LAW SOCIETY DISCOURSE Insolvency of married person
THIS week’s discourse looks into the position in which married persons find themselves upon the insolvency or sequestration of one of the spouses in the marriage. In order to assist the reader understand the subject of this discourse better, a brief definition of the nature and scope of insolvency and sequestration is necessary.
The dictionary meaning of insolvency is the state of being insolvent; an inability to pay one’s debts when they become due. Inability to pay debts is a common occurrence which married persons are not immune to. In other words, a spouse to whom one is married may find themselves trapped in debt or unable to pay their debts.
An individual can be a human being or what is known as a legal person which has independent legal existence, for example a company which possesses legal rights and incurs obligations separately from the individual(s) that formed it.
An individual may be declared insolvent through his own application to the court or through the application of the persons they owe or are indebted to. These persons are known as creditors.
In this country, insolvency is governed by the Insolvency Act 81 of 1955. Marriages, on the other hand, are governed through a dual legal system of the Swazi Law and Custom and the Marriage Act of 1964. Swazi Law and Custom is of course uncodified and it is no surprise that it is littered with many controversies. There are far too many challenges with marriages in terms of swazi law and custom.
The Marriage Act governs civil rites marriages solemnised or concluded in the Kingdom of Eswatini after 1964. Customary law marriages fall outside the Marriage Act.
The proprietary consequences of marriage are governed by Sections 24 of the Act, Section 25 having been declared unconstitutional a couple of years or so ago.
SEQUESTRATION
Simply put, sequestration pertains to the removal or seizure of property from their rightful owners in order to ensure that the rights of creditors are protected and that what remains in the estate of the insolvent is equitably distributed to the creditors.
This is done by the person appointed to administer the insolvent estate who is known as a trustee in the case of an individual and a liquidator in the case of a company.
The insolvent or debtor may voluntarily approach the court for an order of sequestration and the creditors may also apply for the compulsory sequestration of the debtor’s estate.
Even if the debtor is late or deceased, the governing Insolvency Act provides that a person entrusted with the administration of the estate of a deceased insolvent debtor may petition the court and make an application to surrender the debtor’s estate for the benefit of his creditors.
Where a creditor has a claim that has become due, a debt that can be easily determined and makes a demand for payment and the debtor fails to pay, that creditor may apply to court to have the estate of the debtor sequestrated.
The Act provides that the claim in question must not be less that one hundred emalangeni (E100).
In order for the court to make a sequestration order where an application has been made, the court must be satisfied that the estate of the debtor in question is insolvent, that the insolvent owns realisable property of a sufficient value to pay all costs of the sequestration which will be payable out of the free residue of his estate and that it will be to the advantage of creditors of the insolvent if his estate is sequestrated.
It is important to understand the procedures involved leading to the sequestration of deceased insolvent debtor’s estate and subsequently the appointment of a trustee.
The most immediate consequence of a sequestration order (including a provisional or interim order as defined in Section (2) of the Insolvency Act, is to divest the insolvent debtor of his estate and vest it in the master and thereafter in the trustee, once appointed (s 20(1) (a). In terms of Section 20 (2), the joint estate of spouses married in community of property vests in the trustee.
For the purposes of sub-section (1) the estate of an insolvent shall include — (a) all property of the insolvent at the date of the sequestration, including property or the proceeds thereof which are in the hands of a sheriff or a messenger under a writ of attachment; (b) all property which the insolvent may acquire or which may accrue to him during the sequestration, except as otherwise provided in Section 23.
The office of the master of the High Court is mandated with the oversight role in the administration of the estates of insolvent persons. This oversight role also applies to estates of deceased persons.
Certain property is exempt from vesting in the Master upon the sequestration of a debtor. An insolvent debtor may make use of such exempt property to start a new estate afresh.
USE OF SPOUSE TO CONCEAL ASSETS FROM CREDITORS
A party faced with the harsh reality of sequestration may attempt to conceal or shield his assets from his creditors by pretending that they belong to his spouse.
To limit or prevent collusion of this sort, Section 21 (1) of the Insolvency Act provides that an order of sequestration vests the separate property of the solvent spouse in the Master, and subsequently the trustee, as if it were the property of the insolvent estate, and empowers the Master or trustee to deal with the property accordingly. Sequestration, therefore, has the same immediate effect on the solvent spouse’s estate as it has on estate of the insolvent.
The transfer of ownership brought about by Section 21 of the Insolvency Act is not permanent since the solvent spouse may secure the release of the assets if they can establish that they fall into one or more specified categories as stated in Section 21 (2) of the Act. Until an asset is released, the solvent spouse does not own it and cannot exercise any of the usual powers of ownership over it.
The solvent spouse has to show that the property claimed is, in fact, the solvent spouse’s separate property and it therefore ought not to be included in the sequestration. This requirement applies to spouses married out community of property. This is because where spouses are married in community of property there is only one estate - the joint estate of the parties married in community of property.
The following should be noted about the word spouse as used in Section 21 of the Insolvency Act: ‘Spouse’ for purposes of this section includes a wife or husband married according to any law or custom and also a person of the opposite gender living with the insolvent, although not married to him or her (s 21(13).
This latter provision obviously does not apply if the insolvent is married.
The definition of spouse in this context is wide and flexible to include persons currently in a relationship and living together with the insolvent person.
This flexibility is meant to cast the net wide in ensuring that there is no collusion between parties resulting in the erosion of the insolvent’s estate which prejudices the interests of creditors. The application of this section is based on the fact that insolvency proceedings, by their very nature, are not meant to relieve a debtor who is in financial distress, but to ensure a return to creditors.
This is seen from the emphasis by the courts on the requirement of proving that sequestration will be to the advantage of creditors.
Section 21 was introduced because debtors often attempted to avoid payment of their debts by transferring their assets to a spouse, thereby defrauding their creditors. In marriages out of community of property, or in cases where two people were merely living together as man and wife, transferring assets in the face of insolvency by means of simulated transactions could be very hard to resist.
Proof of simulation rests on the trustee. This is a heavy onus because proprietary rights of assets of spouses are normally matters falling within their own personal knowledge. It was therefore onerous for the trustee to separate the property of one spouse from that of the other
When the estate of a ‘spouse’, of a person is sequestrated, the property of the ‘solvent spouse’ is adversely affected by virtue of the provisions of Section 21 of the Insolvency Act of 1955.
The consequences that result from the provisions of Section 21 may be dire not only for the solvent spouse, but also for creditors of an insolvent estate, and indeed also for third parties who may have interactions with the insolvent or solvent spouse.
The correct or incorrect interpretation of this provision by the court, and the consequences thereof, may hold far-reaching financial implications for parties in the insolvency arena, particularly concerning transactions regarding immovable property.
There has been discourse regarding the interference with the spouse’s marital regime choice, but such misgivings have been negated by the release provision in Section 21 (2), which creates a temporary dispossession situation.
This discourse highlights the mechanism provided by the law to avoid collusion between spouses in circumstances of insolvency.
There has been debate about the constitutionality of Section 21 and the courts have pronounced that the section is constitutional and does not interfere with individual’s rights to choose a marital regime.
The argument was that this section takes away the rights of spouses who have decided to marry out of community of property in order to avoid a situation where a person inherits their spouse’s debts. It was held that this is not case as Section 21(2) affords the solvent spouse an opportunity to have their separate property released if they can prove that it belongs to them exclusively.
The highlighted statutory provisions were made to minimise losses for creditors and a spouse has, unfortunately to bear the temporary inconvenience while awaiting the release of their property in the event that their spouse, to whom they are married out of community of property, is sequestrated. A tough balancing act by lawmakers!