Abstract
Rehabilitation after sequestration in terms of the Insolvency Act 24 of 1936 is the only way in which a natural-person debtor may force a discharge of pre-sequestration debts on his or her creditors. Although a debtor may obtain debt relief by implementing the income restructuring procedures of administration in terms of section 74 of the Magistrates’ Courts Act 32 of 1944 and debt review in terms of section 86 of the National Credit Act 34 of 2005, these procedures do not provide for any discharge of debt. Moreover, although a discharge of debt is one of the consequences of rehabilitation, the primary object of the Insolvency Act is not to grant debt relief to harassed debtors, but rather to benefit creditors. The act lays down advantage to creditors as a prerequisite for sequestration applications and rehabilitation and the concomitant discharge of pre-sequestration debts are thus only available to debtors who have sufficient disposable assets to prove advantage. As opposed to this, rehabilitation, and thus the opportunity to obtain a so-called fresh start, is an important feature of consumer insolvency systems worldwide.
Over the past few decades the world has witnessed not only a strong increase in the granting of credit to individuals, but also a sharp increase in the levels of consumer over-indebtedness. However, the South African situation is unique as the system has to deal with a developed first world economy as well as a developing third world economy that reflects in consumer patterns and needs. Probably as a consequence of apartheid, the position is still that some consumers can obtain credit from the conventional financial institutions while the majority have to approach the so-called micro-lenders that grant loans at high interest rates. The question thus arises whether the South African system, with an insolvency act that dates from 1936, provides for adequate debt relief measures to comply with all needs. However, it should be clear that the system is extremely creditor-oriented and over the past 20 years several commentators have repeatedly requested law reform that would bring about a more balanced approach. Among other things, the view is that the exclusion of certain debtors, commonly known as the “no income no asset debtors” (NINA debtors), from a discharge procedure merely because they are not able to prove advantage, may be unconstitutional as it infringes their fundamental right of equality.
In January 2011 the World Bank’s insolvency task force was convened in order to start an investigation into the policies and characteristics of effective insolvency systems for natural persons. In 2013 this investigation led to the publication of the World Bank’s report on consumer insolvency law. According to the report one of the main purposes of a consumer insolvency system is to re-establish the debtor’s economic capability. A debtor’s “economic rehabilitation” is, therefore, of paramount importance, which concept, according to the report, comprises three essential elements. First, the debtor must be released from excessive debt. Second, the debtor must be treated on an equal basis with non-debtors after receiving relief and should therefore not be discriminated against merely because he or she applied for insolvency proceedings or received debt relief. Third, the debtor should be able to avoid becoming over-indebted again in the future, which would entail an attempt to change debtors’ attitudes regarding credit use and the taking of steps to promote responsible credit use. According to the guidelines provided by the World Bank, the fresh start goal should therefore not only entail a discharge of pre-insolvency debt and thus a temporary reprieve, but should also include the rehabilitation of the debtor in a wider sense, that is, to provide the debtor with a prospect for an improved financial future.
In this article rehabilitation in terms of current South African consumer insolvency law as well as relevant law reform initiatives currently on the table are investigated. The aim is to measure the South African laws against international trends as well as the guidelines provided by the World Bank and eventually to make proposals for law reform. As regards international trends, the article distinguishes between the Anglo-American “straight discharge” and the European “earned discharge” approach to debt relief and rehabilitation.
For the purposes of this article rehabilitation means the economic rehabilitation of the debtor as defined by the World Bank. It therefore relates to all insolvency proceedings which could provide the debtor with a discharge of debt, and thus debt relief, but also to rehabilitation in the wider sense. All legislation, procedures and measures which relate to rehabilitation in the sense that it would improve the debtor’s long-term financial health, such as provision for a moratorium against debt enforcement, property and income that are excluded from the insolvent estate and measures providing for the availability of debt counselling and financial literacy programmes, are thus included in the investigation. In addition, legislation, procedures and measures that could possibly prevent the debtor from truly obtaining a fresh start, such as insolvency restrictions and disabilities which may apply to debtors before and after rehabilitation, are also included in the investigation.
The research indicates that the South African system is far behind when compared with the Anglo-American and even the European systems’ approach to debt relief and rehabilitation and that law reform is thus imperative and unavoidable. It is submitted that law reform should occur in accordance with the guidelines provided by the World Bank. To begin with, all debtors, including those who cannot prove advantage to creditors, should be given the opportunity to obtain a discharge of excessive debt. Such discharge should, in accordance with the European approach, be as comprehensive as possible and only “sensitive debts” such as debts pertaining to arrears maintenance should be excluded. Moreover, the discharge should not be delayed for an unnecessarily long period and it is thus suggested that South African lawmakers should, in line with international trends, shorten the current ten-year period for automatic rehabilitation. However, a longer period of three years, instead of one year (which is currently the position in English law) is preferred, as it would fulfil an important educational function by giving the debtor adequate time to learn the necessary lessons of insolvency. However, in order to ensure that all debtors are treated equally in this regard, it is further submitted that the three-year period should not be applicable only to debtors who are able to initiate insolvency proceedings, but also to debtors who initiate an income-restructuring or NINA procedure.
As regards provisions for a moratorium on debt enforcement, it is submitted that the legislator should prohibit sequestration applications where the debtor is subject to administration or debt review. This would assist the debtor in taking on the road to financial recovery without the debtor’s being repeatedly subjected to creditor pressure. As regards exempt assets, lawmakers, in accordance with American law, should consider the exclusion of the debtor’s homestead and motor vehicle from the insolvent estate and provisions enabling the trustee to claim surplus income should be abolished. This would assist the debtor in maintaining a basic living standard and in taking further steps to improve his or her long-term financial health.
In order to reduce the stigma of the current system, insolvency restrictions and disabilities which automatically apply for the duration of insolvency should be minimised. These restrictions and disabilities clearly hamper the debtor’s economic reintegration and it is suggested that lawmakers should consider following the English example by giving the relevant minister the power to review and revoke provisions which may subject unrehabilitated insolvents to unnecessary and outdated restrictions. Regarding the principle of non-discrimination, it is submitted that South African lawmakers should consider the possible shortening of the maximum period for which information pertaining to the granting of debt relief may be displayed on the credit records of the debtor.
Finally, regarding the principle of providing the debtor with a prospect for an improved financial future, the research has indicated that the availability of debt counselling and financial literacy programmes could play an important role in promoting responsible credit use. However, research has also shown that compulsory debt counselling and financial literacy programmes as a precondition for debt relief are often impractical. It is thus submitted that it should not be required as a precondition for relief and that the South African law reform commission’s proposal that a debtor must first consider an arrangement, composition or other debt restructuring procedure before applying for sequestration should not be implemented. It is submitted that a debtor who is able to prove advantage to creditors should be able to sequestrate and should not be denied the opportunity to obtain the necessary and appropriate debt relief at the earliest possible stage.
Ultimately a balance should be struck between the interests of the debtor, creditors and society. It is submitted that current South African law and law reform initiatives currently on the table do not yet represent or achieve this balance.
Keywords: administration; advantage to creditors; arrangement; automatic rehabilitation; composition; consumer; consumer insolvency law; credit granting; creditor; credit records; debt counselling; debtor; debt restructuring; debt review; discharge; earned discharge; economic capability; economic rehabilitation; exempt assets; financial literacy; fresh start; insolvency; Insolvency Act; insolvency proceedings; insolvency restrictions; international guidelines; international trends; Magistrates’ Courts Act; moratorium; National Credit Act; NINA debtors; no income no asset debtors; non-discrimination; over-indebtedness; rehabilitation; responsible credit use; sequestration; straight discharge; World Bank report.