A “significant” court case has brought to light serious abuses of the administration order system, which is one way that debt-ridden consumers can address their debt problems without having to go under sequestration.
Debtors who opted to go under administration between 11 and 15 years ago are still in debt – some having acquired more debt in the process. Administrators have sold debtors’ “files” as if they were the assets of a company, relinquishing their responsibilities and placing people not appointed by a court in charge of the debtors’ estates. And debtors have been charged fees that the person collecting them was not entitled to.
This dismal reality was revealed in a judgment by a magistrate in Atlantis, an economically depressed town 50 kilometres outside Cape Town. The judgment, which dismissed an application by attorney Norman Wolf Shargey to be appointed as an administrator, was handed down by Magistrate Matthew Albertus last year. Shargey took the judgment on appeal, but last month, two weeks before the appeal was due to be heard, it was withdrawn.
The judgment is “significant” to magistrates countrywide, a magistrate who asked not to be named, says. “There’s abuse in the system, and this judgment is useful, because it helps to identify some of the abuses,” he says.
The abuses include:
* The sale of debtor’s files (effectively transferring the management of their estates to another party) without their knowledge or consent;
* Overcharging of prescribed fees; and
* Acquisition of more debt – some of which debtors claim to have no knowledge.
The aim of an administration order (see “What is an administration order?”, below) is “to assist a debtor over a period of financial embarrassment without the need for sequestration”, Albertus says in his judgment, quoting from a High Court judgment.
The latter judgment states that “it was never the intention of the legislature that a debtor should be bound up in an administration order indefinitely, where there is no reasonable prospect of such order being discharged within a reasonable time … It was intended to provide a debtor with a relatively short moratorium to assist in the payment of his or her debts in full and to ward off legal action and execution proceedings during such period.”
One debtor whose file was sold to Shargey had debts of R38 000 when her administration order was granted in January 1999. None of her original creditors appears on the latest distribution account, which suggests that she must have paid off her original debt. However, over the years, more creditors have appeared on her file.
The last debt added was for R18 000, in 2012, 13 years after the administration order was issued. The woman currently owes R21 500. Among her debts is a hospital account of R24.42 and one for arrear TV licence fees. Amounts of R2.04, R1.11, 75c and 68c are being distributed to her creditors each quarter. At this rate, she will never pay off her debt.
Another debtor went under administration in 2003, when he owed R2 388. Now, 12 years later, he owes R5 000, after more claims were added.
In terms of the National Credit Act, it is unlawful for a credit provider to give credit to a consumer who is under administration, without the administrator’s consent.
The case before Albertus was an application by Shargey, of Goodwood in Cape Town, asking the court to relieve administrators Clifford Marmetschke, Nicolaas Smit and Melvyn Weiner of their appointment as administrators and to appoint him instead. Shargey made numerous applications to the Atlantis court, affecting 23 consumers with administration orders. Albertus turned down all the applications in one judgment.
The court heard that Marmetschke had died, so it was not necessary to terminate his appointment; it had fallen away. In the case of Smit and Weiner, the court decided that they should be relieved of their appointments as administrators because they had abandoned their duties.
The court established that Mar-metschke and Smit had a company called M&S Financial Administrators. It changed its name to Amalgamated Debt Management Services, which later became ADMS Business Solutions. This was sold to Shargey.
The magistrate found that, after the death of Marmetschke, the involvement of Smit, Weiner, of Weiner & Associates, Amalgamated Debt Management Solutions, ADMS Business Solutions and Shargey’s law firm in the debtors’ estates was unlawful, because they should not have carried on the duties of an administrator without being appointed by the court.
Albertus dismissed Shargey’s application to be appointed administrator for the following reasons:
* The distribution accounts filed with the court show that Shargey had collected legal fees and other expenses as if he were the court-appointed administrator. The collecting of these fees was irregular. He also claimed costs that he did not have taxed by the taxing master, which is irregular.
* As an attorney, Shargey must have known that he could act as an administrator only if he was appointed by a court. Weiner (an attorney, too) should also have known the debtors’ files could not be transferred or sold like a company’s assets.
* An administrator is not appointed in place of another merely because he applies to replace the other administrator, or because the previous administrator has consented to his application, or because no one has opposed his application, and definitely not because he has bought the files of another administrator, the judgment said.
* The debtors were not given the opportunity to be heard. There’s no indication that they were even notified that someone else was applying to administrate their estates. The debtor has an interest in who is appointed to manage his or her estate, the judgment said.
* The purpose of an administration order is to provide a short-term moratorium to help the debtor, but the distribution accounts show that some consumers have been paying for 11, 13, and 15 years without paying off their debts. In some cases, they were granted more debt. “Surely this is not what the legislature intended, because it is not to the benefit of the debtors or creditors,” the judgment said.
There was no indication that the debtors’ financial affairs had improved or that they were in a position to conduct their own affairs. The magistrate said he would have expected evidence of the debtors’ current situations, to evaluate their position and ascertain whether or it was necessary for them to stay under administration.
These cases indicated that there was no prospect of the debts being discharged in a reasonable time, the judgment said.
Albertus ruled that the clerk of the court must inform, by registered post, all the debtors affected by his judgment. The effect of the judgment is that the debtors have an administration order but no administrator. In other words, no one can lawfully collect their money and pay it over to their creditors.
Most people pay their administrator via an emoluments attachment order (EAO), a court order compelling your employer to deduct money from your salary.
The administration order and the EAO are legally in force until the administration order is rescinded or the debts have been paid in full. Once the administration order is rescinded, the rescission of the EAO follows.
You have to apply to the court to have an administration order set aside, usually with the help of a lawyer. You can do it yourself, in which case you will have to serve notice of the application (for the rescission order) on all interested parties. If there is no administrator, you need only notify all your creditors – via registered mail – that you are applying to have the order set aside.
Deborah Solomon, the founder of the DCI, an online portal for the debt counselling industry and a company that offers debt counselling services, says consumers under administration should enlist the help of someone who has the expertise to do a thorough audit of the administration order and the underlying debt.
CHECK YOUR ACCOUNT
If you have been under administration for more than five years and still haven’t paid off your debts, ask your administrator for a copy of your distribution account. This must show all the payments you’ve made, all charges by the administrator and all the payments that the administrator has made to your creditors. Among other things:
* Check that the amounts on your distribution account correspond with the amounts you pay your administrator monthly.
* Check for new credit. The administrator must give permission before new credit can be granted. According to Deborah Solomon, the founder of the debt counselling industry portal DCI, any new credit added while you are under administration is reckless. If you are eligible for more credit, you shouldn’t still be under administration, she says. It is also an offence to take on more debt while under administration.
* Ascertain what you are paying in legal fees.
If your administrator refuses to give you a copy of your distribution account, go to the magistrate’s court where the administration order was issued and ask the clerk of the court for a copy. Your administrator should file a distribution account with the clerk of the court every quarter. If this has been done, the clerk of the court will give you a copy free of charge.
If your administrator has not been filing distribution accounts regularly with the court, or if you find that the administrator has charged you excessive collection or legal fees, you can apply to the court for your administration order to be reviewed by the magistrate. If the magistrate finds irregularities, he or she may rescind the order. This would leave you without an administrator. You would then need to find a new one, or take charge of your debt.
If you are in position to manage your debt yourself, you can apply to the court to rescind the order and place you in control of your finances again.
WHAT IS AN ADMINISTRATION ORDER?
An administration order is a debt-relief mechanism governed by the Magistrates’ Courts Act (MCA), for people with debts of less than R50 000. It protects you from your creditors.
* A magistrate issues an administration order in response to your application to the court for an administrator to be appointed to manage your estate.
* The role of the administrator is to collect an affordable amount from you each month and distribute it to all of your creditors.
* The administrator must deposit all the money received from you (it might come via your employer) in a trust account. Administration is typically done by attorneys, although anyone can be appointed as an administrator if he or she can satisfy the court that there is sufficient security to protect you in the event that they vanish with your money. An administrator who is not an attorney must also have a trust account.
* An administration order stays in place you can afford to settle the total debt amount on the order, or until you are in a position to take control of your debts and pay them yourself, in which case you must apply to the court for the order to be set aside. When you’ve paid off all your debts, the administrator must notify your creditors and the court that issued the order. The order then falls away.
* The fact that you have an administration order is recorded on your credit report for five years, or until the order is set aside. The consequences of this are significant. In terms of the National Credit Act, credit providers may not lend you money or give you any form of credit while you are under administration, unless your administrator consents to it.
* While under administration, you will be liable to pay the administrator an initial fee as well as a fee of up to 12.5 percent (excluding VAT) of the money collected per quarter. The fees are prescribed by the MCA and cover the administrator’s remuneration and expenses and provide for legal fees.
* The administrator will typically collect money from you via an emoluments attachment order (EAO, also known as a “garnishee order”), which is also a court order. In terms of this order, your employer is compelled to deduct from your salary money that you owe to a creditor. In the case of a consumer under administration, the EAO is in favour of the administrator (and not a creditor).
* Each quarter, the administrator must file a distribution account with the magistrate’s court where the order was issued. This is subject to the “taxation of costs” (the quantification of legal costs) by the taxing master of the court.
ADMIN ORDERS vs DEBT COUNSELLING
There has been a significant decline in the number of people applying for administration orders since the advent of debt counselling, according to magistrates interviewed by Personal Finance.
Administration orders fall under the Magistrates’ Courts Act and have been in use for decades, whereas debt counselling is a relatively new debt-relief mechanism. It falls under the National Credit Act (NCA), which became fully effective in June 2007.
The National Credit Regulator (NCR) is not able to say how many people have administration orders, Lesiba Mashapa, the company secretary at the NCR, says. The regulator can state only how many consumers’ credit reports reflect that they have administration orders. This information is supplied by credit bureaus to the regulator every quarter. On average, 175 900 consumers had administration orders per quarter in 2013. This number dropped to an average of 163 000 consumers per quarter in 2014.
“Magistrates are reluctant to place people under administration because of the abuses,” one magistrate, who asked not to be named, said. “Some of my colleagues in Johannesburg won’t grant those orders.”
Not all magistrates scrutinise the administration order applications, so lawyers shop around for courts that grant them readily.
Administration orders have a place, “where you have ethical administrators”, magistrates say. But they concede that no one is regulating the administrators. The best you can do is to ensure that applications for administration comply fully with the Magistrates’ Courts Act.
Deborah Solomon, the founder of the DCI, a debt counselling industry portal and a company that offers debt counselling services, says that administration orders do not have a place since the advent of debt review.
She says the rights of consumers under administration are prejudiced, because an administrator has neither the duty nor the jurisdiction to interrogate the debt for reckless lending, prescription or the overcharging of interest and fees by the creditor. This, she says, is the responsibility of a debt counsellor, although not all debt counsellors do it.
“From what I’ve seen, administrators are grossly overcharging consumers, which makes administration more expensive than debt counselling. I know of a consumer who went under administration with debt of R20 000, which he paid. But when he retired, R60 000 of his pension payout was attached by the administrator.
“I’ve found administrators charging interest where credit providers haven’t claimed interest. They claim this money but don’t necessarily pay it over to the creditor. They also do ‘swop-outs’: they say to the creditor, ‘The debtor owes you R20 000; we’ll pay you R5 000 for the debt and you write it off.’ In other words, the administrator buys the debt and then charges the debtor interest,” Solomon says.
The “catalyst” for consumers to apply to go under administration is numerous emoluments attachment orders (EAOs), Solomon says. In other words, debtors go this route when they can’t cope with all of the EAOs issued against them. Going under administration has the effect of debt consolidation – you pay your administrator via a single EAO, and he or she distributes money to your creditors.