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BANKRUPTCY & SPOUSES


A result of sequestration is that not only the insolvent spouse's estate is affected, the solvent spouse's property that has not been sequestrated also vests in the master and the trustee once he has been appointed as if the solvent spouse's estate has also been sequestrated. This, at first, seems to fly in the face of the vert purpose of the Matrimonial Property Regime Act. Assets that belong to the solvent spouse may form part of the insolvent estate, the reasoning behind this is the fact that the Insolvency Act (“the Act”) aims to collect maximum assets for the insolvent estate and thus advantaging creditors, which naturally will detriment the solvent spouse.

Before proceeding any further, we need to consider both marital systems available in South Africa, namely in community of property and out community of property. In marriages that were concluded in community of property, there is only one joint estate and thus section 21 will not apply because the joint estate will be sequestrated i.e. there is no “solvent spouse”. On the contrary, when the spouses are married out of community of property (with or without the application of the accrual system), there are two separate estates and Section 21 will be applicable. Section 21 does not only apply to spouses who formally entered into a marriage, but the word "spouse" in Section 21 also includes a wife or husband by virtue of a marriage of any law or custom as well as 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. The effect os Section 21 is that the estate of the solvent spouse vests in the trustee of the insolvent spouse, where the property could possibly form part of the insolvent estate to be distributed to the creditors.

MEANING OF "SPOUSE" IN TERMS OF SECTION 21

Section 21(1) of the Act states:

"…the sequestration of the separate estate of one of two spouses who are not living apart under a judicial order of separation shall vest in the master…"

In terms of Section 21(13) of the Act, a spouse is defined as:

“…not only a wife or husband in the legal sense but also a wife or husband by virtue of a marriage according to any law or custom, and also 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.”

The Act defines the term 'spouse' widely as a husband and wife in the legal sense and it defines the term as wife or husband according to any law or custom and includes a man and woman living together as if they are married. Since the commencement of the Civil Union Act, the term spouse in the Insolvency Act has been amended to include persons of the same sex who have entered into a civil union.

Herbstein J in Chaplin v Gregory (or Wyld) stated that Section 21(1) is, according to him, clear and unambiguous. The legislature intended the section to deal with the relationship between a husband and wife, not an extra-marital relationship. He then continues to Section 21(13) by explaining that the legislature intended to make Section 21(13) applicable to persons who while not legally married were occupying the de facto position of husband and wife. The Court found that it was not empowered to grant an order vesting in the trustee of an insolvent man the property of a woman with whom he had been living as her husband (not in the legal sense) where such man in fact had a legal wife from whom he was either not living apart or living apart though not under an order of judicial separation.

This decision seems to disregard the purpose of Section 21. Section 21 attempts to end collusion between spouses and persons living together as spouses. But there is now a greater possibility of collusion between the insolvent and the person with whom the insolvent lives, while the legal spouse has to bear the consequences of their property vesting in the trustee of the insolvent spouse. It seems like placing a premium on adultery as contrasted with concubinage. It was submitted that the intention is that the separation assumed by the Vourt in the Janit case must be one which results in the permanent termination of the informal relationship and accordingly the relevant provisions are to apply to the unmarried "spouse" notwithstanding the fact that she is not physically living with the insolvent as at the date of sequestration of his estate, unless if their relationship terminated before the date of sequestration.

The Court held the following in the Janit case: “According to the Court, all the various permutations for which the sections provide, contemplate an existing relationship between the insolvent spouse and the solvent one as at the date of sequestration of the insolvent's estate. The Act would require amendment should the contrary view be taken.”

The Court accordingly made it clear that Section 21 is only applicable to current relationships and not relationships that terminated by divorce before sequestration. The legislature intended that the property of the solvent spouse who was living with the insolvent before sequestration vests in the trustee, even when at the time of sequestration they were not living together. The section would then apply to a married solvent spouse who was not living with the insolvent at the date of sequestration, but would in the same circumstances apply to the unmarried solvent "spouse" as seen in Section 21(13). When a married couple is separated in reality but according to law are still married, the solvent spouse is still subjected to the provisions of Section 21, and accordingly the spouse is treated differently to the "spouse" in the informal relationship. It is clear that when considering Section 21(1) and 21(13), there is clear separation between the two categories of spouses, the spouse married to the insolvent and the "spouse" living with the insolvent. All individuals have the right to be treated equally before the law and it is against the Constitution to discriminate between people based on their marital status.

SECTION 21 & MARRIAGES OUT OF COMMUNITY OF PROPERTY

Spouses married out of community of property, each have their own separate estate. Thus spouses married out of community of property often use this marriage regime to defraud creditors by transferring assets by means of simulated transactions. But Section 21 has put an end to this by placing the burden on the solvent spouse to prove that the property claimed by the insolvent spouse's trustee is indeed his/hers by valid title.

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In the past, the trustee was burdened with the onus to prove that the spouses simulated transactions. It was almost an impossible task for a trustee to separate the two estates. In the Maudsley's case Greenberg JP stated that traders attempted to avoid payment by transferring their property into their wives names and accordingly the burden rested on the trustee to prove that it is in fact not the wife's property. This was unfair due to the fact that the trustee has no insight into the affairs of the spouses and thus did not have any assistance in establishing who the property belonged to.

When Section 21 came into operation, common law was changed and accordingly the onus was no longer on the trustee to prove that it was not the wife's property, the onus now rests on the solvent spouse to prove this. The Court in the Harksen case stated that the reason why it is not unreasonable to expect the solvent spouse to carry the onus is because the facts necessary to determine the question of ownership is within the knowledge of the solvent spouse.

We then consider the Maudsley's case where they explain why the implementation of Section 21 is reasonable: “The only thing that is effected by Section 21 in relation to the property which is claimed by the solvent spouse to fall under Section 21(c) is that the onus is cast on the spouse to prove the validity, whereas under the law before 1926 the onus rested on the trustee to prove the invalidity. One knows that before the amendment of the law in 1926, it was common practice for traders (and perhaps others) to seek to avoid payment of their debts by putting property in their wives' names; on insolvency, the burden rested on the trustee to attack the wife's title. If Section 21 is regarded as merely shifting the onus on to the solvent spouse, it nevertheless affords some relief in the direction of preventing the evil referred to. If one goes further and interprets Section 21 as creating new substantive grounds for attacking the property of a spouse, this would amount to depriving such a spouse of the benefits of the law of marriage out of community of property, and very clear wording would be required to effect this object.”

When considering the above passage it seems as if Section 21 is a simple provision. But it is clear that Section 21 has a greater impact that just shifting the onus from the trustee to the solvent spouse. Since Section 21 came into operation, it has been criticised as being a drastic provision that infringes on rights entrenched in the Constitution. Furthermore, Section 21 creates the problem that when the solvent spouse's property vests in the trustee and the trustee uses it for the insolvent spouse's creditors, the solvent spouse's creditors are disadvantaged.

AUTOMATIC VESTING OF SOLVENT SPOUSE'S ASSETS

When one of the spouses married out of community of property becomes insolvent, such estate would ordinarily be sequestrated in terms of the Insolvency Act. The effect of final sequestration is that the estate will vest in the Master and once the Master has appointed a trustee, the estate will vest in the trustee. While the property of the solvent spouse is vested with the trustee the insolvent spouse, the solvent spouse may not deal freely with such vested property. The solvent spouse retains contractual capacity however, while the insolvent spouse does not. Neither spouse will have the right to deal with the vested property freely, and any juristic act relating to that property is null and void.

Section 21 thus has the effect that there is a temporary transfer of property of the solvent spouse to the trustee. One needs to consider the question of whether ownership does indeed pass to the trustee. Section 21(5) states that:

Subject to any order made under sub-section (4) any property of the solvent spouse realised by the trustee shall bear a proportionate share of the costs of the sequestration as if it were property of the insolvent estate but the separate creditors for value of the solvent spouse having claims which could have been proved against the estate of that spouse if it had been the estate under sequestration, shall be entitled to prove their claims against the estate of the insolvent spouse in the same manner and, except as in this Act is otherwise provided, shall have the same rights and remedies and be subject to the same obligations as if they were creditors of the insolvent estate; and the creditors who have so proved claims shall be entitled to share in the proceeds of the property so realised according to their legal priorities inter se and in priority to the separate creditors of the insolvent estate, but shall not be entitled to share in the separate assets of the insolvent estate.”

When considering the above section it is clear that the solvent spouse's estate has to bear a share of the costs of the insolvent estate as if it were the property of the insolvent estate. Furthermore, it is notable that the creditors of the solvent spouse are placed in a disadvantaged position when comparing their position to the creditors of the insolvent estate.

It is made clear in the Kilburn v Estate Kilburn case, as stated by Wessels J, that when one spouse becomes insolvent, both estates of the solvent and insolvent spouse vests in the Master and then in the trustee once he is appointed. In this case, the husband, before their marriage, passed and registered a notarial bond as a second charge upon all his property in favor of his wife and the Court found as a fact that although the bond purported to secure which the husband had verbally promised to pay to his wife there was no serious promise and no intention to pay the wife that sum, but that the whole intention of the spouses was that the wife should claim the sum if and when the husband became insolvent. The court held that there was no legal obligation secured by the bond, the wife upon the insolvency of her husband could not claim in a concursus creditorum on the bond. If the wife obtains property from the husband during the marriage as a donation, or if he gives his wife money to purchase property and registers the property in her name but in reality it is for the benefit of his estate or for the benefit of both spouses then the property forms part of his estate.

Tindal JA in Estate Phillips v Commissioner for Inland Revenue stated that the immovable property in the Kilburn case was bought with the husband's money and registered in the wife's name. The wife then claimed release of the property based on the ground that she acquired the property by a valid title against creditors of her husband. But the Court found that she did not acquire the property by a valid title against creditors.

In Stand 382 Saxonwold CC v Kruger NO the Court quoted a principle referred to in Estate Phillips:

“Having regard to our system of the registration of immovable property and the principle referred to in Estate Phillips, one would expect the Legislature, if it wished to provide for a transfer of dominium from the solvent spouse to the insolvent spouse's trustee, to have said so. It did not say so; it merely used the words 'to vest in him (the trustee) all the property... of the spouse whose estate has not been sequestrated'. (Section 21(1).)”

Thus according to the above, ownership of the solvent spouse's property does not transfer to the trustee of the insolvent spouse. The solvent spouse does not lose her rights of ownership according to Justice Kirk-Cohen in the Saxonwold case.

In the De Villiers NO v Delta Cables (Pty) Ltd , Justice Van Heerden had a different view on the above matter. Delta Cables argued that in terms of Section 21, ownership of the solvent spouse's property did not pass to the trustee. Van Heerden JA rejected this argument and stated that the circumstances on which Delta Cables based their argument that ownership did not pass, was regulating only the spouses capacity in respect of assets that were not subject to the control of the trustee in terms of Section 21. The reasoning of the Full Bench in the De Villiers NO v Delta Cables case was:

“It has always been accepted that a trustee becomes the owner of the property of the insolvent. The Legislature did not say so in so many words, but a transfer of dominium is clearly inherent in the terminology employed in s 20(1)(a) which provides that a sequestration order shall divest the insolvent of his estate and vest it first in the Master and later in the trustee. (In order to obviate repetition I shall henceforth refer only to a vesting in the trustee.) Section 21(1) employs very much the same terminology. It also provides for a vesting in the trustee. True, the subsection does not speak of a divesting, but it goes on to provide that the property so vests 'as if it were property of the sequestrated estate'. This can only mean that the property of the solvent spouse vests in the trustee to the same extent as does the property of the insolvent. In my view, therefore, the Legislature made it perfectly clear that a transfer of dominium of the assets of the solvent spouse takes place. He or she thus no longer retains any of the attributes of ownership of the property concerned.”

Goldstone J, in Constitutional Court decision of Harksen stated that: “Again, on the assumption that the effect of Section 21 is to "transfer" ownership of the property of the solvent spouse to the Master or the trustee, the section does not contemplate or intend that such transfer should be permanent or for any purpose other than to enable the Master or the trustee to establish whether any such property is in fact that of the insolvent estate. Again, there is no intention to divest the solvent spouse permanently of what is rightfully hers or his or to prejudice the solvent spouse in relation to her or his property.”

It has been generally accepted that the Master of the insolvent estate automatically becomes the owner of the estate without the normal requirements of delivery or registration. This method of transfer is referred to as a statutory method of derivative acquisition of ownership.

Although it has been generally accepted that ownership does indeed pass to the trustee, the Constitutional Court in the Harksen case confirmed the position as laid out in the Delta Cables. The whole purpose of Section 21 is merely to ensure that property which properly belonged to the insolvent ends up in the insolvent estate. The statutory mechanism employed is temporarily to lay the hand of the law upon the property of both the insolvent spouse and the solvent spouse and to create a procedure for the release by the trustee or the court of that which in fact belongs to the solvent spouse.

In the Harksen v Lane case the court held in the obiter what effect the vesting has: “Even if the effect of the vesting were not to result in the transfer of full dominium to the Master or trustee, but only some of the incidents of dominium, it is clear that the implications for the solvent spouse would remain severe. The solvent spouse loses rights to dispose of and control the property. He or she may not alienate, encumber or lease such property. If the trustee chooses, the spouse may also lose the use and enjoyment of the property. As well as the tremendous personal inconvenience and difficulty caused, the vesting may have grave implications for a spouse who carries on his or her own business or professional career.”

Whether or not ownership transfers to the Master or trustee, it is clear that vesting of the solvent spouse's has severe consequences for the solvent spouse.

SERVICE OF THE SEQUESTRATION ORDER ON THE SOLVENT SPOUSE

When the court grants the final sequestration order, the sheriff must serve this final order of sequestration on the insolvent spouse but he must also serve the solvent spouse with a copy of the order. The solvent spouse must then within seven days lodge a statement of affairs with the Master. The statement of affairs must be of his affairs as at the date of sequestration order. All the property listed will be valued at cost price or market value whichever is the lowest.

RELEASE OF THE SOLVENT SPOUSE'S PROPERTY

When the trustee takes possession over the solvent spouse's estate, the solvent spouse is able to reclaim the property if the spouse independently carries on the business as a trader or he/she will suffer serious prejudice through the immediate vesting of the property in the trustee. This is done by way of application, in which the applicant should fully set out all the information pertaining to the asset, the prejudice that he/she will suffer and what arrangements he/she will make to protect the interests of the insolvent estate, i.e, its creditors. The solvent spouse will supply the trustee with any evidence to prove his claim.

Upon the solvent spouse's property vesting in the trustee, the implications of the vesting could pose severe consequences for the solvent spouse. In order to assist the solvent spouse, the court has been given the power to declare that the solvent spouse's property should in part or wholly not be affected by the sequestration order for a period determined by the court. Section 21(10) of the Act states that the Court can exclude the property of the solvent spouse for a period that the Court deems fit. In that time period the solvent spouse must provide the trustee with necessary evidence to support their claim to such property. After the solvent spouse has provided the trustee with the necessary evidence, the trustee will notify the solvent spouse whether or not the trustee consent to the release the property to the solvent spouse. However, if upon expiry of the time period, the property has not been released by the trustee, such property will automatically vest in the trustee.

Section 21(2) of the Act further provides that the trustee shall release property of the solvent spouse if it is proved that the property was that of the solvent spouse immediately before his/her marriage to the insolvent or the property was acquired by that spouse under a marriage settlement; or was acquired by that spouse during their marriage by a title valid against creditors of the insolvent; or to be protected in favour of that spouse by section 28 of the Act. This section is a very big bone of contention. Owing to the fact that it may still have been done, before the marriage, so as to defraud creditors. The test is therefore not sufficient as it does not cover all the possibilities.

In the Kilburn v Estate Kilburn Wessels ACJ it was held that the trustee must release such property of the solvent spouse as is shown to have been acquired during the marriage with the insolent by a valid title against creditors.

When one spouse becomes insolvent the estates of both spouses vest in the Master, and then in the trustee when appointed, but there is a proviso that the trustee must release such property of the solvent spouse as is shown to have been acquired during the marriage with the insolvent by a title valid as against the creditors of the insolvent spouse. In other words if property has been acquired by the spouse who is not insolvent by means of her own money or from a source other than her husband, then she holds it by a title valid as against the creditors.

According to the Act, the trustee's obligation to release the property is authoritative and absolute. However if a spouse does not provide sufficient evidence to the trustee and subsequently is unsuccessful in his/her claim, they can apply to the Court for an order obliging the trustee to release such property or for a declaratory order that he/she is entitled to the proceeds if the property has already been sold by the trustee. The Court is entitled to make any order that it thinks is just.

Once the Court has made an order, the trustee is unable to reclaim or recover the property. Such an order can be brought by either be on motion or action proceedings. The Court will take all circumstances into consideration and may decide to refuse release of the solvent spouse's property. When the trustee refuses release and the matter is brought before the court, the court does not review the trustee's decision the court hears an original proceeding. When the court orders the property to be released the court may add conditions to the order stating that the solvent spouse may not deal with the property for a certain period of time. Section 21(4) states:

“The solvent spouse may apply to the court for an order releasing any property vested in the trustee of the insolvent estate under subsection (1) or for an order staying the sale of such property or, if it has already been sold, but the proceeds thereof not yet distributed among creditors, for an order declaring the applicant to be entitled to those proceeds; and the court may make such order on the application as it thinks just. The solvent spouse does not have to apply to the trustee for release of the property, he/she can approach the Court directly.”

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