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Capacity of an insolvent

18 August 2011

Conveyancers and examiners should take cognizance of the fact that even though an insolvent has been rehabilitated, a right to property acquired by such rehabilitated insolvent prior to, or during, his or her insolvency, continues to vest in the trustee despite the rehabilitation (see section 25 of the Insolvency Act 24 of 1936).  However, this does not apply to automatic rehabilitations in terms of section 127A of the Insolvency Act (see discussion infra).

Section 20 of the Insolvency Act provides that as soon as the estate of an insolvent has been sequestrated, such insolvent is divested of the estate which is then vested in the Master and, on appointment of a trustee, in such trustee (see also the definition of owner in section 102 of the Deeds Registries Act 47 of 1937).

In terms of section 21 of the Insolvency Act the property of a spouse, whose estate has not been sequestrated shall also vest in the Master and on appointment of the trustee, in the name of such trustee, as if it were property of the sequestrated estate.  In practice the same interdict noted against the insolvent will also be noted against the spouse and he/she will not be capable of dealing with such assets until such time as the trustee has released such property from the insolvent estate.  In terms of section 21(13) of the Insolvency Act “spouse” means not only a wife or a husband in the legal sense, but also a wife or husband by virtue of a marriage according to law or custom and also a woman living with a man as his wife or vice versa.

The registrar of deeds will thus disallow dealings by the insolvent of any property registered in the name of insolvent or that of his/her spouse.  This applies, as already stated, to any property acquired during insolvency or prior to insolvency.

As regards property of the “spouse”, such property must be released by the trustee before any dealings by the spouse with such property can take place (see section 21 of the Insolvency Act).  This is not applicable to spouses married in community of property as the joint estate is declared insolvent, thus both spouses are insolvent and both must be rehabilitated before re-acquiring the capacity to Act.

A registrar of deeds will allow an insolvent to deal with property acquired during insolvency, provided the “disclaimer” or consent by the trustee is lodged, which consent must be signed by the trustee declaring that such trustee lays no claim to the property which was acquired with the consent and that such property may be dealt with freely by the insolvent.

There are three manners in which a former insolvent can be re-invested with immovable property which formerly vested in the trustee.  Each will now be perused more closely.

Automatic rehabilitation by effluxion of time in terms of Section 127A
Any insolvent not rehabilitated by the court within a period of ten years from the date of sequestration of his/her estate will be deemed to be automatically rehabilitated after the expiry of that period (section 127A of the Insolvency Act).

Prior to the amendment of the Insolvency Act by the Insolvency Amendment Act 122 of 1993, the provisions of section 58 also applied to automatic rehabilitations after 10 years.  However, the said Act amended section 25 and 127A of the Insolvency Act as well as section 3(1) and 58 of the Deeds Registries Act.  In terms of section 3(1)(x) of the Deeds Registries Act, the registrar of deeds will remove from his/her records any sequestration order after the lapse of ten years.  No act of registration in the deeds registry is required to revest the insolvent or his/her spouse with immovable property.

Offer of composition
The estate of an insolvent remains vested in the trustee, subject to the provisions of section 127A, until the insolvent is re-invested therewith pursuant to an offer of composition, as provided for in section 119 of the Insolvency Act.  Property which before rehabilitation vested in the trustee for purposes of realization and distribution, remains vested in the trustee, unless an order is made in terms of section 129(2) read with section 124(3) of the Insolvency Act, which has the effect of revesting the insolvent with his/her whole estate.

At the onset it must be understood that property of the insolvent although vested in the trustee is never formally transferred to the trustee, nor are title deeds in the name of the insolvent endorsed as regards such vesting.

In the conveyance of property acquired by an unrehabilitated insolvent no reference to the insolvency is allowed to appear in the description of such person.  The reason for this is firstly because property can be reinvested in an unrehabilitated insolvent by acceptance of an offer of composition, and secondly because the stigma of insolvency should not be allowed to attach to any person permanently, for instance, after rehabilitation when the rehabilitation order may declare such property to be legally vested in the former insolvent.

In terms of section 119 of the Insolvency Act, an offer of composition accepted by the creditors containing a provision that property of the unrehabilitated insolvent is to be restored to him/her has the effect to divest the trustee of the property and reinvest the solvent therewith.  Section 58(2) of the Deeds Registries Act thereupon provides the procedure to be followed as regards the titles of such property.  The registrar must make an endorsement thereon before the insolvent can deal with such property.

The following documents must be lodged with the registrar before he will make the endorsement:

  1. An application by either the trustee or the insolvent for the endorsement in terms of section 58(2) of the Deeds Registries Act of the titles listed therein to the effect that the property described therein has been restored to the insolvent.
  2. A certified copy of the offer of composition accepted by the creditors, ie certified by the Master.  The copy or certification must conform that it was accepted by the creditors, or alternatively this can be proved by lodging a certified copy of the resolution of creditors accepting it.
  3. In some Deeds Registries, a certificate from the Master that the offer of composition has been accepted by the Master (see section 119(7) of the Insolvency Act).

Where the property is mortgaged, the bonds need not be endorsed or lodged (see ex parte Vels 1921 OPD 171).

Rehabilitation by court
Where property has in fact vested in the trustee and upon or after rehabilitation both the trustee and creditors, with full knowledge of the fact, lay no claim to it, the court, on rehabilitating the insolvent or after rehabilitation, may make an order declaring the rehabilitated insolvent entitled to the property, whereupon it is for the trustee to transfer the property to the rehabilitated insolvent in terms of section 58(1) of the Deeds Registries Act.  This section states that immovable property vested in a trustee which has not in terms of the law been revested in the insolvent may, “whether before or after rehabilitation of the insolvent, be transferred only by the trustee, and may not after such rehabilitation be transferred, mortgaged or otherwise dealt with by the insolvent until it has been transferred to him by the trustee …..”  If there is no trustee in existence, transfer may be passed on a power of attorney signed by the Master (regulation 37).

It will be noted that the court, because of section 58(1), will not entertain an application to ‘revest’ property in a rehabilitated insolvent.  It may declare the rehabilitated insolvent ‘entitled’ to the property, whereupon the trustee may transfer it to him in terms of section 58(1).  Conveyancers, in view of the above, should be careful how they word their application to court.

Leading cases on these matters are Ex parte Gouws 1950 (1) SA 486 (T), Ex parte Vorster 1958 (1) SA 91 (C) and Ex parte Norton No 1958 (3) SA 120 (O).

Allen West
Deeds Training
Pretoria

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