What is the contractual capacity of an insolvent person with regards to a PROHIBITED CONTRACT?
As a general rule, the Insolvency Act does not deprive an insolvent person of contractual capacity. He retains the competency to make binding agreements.
However, to protect the creditors, the Act imposes certain restrictions on contracts.
In the context of PROHIBITED contracts, the debtor may NOT:
- Make a contract which purports to dispose any property of the insolvent estate.
- conclude a contract that adversely affects (or probably will adversely affect) his estate or ANY CONTRIBUTION that he is obliged to make towards the estate WITHOUT THE TRUSTEE’S WRITTEN CONSENT.
What are the contributions referred to in terms of the prohibited contract?
These contributions are claimable by the TRUSTEE under section 23(5). This contribution is earned by: MONEY EARNED BY THE INSOLVENT IN THE COURSE OF HIS EMPLOYMENT, PROFESSION OR OCCUPATION.
When does the contribution become due?
This contribution becomes due to the trustee once the Master has expressed the opinion that these moneys are not necessary for the support of the insolvent and his dependents.
Which contracts are not prohibited?
These are contracts where:
1. the trustee’s consent is not necessary; or
2. where the trustee has already granted the consent.
then such a contract will be binding and valid
How should performance deriving from these contracts be enforced.
HINT: PRINCIPLE FROM DE POLO CASE
According to DE Polo av Dreyer, although the contract is binding, the insolvent may not enforce performance in his favour unless, the Insolvency Act allows him to do so.
In the absence of such a provision, the the trustee is the proper person to enforce performance for the benefit of the insolvent estate.
Why? This is because AFTER sequestration, all the assets and claims belong to the insolvent estate which vests under the trustee. So the insolvent cannot claim performance for his own benefit.
What can the insolvent claim for his own benefit under the Insolvency Act?
In Ex Parte Van Rensburg, the court held that section 23 (9) of the Insolvency Act allows the insolvent to claim his wages/remuneration for his own benefit because he did work after the sequestration.
What are the effects of a prohibited contract?
Where the insolvent enters into a contract which purports to dispose of any property in the insolvent estate or even enter into a contract without the consent of the trustee (where it is required), then such a contract is VOIDABLE. Not Void.
Assets acquired and liabilities incurred under this contract are of the insolvent.
He MAY ACQUIRE an estate adversely to the trustee.
Should the trustee choose not to set the contract aside or simply stand by without voiding it, it will remain binding upon the parties.
IF CONTRACT IS SET ASIDE BY TRUSTEE= RESTITUTION TAKES PLACE.
What is the significance of section 24(1) of IA?
HINT: protection of 3rd parties.
Section 4(1) provides protection for third parties who contract with the debtor, unaware that he is insolvent.
This section provides that if an insolvent sells or transfers property under the estate, AFTER sequestration without the consent of the trustee, then the alienation would be VALID.
UNLESS: the third party truly proves that he was unaware or had no reason to suspect that the insolvent’s estate was under sequestration.
3rd party must truly prove that they did not know, if not, the contract is valid.
What are the 2 important points one should note about section 24(1)?
Section 24(1) only applies:
- to NEW ASSETS , acquired AFTER sequestration (Wessels v De Klerk)
- it places the onus on the 3rd party to prove that, at the time, when he received property in question, he was neither aware nor had any reason to suspect that the debtor was insolvent.
However, it is not enough for 3rd party to show that he had no reasonable ground to suspect insolvency. HE MUST GO FURTHER and ESTABLISH that he had no reason whatsoever to suspect. (FEY NO v MACKAY)
What is the capacity for insolvent person to earn a livelihood?
The insolvent may follow any profession or occupation and enter into employment contracts. NO CONSENT IS NEEDED (Section 23(3)).
However, the insolvent needs the trustee’s consent in order to be employed in the business of a TRADER WHO IS A GENERAL DEALER OR MANUFACTURER.
(section 23(3))
What is the definition of a trader ito section 2?
any person who carries on any trade, business, or undertaking in which property is sold, or is bought, exchanged or manufactured for purpose of sale or exchange, or in which building operations of whatever nature are performed.
What happens when an insolvent pursues vocation without obtaining consent from the trustee?
He commits a criminal offence (section 137(c)). He cannot escape liability by claiming that he did not know that such consent was necessary or required. Should the insolvent enter into such a contract without consent, the said contract will be voidable if the trustee so chooses. This was held in Ex Parte Olivier.
What is the legal capacity of an insolvent person to institute and defend legal proceedings?
There are certain proceedings that an insolvent person can bring in his own name. These are listed in section 23(6)-(10):
a) Matters relating to STATUS (Divorce)
b) Relate to a right which does not affect the insolvent estate (MAINTENANCE)
c) Recover REMUNERATION/REWARD for work done
d) Claim for PENSION to which he is entitled for services rendered.
e) Claim for compensation of DAMAGES due to DEFAMATION or PERSONAL INJURY
f) DELICTUAL claim after sequestration
g) INJUSTICE due to ADMINISTRATION OF ESTATE
is the insolvent obliged to cover security for costs?
In the Magistrates’ Court, the insolvent who brings an action is obliged to give security for costs of the action if the defendant requests it. If insolvent fails to do this, the defendant MAY apply for the action to be DISMISSED.
IN THE HIGH COURT, if the matter is one which the Insolvency Act specifically gives the insolvent to sue in his own name, such as a remuneration for work done, then the insolvent is not required to give security for costs. Unless the failure of the action is a foregone conclusion and thus
vexatious.
IF THE INSOLVENT’S RIGHT TO SUE DOES NOT FLOW FROM THE ACT, COURT MAY ORDER HIM TO FURNISH SECURITY FOR COSTS.
What happens when the insolvent is awarded costs in his favour in a judgement?
If the insolvent sues personally in a matter in which he is entitled to litigate and he obtains an award of costs in his favour, the judgement for costs belongs to him personally and not the insolvent estate.
What is the legal capacity of an insolvent to hold office?
An UNREHABILITATED insolvent is placed under strict disqualifications on the roles they can hold. This is to protect the public, creditors and the integrity of the key professions and institutions.
- Trustee of an insolvent estate or liquidator of a company
- Member of the National Assembly/National Council of Provinces
- Company Director
- Credit provider or debt collector
- member of the legal practice council.
- Credit provider, debt counsellor or paymment distribution agent.
