By Johan Roodt at Roodt Inc.
‘Friendly’ sequestrations are often collusive, intended to relieve the debtor of lawful debts and enable him to cock a snook at his creditors. No one doubts that sequestration, coupled with the prospect of rehabilitation of the insolvent, is a more pragmatic and sensible way of dealing with individuals who have incurred a crippling burden of debt than incarceration of the debtor in a Dickensian debtors’ prison, or condemning the person in question to lifelong and hopeless financial enslavement to creditors.
However, the judicial process of sequestration and rehabilitation is capable of being abused. In Kerbel v Chames 1925 WLD 72 at 75-6 (a decision of a South African court) Curlewis JP said that
one has a strong suspicion that in a very large number of sequestrations in this Court, these sequestration proceedings are not for the benefit of the creditors, but are entirely for the benefit of the insolvent, and are very often instituted by a friend to help the debtor out of his difficulties.
The most recent South African judgment on the potential abuse of so-called ‘friendly sequestrations’ is de Beer v Coverdale 2010 [ZAGPPHC] 9 which was handed down by the High Court on 18 February 2010.
In its judgement, the High Court pointed out that there is a difference between a ‘friendly’ sequestration and a ‘collusive’ sequestration. In the former, the sequestration proceedings are initiated by a genuine creditor who shows goodwill towards the debtor and merely wishes to get the sequestration process moving expeditiously.
The court said that:
There is not necessarily anything sinister in a ‘friendly’ sequestration and an order should not be refused merely because of goodwill between the parties. What is of concern is the prospect of collusion in the sense attributed thereto by Curlewis J in Sevan v Sevan and Ward 1908 TH 193 at 197: ‘In our law, ordinarily speaking, collusion is akin to connivance, and means an agreement or mutual understanding between the parties that the one shall commit or pretend to commit an act in order that the other may obtain a remedy at law as for a real injury;
An earlier judgment of a South African court in Ex Parte Steenkamp 1996 (3) SA 822 (W) noted that it has become rare for the sequestrating creditor in a friendly sequestration to prove his own claim at the first meeting of creditors, or indeed at all for:
He knows in advance that there are no assets in the estate or ... he has simply lent his name for the purpose of the application. The mission is accomplished. The debtor is relieved of his misery and may safely cock a snook at his creditors.
In the judgment in the present case, the judge cited a recent instance in his own division, involving a ‘friendly’ sequestration application where the order was granted and, since no claim was proved against the estate, application was made for the insolvent’s rehabilitation a mere six months later, as permitted by the Insolvency Act in such circumstances. In this particular instance, said the judge:
The sequestrating creditor did not lodge a claim which he, a mere six months earlier, had pursued with much vigour. This points to an abuse of the process of this court.
The court went on to set out the modus operandi adopted in many collusive sequestrations:
- A debtor owes money, frequently a significant amount, to creditors, and cannot pay the debts.
- The debtor seeks the assistance of a third party who agrees to initiate sequestration proceedings to shield the debtor from the latter’s genuine creditors.
- Such a third party, often a friend or relative, masquerades as a creditor and alleges that a debt (which does not in fact exist) is owed by the ‘debtor’. The ‘creditor’ then avers that the ‘debtor’ has not only failed to repay the professed debt but has written a letter saying that he is unable to pay the debt.
- An act of insolvency in terms of the insolvency legislation has now purportedly been committed and the ‘creditor’ proceeds immediately to initiate sequestration proceedings against the ‘debtor’.
- By this means, a court order is quickly secured which declares the debtor insolvent, and the latter is forthwith relieved of debts owing to genuine creditors.
The court went on to say that co-operation may tend towards collusion, and that the courts should be scrupulous in ensuring that sequestration proceedings are not an abuse of the process of the court.
To this end, the court should critically scrutinise the genuineness of the professed debt on which the application for sequestration is based, and refuse to grant the application if the debt is of doubtful provenance or if there are circumstances that raise a suspicion of collusion.