COMMERCIAL LAW: Is a debt restructuring proposal and act of insolvency?

In a recent case before the Constitutional Court the issue arose whether a debt-restructuring proposal in terms of the National Credit Act (“NCA”) constitutes an act of insolvency for purposes of the Insolvency Act. The two pieces of legislation have been causing issues since the inception of the NCA due to their differences in approach to indebtedness.

A debt-restructuring proposal in terms of the NCA consists of a written proposal to a person’s creditors for partial repayment of the debts owed to them. This necessarily contains an expressed or implied notice to such creditors that the debtor is unable to pay his debts. Unfortunately such a notice constitutes an “act of insolvency” for purposes of the insolvency act. These are certain actions by a debtor that create a presumption that he is insolvent. Quite clearly the NCA and Insolvency act are at loggerheads on this issue.

Fortunately for the Constitutional Court, it did not need to address this apparent conflict between the two pieces of legislation, but rather skirted around the issue, based on two factors – firstly, on the facts before it the debtor was factually insolvent and therefore subject to sequestration; secondly, the NCA has been amended (although this amendment is not yet in effect and therefore the court probably erred in relying on this amendment) to state that a debt-restructuring proposal does not constitute an act of insolvency. It is not entirely clear what the situation will be in the interim should a creditor be unable to prove that the debtor is factually insolvent and rely on an act of insolvency alone. Even after the amendment to the NCA becomes effective, it would be preferable that the Insolvency Act also be amended to rule out any further conflict and uncertainty.

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