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The proceeds of an insurance life policy benefitting an insolvent belong to their trustee

13 December 2021 Donald Dinnie, Norton Rose Fulbright
Donald Dinnie, Norton Rose Fulbright

Donald Dinnie, Norton Rose Fulbright

An unrehabilitated insolvent, who is a nominated beneficiary in terms of a life insurance policy, is not entitled to the proceeds of the policy to the exclusion of the trustees of their insolvent estate.

The claimant was married in community of property to the deceased, his wife. A contract of insurance was concluded with the insurer, in terms of which their lives were insured and the survivor appointed beneficiary of the proceeds payable upon the death of the first-dying.

Prior to the claimant’s wife’s death, the joint estate was provisionally sequestrated by order of court. They were married in community of property.

Shortly after his wife’s death the claimant accepted the benefits and sought payment of the proceeds of the insurance policy to him.  The insurer informed the claimant that the proceeds would be paid over to the trustees of the insolvent joint estate.

The claimant argued that as the nominated beneficiary in terms of the insurance policy, the proceeds were due and payable to him exclusively because his wife’s death had terminated the insolvent joint estate.

The question was whether the claimant’s wife’s death altered the ordinary consequences of insolvency and modified the application of the Insolvency Act to allow an insolvent to receive and own property that is beyond the reach of the trustees of his insolvent estate.

Pursuant to the sequestration of the joint estate, the claimant and the deceased both became insolvent debtors for the purposes of the Insolvency Act.  The effect of that was that all property acquired by the claimant as “the insolvent” before the sequestration as well as property acquired or that may have accrued to him during the sequestration including the proceeds of the contract of insurance payable to the claimant after his wife, vested in the trustees to be used to meet the claims of creditors.

On the claimant’s acceptance of the benefit the proceeds become an asset in his hands as an insolvent debtor which proceeds cannot belong to a separate estate of the claimant where such the separate estate is not legally recognised.

The court confirmed that the trustees were entitled to the process of the policy.

Malcolm Wentzel v Discovery Life Limited and Others [2020] ZASCA 121

First published by: Financial Institutions Legal Snapshot

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