Wednesday, 18 March 2015

Ante nuptial contract provides limited protection once insolvency befalls a spouse l insolvency l sequestration l ante nuptial contract l community of property

Ante nuptial contract provides limited protection once insolvency befalls a spouse

Credit: ENSafrica
Thys Scheepers and Adelin Dalais

Source: http://www.lexology.com/library/detail.aspx?g=f794d3c4-fa60-4cb3-a2b0-c25a5a45b6f9

A common misconception surrounding an ante nuptial contract is that it provides married parties some protection when insolvency ensues. However, this is not necessarily the case. As many a solvent spouse discovers upon insolvency of their partner, the policy of the collection of maximum assets for the advantage of creditors actually overwhelms all other policies in South African insolvency law. Spouses who are married out of community of property are generally not liable for each other's debt, however, the sequestration of the estate of one of the spouses can affect the property of the solvent spouse.    

In terms of section 21(13) of the Insolvency Act 24 of 1936 ("Insolvency Act") the word "spouse" is widely defined to include not only a wife or husband in the legal sense, but also includes parties married according to any law or custom and also what is generally known as common law marriages (a woman living with a man as his wife or a man living with a woman as her husband, although they are not married to one another). Since the commencement of the Civil Union Act 17 of 2006 on 30 November 2006 a civil union partnership now has the same legal consequences as a marriage. As such, section 21(3) of the Insolvency Act also encompasses same sex civil union partners.

The Insolvency Act contains a number of provisions that serve to facilitate the trustee in his task of collecting the assets of the insolvent debtor and administering the insolvent estate. The trustee's initial duty is to identify and to preserve the assets of the insolvent debtor. On sequestration, the Insolvency Act provides for the divesting of the estate of the insolvent debtor and the vesting thereof in the Master and, upon his appointment, in the trustee.1 Section 21 of the Insolvency Act provides, as an additional effect of the sequestration of the insolvent spouse's estate, for the vesting of the solvent spouse's estate first in the Master and, upon his appointment, in the trustee as if it were property of the sequestrated estate. In terms of the Insolvency Act, it is only after such vesting has taken place that the solvent spouse can apply for the release of his/her assets.

As mentioned above, a consequence of the provisions of section 21 of the Insolvency Act is to vest the assets of the solvent spouse firmly in the hands of the trustee where, depending on the circumstances, they may or may not remain. The property vests "as if it were property of the sequestrated estate" and the Master or the trustee may deal therewith accordingly, subject to the provisions of the Insolvency Act. The vesting of the assets in the Master and then the trustee once he is appointed does not affect the contractual capacity of the solvent spouse, however, any juristic act of such spouse in relation to such property is void. Therefore, for example, immovable property may not be mortgaged by the solvent spouse. The provisions of section 21 of the Insolvency Act have no extra-territorial force2 and accordingly property of the solvent spouse outside the Republic does not vest in the trustee of the insolvent spouse's estate.

In terms of section 21(2) of the Insolvency Act there are five categories of property belonging to a solvent spouse that the trustee is obliged to release. In this regard, the trustee is obliged to release property which the solvent spouse is able to prove was paid for by him/her with his/her own money; property of the solvent spouse which is proved to have been the latter's immediately before his/her marriage to the insolvent; property which belonged to the solvent spouse immediately before 1 October 1926; property acquired by the solvent spouse under a marriage settlement; property safeguarded in favour of the solvent spouse by the Insurance Act 37 of 1923 (which has been repealed); and other property which may have been acquired with the proceeds of the realisation of such first-mentioned property or through exchange thereof or with income derived therefrom.  

The solvent spouse must produce evidence to the trustee in support of such spouse's claim to the property. In practice, the application for release would occur by way of a sworn affidavit. The affidavit must contain complete information regarding the nature and origin of the solvent spouse's title to the property and supporting documents such as an ante nuptial contract, vouchers, receipts, paid cheques or other relevant documents must be attached as well as affidavits by parties able to confirm the solvent spouse's claim. Where the solvent spouse establishes to the satisfaction of the trustee that his/her property is protected in terms of any of the provisions of section 21(2) of the Insolvency Act, the trustee is bound to release the property. In practice, it is often difficult for a solvent spouse to produce sufficient documentation and evidence to prove that his/her property falls to be protected in terms of this section, particularly when the parties have been married for some time. It should be remembered that the trustee is obligated to act in the best interests of all the insolvent's creditors and will consequently interrogate any documentation produced by the solvent spouse.  

In addition to the recourse the solvent spouse has against the trustee to release the assets he/she owns, the solvent spouse may approach the court to have certain of her assets released. The court is in two instances able to prevent or cancel, as the case may be, a vesting of the solvent spouse's property in the Master or the trustee. In the first instance, where the solvent spouse is carrying on the business as a trader independently of the insolvent spouse and in the second instance where it appears to the court that "the solvent spouse is likely to suffer serious prejudice through the immediate vesting". Where the solvent spouse approaches the court to claim an asset from the trustee, the application must contain full particulars of the asset claimed, the serious prejudice he/she will allegedly suffer as well as the arrangements he/she will make to safeguard the interests of the insolvent estate.

Except with the leave of the court, the trustee must not realise (sell) property that ostensibly belongs to the solvent spouse until the expiry of six weeks written notice to such spouse of his intention to do so. Publication of this notice is required in the Government Gazette and in a newspaper circulating in the district in which the solvent spouse resides or carries on business. The solvent spouse's creditors must be invited to prove their claims as provided for in section 21(5) of the Insolvency Act.  

Section 21 of the Insolvency Act does indeed appear to be a drastic provision and appears to infringe one or more provisions of the Constitution of the Republic of South Africa. However, in Harksen v Lane 1998 (1) SA 300 (CC) the Constitutional Court ruled that section 21 of the Insolvency Act, on the facts of that case, did not infringe the provisions of the Constitution. Robert Hull, an American politician, once said that "all marriages are happy. It's the living together afterward that causes all the trouble", however, considering the provisions of section 21 of the Insolvency Act one may well re-phrase the saying to state that all marriages are happy. It's the living together after insolvency that causes all the trouble.

EUGENE PRINSLOO
Partner
Meecham, Prinsloo & Associates
Personal Debt and Insolvency Paralegal Practitioners

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