South Africa: Deneys Reitz Inc Comments On Commercial Crime, Creditors And Costs

Last Updated: 12 August 2007
Article by Andre Vos

If ever you have a claim against a debtor whose assets become the subject of an asset forfeiture order, there may still be hope for recovering what is owed to you.

Businesses are often the victims of commercial crime. The Prevention of Organised Crime Act, 1998 (POCA) was enacted mainly to combat organised crime, but it also applies to individual wrongdoing. POCA regulates asset forfeiture orders. Where a person has been charged or is about to be charged with a criminal offence, the court may grant a restraint order to preserve assets pending the criminal prosecution of the person concerned. Upon conviction, the court may grant a confiscation order, which permanently divests the defendant of the assets concerned, where the court finds that the defendant derived a benefit form the offence.

A criminal case may take years to finalise. One of the counter-balances in POCA is a section which provides that the High Court may make allowance in the restraint order for the payment of the defendant’s reasonable living and legal expenses from the restrained assets. The defendant must be able to live reasonably and pay for a defence. During the interim period, the assets are controlled by a court-appointed curator. However, the court has to be satisfied that the defendant has made full disclosure of his or her assets and cannot meet such expenses from unrestrained property.

There are three competing rights at stake, namely the right of the State to preserve the assets pending potential confiscation to divest the defendant of the proceeds of unlawful activities, the right of the defendant to living and legal expenses, and the right of creditors of the defendant to be paid.

For as long as a restraint order remains in place, the order would override any other court order, such as a money judgment in favour of a creditor. But the payment of living and legal expenses for any prolonged period could well drain the restrained assets thereby frustrating the claims of creditors.

How these competing interests are to be balanced was the subject of the Constitutional Court’s decision in the matter Fraser v ABSA Bank Limited. Mr Fraser, a businessman, was charged with offences relating to racketeering and money laundering. The Asset Forfeiture Unit was granted a restraint order over his assets. ABSA obtained default judgment against Fraser on a debt he owed to the bank. The debt was not secured and the bank enjoyed no preferent claim against the defendant. Fraser applied to court for the payment of his reasonable living and legal expenses.

ABSA sought to intervene in Fraser’s application because it believed that its interests would be negated, given that an expensive legal battle would drain the assets and frustrate its claim. The court upheld the right of a creditor, in appropriate circumstances, to intervene in a defendant’s expenses application but found that a concurrent creditor’s claim does not automatically take priority over a defendant’s legal expenses.

A defendant should not benefit unduly from the terms of the restraint order. At the same time, the defendant should not be prejudiced as far as living and legal expenses are concerned.

On the facts of the case, the court held that Fraser had not made full disclosure of his assets. He sought to hide assets from his creditors. There was no evidence that he experienced any delay in the prosecution of the criminal case as a consequence of the bank’s attempt to intervene, as was suggested by him in argument.

The Court concluded that Fraser had sought to benefit from the restraint order, as it effectively granted a stay of execution against his creditors but at the same time provided him with a means to pay legal and living expenses. It referred the matter back to the High Court to re-exercise its discretion in the light of the principles of its judgment.

A creditor with a secured claim (e.g. a mortgage bond) may well be in a different position. Such a creditor may have grounds to excise the secured property from the ambit of the restraint order by applying to have the order appropriately varied.

The judgment dealt with another important aspect, namely the right to a fair criminal trial. These rights include the right for the trial to commence and conclude without unreasonable delay and the right to legal representation. They are relevant to the exercise of the court’s discretion. The role of the defendant in causing any delay is also relevant – he or she should not be able to complain about delays if such delays are brought about by his or her own conduct. The right is not unbridled – if a defendant cannot afford a particular legal representative of choice due to financial constraints, one will be assigned at State expense.

Should there be a conviction, the court will enquire into possible confiscation of the defendant’s assets. POCA provides for a creditor at that stage to stake its claim against the restrained assets – the claims of ordinary creditors rank ahead of confiscation orders. The aim of POCA is to divest criminals of the proceeds of crime, not for the State to profit from asset forfeiture. Where there is a discharge, the restraint order falls away and creditors are free to exercise their normal execution rights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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