The interface between the Insolvency Act 24 of 1936 and the National Credit Act 34 of 2005.

Abstract

The Insolvency Act 24 of 1936 regulates the debtor’s estate when sequestrated for the benefit of creditors. The debtor must prove that sequestration will be to the advantage creditors and as such creates a stumbling block in the way of the debtor when applying for the voluntary surrender of his estate. Sequestration is viewed as a drastic measure due to the consequences attached to it. The sequestration procedure is often used by debtors as a form of debt relief as, subsequent to the sequestration procedure, the debtor may become rehabilitated. The effect of rehabilitation is that it discharges the debtor of all pre-existing debts and disabilities resulting from sequestration. Compulsory sequestration is often used as a debt relief measure by the debtor in the form of the so-called ‘friendly sequestration’. One of the reasons for this is that the onus of proof is much less burdensome as compared to the onus required in voluntary surrender by the debtor of his estate. South African law provides for alternative debt relief measures falling outside the scope of the Insolvency Act, including debt rearrangement in terms of section 86(7)(b) or debt restructuring in terms of section 86(7)(c) as a result of debt review in terms of the National Credit Act 34 of 2005 (NCA). However this procedure does not offer the debtor the opportunity of any discharge from his debts as the order expires only after the administration costs and all of the listed creditors have been paid in full. Further the NCA does not mention the Insolvency Act and this has led to problems in the application of both Acts and inconsistencies between them. An application for debt review by the debtor has been held to constitute an act of insolvency. Thus the creditor can use this very act of the debtor to have the debtor’s estate sequestrated. This is possible as an application for the sequestration of the debtor’s estate is not considered to be an enforcement of a debt by legal proceedings for the purposes of section 88(3) of the NCA and such actions by the creditor are not prohibited by the NCA. This was stated in Investec Bank Ltd v Mutemeri 2010 (1) SA 265 (GSJ) and was subsequently confirmed by Naidoo v ABSA Bank 2010 (4) SA 597. The consequence of this is that a debtor’s estate may be sequestrated even where he has applied for debt review. Currently, as stated by Van Heerden and Boraine, there is no explicit regulation by the legislature of the interaction between the provisions of theInsolvency Act and the NCA. In terms of FirstRand Bank v Evans 2011 (4) SA 597 (KZD) a debtor’s estate may be sequestrated even after a debt rearrangement order has been confirmed by a court in terms of the NCA. This clearly operates to the disadvantage of a debtor. Comparing the position with that in foreign jurisdictions such as the United States of America and England and Wales shows a lack of balance between the interests of the creditor and the debtor. South African insolvency law is not aligned with internationally acceptable standards because it is too creditor orientated and debtors are not provided with effective remedies to deal with their financial difficulties. This research paper will focus on reform in South African law to assist debtors in need of debt relief. There is a need for a system to be put into place to regulate application for debt review by a debtor and the application for the sequestration of the debtor’s estate by the creditor. In addition there is a need for the introduction of new legislation or amendment to the NCA which could be effective in redressing the current situation.