Sequestration and judicial discretion

Dura lex, sed lex is a Latin phrase meaning “the law is hard, but it is the law”.[1] This legal maxim captures the principle that law must be applied and enforced, even when the outcome may be harsh or regrettable.[2] In Les Misérables, Victor Hugo explores this theme through characters like Inspector Javert, who embodies the unyielding rigidity of the law in contrast to the compassion often needed in justice. Similarly, the judgment in Body Corporate of Old Trafford v Muronzi[3] (“Old Trafford”) may appear to reflect a strict application of constitutional principles (specifically the right of access to housing under s 26 of the Constitution) which itself is a safeguard against arbitrariness. Yet, the judgment also embodies a form of mercy, as the Pretoria High Court spared the debtor’s estate from the severe consequences of sequestration, even in the debtor’s absence (the debtor did defend but did not attend the hearing as he was apparently ill). This balance between legal rigour and compassion underscores the judiciary’s essential role in tempering the law with empathy when warranted. The judge’s discretion to grant or deny sequestration, as vested in the Insolvency Act[4], is explored further below.

In the case at hand, the Applicant (the Body Corporate) was the sole creditor, and it pursued sequestration proceedings to recover unpaid levy contributions from the Respondent, the unit owner within a sectional title scheme, which unit was acquired in 2002.[5] Despite partial payments by the Respondent, judgments against him in 2020 and 2022 bore very little fruit for the Body Corporate from a financial perspective.[6] Following the issuance of a nulla bona return from the Sheriff – a declaration that the debtor does not have sufficient assets available for attachment to satisfy the debt – in May 2022, the Body Corporate applied for, and was granted, provisional sequestration of the unit owner’s estate.[7] However, upon final consideration, the High Court chose to deny the application for final sequestration and prioritised the unit owner’s constitutional rights to housing under s 26 of the Constitution.[8]

This decision highlighted the significant role of judicial discretion in insolvency matters, particularly when sequestration might result in the debtor’s loss of their primary residence. The Court’s enquiry was shaped by the Body Corporate’s decision to opt for sequestration over the Rule 46A procedure to execute against the immoveable property, the latter of which provides constitutional safeguards by requiring judicial oversight before property is deemed executable (and the setting of a reserve price). The Court raised concerns about whether this choice aligned with the spirit of s 26 of the Constitution, as sequestration may bypass the protective oversight built into execution procedures.[9] This observation reflects the Court’s intent to ensure that sequestration is not wielded as a procedural shortcut to enforce debt collection, particularly when less invasive methods are available to the creditor (i.e. executing against the immoveable property first).

Section 12(1) of the Insolvency Act gives the Court discretion even where statutory requirements are met.[10] Specifically, sequestration must demonstrate a clear advantage to creditors, and it may be refused if special circumstances exist.[11] Here, the Court questioned whether the Body Corporate’s choice of sequestration served any real advantage, considering that only one creditor was involved, and the Body Corporate had other avenues for recovery.

The Court closely examined the Body Corporate’s rationale for using sequestration, which purportedly would allow the trustee of the insolvent estate to privately sell the unit owner’s property at a potentially higher price.[12] However, as the sole creditor, the Body Corporate’s argument for the advantage to creditors seemed tenuous and abstract, lacking the substantive benefit that the Insolvency Act demands.[13] Even in cases where other creditors exist, s 15B(3)(a)(i)(aa) of the Sectional Titles Act[14] (the well-known embargo provision) already prioritises the Body Corporate’s claim, as it prevents the transfer of a unit in the sectional title scheme until all dues to the body corporate are settled, further eroding the unique advantage of sequestration in this context.[15]

Additionally, the Supreme Court of Appeal’s recent decision in Body Corporate of Marsh Rose v Steinmuller[16] (“Marsh Rose”) emphasises that a body corporate’s financial security (codified in the embargo provision) is upheld in both sequestration and execution sales.[17] The Body Corporate’s position that sequestration would halt the accrual of debt and relieve the financial burden on other sectional title owners was also found lacking, as unpaid levies would impact other owners equally, regardless of whether sequestration or execution is pursued.[18] Here, the judgment underscores the Court’s refusal to use sequestration as a debt collection tool when execution may yield similar or superior results without infringing upon protected constitutional rights.

In Rodel Financial Services (Pty) Ltd v O’Callaghan[19] Judge Windell reinforced that execution is preferable over sequestration when it is more cost-effective and efficient for a sole creditor.[20] In Old Trafford, the Body Corporate had delayed nearly two years before initiating sequestration proceedings, seemingly undermining any asserted benefit over execution.[21] This delay further led the Court to regard the claimed creditor “advantage” as speculative, as no additional creditors or voidable dispositions emerged to support the Body Corporate’s position.[22]

The Court’s exercise of its judicial discretion under s 12(1) of the Insolvency Act was also guided by the Jaftha principles,[23] which prioritise judicial oversight when there is potential infringement on housing rights.[24] The Court emphasised that it is not the procedural nature of sequestration that invokes constitutional concerns but the potential impact on the unit owner’s right of access to housing.[25] This viewpoint was fortified by Nedbank v Fraser[26], where judicial oversight was deemed essential, not because of the specific proceeding but due to its potential consequences.[27] Therefore, the High Court recognised that applying the protective Jaftha principles is pertinent to both execution and sequestration when primary housing is at risk.

The judgment concludes with an order denying final sequestration of the unit owner and requiring the Body Corporate to furnish the unit owner with a copy of the judgment.[28] This case highlights that courts will carefully weigh the implications of sequestration, especially when it jeopardises the constitutional right of access to housing for the debtor. It reinforces that sequestration is not an automatic entitlement for creditors; it is a judicial and debt collection tool subject to discretionary judicial oversight aimed at safeguarding the interests of both creditors and debtors.

The effect of the judgment is that legal practitioners, community schemes, and other creditors must continue to carefully choose between the procedures of executing against immovable property and pursuing sequestration. This choice demands a thorough weighing of not only the associated legal costs (and how to fund those costs) but also the entire spectrum of circumstances, as it is not a foregone conclusion that sequestration will be granted by the High Court – even if unopposed or if the debtor fails to appear in court after initially opposing (such as in Old Trafford).

While the judgment rightly highlights the importance of protecting the housing rights of debtors, it also exposes a harsh reality for creditors, especially unit owners who are forced to subsidise non-paying neighbours over extended periods due to unpaid levies in a sectional title scheme. These owners bear not only the financial strain of unpaid levies but also the legal expenses of exploring every avenue for recovery. While it may seem harsh to apply to the High Court to sequestrate a person for a debt under R50 000, bodies corporate face increasing difficulties, high costs, and time-sensitive challenges in collecting outstanding levy contributions under certain circumstances. This judgment emphasises the need for courts to carefully balance these pressures, ensuring that the protection of the debtor’s rights does not come at an undue cost to the creditors’ rights to fair recourse.

Balancing these conflicting rights is complex and places a critical responsibility on our courts to exercise discretion judiciously, ensuring that protections for housing rights do not unduly impair creditors’ rights to fair and timely recourse. At what point will the constitutional rights of paying unit owners be considered from this perspective? Is it constitutional for them to be compelled to subsidise non-paying neighbours or to bear others’ debts, potentially indefinitely?

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FOOTNOTES:

[1] Oxford Reference, “Dura lex, sed lex: The Law is Hard, but it is the Law”, accessed at https://www.oxfordreference.com/display/10.1093/acref/9780197583104.001.0001/acref-9780197583104-e-604.

[2] Oxford Reference, “Dura lex, sed lex: The Law is Hard, but it is the Law”, accessed at https://www.oxfordreference.com/display/10.1093/acref/9780197583104.001.0001/acref-9780197583104-e-604.

[3] (016676/2023) [2024] ZAGPPHC 623 (21 June 2024). Accessible at https://www.saflii.org/za/cases/ZAGPPHC/2024/623.html#_ftnref6.

[4] Act 24 of 1936.

[5] Old Trafford paras 1 to 3.

[6] Old Trafford paras 2 and 6.

[7] Old Trafford paras 2 and 3.

[8] Old Trafford para 50.

[9] Old Trafford para 8.

[10] Old Trafford para 10 and 12.

[11] Old Trafford paras 10 to 12.

[12] Old Trafford para 18.

[13] Old Trafford para 19.

[14] Act 95 of 1986.

[15] Old Trafford paras 20 and 21.

[16] 2024 (2) SA 270 (SCA). Accessible at https://www.saflii.org/za/cases/ZASCA/2023/143.html.

[17] Old Trafford para 21. Marsh Rose para 36.

[18] Old Trafford para 24.

[19]  (2016/23121) [2017] ZAGPJHC 467 (31 March 2017). Accessible at https://www.saflii.org/za/cases/ZAGPJHC/2017/467.html.

[20] See Old Trafford para 25 where the Court quotes para 34 of Windell J’s judgment in Rodel Financial Services (Pty) Ltd v O’Callaghan.

[21] Old Trafford para 26.

[22] Old Trafford para 28.

[23] Jaftha v Schoeman and Others, Van Rooyen v Stoltz and Others 2005 (2) SA 140 (CC). Accessible at https://www.saflii.org/za/cases/ZACC/2004/25.html.

[24] Old Trafford paras 41 and 45 to 47.

[25] Old Trafford para 46.

[26] Nedbank Limited v Fraser and Another, Nedbank Limited v Chabalala and Another, Nedbank Limited v Machitele and Another, Nedbank Limited v Moccasin Investments (Pty) Limited, Absa Bank Limited v Young Star Traders CC and Another 2011 (4) SA 363. Accessible at https://www.saflii.org/za/cases/ZAGPJHC/2011/35.html.

[27] See the quote from Nedbank v Fraser in para 46 of Old Trafford.

[28] Old Trafford para 50.