. Mr
Harcourt SC, for FNB, submitted that it should be the date of
instituting the application for sequestration, whilst Mr Kemp SC,
for
Mr Evans, submitted that it is at the date of giving the notice.
[16] In my view Mr Kemp is correct. The section is
couched in the present tense and is invoked where the debtor gives
notice to
the creditor of an inability to pay debts. Clearly the
notice must do that when the creditor receives it. The question is
what
it means to the recipient at the time of its receipt.
2
Otherwise it is conceivable that an otherwise innocuous
letter could take on a fresh colour as a result of subsequent events,
which
could be highly prejudicial to the debtor. In my view the
authors of
Insolvency Law
3
are correct in saying that ‘a notice of inability
to pay debts does not cease to be an act of insolvency as a result of
circumstances
obtaining subsequently to the giving thereof
…’
This accords with the view of Horwitz J in
Chenille
Industries v Vorster
4
,
in rejecting a submission that subsequent events affected the meaning
to be given to a notice alleged to fall under s 8(g),
that ‘if
the act be unequivocal it cannot be explained away by circumstances
arising subsequently’. The cases to which
both counsel
referred, dealing with the lapse of time from the date of receipt of
the letter, do not I think qualify this approach
but are pertinent at
a different stage of the enquiry and I will revert to them in due
course.
[17] The most pertinent fact known to FNB at the time it
received this letter was that Mr
Evans was
significantly in default of his obligations under both the bonds and
the loan agreement. The letter would have said to
them that
cumulatively Mr Evans debts were such that he could not, as situated
at present, pay them in accordance with his commitments.
FNB is
clearly familiar with the terms of the NCA and the basis upon which a
debtor is entitled to seek debt review. To be told
by Mr Evans that
he had done this would unequivocally have conveyed that he was unable
to repay the amounts he had borrowed from
the bank in accordance with
his contractual undertakings.
[18] Mr Kemp argued that the letter conveyed an
intention to have Mr Evans’ debts rearranged in terms of s 87
of the
NCA. He pointed out that the purpose of the NCA is that the
debtor should discharge the debts lawfully owed by him or her. He
stressed
that once the debtor’s debts have been rearranged by
an order of court under s 87(1)(b)(ii) of the NCA the debtor is
only obliged to make payments in terms of that order and such an
order should only be made where the full indebtedness of the debtor
will ultimately be discharged. That is all correct but it is not
clear that it takes matters any further.
[19] However valid these points may be they do not alter
the fact that when Mr Evans wrote this letter he was unequivocally
conveying
to FNB that he was at that time unable to pay his debts. It
is true that he was hoping by way of the mechanisms of the NCA, to
make arrangements for the payment of those debts on a basis different
from his existing contractual obligations. I assume in his
favour
that he genuinely believed that if his debts were rearranged they
would ultimately be discharged. Nonetheless what he was
conveying to
FNB was that he was not in a position at that time to pay his debts
on the terms on which they had been incurred.
That understanding of
his letter would be reinforced by two factors. The first is that he
was already substantially in arrears
in paying his debts to the bank.
The second is that the purpose of the letter was to instruct the bank
to cancel a debit order
by means of which he was supposed to be
paying the amounts due in terms of the loan agreement.
[20] The requirements of s 8(g) are satisfied when the
notice given by the debtor to the creditor conveys that the debtor is
at
present unable to pay his or her debts. The debtor’s
willingness to attempt to pay the debts in the future is not
relevant.
As Scott J pointed out in
Standard
Bank of SA Limited v Court, supra
,
5
‘…
a debtor who gives notice that he will only be
able to pay his debt in the future gives notice in effect that he “is
unable”
to pay. A request for time to pay a debt which is due
and payable will, therefore, ordinarily give rise to an inference
that the
debtor is unable to pay a debt and such a request contained
in writing will accordingly constitute an act of insolvency in terms
of s 8(g). This is particularly so where the request is coupled with
an undertaking to pay the amount due and payable by way of
instalments … A distinction must, however, be drawn between an
inability to pay and an unwillingness to pay. If a reasonable
person
in the position of the creditor to whom the notice is addressed would
understand the notice to mean that while the debtor
was unwilling to
pay his debt forthwith he could nonetheless do so if pressed, then
the notice will not constitute a act of insolvency
… In each
case where there is a request for time, the enquiry, therefore, is
whether the content of the written statement,
viewed together with
the circumstances to which it may be permissible to have regard, is
such as to negative the inference arising
from the request for time
to pay and to justify the conclusion that the debtor would be able to
pay at once if pressed to do so.’
[21] Mr Evans was asking for time to pay. He was also
conveying that he wanted to pay his debts other than in accordance
with his
existing contractual obligations in consequence of their
being rearranged by way of a court order in terms of s 87 of the
NCA. That he was conveying unequivocally that, at the time of the
letter, he was unable to pay his existing debts is in my view
clear.
[22] Mr Kemp protested, albeit in muted fashion, that
this places any debtor, who informs his or her creditors that they
have applied
for debt review or that he or she is in the process of
debt review, in a situation where it can be contended that they have
committed
an act of insolvency. However, that is not a novel
situation. As Caney AJ pointed out in
Madari v
Cassim
6
a debtor who gave notice to his creditors of an
intention to apply for an administration order under the Magistrates’
Courts
Act, which is an earlier form of debt rearrangement, was in
precisely that situation. It was suggested to me that s 8(g) must be
interpreted differently in consequence of the enactment of the NCA.
However, I fail to see how the well-established meaning of
a
provision in the
Insolvency Act can
be altered because of the terms
of a wholly different statute that makes no reference to it. It is
not as if Parliament was unaware
of the existence of the
Insolvency
Act when
the NCA was enacted. One can be certain of that because the
NCA contains in Schedule 1 rules concerning conflicting
legislation
and it makes no mention of the
Insolvency Act, whilst
giving priority to the provisions of the NCA over sections 57 and 58
of the Magistrates’ Courts Act dealing with the procedures
by
which a debtor can arrange to pay his or her debts in instalments.
Then in Schedule 2 amendments are made to various statutes
including
s 84
of the
Insolvency Act. If
Parliament had intended to
qualify
s 8(g)
in the manner suggested in argument it would
surely have said so.
[23] The qualification contended for on behalf of Mr
Evans would also have most peculiar results. It would favour the
canny and
informed debtor over the ignorant and unsophisticated. Thus
a letter informing a creditor of the debtor’s inability to pay
debts, coupled with a request to pay the debt off over a period of
time in smaller instalments, would constitute an act of insolvency
under
s 8(g).
A similar letter, differently couched but suggesting
that the debt be paid off over the same period of time and in the
same instalments,
by way of a proposal under
s 86(7)(c)
of the NCA
available for acceptance by the credit provider under
s 86(8)(a)
,
would not constitute an act of insolvency. I can see no warrant for
construing what is essentially the same statement in a different
fashion depending on whether or not the debtor invokes the provisions
of the NCA. That would favour the debtor who is aware of
the NCA and
its provisions and redound to the disadvantage of the debtor who did
not. If the NCA has an impact on sequestration
proceedings it must
lie elsewhere. I hold that the letter of 17 April 2009 relied on by
FNB constituted an act of insolvency by
Mr Evans in terms of
s 8(g)
of the
Insolvency Act.
[24
] The broader contention advanced by Mr Kemp was
that the effect of the NCA is to preclude a credit provider from
bringing
an application for the sequestration of the debtor’s
estate. In advancing this contention he relied principally upon the
provisions of
s 88(3)
of the NCA. That section provides that:
‘
Subject to
section 86(9)
and (10), a credit
provider who receives notice of court proceedings contemplated in
section 83
or
85
, or notice in terms of section 86(4)(b)(i) may not
exercise or enforce by litigation or other judicial process any right
or security
under that credit agreement until
(a) the consumer is in default under the credit agreement; and
(b) one of the following has occurred:
(i) an event contemplated in sub-section (1)(a) through (c);
(ii) the consumer defaults on any obligation in terms of a
rearrangement agreed between the consumer and credit providers, or
ordered by a court or the Tribunal.’
The contention is that sequestration is the ultimate
form of debt enforcement by way of the liquidation of all the
debtor’s
assets and that, as FNB had received notice under
s 86(4)(b)(i)
prior to launching such proceedings, it is
precluded by
s 88(3)
from doing so.
[25] The problem with this is that whilst a credit
provider may bring sequestration proceedings with a view to obtaining
payment
of a debt that does not mean that the credit provider is
thereby seeking to exercise or enforce by litigation or other
judicial
process any right or security under the credit agreement.
The credit provider may hope to obtain payment in whole or in part of
the debt but the proceedings are not proceedings to enforce the
credit provider’s rights under the credit agreement. Their
purpose is to set the machinery of the law in motion to have the
debtor declared insolvent.
7
[26] Although it was suggested in argument that the
point is novel that is not correct and it is therefore unnecessary
for me to
engage in a detailed analysis of the relevant provisions of
the NCA. In
Naidoo v Absa Bank
8
it was held that sequestration proceedings are not
‘legal proceedings to enforce the agreement’ within the
meaning of
s 129(1)(b)
of the NCA. In reaching that conclusion
Cachalia JA expressly approved
9
the reasoning of Trengove AJ in
Investec
Bank Limited v Mutemeri
10
that had led to that same conclusion. That reasoning
also led Trengove AJ to conclude that sequestration proceedings are
not proceedings
‘in respect of a credit agreement’ within
the meaning of s 130(3) of the Act or an endeavour to exercise or
enforce
by litigation or other judicial process any right or security
under the credit agreement as referred to in s 88(3) of the NCA.
11
I agree with these conclusions and the reasoning by
which they were arrived at. I would add only that it avoids what
would otherwise
be the very odd conclusion that the NCA operates to
preclude credit providers from sequestrating the estates of their
debtors,
but does not prevent other creditors from doing so. If
sequestration of a person’s estate whilst they are under debt
review
was to be rendered impermissible there appears to be no sound
reason why it should be available to creditors who are not credit
providers under the NCA. Conversely there is no obvious reason why
credit providers should be a class of creditor excluded from
invoking
the mechanisms of the
Insolvency Act.
[27
] That serves to dispose of the contention that it
was impermissible for FNB to bring sequestration proceedings. To sum
up at this
stage FNB has satisfied the three requirements for a
provisional sequestration order set out in
s 9
of the
Insolvency
Act. It
has established on a
prima facie
basis
that it has a liquidated claim exceeding R100 against Mr Evans; that
Mr Evans has committed the act of insolvency mentioned
in
s 8(g)
of the
Insolvency Act and
that there is reason to believe that his
sequestration will be to the advantage of creditors. The first and
third of these were
not challenged in argument. The indebtedness is
that under the loans secured by the mortgage. The realisation of Mr
Evans’
assets will result in a not negligible dividend being
paid to creditors and there are also matters that may properly be the
subject
of investigation by a trustee, such as the source and amount
of his income; the identity of his employer and the circumstances in
which his 18 year old son came to be the sole member of a close
corporation that may possibly be his employer. As already mentioned
the figures given by him in his application for debt review in
respect of his income and expenditure are irreconcilable. He claimed
to be servicing all his other current liabilities but it is
impossible to see how he was able to do this (much less live) on an
after tax income of R22 408, when he was paying R21 362.42
to his debt counsellor for payment to his creditors. There
is a
mystery here that requires an explanation. The only apparent one is
that he has not made a full disclosure of his income.
It is unclear
whether he was paying any other credit providers in terms of the
provisional rearrangement order. Beyond saying that
he encountered
financial difficulties in 1998 ‘in respect of a failed business
venture’ he gives no indication of the
precise cause, nature
and extent of his financial woes. Nor does he give any proper account
of his current business activities.
All of this can properly be
investigated by a trustee and may result in the discovery of assets
or income that can be used to pay
the creditors. That leaves only the
question of the exercise of my discretion.
[28] Once the applicant for a provisional order of
sequestration has established on a
prima facie
basis the requisites for such an order the court has a
discretion whether to grant the order. There is little authority on
how this
discretion should be exercised, which perhaps indicates that
it is unusual for a court to exercise it in favour of the debtor.
Broadly speaking it seems to me that the discretion falls within that
class of cases generally described as involving a power combined
with
a duty.
12
In other words where the conditions prescribed for the
grant of a provisional order of sequestration are satisfied then, in
the
absence of some special circumstances, the court should
ordinarily grant the order. It is for the respondent to establish the
special
or unusual circumstances that warrant the exercise of the
court’s discretion in his or her favour.
13
Here Mr Evans relies upon two linked matters. Initially
there is the period of time that elapsed between 17 April 2009 and
the launch
of these proceedings on 8 April 2010. Linked to that are
the circumstances relating to his application for a debt
rearrangement
order in terms of the NCA. Under this latter head he
places a strong reliance on his compliance with the interim debt
rearrangement
order between August 2009 and April 2010, which
resulted in FNB receiving some R200 000 in respect of the different
debts owed
to it, and the sale of the sectional title unit in
Umhlanga, with the resultant improvement in his overall financial
position.
[29] Counsel did not refer me to any cases, nor did I
find any, dealing with a significant delay in launching a
sequestration application
after the receipt of a
section 8(g)
notice.
I was, however, referred to some cases dealing with a significant
lapse of time between the launch of such proceedings
and the date of
the
nulla bona
return
relied on by the applicant as an act of insolvency in terms of
s 8(b)
of the
Insolvency Act. The
first is
Abell v
Strauss
,
14
where Irving Steyn J said:
‘
Quite apart from this, however, there is
the additional factor that at this stage the purported
nulla
bona
return is some seven months old
and, as was indicated in
Bhyat v
Khurishi
1929 TPD 896
;
“
If a
nulla
bona
return is not a recent one, there
must be allegations supported by facts that the debtor’s
position is unchanged.”
In the papers before me there is nothing to indicate, even remotely,
that the respondent’s position is unchanged from what
it was in
January 1970.’
Accordingly the application failed.
15
[30] Like Goldstein J in
Wilken
and Others NNO v Reichenberg
16
I was unable to find the quotation from
Bhyat
v Kurishi
, because it does not appear in that
judgment, nor is the judgment authority for that proposition. It
appears that in error Irving
Steyn J took a sentence from Mars
The
Law of Insolvency
17
and wrongly attributed it as a quotation from
Bhyat
v Kurishi
,
which was the
authority for that proposition cited in the footnote to the text
.
18
A reading of that case provides no support for the
proposition in question.
[31] There is nothing in the
Insolvency Act that
justifies this gloss on the provisions of either
s 8(b)
or
s 8(g)
, at least at the level of what must be proved by an
applicant for a provisional sequestration order. However, where there
is a
substantial lapse of time and nothing before the court to
indicate that the debtor’s circumstances have not improved in
the
interim that may, in a marginal case, be a significant factor in
the exercise of the court’s discretion. So will the explanation
for the creditor not acting on the
nulla bona
return or
s 8(g)
notice with reasonable celerity. In the
present case, however, the reason is readily apparent. FNB had
obtained a judgment the
usefulness of which had been thrown into
doubt by the application for its rescission. It was confronted with
the possibility of
protracted proceedings in both the High Court and
the Magistrates’ Court had it continued on its existing path.
In those
circumstances it is hardly surprising that it chose to have
recourse to sequestration proceedings. At the time it did so, Mr
Evans’
indebtedness was mounting daily notwithstanding the
payments he had been making, purportedly in terms of a debt
rearrangement order.
As FNB pointed out the payments were
insufficient to cover the interest accumulating on his debts and the
only prospect of his
actually discharging his indebtedness was that
an assumption that his financial circumstances would improve
sufficiently so that
he could escalate those payments at a rate of 8%
per annum proved justified. At lowest that was then and remains a
highly speculative
assumption.
[32] As regards a change in circumstances the only
change is that which has arisen from the sale of the sectional title
unit in
Umhlanga, the effect of which was to discharge the loan
agreement and reduce to some extent Mr Evans’ indebtedness in
respect
of the loans secured by mortgage bonds over his home. The
statement in his initial founding affidavit that:
‘
I will in any event be in a position to
settle all the debts on the sale of the office property’,
has proved overly optimistic. Although for nine months
until April 2010 he was making payments of slightly more than R21 000
per
month to FNB in reduction of his indebtedness no further payments
have been made since May 2010, with the result that the indebtedness
will have increased. I have already referred to the unsatisfactory
level of disclosure in regard to the sources and amount of his
income
and the manner in which he has been disposing of it, not only in
regard to the discharge of the debts owed to FNB but also
in
discharging his other debts and paying his ordinary living expenses.
Overall the papers leave me with the clear impression that
whilst his
financial circumstances have improved they have not improved to the
extent that he is in a position to discharge all
his debts from
current income. Certainly he has not placed any evidence before me to
demonstrate that fact.
[33] In those circumstances I do not think that the
lapse of time between the letter of 17 April 2009 and the
commencement of sequestration
proceedings is material to the proper
exercise of my discretion. In supplementary heads of argument a
passage was quoted to me
where Caney J said:
‘
It may very well be the case that an act of
insolvency may become stale or a creditor may abandon or waive his
right to rely upon
it.’
19
However no argument was addressed to me that FNB had
abandoned or waived its rights to rely upon the
s 8(g)
notice. As
regards its becoming stale that is in my view only pertinent where it
is shown that circumstances have so altered since
the act of
insolvency that it would be inappropriate for the court in the
exercise of its discretion to grant a provisional order.
On its own,
however, the mere lapse of time since the act of insolvency, in
circumstances where sequestration would clearly be
in the interests
of creditors, is unlikely to warrant the court exercising its
discretion in favour of the debtor. The present
is not a case where
it affects matters.
[34] I did not understand Mr Kemp to argue that Mr Evans
is in fact solvent, as opposed to submitting in his heads of argument
that
FNB had not proved that he is insolvent. In case I misunderstood
him, however, it is appropriate for me to say that I am not satisfied
on the information placed before me that Mr Evans is solvent.
Uncertainty might have been fatal to FNB’s case were it based
solely upon actual insolvency.
20
However, FNB confined its case to one based on the
commission of an act of insolvency. In those circumstances,
particularly at the
level of a provisional order of sequestration, if
the debtor is to persuade the court to exercise its discretion in his
or her
favour, they must place evidence before the court that clearly
establishes that their debts will be paid if a sequestration order
is
not granted. If that contention is based on a claim that the debtor
is in fact solvent then that should be shown by acceptable
evidence.
In this regard the oft-quoted words of Innes CJ in
De
Waard v Andrew & Thienhaus Limited
21
are
pertinent:
‘
Now, when a man commits an act of
insolvency he must expect his estate to be sequestrated. The matter
is not sprung upon him …
Of course, the Court has a large
discretion in regard to making the rule absolute; and in exercising
that discretion the condition
of a man’s assets and his general
financial position will be important elements to be considered.
Speaking for myself, I
always look with great suspicion upon, and
examine very narrowly, the position of a debtor who says, “I am
sorry that I cannot
pay my creditor, but my assets far exceed my
liabilities”. To my mind the best proof of solvency is that a
man should pay
his debts; and therefore I always examine in a
critical spirit the case of a man who does not pay what he owes.’
In
this case Mr Evans concedes that he fell upon hard times financially
and, whilst he claims that his circumstances have improved
somewhat
in consequence of the sale of the sectional title unit in Umhlanga,
he does not make out any strong case that he is financially
sound and
capable of discharging his debts in the ordinary course. A person who
claims that they are solvent and for that reason
should not be
sequestrated should be able to establish this by way of acceptable
evidence. Apart from reliance on the alleged debt
rearrangement Mr
Evans did not do so.
[35] That leaves the reliance upon the provisional debt
rearrangement order obtained in the Magistrates’ Court. In
essence,
Mr Evans contends that as a result of that order he is only
lawfully obliged to pay a diminished sum to FNB in discharge of his
indebtedness under the bonds and for that reason it is inappropriate
that his estate be sequestrated.
[36] I accept that in a clear case where the debtor’s
debts have been rearranged by way of an order in terms of
s 87
of the
NCA and it is apparent that this will result in the debts being
discharged within a reasonable, albeit slightly longer than
contracted, period, this will constitute a powerful reason for the
court to exercise its discretion against the grant of a sequestration
order. However, once it is accepted that debt review proceedings
under the NCA do not constitute an automatic bar to the grant
of a
sequestration order, I am unable to see why the fact that a debt
rearrangement order has been granted necessarily affects
the
situation. Contrary to the submissions by Mr Kemp that the effect of
such an order is to alter the debtor’s contractual
obligation
to the creditor, in my view it does nothing more than preclude the
creditor from pursuing its contractual rights for
so long as the
debtor is complying with the debt rearrangement order. That is, after
all, what the NCA says in
s 88(3)
thereof. If the debtor does
not comply with the debt rearrangement order the creditor is not
confined to claiming remedies on the
basis of an amended contract.
Instead the bar on proceeding against the debtor ‘to exercise
or enforce by litigation or other
judicial process any right or
security under that credit agreement’ is removed and the
creditor is entitled to pursue in
full its contractual remedies. The
effect of a debt rearrangement order is to place a moratorium on
credit providers pursuing their
contractual remedies for so long as
the debtor complies with the terms of the debt rearrangement order.
Once it is recognised that
an application for sequestration is not
the enforcement of the credit agreement it must follow that any
moratorium to claiming
payment under the credit agreement that exists
by virtue of a debt rearrangement order is not a bar to the grant of
a sequestration
order.
[37] None of this detracts from what I said earlier,
namely that the existence of a debt rearrangement order that provides
for the
payment of the debtor’s debts within a reasonable time
and in an orderly fashion, in conjunction with proof that the debtor
is complying with the terms of the order, is a powerful reason for
the court to exercise its discretion in favour of the debtor
when an
application is brought for the sequestration of his or her estate. It
is not, however, decisive. It is even less decisive
when, as here,
the existence and validity of any such order is debatable. FNB
contends that it caused its credit agreements to
be removed from the
debt review process by way of a notice in terms of
s 86(10)
of the
NCA. Mr Evans disputes that. It is not a question that can be
resolved on these papers and when I asked counsel whether
it needed
to be resolved in order to determine the present application both,
for different reasons, said that it did not.
[38] Assuming that the
s 86(10)
notice was
ineffective I nonetheless have serious reservations about the
validity of the provisional debt rearrangement order.
First, it was
sought in a court that does not appear to have any jurisdiction over
Mr Evans, who both resides and carries on business
outside its area
of jurisdiction. Second, the rearrangement order was granted on a
provisional basis by way of a rule
nisi
.
As Mr Harcourt pointed out, in his supplementary written submissions,
the NCA has no provision for the grant of rules
nisi
or any kind of interim or provisional debt rearrangement
order. In
s 87(1)
it contemplates a hearing and a decision on
the application before it and nothing more. In terms of the
Magistrates’ Court
Act 32 of 1944
22
the magistrates’ courts have a limited
jurisdiction in relation to the grant of rules
nisi
and none of the cases for which that Act
provides contemplates an order such as this one.
Then
there is the impact of the order for a stay of operation of the debt
rearrangement order. I can find nothing in the NCA or
the
Magistrates’ Court Act that sanctions such a procedure. It is
accordingly, at the lowest, extremely doubtful whether
the
magistrates’ court ever validly granted a debt rearrangement
order and whether any such order is still in place. The
fact that the
status of the debt rearrangement order obtained by Mr Evans is highly
questionable is an important factor to consider
in the exercise of my
discretion.
[39] A further factor to bear in mind in considering the
effect of a debt rearrangement order on the exercise of the court’s
discretion in relation to a sequestration application, is the period
during which the order will, if implemented, result in the
repayment
of the debtor’s indebtedness. Certainly, at the time when the
present debt rearrangement order was proposed and
put before the
magistrate, it necessarily involved an extension of Mr Evans’
indebtedness to FNB and others far beyond the
term of the original
credit agreements. That conclusion is drawn from the fact that the
original basis for payment under the debt
rearrangement order was one
that did not discharge the monthly interest accruing on the
indebtedness. According to the application
for debt review Mr Evans’
monthly commitments in respect of credit agreements amounted to
R31 480. The debt rearrangement
order provided for him to pay
R23 397, less a distribution cost, per month, to be distributed
pro rata to his creditors. The
interest rate on his debts, bar one,
ranged between 11% and 22.4%.
[40] Manifestly on those figures the only basis upon
which compliance with that debt rearrangement order would succeed in
discharging
his debts would be if he was able to increase his
payments by 8% per annum every year for a number of years. That is a
highly speculative
assumption, although experience in these cases
suggests that debt counsellors almost invariably make it, or a more
generous assumption.
It certainly means that the debts would only be
discharged over a considerably greater period than the credit
providers had anticipated
when they concluded the credit agreements
with Mr Evans. There is much to be said for the proposition that the
proposal was very
nearly as unrealistic as that which I considered in
Mudaly’s
case.
23
Where a proposal for debt restructuring will
significantly extend the period of the debtor’s indebtedness
and is dependent
for its effectiveness upon a speculative assumption
regarding increases in income and payments, that will diminish the
weight to
be attached to such an order in exercising the court’s
discretion whether to grant a sequestration order.
[41] There is one further relevant factor. Mr Kemp
contends that, as a result of the discharge of the loan debt, Mr
Evans is in
possession of a sufficient income to pay his outstanding
indebtedness to FNB in the ordinary course by way of monthly
instalments
on a loan on conventional terms. If that is so there
seems to be no reason why he should not either negotiate for the
reinstatement
of his loan with FNB or obtain a loan in a
corresponding amount from another financial institution and pay FNB.
The fact that he
has not done so suggests that his financial position
may not be as rosy as Mr Kemp submits. That is a factor that weighs
against
the exercise of my discretion in his favour.
[42] Overall, I am not satisfied that this is a case
where I should exercise my discretion to refuse to grant a
provisional sequestration
order. Mr Kemp submitted that the
application should either be dismissed or a final order be granted
because it would serve
no purpose to argue the same issues again
before this court if I were to decide in favour of FNB. He said that
this accorded with
the ‘Transvaal’ approach. I am not
aware of any such approach. That it is impermissible as being
contrary to the express
provisions of the
Insolvency Act I
have no
doubt.
Section 9(5)
of that Act provides that the court on
consideration of an application may either act in terms of s 10
or may dismiss the
application, postpone its hearing or make such
other order as in the circumstances appears to be just. Section 10
provides only
for the grant of a provisional order for sequestration.
There are then requirements for the service of the rule
nisi
and s 12(1) provides that thereafter there shall be a
hearing ‘pursuant to the aforesaid rule
nisi
’
.
The authorities (which emanate from the former
Transvaal) are clear in holding that the preliminary step of granting
a provisional
order is peremptory.
24
In those circumstances the proper order is a provisional
order.
[43]
I accordingly grant the following order:
1. That a rule
nisi
do issue calling upon the
respondent and all other interested parties to show cause, if any, to
this court on the 19th day of May
2011 at 09h30 or so soon thereafter
as the matter may be heard why the estate of the respondent should
not be placed into final
sequestration.
2. That this order operate with immediate effect as an
order for the provisional sequestration of the estate of the
respondent.
3. That a copy of this order be served on:
3.1 The respondent;
3.2 The Master of the High Court;
3.3 The South African Revenue Services.
4. That a copy of this order be published on or before
the 29
th
day of April 2011 once in the Government Gazette
and once in a daily newspaper published and circulating in the
Ballito and greater
Durban areas.
DATE OF HEARING 11 FEBRUARY 2011
DATE OF JUDGMENT 18 MARCH 2011
APPLICANT’S COUNSEL MR A W M HARCOURT SC with MR W
N SHAPIRO
APPLICANT’S ATTORNEYS MAHARAJ ATTORNEYS
RESPONDENT’S COUNSEL MR K J KEMP SC
with MR E CROTS
RESPONDENT’S ATTORNEYS BOOYSEN & CO INC
1
Standard
Bank of SA Limited v Court
1993 (3) SA
286
(C) at 292 H-J and on appeal
Court
v Standard Bank of South Africa Ltd
[1995] ZASCA 39
;
1995
(3) SA 123
(A) 134A-C..
2
Optima
Fertilisers (Pty) Ltd v Turner
1968 (4) SA 29
(D) at C_D
3
Insolvency
Law
by the late Justice P M Meskin (looseleaf) currently edited
by Justice P A M Magid, Prof A Boraine, Ms J Kunst and Prof D A
Burnette,
para 2.1.2.7, p 2-16 (Issue 35)
4
1953
(2) SA 691
(O) at 696D-E.
5
At
293 B-G.
6
1950
(2) SA 35
(D)
7
Collett
v Priest
1931 AD 290
at 299.
8
2010
(4) SA 597
(SCA).
9
In
para [4]
10
2010
(1) SA 265
(GSJ) paras [27]-[31]
11
Paras
[33} and [34].
12
Schwartz
v Schwartz
[1984] ZASCA 79
;
1984 (4) SA 467
(A)
473I-474E.
13
c/f
Cargo Laden and Lately Laden on Board
the mv’Thalassini Avgi v mv Dimitris
1989
(3) SA 820
(A) 833C-F.
14
1973
(2) SA 611
(W) at 613 B-C
15
That
was also the fate of the application in
Rodrew
(Pty) Limited v Roussouw
1975 (3) SA
137
(O) at 139 C-D.
16
1999
(1) SA 852
(W) at 860 A-C.
17
The
edition that was then current is not available to me but the
sentence appears in precisely those terms in the 8
th
edition at page 65.
18
The
error is cumulative as the same case is cited as authority for the
same proposition in LAWSA in Vol 11 (2
nd
Ed) para 213 p 213.
19
Optima
Fertilizers (Pty) Limited v Turner
1968
(4) SA 29
(D) 34 A-B.
20
Ohlsson’s
Cape Breweries Limited v Totten
1911
TPD 48
at
21
1907
TS 727
at 733.
22
S
30 read with Rules 55(1) and 56.
23
BMW
Financial Services (South Africa) Ltd v Mudaly
2010
(5) SA 618
(KZD) paras [37] to [42].
24
Provincial
Building Society of SA v du Bois
1966
(3) SA 76
(W) at 81 E-F.