Insolvency is capitis diminutio which is imposed by the court of law on someone who is failing to pay their debts and on the other hand someone whose liabilities exceed their asset. The diminished legal capacity of Insolvent person deprives him/her certain legal capacity and rights. This is done to protect other persons, which is the body of existing creditors and also grant relief to the insolvent person. Inability to pay debts is merely evidence of Insolvency. Sequestration is used only with reference to one’s estate, thus it is the debtor’s estate that is sequestrated. The final Constitution Act 108 of 1996, has brought about what has been described as a complete metamorphosis of South Africa’s legal system and jurisprudence. The final constitution in chapter two it contains the bill of rights. Section 21 of the law of Insolvency Act 24 of 1936 infringes certain rights guaranteed in the final constitution.
The effect and the intended purpose of section 21.
Section 21 of the Insolvency Act 24 of 1936, its effect is that all property of solvent spouse to whom the Insolvent spouse is married to out of community of property, is vested in the trustee of the insolvent estate as if it is the property of sequestrated estate. This occurs upon the sequestration of person’s estate. In terms of the aforementioned section the term ‘spouse’ is broadly defined, apart from husband and wife who are legally married to each other it further included man and a woman who are living together as husband and wife even though they are not legally married. Section 21(1) of Insolvency Act 23 of 1936 vest ownership of the solvent spouse’s property to the Trustee. This occurs to spouses married out of community of property. Section 21(2) provides grounds in which the solvent spouse may obtain the release of his/her property.
One of the grounds is that the solvent spouse must hold such property by a valid title as against the Insolvent’s creditors. However the solvent spouse ought to prove this on a balance of probabilities. In terms of section 21(10) which states that a High court may order that a property of a spouse may not immediately vest in the Trustee or Master of the court only if he/she is conducting a business of a trader, which is apart from the Insolvent spouse. The order can also be made even when the solvent spouse is likely to suffer serious prejudice due to immediate vesting of ownership. The intended purpose of this section is to protect other persons, these are the general body of existing creditors by paying them what’s due to them, it also provides a benefit of relief to the Insolvent spouse.
The constitutionality test of section 21 of the Insolvency Act.
The Constitution of the Republic of South Africa Act 108 of 1996 has brought about what has been described as a complete metamorphosis of South Africa’s jurisprudence and legal system. Section 2 of the constitution states that the constitution is the supreme law of the Republic, law or conduct inconsistent with it is invalid. the duty imposed by the constitution must be fulfilled. The rights of all people in our country and the democratic values of human dignity, equality and freedom is enshrined in chapter two (2) the bill of rights. Which impose the duty to the state to protect, respect and promote not forgetting fulfilling all these fundamental rights.
Section 36 of the constitution state that the rights which are contained in the Bill of Rights may only be limited to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom. These factors ought to be observed when determining whether the limitation is justifiable these include the nature of the right, the importance of purpose of limitation, relation between the limitation and its purpose. Section 39(1) of the constitution provides that court must promote the value underline an open and democratic society based on human dignity, equality and freedom must also consider international law. Section 21 of Insolvency Act have some provisions which infringes the fundamental rights enshrined in our 1996 final constitution. Right to privacy, right to equality, right to property and right to freedom these rights are of particular relevance to section 21 of Insolvency Act.
Section 21 in conflict with section 25 of the constitution (property)
Section 25(1) of the Constitution provides that no one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property. section 25(2) provides that property may be expropriated only in terms of law of general application (a) for a public purpose or in the public interest, and (b) subject to compensation. The case of Harksen v Lane NO and Others is the first property challenged provision of the Insolvency. It was argued in the aforementioned case on behalf of Jeanette Harksen that the provision by section 21 of the Insolvency Act to vest her property in the Trustee of the Insolvent estate of her husband.
In terms of section 21, this amount to expropriation of property without any provision of compensation as it was required by interim constitution which was replaced by the final 1996 constitution. Jeanette's argument was based on the provision of section 21 of Insolvency Act, which deals with transferring of ownership of her property as a solvent spouse to the Trustee of Insolvent estate as provided by section 21 of Insolvency Act. The court took into account that the effects and purpose of section 1 was not to divest nor to save temporarily the solvent spouse of her ownership of property which rightfully belongs to her. Court further stated that the purpose of this section ensures that the Insolvent estate is not to be deprived the property which it is entitled to it was ruled that section 21 of Insolvency Act does not amount to expropriation of the solvent spouse property.
Section 21 in conflict with section 9 of the constitution (equality)
Section 9(1) of the Constitution provides that everyone is equal before the law and has the right to equal protection and benefit of the law. Section 9(3) provides that the state may not unfairly discriminate directly or indirectly against anyone on one or more grounds, including race, gender, sex, pregnancy etc. Again in the case of Harksen v Lane NO and Others the constitutional validity of section 21 of Insolvency Act was challenged based on the ground that it deprives equality before the law and also equal protection before the law which constitute unfair discrimination. It was contended that by favouring solvent spouse who are traders as provided by section 21(10) it constitute discrimination against spouse who are not on trade. It was further submitted also that section 21(2) do not ‘save' provision of section 21(10) this is because there may be innocent reasons why the solvent spouse is unable to establish that property belongs to him/her. In judgment the majority holds that section 21 does not violate the right to equality whereas majority registered a strong dissent. Majority judgment by Goldstone J he viewed section 21 as providing crucial assistance to a trustee in determining which property in the possession of spouses belongs to the insolvent estate. Section 21 safeguard the interests of the solvent spouse in his or her property. Goldstone J further held that the discrimination against solvent spouses was not unfair, section 21 protected the public interest the rights of the creditors of insolvent estates.
Section 21 in conflict with the provision of section 14 of the constitution (privacy)
Section14 of the Constitution provides that everyone has the right to privacy, which includes the right not to have their property searched or heir possessions seized. The case of Podlas v Cohen and Bryden NNO & Others this case accurately reveals the South African court approach with regard to person right to privacy Insolvency matters. This is in relation with section 21 and 152 of the Insolvency Act. Section 152 provides that a master of a court to institute an enquiry into the affairs the Insolvent estate this is done by summoning a person to appear before him to give information. The applicant urged that section 21 and 152 of Insolvency Act violated her rights to privacy, freedom of speech and right to speak. Spoelstra J ruled that a person who's being sequestrated generally effectively sacrifices his/her right to privacy in case the matter is related to pre-sequestration of patrimonial matters. Court stated that the rights of creditors is the one which enjoys preference against those of the Insolvent and this is justifiable and reasonable in an open democratic state.
Section 21 in conflict with the provision of section 10 of the constitution (dignity)
Section 10 of the constitution provides that everyone has inherent dignity and the right to have their dignity respect and promoted. Where discrimination results in treating persons differently in a way which impairs their
fundamental dignity as human beings, it will be a breach of section 8(2) which is all about discrimination. The discrimination on an unspecified ground if it is based on attributes or characteristics which have the potential impairs the fundamental dignity of persons as human beings or to affect them adversely in a comparably serious manner. Section 21 of Insolvency Act can be regarded as invalid in this matter.
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