Definition:

Rehabilitation is a legal process which happens, in some instances automatically or by order of the High Court of South Africa, whereby the insolvent is relieved of the legal implications of being insolvent and put back into a legal position of someone who is / was not declared insolvent.

 

Legal Implications of Rehabilitation?

Section 129 of the Insolvency Act states that the effect is that of bringing an end to your sequestration and of discharging (writing off) all your debts which were due, or of which the cause of which had arisen before the sequestration, and which did not arise out of fraud on your part and to further relieve you of every disability resulting from the sequestration.”

 

When do I qualify for rehabilitation? 

There is a popular myth in South Africa which says that you must wait 5 years before you can rehabilitate. This is nonsense. There are 7 Sections in the Insolvency Act which deals with 8 circumstances under which you can Rehabilitate. Each of these instances has its own time frame:

Statutory composition

(Section 1197 read with Section 124(1)). You can at any time after sequestration approach your trustee to accept a proposal to your creditors in terms whereof all your creditors (not only those who have proven claims in your insolvent estate) will be paid at least 50 cents in the rand. Once you have given sufficient security to the Master of the High Court that all these creditors will be paid, the Master of the High Court will issue a certificate in which this agreement and security is reflected. You must include in this offer a tender for the administrative cost in the estate. Administrative costs are the trustees’ disbursements and fees. The rights of secured creditors (bondholders etc) are not affected. That part of the claim which has not been met from the sale of the assets which they held as security, form part of the so called concurrent creditors and the 50 cents in the rand applies to their unfulfilled claims as well. Once the Master of the High Court has issued this certificate you can immediately apply for rehabilitation.

Claims proven in your insolvent estate

Section 124(2)(a) – If creditors have proven claims against you insolvent estate you can apply for rehabilitation after twelve months after have lapsed since confirmation of the Master of the first liquidation and distribution account submitted by the trustee. A further condition is that a period of four years since date of sequestration must have passed.

Claims proven in your insolvent estate – (proviso section applicable)

Section 124(2) has a provisional condition which states that if your trustee’s first liquidation account have been confirmed by the Master and ‘n period of twelve months after this confirmation have elapsed you can apply for rehabilitation at any time if the Master recommends the rehabilitation. In practise you must proof very specific circumstances which must be to the advantage of the general wellbeing of South Africa, commerce, your company or for example the previous disadvantaged people.

The court does not really consider the fact that such an “early” rehabilitation is to your own benefit – there must be a wider benefit. Should you qualify under this section, you can effectively apply for rehabilitation once your insolvent estate has been wound up. Depending on circumstance, you can rehabilitate as early as twelve months after date of sequestration.

Previous sequestration

Section 124(2)(b): If you have been previously sequestrated, you can only apply for rehabilitation if two conditions are met:

1. A period of four years must have elapsed since the date of your sequestration; and

2. A period of three years must have elapsed since the date of confirmation of the trustees first liquidation account.

Criminal Offence committed

Section 124(2)(c) – if you have been found guilty of a criminal offense in your insolvent estate, you are allowed to bring an application for your rehabilitation after five years elapsed since the date that criminal judgement was passed.

No claims proven

(Section 124(3)) – after your sequestration there are two creditors’ meetings held at either the offices of the Master of the High Court or at your local Magistrate Court. These meetings are also called the “first meeting” and “second meeting”. If a period of six months since your sequestration have passed and no claims were proven on the first and second meetings then you qualify to bring an application for rehabilitation. In practise the six month period is normally a bit short because certain administrative procedures are normally only completed after at least about nine months. Rehabilitations under this section normally occur when your insolvent estate was very small and creditors were afraid of contribution, so they did not proof claims.

Full payment of claims

Section 124(5) – if the assets in your insolvent estate realize sufficient funds to pay all creditors who have proven claims in full, you immediately quality to apply for rehabilitation.

Effluxion of time

Section 127(A) – if you have not applied to the High Court for a rehabilitation order and ten years have passed since the day of sequestration, you rehabilitate automatically.

 

Must I repay my debts before I can apply for rehabilitation?

No. In layman’s terms, when you are sequestrated your debt is written off. None of your old creditors can ever force you to pay back the “old debt”. In legal terms your debt is not written off, it vests in a trustee who must realise the assets and distribute the yield of the sale of the assets amongst creditors in accordance to insolvency act.

Frequently asked Questions: Rehabilitation

The National credit Act has had the effect of changing the rules of the Credit Bureaus. Before the National Credit Act, the adverse credit information of someone who rehabilitated was carried on the credit Bureaus for 10 years after rehabilitation. The current position is that the moment a person rehabilitates, the adverse credit information (pertaining to debt incurred before sequestration) is supposed to be removed from ITC, Experion etc. The only reference that stays for a period of 5 years is a notice of your rehabilitation

Once the court grants your rehabilitation order, the Registrar of the High Court must despatch a copy of the order to the credit bureaus who must then remove your adverse credit information. The unfortunate situation is that the credit bureau fails or neglects to do their work. When we do our client’s rehabilitation we attend to this. The practical procedure is that we lodge an objection at the credit bureau and we forward the rehabilitation order to the credit bureau along with the objection. According to the rules of the credit bureaus, if no one objects to the removal of your name from the credit bureau within twenty one days, they must remove all adverse information of which the course of action has arisen before the date of your sequestration. It sometimes happens that a creditor has taken judgement against you after you have been sequestrated. The credit bureaus then refuse to remove the judgements that were taken after sequestration unless we get a letter from the creditor (or their attorneys) in which they state that the cause of action has arisen before sequestration. If this hick-up does occur it sometimes takes us months to clear your name, but the job gets done in the end. Our personnel sometimes spend hours (literally) the phone with the credit bureaus in an effort to get them to do their work. The “clean-up” process is supposed to take at the most thirty days, but sometimes takes as long as three or four months. It is a rather humbling experience to negotiate with someone at the credit bureau who has standard 4 (welding) on his name.

The National credit Act has had the effect of changing the rules of the Credit Bureaus. Before the National Credit Act, the adverse credit information of someone who rehabilitated was carried on the credit Bureaus for 10 years after rehabilitation. The current position is that the moment a person rehabilitates, the adverse credit information (pertaining to debt incurred before sequestration) is supposed to be removed from ITC, Experion, etc. The only reference that stays for a period of 5 years is a notice of your rehabilitation.

The Insolvency Act prescribes certain procedures by which an insolvent rehabilitate, which entails inter alia that reports from the Master of the Supreme Court, as well as the Trustee, is submitted to Court, where after a Judge orders that you are rehabilitated, thus declaring you fit and proper to partake in commerce. Sometimes the banks will discriminate against you because you were previously sequestrated. We fail to understand on what legal grounds a bank can decide that they have the authority to just negate a Judge’s decision. Banks (and other credit providers) should consider your application for credit on the very same grounds of a person that was never sequestrated. It could not be legally excused if they hold it against you, because that would be contrary to the stipulations of Section 129 of the Insolvency Act, which we have quoted.

Whether certain formalities have been met, but essentially whether you are fit and proper to partake fully in the commercial environment.

Only the Court that gave the sequestration order. There are a few exceptions on which we will advise you.

Your trustee must pay the money into the guardian fund which falls under control of the Master of the High Court. Once all your creditors have been settled in full, you immediately qualify to bring an application for your rehabilitation. After the Court has granted the rehabilitation order you can collect the money from the guardian fund. Unfortunately in practise it is not that easy. The Masters office has tremendous procedure problems and sometimes it takes us a year to get your money back from the guardian fund. If everything runs smoothly there is no reason why this should not take more than a few days.

Before you can fully and properly partake in commerce you must be rehabilitated. Banks will not allow you to open cheque accounts, credit cards, or to borrow money to purchase a property, car etc. unless you are rehabilitated. The further problem is that, for as long as you are not rehabilitated, every asset that you accumulate during sequestration vests in your insolvent estate.

If you have accumulated assets during your sequestration, those assets are deemed to form part of you insolvent estate (Section 24(2)(b) of the Insolvency Act read with Section 123(1)). If you have for example bought a house, you must, when applying for rehabilitation, also ask the court to give an order in terms whereof the property that you have bought vest in your “new” estate. If you have bought for example household furniture and an inexpensive motorcar etc, you don’t need to ask the Court for a Vesting Order because these assets are needed to maintain normal and ordinary lifestyle.

Should you contact our offices, we will, for an agreed fee determine whether you qualify for rehabilitation. Should you qualify the fee that we have already charged you is deducted from the fee that we will charge you for the rehabilitation, even if the rehabilitation application can only be brought a few years in future.

In my experience, those banks which lost money in your sequestration are difficult. Banks who were not creditors in your insolvent estate will normally help you. They might want you to go through a “probation” (own term) period, to determine how you deal with accounts they opened for you. My advice is; do not take no for an answer, keep on trying.

We have done hundreds of rehabilitations applications. We were successful in each and every application. The reason for this high success-rate is that the insolvency act is very specific in this regard. If you know the applicable law you can advise your client with confidence. We can virtually guarantee our clients a positive result.

In the winding-up of you estate it might happen that, even though preferent creditors receive a dividend, there is not enough funds to cover the administrative costs of your estate. You must keep in mind that preferent creditors are only obliged to pay the cost of realisation of the asset of which they hold security. They are not obliged to pay the “general administrative cost”. Should there be a shortfall in the “general administrative cost” then each creditor who has proven a claim in your insolvent estate becomes liable for the administrative cost, pro rata to the amount of his claim. It is important to note that, when you bring an Application for your rehabilitation, you must repay this administrative cost. You must not confuse the contribution towards the shortfall on administrative cost with repayment of old debt. In present terms the contribution can vary from zero to as much as R25,000.00 at the time of your Application for Rehabilitation.

No. In layman’s terms, when you are sequestrated your debt is written off. None of your old creditors can ever force you to pay back the “old debt”. In legal terms your debt is not written off, it vests in a trustee who must realise the assets and distribute the yield of the sale of the assets amongst creditors in accordance to insolvency act.

If you incurred debts after sequestration it does not fall in your insolvent estate and you must simply pay the debt.

Yes indeed. The Act was written in common English and we hereunder quote certain relevant sections of the National Credit Act number 34 of 2005.

Chapter four of the National Credit Act deals with Consumer credit policy – it reads as follows:

“Protection against discrimination in respect of credit:

Section 61(1): Relative to the treatment of any of other consumer or prospective consumer, a credit provider must not unfairly discriminate directly or indirectly against any natural person, juristic person or association of persons on one or more grounds set out in Section 9(3) of the Constitution, or on one or more grounds set out in Chapter 2 of the Promotion of Equality and Prevention of Unfair Discrimination Act, when-

(a) Assessing the ability of the person to meet the obligations of a proposed credit agreement;

(b) Deciding whether to refuse an application to enter into a credit agreement, or to offer or enter into a credit agreement;

(c) Determining any aspect of the cost of a credit agreement, to the consumer;

(d) Proposing or agreeing the terms and conditions of a credit agreement;

(e) Assessing or requiring compliance by the person with the terms of a credit agreement;

(f) Exercising any right of the credit provider under a credit agreement, this Act or applicable provincial legislation;

(g) determining whether to continue, enforce, seek judgment in respect of, or terminate a credit agreement; or

(h) Determining whether to report, or reporting any credit information or record.”

Section 61(3) of the Consumer Credit Policy, which reads as follows:

“Subsection (1) and (2) apply in respect of a consumer or prospective consumer that is an association or juristic person to prohibit unfair discrimination against that association or juristic person based on the characteristics of any natural person who is a member, associate, owner, manager, employee, client or customer of that association or juristic person.

Section 61(5) Reads:

A credit provider may determine for itself any scoring or other evaluative mechanism or model to be used in managing, underwriting and pricing credit risk, provided that any such mechanism or model is not founded or structured upon a statistical or other analysis in which the basis of risk categorization, differentiation or assessment is a ground of unfair discrimination prohibited in Section 9(3) of the Constitution.

So far so good. Section 61(5) is problematic. The act states that “…A credit provider may determine for itself any scoring or other evaluative mechanism or model to be used…”, but, in my opinion, to prove that the bank discriminate against you, you only needs to prove to Court that the bank has in the past granted finance to any other customer of its customers, which customer was previously sequestrated and has a similar or weaker financial profile than you.

Section 61(6) Reads:

In respect of an alleged contravention of this Section, any person contemplated in Section 20(1) of the Promotion of Equality and Prevention of Unfair Discrimination Act, may either-

  1. institute proceedings before an equality court, in terms of Chapter 4 of the

Promotion of Equality and Prevention of Unfair Discrimination Act; or

  1. make a complaint to the National Credit Regulator in terms of Section 136, which must refer the complaint to the equality court, if the complaint appears to be valid.

62. (1) On request from a consumer, a credit provider must advise the consumer in writing of the dominant reason for-

(a) refusing to enter into a credit agreement with that consumer;

(b) offering the consumer a lower credit limit under a credit facility than applied for by the consumer, or reducing the credit limit under an existing credit facility;

(c) refusing a request from the consumer to increase a credit limit under an existing credit facility; or

(d) refusing to renew an expiring credit card or similar renewable credit facility with that consumer.

62.(2) When responding to a request in terms of subsection (1), a credit provider who has based its decision on an adverse credit report received from a credit bureau must advise the consumer in writing of the name, address and other contact particulars of that credit bureau.

62.(3) On application by a credit provider, the Tribunal may make an order limiting the credit provider’s obligation in terms of this Section if the Tribunal is satisfied that the consumer’s requests for information are frivolous or vexatious.”