Recently, the Supreme Court of Appeal (‘the SCA’) was tasked with evaluating whether the benefits of a long-term life insurance policy are shielded from creditors following the sequestration of a joint estate.
The dispute in Prinsloo v Majiedt centred around a life insurance policy taken out by a husband, Louis Prinsloo, in favour of his wife, Nelly, during the subsistence of their marriage in community of property. After Louis’ death, Mrs Prinsloo received R10 million in policy benefits, which she immediately transferred to a close corporation (‘the CC’). The parties’ son, Eugene, the sole member of the CC, transferred the funds into his personal bank account.
Two years after Louis’ death, the joint estate was sequestrated, and the trustees of the insolvent estate sought to recover the funds from Eugene. The trustees contended that the transfer of the R10 million in benefits constituted a ‘disposition’ or ‘impeachable transaction’ under the Insolvency Act. In the alternative, they argued that the transfer amounted to unjustified enrichment.
The key legal issue for determination was whether section 63 of the Long-term Insurance Act (‘the Act’) shields such policy benefits from being claimed by creditors. Subject to specific exceptions, section 63 of the Act stipulates that long-term insurance policy benefits are exempted from attachment or execution of the debts of the policyholder – or their estate upon their death – as long as the debts devolved upon a spouse, child, parent, or stepchild. Notably, this protective mechanism is subject to a five-year period and won’t operate if the policyholder took out the policy with the intention of defrauding creditors.
While the High Court held that the protection offered by section 63 of the Act did not apply to a surviving spouse as a third-party beneficiary, the SCA criticised the ‘fatal non-joinder of Mrs Prinsloo’ during proceedings. In an assessment of the evidence, the SCA firmly ruled that she should have been joined to the High Court proceedings as she had a direct material and substantial interest in the outcome of the matter. The SCA further rejected the trustees’ allegation that Mrs Prinsloo had no interest in the case as she divested herself of the proceeds by transferring the funds to her son’s CC.
Finding that Mrs Prinsloo plainly has locus standi, the SCA further noted that, under section 63 of the Act, she was entitled to assert that the proceeds were protected and thus not subject to attachment by the trustees, provided the necessary proof was submitted.
The SCA accordingly referred the case back to the High Court for Mrs Prinsloo’s joinder and, crucially, final determination on whether the policy benefits qualified for protection under section 63 of the Act. Given that the judgment leaves open questions concerning the protection of life insurance benefits in the context of an insolvent joint estate, the High Court ruling will be of great interest to creditors, policyholders, and insolvency practitioners.
Need expert legal support with a similar matter? STBB’s insolvency law specialists have the skills and experience to assist. For trusted legal support, contact our experts at litigation@stbb.co.za.
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