The abuse of sequestration proceedings and its consequences

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BUSINESS NEWS - Abuse, Misuse and/or exploit, alike – call it what you like, honesty is the best policy. More often than not, the South African Judicial system is unfortunately faced with some parties not being honest, upfront, and transparent in their dealings before the Court of law.

It is well documented that South African insolvency law aims to provide for an equitable distribution of the debtor’s property to the advantage of the creditors, whereas it is not expected to benefit the debtor, at all.

In the case of Ex Parte Snooke 2014 (5) SA 426 (FB), it cropped up in relation to the abuse of sequestration proceedings.

This case deals with an ex parte rehabilitation, considering a sequestration application, which was used for a purpose or in a way which were significantly different from the ordinary- or its main purpose.

The application was based, inter alia, on the fact that no claims were lodged against the insolvent estate after the sequestration proceedings. Thus, rehabilitation was sought in accordance with Section 124(3) of the Insolvency Act, 24 of 1936, as amended.

Both the Master of the High Court and the other Trustee did not object to the granting of the relief sought in the application, but nothing as far as this article is concerned, turns around this. The concerns raised by the Court is however of importance.

The apposite facts of the concerns were that the statement of affairs was not fully disclosed in the application, hence the circumstances called out for many answers.

Excessive fees were charged, and in doing that, wool was pulled over the Court’s eyes. The short turnaround time for the lodgement of claims was also very limited given the position of the creditors.

Accordingly, the Court directed that the rehabilitation proceedings be postponed with certain specific directions to, inter alia, give more notice (incl. explanation) to the creditors for any possible claims.

The moral of the story is that full disclosure to the Court is always required, compliance being utmost important, and in casu, creditors should at best benefit from sequestration proceedings.

Sequestration proceedings is a powerful weapon that should only be used for its purpose, and as a matter of last resort as well, and that is to recover debt in accordance with the law. The legislature very likely had in mind that a sequestration must primarily be to the benefit of creditors and not insolvent persons.

With respect, when considering sequestration, subsequently rehabilitation proceedings, it is imperative that claims of creditors should not be circumvented. Any abuse of the proceedings may naturally lead to dire consequences, which from the bat, is not advisable.