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Prescription and Actions under the Insolvency Act

4th October 2013

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The Supreme Court of Appeal (SCA) recently provided clarification on prescription, specifically with regard to actions brought under Section 156 of the Insolvency Act, No. 24 of 1936 (Insolvency Act).

This is significant to insurers and, while seemingly clear cut in law, had yet to be definitively decided in the SCA. The judgment handed down in van Reenen vs Santam has provided a number of answers and ensured that the hurdles facing plaintiffs who bring an action under these circumstances are set to 'difficult'.

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The two questions on appeal before the SCA in van Reenen vs Santam were crisp ones. The court was tasked with deciding when the appellant's claim became due so that it could consider whether the claim was extinguished by prescription. Another question concerned instituting the action prior to the claim becoming due and whether or not this interrupted the prescription.

In an action under Section 156 of the Insolvency Act, the third party claimant has a right to recover from the insurer of an insolvent entity. In Coetzee vs Attorneys' Insurance Indemnity Fund it was resolved that Section 156 gives the third party a direct right of action against the insurer.

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Issues relating to Section 156 have previously been dealt with. In Gypsum Industries Ltd v Standard General Insurance Co Ltd the court held that it is competent for a plaintiff to proceed directly against the insurer without first obtaining judgment against the insured. Section 156 provides the Insured with the cause of action, which can only come into being on the insolvency of the insured.

However, the section was not drafted by the legislature to confer any additional favour upon that creditor. Hence the third party's difficulty: any claim would have to be proved - not only the creditor's claim against the insured, but also that the insured would have succeeded against the insurer in its claim for indemnity- this was confirmed in Transnet v Mutual and Federal

The facts

What makes the appellant's argument interesting is that it put to the court that Section 156 essentially interrupted prescription (ie Section 156 creates a form of statutory cession which has the effect of interrupting prescription).

The appellant, in this instance the third party, had to bring itself within the purview of Section 156 by proving that the:

  • the insolvent insured had incurred liability to the appellant;
  • the insurer (in this case the respondent) was contractually obliged to indemnify the insured in respect of that liability; and
  • the respondent had been obliged to prove that amount.

The appellant argued that there was no new cause of action which arose as a result of the insured being sequestrated, but rather that the sequestration interrupted prescription. The court found that on the appellant's own version, the claim fully accrued in terms of Section 12(3) of the Prescription Act, No. 68 of 1969 (Prescription Act). To put it differently, the appellant had become fully aware of the order of insolvency and therefore of its rights against the respondent in terms of Section 156.

The above notwithstanding, it was the appellant's argument that the running of prescription was continuously interrupted by Santam's express or tacit acknowledgement of liability until it repudiated the insured's claim.

The court dealt with Section 14 of the Prescription Act which notes that: "The running of prescription shall be interrupted by an express or tacit acknowledgment of liability by the debtor - If the running of prescription is interrupted as contemplated in subsection (1), prescription shall commence to run afresh from the date on which the interruption takes place…."

It is evident from the wording of this section that the legislature envisaged an acknowledgement of liability for the debt made by the debtor to the creditor, or his or her agent. Section 156 does not envisage an insurer's liability to the insured if such liability be proven by a third party. To the contrary, the respondent and the insured both denied liability on the part of the insured. Whether the claim was later repudiated by the respondent is irrelevant, as confirmed by the SCA.

The court noted that Section 156 does not transfer to, or vest the existing rights of, an insolvent estate in a third party. Therefore acknowledgment of liability by the insurer to its insured does not avail the third party. As a result there was no interruption of prescription in terms of the Prescription Act and the appellant's appeal was dismissed on the grounds that the claim had prescribed.

Conclusion

This should reassure insurers as claims in terms of Section 156 remain difficult to prove on the part of third parties. This is not simply because the third party must prove its claim against the insured and against the insurer, but also because no acknowledgment of debt to the insured or liability to the insured on the part of the insurer will assist the third party.

The third party has two courses of action, both of which must be proved and both of which may prescribe. Where a third party has the right to claim against the insurer for the amount owed by the insured under Section 156 of the Insolvency Act, prescription will begin to run from the date that the order declaring the insured insolvent is handed down.

By Luke Choate, associate, Webber Wentzel

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