Hogan Lovells Publications | December 2014

A constitutional challenge on the statutory notification provisions of the Insolvency Act: Investec Bank Limited v Stratford and Others

On 2 September 2014 the Constitutional Court heard an appeal against a final order of sequestration granted by the High Court of South Africa (Western Cape High Court) on 14 August 2013 sequestrating the joint estate of Mr Ivor Charles Stratford, the former chairman of the Pinnacle Point Group, and his wife Mrs Sheila Margaret Stratford (the Stratfords).

The basis for the appeal by the Stratfords rests on the interpretation and constitutionality of section 9(4A) of the Insolvency Act 24 of 1936 (the Act). At first glance, and as will appear from the facts hereunder, one is left with the impression that the Stratfords resorted to a stratagem resting on technicalities by challenging the statutory notification requirements contained in the Act in an effort to evade what seems an inevitable consequence, that being the sequestration of their joint estate.

Investec Bank Limited (Investec) brought an application under case number 10394/2012 in the High Court of South Africa (Western Cape High Court) for an order sequestrating the joint estate of the Straftfords, arising from a claim of approximately ZAR240 million that Investec has against the Stratfords in their personal capacities. On 15 October 2012 the Honourable Cloete AJ granted an order for the provisional sequestration of the Stratfords' joint estate.

The Stratfords opposed the granting of a final order of sequestration on the basis that there would be no advantage to creditors as required by section 12(1)(c) of the Act. The domestic workers employed by the Stratfords also intervened in the proceedings and together with the Stratfords (collectively the Respondents), brought a counter-application in terms of which they sought an order declaring section 9(4A) of the Act to be unconstitutional, insofar as it does not make provision for effective service of a petition (application) for the sequestration of an estate on a debtor's domestic employees.

In the present case a copy of the main application was served personally on the Stratfords by a candidate attorney employed by the attorneys representing Investec. Upon serving the application, she enquired with the Stratfords whether they had any employees. The Stratfords responded that they had a domestic worker and she proceeded to leave a copy of the petition on the kitchen table at the Stratfords’ residence as there was no notice board at the premises. The Stratfords did not inform their domestic employees that a copy of the application was left on the kitchen table for them.

The High Court was called upon to determine the following:

• Whether the petitioning creditor had established a claim against the debtor.
• Whether the debtor had committed an act of insolvency or was insolvent.
• Whether it would be to the advantage of the creditors of the debtors if their estate were sequestrated.
• If it would be just, fair and in the interest of justice to declare section 9(4A) of the Act to be unconstitutional in so far as it does not make provision for the service of a petition on employees who are not employed in a business operation of their employer.

For purposes hereof I shall focus on the constitutional challenge on section 9(4A) of the Act.

Section 9(4A) (a) (ii) requires a copy of the petition to be furnished to the debtor’s employees -

"(aa) by afixing a copy of the petition to any notice board to which the petitioner and the employees have access inside the debtors premises;
or
(bb) if there is no access to the premises by the petitioner and the employees, by affixing a copy of the petition to the front gate of the premises, where applicable, failing which to the front door of the premises from which the debtor conducted any business at the time of the presentation of the petition."

On this point, Investec contended that although the provision does not require a copy of the petition to be furnished to employees of the debtor who are not employed in a business operation of the debtor, the applicant did in fact furnish a copy of its petition to the Stratford's domestic employees in accordance with the provision.

Reference was made to the matter of Gungudoo and Another v Hannover Reinsurance Group Africa (Pty) Ltd and Another 2012 (6) SA 537 (SCA), where it was held that, the intention of the legislature was to only make this provision applicable to employees of the debtor who are involved in the debtor's business concern (business employees) and not a debtor’s domestic employees. Domestic workers are, by virtue of the meaning ascribed to section 9(4A) by the Supreme Court of Appeal in the Gungudoo matter, excluded from the protection by law, as employees referred to were those in the business sector. This differentiation does not amount to unfair discrimination as it meets the criteria for justifiability under section 36 of the Constitution. As the name Insolvency Act suggests, it deals with insolvencies and not domestic circumstances.

The Respondents submitted that prior to the granting of the provisional order, Investec should have complied with the provisions of sub-sections 9(4A)(a)(ii) and (b) of the Act. The Respondents argued that the exclusion of domestic employees from the protection contemplated by the provision of section 9(4A) of the Act renders this sub-section to be unconstitutional on the basis of race and gender discrimination. They further contended that the lack of notice of the sequestration proceedings amounts to, among other things, an unconstitutional breach of their fundamental right to fair labour practises as their employment was effectively terminated and lost without any prior notice.

In his judgment, the Honourable Mantame JA was of the view that the Respondents had interpreted the statute beyond what the legislature intended and that there is no provision that the petition must be served on each and every domestic employee or that the petition must be directly drawn to the attention of the employees.

In any event, a copy of the application was served by the candidate attorney by placing it on the Stratfords’ kitchen table and this constituted compliance with the provision. The judge was also of the view that the Gungudoo judgment was correct in that a petition needed to be furnished only to those employees of the debtor who are involved in the debtor's business concern, and not a debtor's domestic employees. In this present case, the domestic employees were furnished with a copy of the application.

The court dismissed the constitutional challenge reasoning that the domestic employees had in fact received the application, hence there was compliance with section 9(4A) rendering a finding on the constitutional issue unnecessary. Accordingly, a final order sequestrating the joint estate of the Stratfords was granted and the counter-application challenging the constitutionality of section 4(A) was dismissed.

The Stratfords and the domestic employees applied for leave to appeal to the Supreme Court of Appeal, which was dismissed for lack of prospects of success.

It will be very interesting to see what stance the Constitution Court will take in light of the fact that the Supreme Court of Appeal has already been clear in interpreting the notification provision in the Insolvency Act to apply only to the business employees of a person on the verge of sequestration.

The domestic employees' challenge on the constitutionality of the notification provision on the basis that it amounts to unfair discrimination on race and gender, and in conflict with fair labour practices and the right to access to courts is seemingly a last-ditch attempt by the Stratfords to avoid sequestration of their estate.

The pertinent question that arises is whether a notification point is a valid excuse to avoid the inevitable as in this present matter? One ought to be very cautious of debtors that resort to raising technicalities in the process in an attempt to avoid the inevitable. The fact that a technical point is raised, alternatively the presence of a procedural defect should in no way affect the purpose and spirit of the Act.

The decision of the Constitutional Court will be important in confirming the position on this issue to avoid abuse of the process and the frustration of creditors' rights. 

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