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Is an Application for Debt Review an act of Insolvency?

Adv. Nelson Kekana MTP (SA)

CoTE committee member

The FirstRand Bank Limited vs Janse van Rensburg [2012] 2 ALL SA 186 (ECP) is one such case which dealt successfully with the confusion of whether debt review applications constitute an act of insolvency in terms of the provisions of s8(g) of the Insolvency Act, No 24 of 1936 (as amended).

Facts in brief-FirstRand Bank Limited applied for the provisional sequestration order of Mr and Mrs Janse van Rensburg on the basis that they had committed an act of insolvency in terms of s8 (g) of the Insolvency Act. FirstRand Bank relied on the fact that the Janse van Rensburgs had made applications for an order in terms of s86 (7)(c) of the National Credit Act, No 34 of 2005 (NCA) for a declaration of over-indebtedness. In support of the application, FirstRand Bank relied on a consumer profile report issued by a credit bureau, reporting that the Janse van Rensburgs had applied for debt review.

In terms of s8 (g) of the Insolvency Act, a debtor commits an act of insolvency if he gives notice in writing to any one of his creditors that he is unable to pay any of his debts. In order to meet the requirements of s8(g) of the Insolvency Act, there must be a notice in writing by the debtor[emphasis added]to a creditor in which the debtor states that he is unable to comply with his financial obligations. The court found that FirstRand Bank’s application did not meet the requirements of s8 (g) of the Insolvency Act.

NB The court scrutinised the procedure of applying for debt review and found that the application for debt review does not involve notice given by the debtor to a creditor in which the debtor declares an inability to pay one or more of its creditors. It is important to note that the application for debt review in terms of s86 of the NCA read with the NCA regulations is by the debtor to a debt counsellor and not by a debtor to his creditor.

NB It does not constitute a notice as required under the Insolvency Act, which notice will be given by the debtor to the creditor in which the debtor declares an inability to pay one or more of his creditors. An application for debt review or debt re-arrangement as envisaged by the NCA is based on the principle that the debtor will have to fully satisfy his or her financial obligations, and therefore it does not meet the requirement of s 8(e) of the Insolvency Act. The intention under debt review is to pay debts under suitable revised payment arrangement.[emphasis added]. Further, a debt re-arrangement pursuant to section 86(7)(b) read with s 86(8)(a) of the NCA is not, by itself, indicative of the debtor’s inability to pay his debts.

The court reiterated that the notice of inability to pay envisaged by s 8(g) of the Insolvency Act must be given deliberately and with the intention of giving such notice, and to the creditors(Van Rensburg para 23). It stated that if the words of the notification do not convey an unequivocal statement of inability to meet a debtor’s obligation, the fact that the creditor may have construed the notice in that manner does not render the notice one in terms of s 8(g) of the Insolvency Act (Van Rensburg para 28)

NB The notice must be such that on receiving it, a creditor can reasonably conclude that the debtor is unable to pay his debts. (Van Rensburg para 26)

FirstRand Bank did not rely on a written communication addressed to it by the Janse van Rensburgs, but on a profile report issued by the credit bureau reflecting that they made application for debt review in terms of the NCA. The court held that the profile report provided no details of the application for debt review, contained no reference to statements and declarations made by the Janse van Rensburgs, and contained no information on which a creditor may determine that the debtor is unequivocally stating an inability to pay. As a result, the court held that the profile report did not constitute a written notice envisaged by s8(g) of the Insolvency Act (Van Rensburg para 30), and dismissed the applications.

This decision brings relief and clarifies the confusion that might have existed before vis-à-vis the impact of an application for debt review and misconstrued implication that it may constitute an act of insolvency. Both processes are separate and each requires a notice, with the former being to the debt counsellors while the latter is directly to one or more creditors. The former cannot be used to pursue the latter without the necessary notification.