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[2008] ZANCHC 50
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Conradie and Another v Master of the High Court: Kimberly and Others (1260/2006) [2008] ZANCHC 50 (13 June 2008)
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IN THE HIGH COURT OF
SOUTH AFRICA
(Northern Cape
Division)
Case
Nr:
1260/2006
Case
Heard:
23/05/2008
Date
delivered:
13/06/2008
In
the matter between:
Janet
Conradie
1
ST
APPLICANT
Eben
Conradie 2
ND
APPLICANT
and
Master
of the High Court: Kimberley
1
st
RESPONDENT
Johan
Schoon NO 2
nd
RESPONDENT
Abraham
Johannes Swanepoel NO 3
rd
RESPONDENT
JUDGMENT
Olivier J:
The
first applicant, mrs Janet Conradie, was married to mr Hendrik
Christoffel Conradie (“
the
testator
”).
Two sons were born of their marriage, mr Eben Conradie (the second
applicant) on 14 October 1985 and mr Ryno Conradie
on 14 December
1987.
In a combined will the
first applicant and the testator stipulated the following:
Upon
the death of the first deceased a trust (named the ER Trust) would
be established.
The
remaining portion (after certain bequests) of their joint estate
would go to the ER Trust to be administered in accordance
with a
particular trust deed.
The
surviving spouse
(in this case the first applicant) would be an income beneficiary.
The two sons would be
both income and capital beneficiaries.
During
the lifetime of the surviving spouse
no capital would vest in their sons without the written consent of
such spouse.
The
surviving spouse
would be a trustee.
The relevant
provisions of the trust deed were the following:
A
relatively wide range of powers were granted to the trustee/s,
including the power to appropriate and utilize not only the
income
of the ER Trust, but also its capital.
No
capital would vest in any of the capital beneficiaries before they
reached the age of 25 years.
A
trustee whose estate was sequestrated, would immediately cease to
be a trustee.
The
trustee/s could at any time in their discretion, subject only to
the provisions of the will, terminate the ER Trust, and
provision
was made for what would be done with the capital of the trust in
such an event.
The
ER
Trust was established upon the death of the testator on 30 July 1996
and the first applicant was duly appointed as trustee
on 6 March
1997.
On
18 January 2002, and upon the application of the first applicant,
the surrender of both her estate and the estate of the ER
Trust was
accepted and both the estates were sequestrated.
The first applicant
was rehabilitated on 2 June 2006.
After
all the creditors of the ER Trust had been paid in full there
remained a surplus amount of R138 335,72. The Master (the
first
respondent herein) has paid the amount into the Guardians’
Fund in terms of
section 116(1)
of the
Insolvency Act, 24 of 1936
.
The
second and third respondents are the co-trustees in the
administration of the estate of the ER Trust. They do not oppose
the application. The Master also does not oppose the application,
but has furnished the Court with reports containing his input
and
recommendations.
Mr
Coetzee appeared as counsel for the applicants. Mr Schreuder became
involved as counsel
amicus
curiae
and the Court is indebted to him for his efforts and arguments.
ORIGINAL NOTICE OF
MOTION
In
the notice of motion in its original form the applicants moved for
an order “
Dat
die eerste respondent gemagtig en gelas word om enige gelde in die
voogdyfonds gehou ter krediet van die ER Trust, aan die
eerste
applikant te betaal
”.
In
my view there is no legal basis for such an order. The provisions
of
section 116(1)
of the
Insolvency
Act read
as follows:
“
If
after the confirmation of a final plan of distribution there is any
surplus in an insolvent estate which is not required for
the payment
of claims, costs, charges or interest, the trustee shall immediately
after the confirmation of that account, pay that
surplus over to the
Master, who shall deposit it in the Guardians’ Fund and
after
the rehabilitation of the insolvent
shall pay it out
to
him
at his request.”
(The emphasis is my
own)
The
first applicant can clearly not be regarded as “
the
insolvent
”
for the purposes of the sequestration and administration of the
estate of the ER Trust.
Mr Coetzee conceded
that
section 116(1)
does not provide for the payment of such surplus
to anyone other than the particular insolvent, but submitted that
such an order
can nevertheless be made in the exercise of a
discretion which he argued this Court would have in circumstances
like these.
Mr Coetzee could not,
however, direct me to any authority for this proposition and I am
not aware of any legal basis for the exercise
of such a discretion.
Even
if the assets of a trust are for practical purposes deemed to vest
in its trustee/s (see
Kohlberg
v Burnett NO and Others
1986
(3) SA 12
(AD) at 25H) that could never mean that a trustee would in
his/her personal capacity be entitled to any part of such assets.
The first applicant in any event ceased to be a trustee of the trust
when her own estate was sequestrated.
The
first applicant is furthermore not a capital beneficiary of the ER
Trust and the surplus amount would clearly be part of the
proceeds
of the realization of the capital of the trust.
Even
if the intention had been that the income of the trust would be used
for the maintenance of the two sons, the fact that the
first
applicant has been supporting them from her own funds (since the
sequestration of the ER Trust’s estate) would not
simply now
entitle her to the surplus amount.
A
MENDED
NOTICE OF MOTION
In
his initial report the Master recommended that an order be made
authorising the Master to appoint a trustee or trustees and
to pay
over the surplus to the newly appointed trustee/s.
The applicants have
filed an amended notice of motion and are now seeking relief along
the lines suggested by the Master.
In
making this recommendation the Master adopted the attitude that the
ER Trust remained in existence when its estate was sequestrated
and
in my view this is indeed the correct legal position.
Nowhere
in the trust deed is it provided, or even suggested, that the trust
would cease to exist upon the sequestration of its
estate.
The
Trust Property Control Act, 57 of 1988, similarly contains no
provisions to this effect.
In
view of the surplus and the fact that the trust had apparently been
solvent when its estate was sequestrated, it could also
not be
argued that the trust had ceased to exist due to the fact that it
no longer had any assets (compare
Ex
parte Voortman et Uxor
1919 OPD 53).
Even
if the trust had lost all its assets in the administration process
(and even if it did not even have an asset in the form
of the
surplus that remained in this case) it would not in my view,
automatically and because of this alone, have ceased to
exist as a
legal entity (compare
African
National Congress and Another v Lombo
[1997] ZASCA 1
;
1997 (3) SA 187
(AD); as will be seen below, the
Insolvency Act
also
envisages the continued existence of an insolvent whose estate
has been sequestrated and administered).
Nothing
would, for instance, have prevented the trust from proceeding to
build up a new estate (see, for example,
section
23(3)
of the
Insolvency
Act
and
Insolvency
Law
,
Meskin, 5-44(1)).
Should
it be accepted that the
trust
ceased to exist when its estate was sequestrated, it would mean
that the testator would have to be deemed to have died
intestate as
far as the surplus is concerned (see
Honoré’s
South African Law of Trusts
,
Cameron
et
al
,
5
th
ed, p551), and there is a presumption against partial intestacy
(see
Tolond
NO v The Master
1990 (1) SA 801
(D) at 805E-F and
Honoré’s
South African Law of Trusts, supra
,
at 551).
It
is quite clear that the testator and the first applicant intended the
remainder of their joint estate, and therefore the capital
of the ER
Trust, to eventually go to their sons, and the joint will contains no
residual provisions for a contingency such as this.
I
was unable to find any authority to the effect that a trust is
automatically terminated by the sequestration of its estate.
Even
if it could be argued that the sequestration of a trust’s
estate would eventually lead to it termination, such a
trust would
at the very least have to continue to exist for the duration of the
administration of its sequestrated estate (compare
Ex
parte Buttner Brothers
1930 CPD 138
at 144-145), of which process the payment of such a
surplus would then obviously form part.
The
fact that an insolvent has various obligations in the process of the
administration of a sequestrated estate, would in itself
militate
against an argument that any insolvent could cease to exist when the
final sequestration order is made (see
The
Law of Insolvency
,
Smith, 3
rd
ed, p106).
Although
there is obviously a clear distinction between a trust and a
company it is of interest to note that there is ample
authority for
the proposition that a company does not cease to exist when it is
wound up (see
R
v Heyne en Andere
(3)
1958 (1) SA 614
(W),
Letsitele
Stores (Pty) Ltd v Roets and Others
1958 (2) SA 224
(T) at 227H,
Ex
parte Provisional Liquidator Hugo Franco (Pty) Ltd
1958 (4) SA 397
(W) at 400G-401B and
O’Connell
Manthe & Partners Inc v Vryheid Minerale (Edms) Bpk
1979 (1) SA 553
(T) at 557H, but compare
Attorney-General
v Blumenthal
1961 (4) SA 313
(T)).
The
question would then be what the correct procedure would be to have
the surplus released from the Guardians’ Fund and
in this
regard there are three possibilities to consider:
In
the first place there is the possibility suggested by the Master
(and adopted in the amended notice of motion) that the Master
simply (and apparently without the rehabilitation of the ER Trust)
appoints a trustee or trustees and pays over the surplus
to the
newly appointed trustee/s.
As
a second possibility it must be considered whether a trust can be
rehabilitated in accordance with the provisions of the
Insolvency
Act, in
which case the surplus can be dealt with in terms of
section 116(1)
; again after the appointment of the trustee/s.
A last possibility
which has to be considered is the setting aside of the
sequestration order in terms of
section 149(2)
of the
Insolvency
Act.
P
AYMENT
OF SURPLUS TO TRUSTEE/S
The provisions of
section 116(1)
of the
Insolvency Act were
clearly intended to
provide for the temporary preservation of a surplus, until such time
as the insolvent is rehabilitated.
In
view
of the fact that the trust has not been rehabilitated, the Master
would therefore quite clearly not be able to rely on
section 116(1)
to pay the surplus to a newly appointed trustee.
I
am not aware of any other basis upon which the Master would be
entitled to pay the surplus to an unrehabilitated insolvent
and I
cannot see (all the more so in view of what follows) how this Court
could have the discretionary power, as suggested by
mr Coetzee, to
order the Master to act in contravention of the clear provisions of
section 116(1)
of the
Insolvency Act.
It
would in any event make no sense that the legislature would insist
that a natural person be rehabilitated before he/she re-enters
the
commercial arena without the supervision of a trustee, but would be
quite happy to allow a trust of which the estate has
been
sequestrated, but which has continued to exist (possibly even with
the same trustee/s), to do so without having been rehabilitated.
THE REHABILITATION
OF THE TRUST
The question that then
arises, and in respect of which the Master has requested guidance in
view of the increasing number of sequestration
orders in respect of
trusts, is whether it is legally possible and competent to
rehabilitate a trust.
The
author Meskin (
Insolvency
Law, supra
,
at 14-2) is of the view that a trust cannot be rehabilitated. He
argues that those provisions of the
Insolvency Act that
deal with
rehabilitation, apply only to “
a
natural person who, after sequestration, continues in existence and
is able to accumulate a new estate
”.
I
am, with respect, unable to agree with this argument. I have
already come to the conclusion that a trust, like a natural person,
continues to exist despite the sequestration of its estate
(unless it is otherwise provided in the trust deed).
I
can
see no reason why, if the provisions of the
Insolvency Act apply
to
a trust for the purposes of the sequestration of its insolvent
estate, the provisions that would enable an insolvent who is
a
natural person to accumulate a new estate would not apply to a
trust.
I also do not agree
with the suggestion that only a natural person can be rehabilitated.
Section
124(1)
of the
Insolvency Act entitles
“
An
insolvent
”
to apply for an order of rehabilitation. The word “
insolvent
”
(when used as a noun) is defined in section 2 of the Act as meaning
“
a
debtor
whose estate is under sequestration …
”.
It
is trite that a trust is regarded as a “
debtor
”,
as defined in
section 2
of the
Insolvency Act, for
the purposes of
the sequestration of its insolvent estate (see
Ex
parte Milton
,
NO
1959 (3) SA 347
(SR) and
Magnum
Financial Holdings (Pty) Ltd (In liquidation) v Summerly and
Another NNO
1984 (1) SA 160
(WLD); I cannot see why there should, for this
purpose, be a distinction between trusts
inter
vivos
and testamentary trusts).
There
is in my view no reason why a trust should not also be regarded as a
“
debtor
”
for the purposes of the definition of the noun “
insolvent
”,
and therefore for the purposes of
section 124(1)
of the
Insolvency
Act.
Considerations
of fairness and practicality militate against an interpretation of
the
Insolvency Act that
, while the estate of a trust can be
sequestrated, the trust cannot be rehabilitated.
Such
an interpretation would mean that, while other insolvents are
entitled to the positive and beneficial effects of rehabilitation
(see
section
129(1)
of
the
Insolvency Act
),
trusts are not and will indefinitely remain burdened with the
consequences of sequestration, or at least until the termination
of
such trusts. There is quite simply no legal basis or need for such
a discriminatory interpretation of the
Insolvency Act.
>
The
fact that the
legislature
chose to provide that “A
partnership whose estate has been sequestrated shall not be
rehabilitated
”
(see
section
128
of the
Insolvency
Act
),
can in no way justify the inference or interpretation that, because
a trust is similarly not a natural person, it can also
not apply for
its rehabilitation.
In
this regard it is important to bear in mind, in the first place,
that although there was difference of opinion in this regard,
the
practice of rehabilitating even partnership estates was accepted and
applied by some Courts until the coming into operation
of the
present
Insolvency Act, and
of
section 128
thereof (see
Ex
parte Buttner and Others, supra
,
Ex
parte Ranchod
1949 (4) SA 352
(SR) at 354 and
The
Law of Insolvency, supra
,
at p 304). Although it turned out not to be necessary to decide
this point, a Court of this division was prepared to assume
that it
would have been competent to grant such an order (see
Ex
parte Blake
1925 GWLD 45).
There
are, in any event, fundamental differences between the legal
concepts of a partnership and a trust.
Partners
are personally liable for the debts of a partnership and their
personal estates are also liable to be sequestrated
in the event of
the sequestration of the estate of the partnership (see
section
13(1)
of the
Insolvency
Act
).
The combination of partners (and their estates) that formed the
partnership prior to its estate being sequestrated will
then no
longer exist like before or be able to apply for a rehabilitation
order (see
The
Law of South Africa
,
2
nd
ed, Joubert, vol 19, at p268-269).
In
the case of a
trust
a trustee is not personally liable for the debts of the trust,
his/her estate will therefore not be sequestrated as a result
of the
sequestration of the trust’s estate and he/she will therefore
in the normal course of events remain a trustee and
as such be
competent to lodge an application for rehabilitation on behalf of the
trust. Even if the trustee would for some reason
lose his/her
office, the Master would simply appoint a new trustee or trustees
(see
section
7
of the
Trust
Property Control Act
).
In
any event a partnership is in common law dissolved when its estate
is sequestrated (see
Cassim
v The Master and Others
1962 (4) SA 601 (DCLD) at 606D-E) and even if it was possible, it
would therefore serve no purpose to entertain an application
for
the rehabilitation of such a partnership. The same does not apply
to a trust.
The
fact that the legislature has, despite the
dicta
in the
Milton
and
Magnum
Financial Holdings
cases referred to above, chosen not to amend the
Insolvency Act so
as to rule out applications for the rehabilitation of trusts (as
was done in respect of partnerships), is in itself an indication
of
an intention that the rehabilitation of a trust would be competent.
To
accept that a trust can apply to be rehabilitated need not present
any practical difficulties. The required affidavit can
be deposed
to by a trustee (if need be, a newly appointed trustee) and,
insofar as any of the provisions of the
Insolvency Act might
on the
face of it appear to envisage a natural person as the insolvent,
this can be easily overcome by applying all the applicable
provisions as best as practically possible in the circumstances
(compare
Ex
parte Buttner Brothers, supra
,
at 143). The Master has, however, not drawn my attention to any
potential problems in this regard. Formal defects can in
any event
be condoned in terms of
section 157(1)
of the
Insolvency Act.
The
conclusion to which I have therefore come is that a trust can be
rehabilitated.
SETTING
ASIDE OF
THE
SEQUESTRATION ORDER
A
final sequestration order will only be set aside where there are
special and extraordinary circumstances justifying such an
order
(see
The
Law of Insolvency, supra
,
at p 310-312 and
Storti
v Nugent and Others
2001 (3) SA 783
(WLD) at 806A-807C).
In this regard the
following considerations are relevant:
The
estate of the ER Trust had in fact been solvent at the time of its
sequestration. Although the first applicant does not
explain how
this happened, it is not in dispute that she had surrendered the
estate of the trust while she was under the
bona
fide
,
but mistaken, impression that it was insolvent.
The
creditors of the trust have been paid in full.
As
already mentioned, neither the co-trustees nor the Master have
opposed the application and it would therefore appear as though
they are not interested in the surplus and would have no objection
to it being paid over to either the applicant or to newly
appointed
trustees in the ER Trust.
I
am of the opinion that, despite the fact that the
ER
Trust would be entitled to apply for its rehabilitation and then to
obtain payment of the surplus in terms of section 116(1),
the
circumstances of this matter are sufficiently exceptional to justify
the setting aside of the sequestration order at this
stage.
I
have been given the assurance by the Master that such an order would
not have the effect that the whole process of the administration
of
the estate will have to be reversed. That would quite clearly not
be an option in this case. The immovable properties of
the trust
have been sold and the creditors have, as already mentioned, been
paid in full.
In
Ex
parte Belcher: In re Die Boven Ko-operatieve Molen Maatschappy
Beperkt v Belcher
1939
WLD 39
the fact that the estate of the applicant had been liquidated
was not regarded as a bar to the setting aside of the sequestration
order.
Although
it was regard
ed
as relevant in
Ex
parte Patterson
1931 TPD 374
at 377, it was only one of several considerations which
led to the refusal to set aside the sequestration order.
In
view of the fact that the setting aside of the sequestration order
in the estate of the
ER Trust was not sought in the original or amended notice of motion,
I have afforded both counsel, the Master and the second
and third
respondents the opportunity of responding to the possibility of such
an order as a mechanism to enable the Master to
pay out the surplus
to the new trustee/s of the trust, without the need for an
application for rehabilitation.
I
received no response from the co-trustees. Mr Schreuder is of the
view that there are no exceptional circumstances which
would
justify the setting aside of the sequestration order. In his
response the Master has also expressed the opinion that “
hier
(is)
geen buitengewone redes vir die wysiging en tersydestelling van die
sekwestrasiebevel nie, anders as om die surplus fondse in
die
Voogdyfonds te onttrek nie.
”
In
view of what has already been stated above I disagree. The attitude
adopted by mr Schreuder and the Master loses sight of
the fact that
the creditors have been paid in full and, of even more importance,
that the trust had in actual fact not been insolvent.
As
a further reason why the sequestration order should not be set
aside, the Master stated that an order of rescission would mean
“
dat
die eerste applikant ‘n verkeerde sekwestrasie aansoek geloods
het, net omdat daar nou ‘n surplus in die boedel
is …”
.
This is not correct. It is not in dispute that the first applicant
had been under the mistaken impression that the trust was
insolvent
when she applied for the surrender of its estate. The
sequestration order would therefore not be wrong merely because
of
the surplus, but indeed because it was sought and granted on the
basis of incorrect information.
In
his supplementary heads of argument mr Coetzee has now expressed the
view that the setting aside of the sequestration order
would be
competent, and would be an equitable order to make in the
circumstances, and he has requested an amendment to the amended
notice of motion to insert therein, as para 1.3, the following:
“
Alternatiewelik
dat beveel word dat die aanvaarding van die ER Trust se boedel op 18
Januarie 2002 tersyde gestel word.”
I
am of the view that an order setting aside the sequestration order
would be competent and justifiable in the circumstances,
and that
the Master should for the sake of clarity nevertheless be authorised
to appoint trustee/s and to pay out the surplus,
and in the premises
the following orders are made:
The
amended notice of motion dated 23 November 2006 is amended by the
insertion therein of paragraph 1.3, which reads as follows:
“
Alternatiewelik
dat beveel word dat die aanvaarding van die ER Trust se boedel op 18
Januarie 2002 tersyde gestel word.”
The
order of 1
8
January 2002, accepting the surrender of the estate of the ER Trust
and sequestrating it, is set aside.
The
Master is authori
sed
and ordered to appoint a trustee or trustees for the ER Trust and to
pay out the surplus, held in the Guardians’ Fund
and remaining
in the administration of the estate of the ER Trust, to such
trustee/s.
________________________
C J OLIVIER
JUDGE
NORTHERN CAPE
DIVISION
For the
Plaintiff:
Adv
W Coetzee
Instructed
by:
Engelsman
Magabane Inc, KIMBERLEY
Amicus
curiae
: Adv
J Schreuder