Johannesburg – The National Credit Regulator (NCR) has agreed to guidelines proposed by the Debt Counsellors’ Association of South Africa to prevent the exploitation of people who want their debt restructured, the NCR said on Friday. The guidelines set maximum fees that debt counsellors may charge and are an interim measure pending the finalisation of […]
28 November 2012
April 9, 2001
By Adam Harris
Insolvency is all about loss – not just of material things, but of intangibles such as your reputation and your dreams of success, so it can be devastating. Yet it happens to people in South Africa every day and most of them pick themselves up and get back into business.
Few situations are more traumatic than going insolvent. In the worst-case scenario, you face the selling of your house (and it may have been your family home for many years), the repossession of your cars by the bank and the prospect of clawing your way back to credit respectability.
Fortunately, this gloomy picture isn’t how it has to be. There are ways of managing the insolvency process – and they don’t involve defrauding your creditors. Some time ago, I reviewed a publication that set out a multitude of helpful hints on how to avoid settling your debts. It advocated a number of nasties that could land you in deeper trouble than the insolvency itself. That is a route no one with any integrity would suggest.
How does insolvency happen?
All too easily. You have faith in your business and you don’t expect to fail. If you’ve registered a company or a close corporation, why wouldn’t you sign surety for a bank loan? Anyway, the bank wouldn’t consider giving you more credit without your signature. The suretyship document might be just one of many documents pushed under your nose by your friendly bank manager. You might not even read it. You know he’s a reasonable man.
Unfortunately, it’s not that simple. The big problem is that suretyships don’t have sell-by dates. Sooner or later your bank manager or some other creditor will produce the document from a bottom drawer. Suddenly you, personally, will be the debtor. That’s what the technical term “co-principal” means. Your signature authorises the bank to knock at your door without even claiming from your company first.
How do you handle it?
You may not have been the author of your own insolvency. You may not even have seen it coming. Whatever the circumstances, you are likely to be in a state of shock. You will need to talk to someone who can explain to you exactly what the implications are and prepare you thoroughly for what lies ahead.
The insolvency process begins with an application to the High Court. Once an order has been granted, a trustee will be appointed by the Master of the High Court. It is his task to gather together all your assets and to sell them for the benefit of your various creditors. This is where managing the process of your insolvency comes in.
Remember that, as our law stands at the moment (and there are moves afoot to change this), all the assets of the marriage partner who has not been sequestrated fall under the control of the trustee, unless you are able to prove that they are not part of the insolvent estate.
It’s no easy task, but you need to prepare a list of all your movable assets and put together the best available proof (receipts, credit card slips and so on) that you, the insolvent, are not the owner of the assets.
The trustee’s task
The trustee is entitled to monies received by you from your profession or employment that are not necessary to support you and your family. Obviously, you are entitled to earn a living and to support those dependent on you.
If it’s any comfort, you can be sure that the trustee’s job is a tough one. Depending how much pressure he’s under from creditors to dig deep and unearth any hidden assets, and depending how co-operative you are, he might be in regular contact with you or you might not hear from him at all. Of course, as in any profession, styles vary. There are trustees who specialise in chasing up the hidden assets of insolvents and they have been known to ferret them out from far-flung corners of the world. By law, they have to do so if the existence of such assets is drawn to their attention and if they have the means at their disposal to do it.
It came as a shock to a client recently when, after sequestration, he was required by the trustee to surrender a portion of his monthly income for distribution to his creditors. This is a possibility that is often ignored when you’re biting your nails in your attorney’s office discussing the fate of your estate.
Psyching up for insolvency
One of the most difficult aspects of insolvency is one you won’t read about in textbooks or get your legal representative to help you with: the psychological impact, which can be quite severe. In this country there are few support systems, but in America special programmes have been established to guide the insolvent and his/her family through the process of adjustment, focusing on things such as the use of credit, social safety nets, financial literacy, effects on the family structure and societal influences. Our level of sophistication in this area leaves a lot to be desired, so you should be aware that it’s up to you to make sure you get the counselling and financial advice you need.
When insolvency is the best option
Every case that comes through the courts is different and every insolvent has his or her own way of dealing with sequestration, but in most cases co-operation with the trustee is much more productive than trying to hide your assets. When creditors are clamouring and issuing threats and your debt position is worsening, insolvency may be the most positive thing you can do. When your prospects of being able to trade your way out of the trough are remote, insolvency does at least have the effect of relieving you of the burden. Your creditors become your trustee’s problem.
Once your assets have been sold and there is cash to distribute to the creditors, no single one (unless, of course, they had security) will be paid proportionally more than any other. The hounding you are sure to have been subjected to from creditors will come to an end. Your creditors will have to submit claims to your trustee and he will decide whether the claims are valid. Ultimately, how much each creditor is paid will come down to simple mathematics. One of the most important aspects of insolvency is that it does draw a line at a particular point, which allows you to start afresh without your creditors breathing down your neck.
If you are in financial trouble, consider carefully what impact insolvency would have. Whatever you do, don’t leave things until you are on the receiving end of an application for your sequestration. If you are proactive, it might be possible to reach an agreement with your creditors that would ensure they were paid over an extended period of time – often a better prospect than hoping for a few cents in the rand at some unspecified date in the future.
If you don’t make application for your rehabilitation (which is the term for the lifting of the cloak of insolvency), it happens automatically 10 years from the date on which the provisional order of sequestration was granted in court. There is provision in the Insolvency Act for rehabilitation earlier than 10 years, but it depends on various things, such as whether you have been insolvent before and whether rehabilitation has been recommended by the Master of the High Court. In most cases, a rehabilitation application can be comfortably made after four years.
And the good news
When you are feeling desperate, remember that some very well-known names on the business map have been through the insolvency mill. In their cases, they made it on the second – or even the third – attempt.
* Adam Harris is an attorney specialising in insolvency matters. He is a member of the National Council of the Association of Insolvency Practitioners of Southern Africa, and serves on the insolvency standing committee of the Association of Law Societies of South Africa.
This article was first published
in the October 2000 edition of Personal Finance magazine.