The impact of Section 25 of the Constitution of South Africa, 1996, on Insolvency Law

Abstract

This qualitative study aims to investigate the constitutionality of section 20 and 21 of the South African Insolvency Act 24 of 1936. These sections relate to the regulation of sequestration of the estate of an insolvent individual. This study is underpinned by the critical analysis of section 25 of the Constitution. It seeks to question or examine the specific application of section 20 and section 21 of the Insolvency Act, within the context of the potential arbitrary deprivation of property. Section 25 of the Constitution prohibits the arbitrary deprivation of property, and, as such, the primary research question of this study is whether interference with property rights as per the prohibitions in section 20 and section 21 of the Insolvency Act qualify as a prohibited deprivation in terms of the Constitution. Consequently, the problem that this research addresses is the constitutionality of section 20 and section 21 of the Insolvency Act. This study argues that sequestration, by necessity, affects the property rights of the insolvent debtor. To address the research problem, the study critically analysed the issues relating to deprivation, as set out in section 25 of the Constitution. The analysis was undertaken in order to ascertain whether the deprivation which occurs in terms of sections 20 and 21 of the Insolvency Act is arbitrary, and to determine the form of arbitrariness. The structure of the research comprises a legislative and literary contextualisation of the Insolvency Act, followed by a critical analysis of the constitutionality of the Insolvency Act. The critical analysis yields the following interpretation: The Insolvency Act is considered to be a law of general application, and it governs the two processes through which a debtor’s estate may be sequestrated, namely voluntary surrender and compulsory sequestration. The fact that sequestration has formal procedures set out in the Act indicates that the process is non-arbitrary, as the two processes directly aim to fulfil the purpose of the Insolvency Act, through specific procedural steps which require compulsory compliance. This ensures due process and prevents the undermining of the constitutional rights of both the insolvent debtor and the creditors in question. This also limits arbitrary deprivation of property, as the arbitrariness is determined in terms of deprivation for public purpose or public interest. If the deprivation is not made in the public interest, it may be found arbitrary in terms of section 25 of the Constitution. It may be argued that the sequestration of an insolvent debtor is not a process which serves the public interest, however, if the arbitrary deprivation is justifiable and reasonable, then it is constitutional in terms of section 36 of the Constitution. Inasmuch as sequestration is a process which aims to repay creditors what is owed to them by the insolvent debtor, it is a justifiable process, and provided that the process follows the conditions set out in the Insolvency Act, by the court, it is substantively and procedurally reasonable. This is substantiated by the fact that the sequestration order will only be granted if sequestration is to the advantage of creditors. The Insolvency Act lays down ‘advantage to creditors’ as a prerequisite for sequestration applications. This study makes recommendations for legislative review of the definition of ‘property’, as the broad definition and discretion in its application resulted in conflicting court judgements within the context of insolvency procedures. Against the background of the findings and recommendations related to property rights, this study further supports a legislative review of the debt relief process and the timespan of post-sequestration rehabilitation, which may take up to ten years.