Articles

squeezing blood out of a stone

by Steve - Posted 02 December 2008

Many a creditor has been frustrated by seasoned and savvy debtors who shield their personal estates using trusts and companies. However, the Natal Provincial Division in the case of Nedbank Ltd v Thorpe brings some welcome relief and shows that some stones will yield some blood if they are squeezed tight enough.

Thorpe owed the bank a lot of money based on suretyships he had signed in favour of the bank for various companies. On paper, Thorpe’s personal estate was insolvent. He owned no assets and earned no income. However in practice, it appeared that Thorpe was actually a wealthy man who drove a luxury Bentley motor vehicle and ran a very successful short-term insurance business.

The problem was that Thorpe used a discretionary trust to insulate his wealth. The trust owned all the assets he had the benefit of. This included motor vehicles, properties and shareholdings in various companies.

To get to the bottom of the relationship between Thorpe and the trust, Nedbank applied to court for Thorpe’s estate to be sequestrated. The aim of the exercise was so that the investigative machinery of the Insolvency Act could be used. This included a forensic audit into the trust’s assets and cash flows and Thorpe’s loan account in the trust. The other trustees could also be interrogated to find out whether they played any active role in the management of the trust or whether Thorpe himself was the “directing mind” of the trust.

For the court to agree, it needed to be satisfied that there was a reasonable prospect that sequestrating Thorpe’s estate would be beneficial to his creditors. More particularly, was launching an investigation under the Insolvency Act enough of an advantage when Thorpe himself owned no assets? Or put another way – was there is a reasonable prospect (not a likelihood) that some pecuniary benefit will result to creditors.

The court held that the right of investigation is not as an advantage in itself, but as a possible means of securing an ultimate material benefit for creditors (e.g. to recover property disposed of by the insolvent or to disallow doubtful or collusive claims). If there is reasons for thinking that as a result of enquiry under the Act some assets or income may be revealed or recovered for the benefit of creditors, that would be sufficient.

The court understood that a debtor knows all about his own affairs but a creditor usually has little or no knowledge of the exact position of the debtor and it is therefore difficult to provide satisfactory proof that the sequestration of the debtor's estate will be to the advantage of the creditors. However the court was inclined to accept, as proof, very little evidence that sequestration would be to the advantage of the creditors. It was sufficient for the bank, in an overall view on the papers, to show  that there is reasonable ground for coming to the conclusion that upon a proper investigation under the Insolvency Act, a trustee may be able to unearth assets which might then be attached, sold and the proceeds disposed of for distribution amongst creditors.

An order was granted to sequestrate Mr Thorpe’s estate.