Why You Cannot “Hide” Assets Before Sequestration
When an individual faces the overwhelming pressure of mounting debt, the impulse to “hide” certain assets from the reach of creditors could arise. This could involve selling a vehicle to a relative or transferring property into a trust. However, it’s important to be aware that such actions taken in the months or even years leading up to a sequestration order are subject to intense legal scrutiny.
Under the Insolvency Act 24 of 1936, a Trustee may apply to the court to have these transactions set aside, bringing the assets back into the insolvent estate for the benefit of all creditors.
The Role of the Trustee and the Concursus Creditorum
Once the High Court grants a sequestration order, your financial status changes. A concursus creditorum is established – a legal state where the interests of your creditors as a group take precedence.
A Trustee is appointed to oversee your estate after sequestration. Their primary duty is to collect all available assets and distribute them fairly. If you have moved assets out of your name shortly before sequestrating, the Trustee can investigate these as Voidable Dispositions.
It is important to note that while this applies to individuals, the process for businesses (known as Liquidation) follows a similar but distinct legal framework under the Companies Act.
The Three Legal Principles: Sections 26, 29, and 30
The Insolvency Act identifies three specific types of transactions that a Trustee can overturn:
1. Dispositions Without Value (Section 26)
This occurs when you transfer an asset and receive nothing, or something of significantly lower value, in return.
- The Scenario: Selling a luxury car worth R500,000 to your brother for R20,000, or donating a property to a family trust.
- The Risk: If you are sequestrated within two years of this type of transaction, and you cannot prove that you were solvent (your assets exceeded your liabilities) immediately after the transfer, the Trustee can reclaim the asset. Even if you were solvent immediately after the disposition, the court retains a discretion to set it aside if prejudice to creditors is shown.
2. Voidable Preferences (Section 29)
This section aims to prevent bias among creditors. If a transaction has the effect of preferring one creditor over others, you have created a voidable preference.
- The Scenario: Paying back an undocumented loan to a friend just two months before filing for sequestration, while your credit card debt remains unpaid.
- The Risk: Any payment or transfer made within six months of your sequestration that has the effect of preferring one creditor over another can be set aside by the Trustee.
3. Undue Preference to Creditors (Section 30)
This section focuses on the debtor’s intent. If the Trustee can prove that you made a payment specifically intending to favour a certain creditor, the transaction is vulnerable.
- The Risk: Unlike Section 29, there is no time limit for an Undue Preference. If the intent to prefer is proven, the transaction can be overturned regardless of how long ago it occurred.
The Consequences of Asset Hiding
Attempting to bypass the legal system by hiding assets often leads to severe complications:
- Litigation Against Loved Ones: The Trustee will take legal action against the person who received an asset (e.g., your spouse or friend) to recover it. This draws your inner circle into a stressful legal battle.
- Criminal Prosecution: Under the Insolvency Act, concealing assets or making fraudulent dispositions may constitute criminal offences.
- Delayed Rehabilitation: Your ultimate goal is Rehabilitation, the legal process that makes you solvent and debt-free again. If a court finds you acted dishonestly by hiding assets, your rehabilitation may be delayed for years.
Final Thoughts
Sequestration is intended to be a transparent process that offers a path to rehabilitation for individuals in financial distress. Honesty and full disclosure, and the help of a legal professional, are the only ways to ensure the process runs as smoothly as possible and that you regain your financial freedom as quickly as possible.
At Cawood Attorneys, we guide you through the complexities of the Insolvency Act to make sure you understand which assets are legally protected (such as certain pension funds and tools of trade) so you don’t feel the need to resort to risky dispositions. Contact us today to get legal assistance you can count on.