The High Court will have to reconsider a judgment which held that the life insurance benefits received by a surviving spouse were not protected from the claims of creditors of an insolvent estate. This follows an order by the Supreme Court of Appeal (SCA) last month.
“The SCA’s judgment highlights the complexities surrounding the protection of life insurance benefits in the context of insolvency, especially where the beneficiary is a spouse of an insolvent estate,” commented Carmen Schoon, an executive in ENS’s dispute resolution, insolvency, business rescue, and debt recovery practice.
She said it will be up to the High Court to determine the interplay between the Insolvency Act and the Long-term Insurance Act (LTIA).
Background to the sequestration
Louis and Nelly Prinsloo were married in community of property. In 2011, Louis Prinsloo took out a life insurance policy with Old Mutual, initially naming himself as the beneficiary. In 2013, he updated the policy, designating his wife as the recipient of the death benefits.
Upon Louis’s death in 2018, Old Mutual paid R10 million to Nelly Prinsloo (Mrs Prinsloo), who immediately transferred the funds to a close corporation of which their son, Eugene Prinsloo (Mr Prinsloo), is the sole member. Mr Prinsloo transferred the funds to his personal bank account.
In September 2020, the joint estate was provisionally sequestrated, with a final sequestration order granted the following month. In November 2020, Donovan Theodore Majiedt and Reinette Steynburg (the respondents) were appointed as the provisional trustees of the insolvent joint estate.
The trustees instituted proceedings in the Free State Division of the High Court against Mr Prinsloo, seeking to recover the R10m.
The basis of the summons was that the transfer of funds constituted a disposition by Mrs Prinsloo, alternatively, of the joint estate, to Mr Prinsloo that ought to be set aside as impeachable under the Insolvency Act or the common law, or as part of a larger loan, or on the basis of enrichment.
Section 63 of the LTIA
Mr Prinsloo pleaded, among other defences, that the policy benefits are protected in terms of section 63 of the LTIA.
Sub-section (1) states that benefits under specific long-term policies, in force for at least three years, are protected from attachment, execution, or inclusion in an insolvent estate during the policyholder’s lifetime. Upon the policyholder’s death, these benefits are not available to pay the debts of the policyholder’s estate (except for debts secured by the policy), provided the benefits devolve upon a spouse, child, stepchild, or parent.
Sub-section (2) limits this protection to a period of five years from the date the benefits were provided, and sub-section (4) states this protection does not apply if is shown the policy was taken out with the intention to defraud creditors.
High Court’s decision
In September 2022, the High Court concluded that, where section 63 applies, policy benefits are protected only against the debts of the policyholder upon his or her death. In this case, Mrs Prinsloo was nominated as the beneficiary and received the policy benefits directly from the insurer, bypassing the deceased’s estate. The court rejected the argument that this scenario triggered the statutory protection.
On appeal to the SCA, Mr Prinsloo abandoned his earlier contention that section 63 should be interpreted to apply not only to the policyholder or insured life but also to a beneficiary. Instead, he narrowed his focus to the effect of a marriage in community of property on the scope and application of section 63.
Mr Prinsloo argued the proceeds of the insurance policy are protected from the creditors of the insolvent joint estate, which encompasses the debts of both the deceased and his surviving spouse. Although the parties presented submissions on this issue before the High Court, the court did not rule on it, stating it was not required to address this aspect of the case.
Whether Mrs Prinsloo should have been joined
During the course of preparing for the SCA appeal, the question arose whether Mrs Prinsloo should have been joined as a party to the litigation.
Mr Prinsloo conceded that his mother should have been joined, but the trustees disagreed. They contended that Mrs Prinsloo lacked a direct and substantial interest in the litigation, because she had divested herself of the proceeds, and any interpretation of section 63 of the LTIA would not result in the proceeds returning to her after the joint estate’s termination.
The SCA rejected the trustees’ position, finding that Mrs Prinsloo’s joinder was essential. The unanimous judgment made the following points:
- Mrs Prinsloo has locus standi to address the separated issue: whether or not the benefit she received is protected in terms of section 63. The court emphasised her direct interest, noting, “It is difficult to envisage a situation in which a person will have a more direct and substantial interest than where a declaration is sought from a court that she, being named, did not enjoy protection in respect of certain benefits she had received.”
- Under section 63(3)(b), the person claiming protection must prove it on a balance of probabilities. The court said Mrs Prinsloo could argue that the proceeds were protected in her hands, potentially offering an interpretation of section 63 that Mr Prinsloo did not pursue, justifying her participation.
- The trustees’ claim that Mrs Prinsloo has no interest because she divested herself of the proceeds was circuitous. The court explained that whether she was entitled to divest herself – that is, whether the benefits were protected – is the core issue, making her input necessary.
- The separated issue affects not only the current action against Mr Prinsloo but also any future claim by Mrs Prinsloo. If the proceeds are recovered from Mr Prinsloo, they will be listed as an asset in the insolvent joint estate. Without her joinder, a later court might reach a different conclusion on the protection issue, leading to conflicting judgments, multiple actions, and wasted resources.
The SCA concluded that the High Court proceedings were fundamentally flawed because Mrs Prinsloo was not joined as a party.
It directed Mr Prinsloo to apply for his mother’s joinder within 30 days of the order, unless she waived her right to participate and agreed to abide by the High Court’s decision.
