Unpacking contractual capacity
Purpose of the restriction
THE rationale behind limiting the contractual capacity of insolvent persons is primarily centred around the protection of the interests of creditors and the effective administration of the insolvent estate. There are various reasons for these limitations and they include:
1. Preservation of assets: By imposing restrictions on the disposal of property without trustee consent, the aim is to prevent the insolvent person from dissipating or hiding assets that should rightfully be available for distribution to creditors.
These limitations help maintain the integrity and value of the insolvent estate. This ensures a fair and orderly distribution of assets.
2. Fiduciary duty: Insolvent individuals have a fiduciary duty to act in the best interests of their creditors. The restrictions on their contractual capacity helps prevent them from entering into contracts that could potentially harm the interests of creditors or manipulate the insolvency process for personal gain. 3. Avoiding further financial obligations:
The limitations on entering into contracts likely to adversely affect the estate without trustee consent are in place to protect the insolvent person from incurring additional debt or obligations that could further exacerbate their financial difficulties.
By requiring the trustee’s permission, there
is an additional layer of oversight to evaluate the potential impact of such contracts on the estate.
4. Promoting transparency: Restricting the ability of insolvent individuals to be directors or hold liquor licences enhances transparency and instils confidence in the insolvency process.
These limitations ensure those responsible for managing businesses or operating licensed activities are individuals with appropriate financial standing, reducing the risk of impropriety or non-compliance.
The limitations on the contractual capacity of insolvent persons seek to strike a balance involving protection of the rights and interests of creditors, preservation of the assets of the insolvent estate, and promotion of the fair and efficient administration of the insolvency proceedings.
These measures help to ensure a more equitable distribution of available resources and maintain the integrity of the insolvency process.
Prodigals
A prodigal is an individual who, due to a demonstrated inclination to recklessly squander their assets, is declared by the court to be incapable of managing their affairs. In legal terms, a prodigal is often referred to as a “spendthrift”.
To protect the prodigal’s property and ensure responsible management, the law imposes certain restrictions on their contractual capacity.
Under the law, a prodigal is generally not permitted to enter into contracts relating to their property without the assistance or oversight of a curator. A curator is a legally appointed guardian or trustee who acts on behalf of the prodigal to manage their affairs and preserve their assets. The curator’s role is to safeguard the prodigal’s financial well-being and prevent the dissipation of their property due to imprudent spending or behaviour.
Purpose of the restriction
The restrictions on a prodigal’s contractual capacity serve several purposes:
1. Financial protection: By inhibiting the prodigal’s ability to enter into contracts independently, the law seeks to shield their assets and wealth from being squandered or mismanaged due to impulsive or irresponsible behaviour.
This protection is intended to safeguard the prodigal’s financial interests and prevent them from experiencing significant financial harm.
2. Legal oversight: The presence of a curator provides a level of legal oversight and guidance for the prodigal, ensuring that their contracts and financial decisions align with their best interests. The curator acts as a responsible, impartial party, who is qualified to evaluate the potential impact of contracts on the prodigal’s estate and make informed decisions on their behalf. 3. Preventing exploitation: The limitations on a prodigal’s contractual capacity also help protect them from potential exploitation by unscrupulous individuals who may seek to take advantage of their vulnerability or imprudent spending habits.
By requiring the involvement of a curator, the law promotes transparency and reduces the risk of the prodigal being coerced into disadvantageous contracts.
LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation.
No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.
◆ Arthur Marara is a practising attorney, author, human capital trainer, business speaker, thought leader, law lecturer, consultant, legal proctor (University of Zimbabwe), notary public and conveyancer. He is passionate about promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email attorneyarthurmarara@gmail.com