In my previous article (“Insolvent Estates in a Nutshell”) I explained the processes that are followed once a person is declared Insolvent.
When can an insolvent “get back to his normal life” is a question we get asked a lot and I am therefore going to deal with the question of when an Insolvent person can apply for rehabilitation and the effect of a Court Order granting the rehabilitation is.
1. WHEN CAN AN INSOLVENT APPLY FOR REHABILITATION
? AUTOMATIC REHABILITATION
When a period of ten (10) years have lapsed/expired from the date of sequestration in the case of a voluntary sequestration or the date of provisional sequestration in the case of a compulsory sequestration, an insolvent is deemed to be rehabilitated.
? REHABILITATION BY THE COURT
There are four (4) instances where the Court is able to grant an order for the rehabilitation of an insolvent:
1. Where the insolvent and his concurrent creditors entered into a composition agreement in terms whereof the creditors accepted a dividend of at least 50c in the R1.00 and the composition was confirmed by the Master by the issuing of a Certificate in terms of Section 199(7) of the Insolvency Act, Act 24 of 1936, the Insolvent may apply to Court for his rehabilitation. The Court is then able to grant the application IF the Certificate shows that such dividend has been paid or security for the payment of the dividend has been given by the insolvent.
A separate agreement has to be entered into in the event that the insolvent has a secured or preferent creditor.
In the event that the Court finds that there is a secured or preferent creditor and no agreement was entered into with them, the Court may exercise its discretion and withhold the rehabilitation.
This application is brought in terms of Section 124(1) of the Insolvency Act.
2. Where no composition took place, an insolvent is entitled to apply for rehabilitation after a period of twelve (12) months have lapsed/expired from the date of the Master of the High Court’s confirmation of the First Liquidation and Distribution Account as prepared by the Trustee of the Insolvent Estate. There are a couple of qualifications that must be met before an application in this regard may be brought to Court:
? The insolvent must not have been sequestrated before. If he was insolvent before, he may only apply for rehabilitation after three (3) years have lapsed from the date of confirmation of the Account.
? The insolvent should not have been convicted of any fraudulent act in relation to the current or previous insolvency or any offense pertaining to the destruction of books or assets;
concealment of liabilities or pretext to existence of assets; or failure to keep proper records. In the event that he was convicted of any of the above, he may only apply for rehabilitation after five (5) years have lapsed from the date of such conviction.
? The Master must recommend that he be rehabilitated if a period of four (4) years have not lapsed from the date of his sequestration.
This application is brought in terms of Section 124(2) of the Insolvency Act.
? No claims were proved by creditors against the estate after the expiry of a period of six (6) months from the date of sequestration;
? He has not commited any of the offences as mentioned the second qualification above;
? He has never been sequestrated previously;
The Insolvent may apply for rehabilitation after a period of six (6) months has lapsed from the date of his sequestration.
In this application no recommendation by the Master of the High Court is required.
This application is brought in terms of Section 124(3) of the Insolvency Act.
4. Where a Liquidation and Distribution Account was drafted and lodged by the Trustee of the Insolvent Estate in terms whereof:
? All the creditors are paid in full (full amount claimed plus interest on the amount from the date of sequestration); AND
? All the costs of sequestration are paid in full;
An insolvent may at any time after the Confirmation of the Account by the Master of the High Court, apply for rehabilitation.
In the event that there are secured creditors who relied on their security and they are under normal circumstances only entitled to a dividend out of the proceed of the specific asset for which they hold security, an insolvent may not apply for rehabilitation where the shortfall on these claims have not been paid in full as well. In this instant the fact that the secured creditor relied on his security has no value.
This application is brought in terms of Section 124(5) of the Insolvency Act.
2. WHAT IS THE EFFECT OF REHABILITATION
Whether automatic rehabilitation takes place or the Court grants a rehabilitation order in terms of any of the above situations, the effect of the rehabilitation is to eliminate the status of “insolvent”. It therefore puts an end to the person’s insolvency and his debts that existed at the date of his sequestration is discharged, including debts owed to foreign creditors. He is therefore “debt-free”.
Rehabilitation does not have the effect of reinvesting the insolvent with his assets in the event where his insolvent estate has not been finalized and discharged by the Master of The High Court and there are therefore still assets that have not been sold. These assets remain in his insolvent estate and the Trustee of his estate has the obligation to realise the asset and distribute the proceeds between creditors.
There are two exceptions to the above, being where a composition specifically provides that his assets will reinvest in the insolvent upon confirmation thereof, and where an application is brought in terms of Section 124(3) of the Insolvency Act. In these to instances, the insolvent’s property is returned to him.
In the event that there were surplus funds in the estate after ints finalization and these funds were deposited into the Guardians Fund, the insolvent may, upon his rehabilitation, request the Master of the High Court to pay these funds to him and the Master must pay it accordingly.
Rehabilitation has no effect on the following:
– Property that the insolvent acquired during his sequestration and which has not vested in the Trustee of his insolvent estate. This property forms part of his “new” and separate estate and his creditors (who was creditors at date of sequestration) have no claim to this property;
– The rights of the Trustee or creditors under a composition or the powers or duties of the Master or Trustee in connection therewith;
– Reinvested property, where in terms of a composition that specifically provided therefore, his assets were reinvested in him after confirmation of the composition;
– The liability of a surety for the insolvent in respect of the insolvent’s debt as at date of sequestration. Even though the insolvent was rehabilitated, the surety therefore remains liable for such debt. Where the surety pays the amount after the insolvent’s rehabilitation, the surety can claim such an amount from the insolvent;
– The liability of any person to pay a penalty or suffer punishment under any provision of the Insolvency Act.
I hope and trust that the information as set out above answers the two questions which we so frequently encounter in our practice.
By Suné Smit (B.Comm, LL.B, AIPSA Ins. Law)