HIGH COURT OF SOUTH AFRICA (GAUTENG DIVISION, PRETORIA) REGINA CATHARINA OBERHOLZER. In an application for the voluntary surrender of her estate

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1 HIGH COURT OF SOUTH AFRICA (GAUTENG DIVISION, PRETORIA) Not reportable Of interest to other Judges CASE NO. 4251/2017 REGINA CATHARINA OBERHOLZER Applicant In an application for the voluntary surrender of her estate CASE NO /2017 ZACARIA MMUTLANYANA NCHABELENG GABAJE ANDRONICA NCHABELENG First Applicant Second Applicant In an application for the voluntary surrender of their estate CASE NO /2017 TIAAN VAN DER WALT VICKI VAN DER WALT First Applicant Second Applicant In an application for the voluntary surrender of their estate Heard: 4 May 2017 Order granted: 10 May 2017 Reasons: 9 June 2017 Coram: Makgoka, J

2 2 Summary: Voluntary surrender the impact of the National Credit Act on the applications for voluntary surrender where most debts are credit agreements - applicant should satisfy court why the mechanism of voluntary surrender should be preferred to that of debt review provided for in the National Credit Act. Voluntary surrender duty to disclose all relevant facts advantage to creditors what to consider calculation of dividends need for proper basis. J U D G M E N T MAKGOKA, J: [1] Various judgments in this Division and other Divisions of the High Court have sought to address the perennial problems often presented by applications for voluntary surrender of estates in terms of s 6 of the Insolvency Act 24 of See for example: Ex parte Steenkamp and Related Cases 1996 (3) SA 822 (W); Ex Parte Mattysen Et Uxor (First Rand Bank Ltd Intervening) 2003 (2) SA 308 (T); Ex Parte Kelly 2008 (4) SA 615 (T); Ex Parte Ford and two others 2009 (3) SA 376 (WCC); Ex Parte Bouwer and Similar Applications 2009 (6) SA 382 (GNP); Ex Parte Arntzen 2013 (1) SA 49 (KZP); Ex Parte Cloete (1097/2013) [2013] ZAFSHC 45 (5 April 2013); Ex Parte Erasmus and another 2015 (1) SA 540 (GP); Ex Parte Concato and Four others [2016] 2 All SA 519; 2016 (3) SA 549 (WCC); Ex Parte Fuls and others 2016 (6) SA 128 (GP). [2] This is by no means a closed list of such judgments. There are many others.

3 3 [3] In spite of these judgments, the problems associated with these applications stubbornly persist, either because legal practitioners ignore the injunctions in those judgments, or have found innovative ways to circumvent their effect. [4] This judgment is an addition to the judgments I have referred to. It concerns three applications for voluntary surrender of estates which came before me in the unopposed motion court for the week 2-5 May All three applications involve small estates, comprising either of second hand household goods or cash paid into an attorney s trust account. The debts of the estates largely arose from credit agreements. [5] In view of that, I raised the question whether the mechanism of debt review as provided for in the National Credit Act 34 of 2005 (the NCA) was not a more suitable alternative to that of voluntary surrender. Counsel who appeared in all three applications, made brief submissions, after which I reserved judgment. Thereafter, counsel for the applicants, Mr Loibner, graciously filed written submissions, for which I am grateful, urging me to accept the surrender of the applicants estates. [6] On 10 May 2017 I made orders refusing the surrender of the estates and dismissing each of the applications. I undertook to furnish reasons for those orders at a later stage. These are the reasons. [7] The three applicants are represented by the same firm of attorneys. The application of Van der Walt was on the roll on 2 May 2017 while those of Oberholzer and Nchabeleng were heard on 4 May Because of some similar features in them, I have decided on a composite judgment.

4 4 [8] The judgment is structured as follows: (a) An overview of each application; (b) Reasons for insolvency; (c) Purpose of the National Credit Act; (d) Debt review in terms of the National Credit Act and its suitability to the applications; (e) Judicial pronouncements on alternative remedies to sequestration; (f) Failure to disclose full information and lack of proper valuation of assets; (g) Advantage to creditors and the calculation of dividend. An overview of the applications Oberholzer [9] The applicant, Ms Oberholzer is a salaried employee. She states that she earns a net income of R , with her monthly obligations amounting to R Her total assets are said to be worth R , consisting of movable assets valued at R and a cash amount of R , which is held in the trust account of her attorney. Her liabilities are stated to amount to R , owed to eleven concurrent creditors, from whom all but one, she had borrowed money. The only creditor in respect of whom the debt is not a loan is said to be a plumber for services rendered. Nchabeleng [10] The applicants are married to each other in community of property. The founding affidavit has been deposed to by the husband, Mr. Nchabeleng, to

5 5 which the second applicant, Mrs Nchabeleng, has deposed a confirmatory affidavit. Mr Nchabeleng states that he is a pensioner and his wife, the second applicant, is a teacher. Mrs Nchabeleng earns a salary of R and their monthly expenses amount to R , leaving them with a monthly shortfall of R Their only asset, it is alleged, is an amount R held in the trust account of their attorney. They allegedly do not own any other assets and that the few household items in our possession [are] of no considerable financial value. Their liabilities amount to R comprising nine concurrent creditors. Like in the application of Oberholzer, all but one of those creditors, are for monies lent and advanced to the applicants. The only exception is in respect of services rendered by the applicants attorneys of record. Van der Walt [11] The parties are married to each other in community of property. The affidavit in support of application has been deposed to by the first applicant, Mr. van der Walt. Mrs Van der Walt, the second applicant, has deposed to a confirmatory affidavit. Mr Van der Walt states that he earns a net salary of R Mrs Van der Walt is unemployed. Their monthly expenses amount to R Their liabilities are stated to be R , while their total assets are R The applicants have ten concurrent creditors. Six of those creditors had lent money to the applicants. Two of the creditors are clothing retail stores from whom the applicants bought clothes on credit. One is a mobile communications service provider, apparently for a cellular telephone account. The last debtor is the applicants attorney of record, for services rendered. [12] The applicants assets consist of a motor vehicle (a 2000 Toyota Tazz), and various moveable assets, namely: lounge suite, dining room suite,

6 6 microwave, refrigerator, freezer, dishwasher, and a washing machine. The motor vehicle was valued for R These moveable assets were valued in the amount of R The reasons for insolvency [13] The reasons for insolvency are almost similar in each application. The following is said, respectively: Oberholzer My problems arose from the increase in living expenses in terms of which my salary could no longer cope. My income could also not keep up with unforeseen expenses which arose from time to time. I began taking loans to cover the shortfall, which placed me in a situation where my monthly obligations became higher and higher. I later took out loans simply to pay up other loans. I have considered all possible solutions but it appears that there is simply no solution to my problems. I have made an inquiry as to the possibility of being under debt review. I was advised that due to the fact that my income is not enough to make provision for the necessary repayments, such an application will not succeed. My estate is currently hopelessly insolvent without any realistic prospect that I would ever be able to pay my debts. (my translation from Afrikaans) Nchabeleng We could afford our monthly living expenses as well as repayments towards our creditors. Due to medical reasons I was forced to go on pension which left my wife as the sole provider of our family. Her salary is not nearly enough to pay for basic living expenses. Because of the above mentioned we were forced to make use of various personal loans in order to pay some of our creditors as well as our monthly living expenses. These loans only increased our financial obligations. Van der Walt I am a manager and my wife is unemployed. Previously we could afford our monthly expenses as well as repayments towards our creditors. I am the sole provider [for] the family but my salary is not enough to pay for basic living expenses and to make payments to

7 7 creditors. Despite my wife s best efforts she is unable to obtain any employment. Because of the above mentioned we were forced to make use of various personal loans in order to pay some of our creditors, as well as our monthly living expenses. These loans only increased our financial obligations. The purpose of National Credit Act [14] Section 3 of the NCA provides amongst others: The purposes of this Act are to promote and advance the social and economic welfare of South Africans, promote a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry, and to protect consumers, by-. (c) promoting responsibility in the credit market by- i) encouraging responsible borrowing, avoidance of over-indebtedness and fulfilment of financial obligations by consumers; and ii) discouraging reckless credit granting by credit providers and contractual default by consumers;.. (g) addressing and preventing over-indebtedness of consumers, and providing mechanisms for resolving over-indebtedness based on the principle of satisfaction by the consumer of all responsible financial obligations Debt review in terms of the NCA [15] Debt review is governed by s 86 of the NCA. Section 86(1) provides that a consumer may apply to a debt counsellor in the prescribed manner and form to have the consumer declared over-indebted, upon payment of a nominal application fee. In terms of s 86(6), a debt counsellor who has accepted an application in terms of the section must determine: (a) Whether the consumer appears to be over-indebted; and

8 8 (b) If the consumer seeks a declaration of reckless credit, whether any of the consumer s credit agreements appear to be reckless. [16] If, as a result of an assessment conducted in terms of s 86(6) a debt counsellor reasonably concludes, among others, that the consumer is overindebted, he or she may, in terms of s 86(7), issue a proposal recommending that a magistrate court make either of the following orders: (a) That one or more of the consumer s credit agreements be declared to be reckless credit; (b) The re-arrangement of one or more of the consumer s obligations by: (i) (ii) (iii) (iv) extending the period of the agreement and reducing the amount of each payment due accordingly; postponing during a specified period the dates on which payments are due under the agreement; extending the period of the agreement and postponing during a specified period the dates on which payments are due under the agreement; or recalculating the consumer s obligations because of contravention of certain parts of Chapters 5 and 6 of the NCA. [17] Section 79(1) provides that a consumer is considered over-indebted if the preponderance of available information at the time or determination is made indicates that the particular consumer is or will be unable to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party. When making the determination, regard is had to the consumer s:

9 9 (a) financial means, prospects and obligations, and (b) probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which he is a party, as indicated by the consumer s history of debt repayment. (ss 79(1)(a) and 79(1)(b)). [18] The reason for taking into account the factors mention in Section 79(1)(a) and (b) is that a consumer might have been perfectly able to afford the credit when he entered into the credit agreement but become over-indebted at a later stage, as a result of an intervening event e.g. retrenchment. Suitability of debt review to the applications [19] In all three applications, each of the applicants made a statement to the effect that they do not qualify for debt review because: they do not earn enough money to make arrangements with their creditors; they had not concluded credit agreements with all of their debtors, which automatically excludes them from the process of debt review. The argument here is that should the credit agreement debts be subject to debt review, the applicants would still be in a financially distressed position with regard to those debts which have not been restructured. In the applications of Van der Walt and Nchabeleng, a further reason is advanced, namely that debt review would not assist their financial position, but would instead worsen the situation. In a paragraph similar in both applications, the following is said: We do not qualify for debt counseling because of the fact that we do not earn enough money to make any arrangements with our creditors. We have not entered into credit agreements with all of our creditors which automatically excludes them from the debt counseling process resulting in the fact that [the] said process would not assist our financial woes. Additionally we would have to pay the debt counsellor a fee of R as well as

10 10 legal fees of R and a monthly after-care fee of R500 for 60 months which amounts to a total of R [20] The above statements do not bear scrutiny, and are not borne out by the facts. The mechanism of debt review was specifically designed for consumers who find themselves over-indebted, among others, because they do not earn enough to keep up with their obligations in the credit agreements. Second, as illustrated above, only a small portion of the applicants debts fall outside the definition of a credit agreement. For example, in all three applications, the noncredit agreements debts make up an insignificant percentages of the applicants total debts: R of R in Van der Walt; R1 820 of R in Oberholzer; and R of R in Nchabeleng. It is therefore clear that should the credit agreement debts be restructured, that would take care of the major portion of the debts in each case. [21] With regard to the costs of debt review as likely to worsen a debtor s financial woes, it is clear that the applicants in Van der Walt and Nchabeleng regurgitate the maximum amounts allowed in terms of the regulations to the NCA, without any regard to their individual estates. Therefore, these amounts are unreliable. It is only after proper assessment and a report by a debt counsellor having been made, that a determination can be made as to the feasibility and desirability of debt review. The mere ipse dixit of an applicant is not sufficient. [22] There is a cogent reason why debt review should be given serious consideration in these applications. In all three applications, the applicants allege that they took up loans to pay other loans. Except in the application of Nchabeleng, there is no suggestion that any of the applicants financial situation

11 11 had deteriorated because of an intervening event like retrenchment or major disability. They simply allege that due to the rising cost of living, they reached a point of inability to pay their debts, and were forced to take up more loans. This can only mean that when further credit was granted, the applicants were already over-indebted. That suggests that further credit was granted recklessly. This is another basis upon which the applicants should consider the favourable provisions of the NCA at their disposal, which could result in, among others, a declaration of some of their credit agreements reckless, and a concomitant order in terms of s 83(2)(a) setting aside of their rights and obligations under such agreements, or suspending them in terms s 83(2)(b). [23] From even a cursory reading of the applications, it is clear that in each case, only a perfunctory and mechanical consideration was given to the mechanism of debt review provided for in the NCA, and that the applicants were, obviously on advice of their attorney, single-minded about voluntary surrender of their respective estates. I demonstrate below why that is a wrong starting point. Judicial pronouncements on alternative remedies to sequestration [24] Even before the advent of the NCA, courts had expressed disquiet about the preference of sequestration. In Ex parte Van Den Berg 1950 (1) SA 816 (W) Ramsbottom J lamented the use of the machinery of sequestration to distribute a very small amount to creditors.after paying the costs of realisation and the cost of administration as using a sledgehammer to break a nut. He cautioned against the use of the expensive machinery of sequestration opposed to the ordinary litigation process. In Gardee v Dhanmanton Holdings 1984 (1) SA 1066, Didcott J criticised the use of the elaborate mechanism of sequestration and thus the increasing costs which sequestration imposes on an estate and, he

12 12 too, advocated a return to or preference for ordinary means of litigation and execution. See also Manacos v Davids 1976 (1) SA 19 (C). [25] The NCA brought with it wide-ranging mechanisms designed to address precisely the situation which many applicants for voluntary surrender of estates find themselves in. Our courts have recently expressed themselves in this regard. In Ex Parte Ford, in which three applications for voluntary surrender were brought, the court observed (at para 16) that an adequate explanation was sought by the court why, when much of the debt fell within the ambit of the Act and credit appeared to have been granted recklessly, the various applicants had failed to avail themselves of the remedies available under the NCA. [26] In Ex Parte Cloete, Daffue J was also emphatic on the need for debtors to utilize the protection afforded to them in terms of the NCA: [24] [M]y view is that all debtors, especially those with small and medium sized estates, should as a starting point embrace the protection of the NCA if the claims against them fall within the ambit of that Act. See also Ex parte Ford and two similar cases 2009 (3) SA 376 (WCC). Insolvency must always be the last resort. As a general rule it is not acceptable that debtors utilise the expensive machinery of the Insolvency Act to get rid of creditors to the disadvantage of the last-mentioned. [27] Dealing with a similar situation in this Division, Van Niekerk AJ in Ex Parte Fuls explained at para 6 that it is incumbent on an applicant in an application for voluntary surrender, where it is required to illustrate advantage to creditors, to make a full disclosure of at least the following: (a) whether the applicant availed himself/herself of the procedures afforded in the NCA for debt review prior to the application being proceeded with, and if not, full reasons for such failure;

13 13 (b) A comprehensive report of the debt counsellor involved, explaining what procedures were followed, and whether or not the applicant complied with any debt restructuring arrangements. [28] The learned acting Judge made the following apposite remarks at para 8, with which I respectfully agree: Where an application of this nature lacks averments in the respect as set out supra, it does not comply with the requirement that the applicant satisfy the court that it is in the interest of his/her creditors that the estate should be surrendered, and should accordingly be dismissed. The effect of Ex Parte Ford, Ex Parte Cloete and Ex Parte Fuls [29] The effect of the judgments in Ex Parte Ford, Ex Parte Cloete and Ex Parte Fuls is therefore the following: where much of the debt of the applicant fell within the ambit of the NCA, the applicant is obliged to set out comprehensively why they should not avail themselves of the remedies provided in ss of the NCA. Put differently, the applicant must satisfy the court why, when regard is had to the advantage to creditors, sequestration should be preferred over debt-review. [30] To comply with this requirement, it is inevitable that an applicant must first consult with a debt counsellor, whose report must be placed before the court, from which a determination can be made as to the feasibility of debt review. The court cannot be expected to rely on the mere say-so of an applicant, as the applicants in the present applications have sought to do. The applicants should be non-suited merely on their failure to comply with the clear injunction of the judgments referred to above.

14 14 Failure to disclose full information and inadequacy of valuation report [31] There are, in addition, other unsatisfactory aspects in each of the three applications. These are considered in the context of the requirement that an applicant for voluntary surrender must demonstrate that the surrender of his or her estate would result in a dividend to his or her creditors. [32] As stated earlier, the assets in the application of Oberholzer comprise a few second-hand household goods valued at R27 720, plus an amount of R paid into the applicant s trust account. With regard to this amount, there is no explanation in the affidavit as to its source, given the applicant s explanation that she has a monthly shortfall of R [33] Similarly, in the application of Nchabeleng, the applicants have paid a sum of money (R35 000) into their attorney s trust account. They mention that they had used all their savings to pay that amount in order to provide suitable dividend to their creditors. They had used the same source to pay the legal fees for this application. What the applicants do not disclose to the court though, are the following pertinent aspects: the period during which Mr Nchabeleng was medically boarded; whether on being placed on early pension, he received any lump sum, and if so, the amount thereof; and whether he receives any monthly pension income. [34] Also, what I find difficult to accept in the application of Nchabeleng is the allegation that the applicants do not own any moveable assets of value. In the absence of an expert report by a sworn valuator as to the value (or lack thereof) of the applicants moveable assets, their statement to the effect that those assets are of no value, remains a sterile and valiant assertion. The court

15 15 does not have to speculate about information which is within the knowledge of the applicants. [35] In the application of Van der Walt, the valuation report is sketchy and bald. Various amounts have been attributed to the applicants moveable assets as forced values. As mentioned earlier, the applicants assets comprise a motor vehicle and some household appliances. As to how the forced values of these assets have been arrived at, is unclear from the report. In the affidavit accompanying the valuation report, the valuator baldy states that the moveable assets are in a good condition. He then refers to one of the assets, the washing machine, and says: The washing machine is in a good and working condition. This washing machine has up to nine different programs with additional options as well. With the direct drive technology the motor is connected directly to the drum, without the use of the belt and pulley. This technology lets you to save electricity, reduce the noise and vibration but enhances washing performance and durability. After taking all of the above-mentioned into consideration we have this washing machine for R3000 forced value. [36] In respect of the motor vehicle, the valuator makes the observations that: the material upholstery has various stains; the tyres and the windscreen [are] in good condition; and the vehicle s body has no visible scratches or dents. On these observations, the valuator concludes that the vehicle s trade value is R and its retail value is R , and after taking all of this into consideration the value of the vehicle is R forced value. [37] From the above, two aspects emerge. First, apart from the washing machine and the motor vehicle, the valuator has not provided any details about the other moveable assets, and the basis for the amounts attributed to them as

16 16 forced values in the valuation report. Second, the details provided in respect of the motor vehicle are woefully inadequate. He provides no valuation method at all, for example comparable sales. He does not mention the mileage on the vehicle, nor does he mention the service record of the vehicle. Both these are important considerations when determining the value of a motor vehicle. Lack of information in this regard ineluctably casts doubt whether the valuator physically inspected the vehicle. In sum, the valuation report simply falls short of the necessary information. A useful comment of what should preferably be contained in a valuation report of a motor vehicle was made by Daffue J in Ex Parte Cloete. There, commenting on a similarly sketchy valuation report, the learned Judge made the following observations: [29] The valuation of Mr Kotze relied upon is really an exercise in futility. [T]here is no indication that he considered the valuations or sales of comparable vehicles and in particular, there is no indication that he has considered the authoritative booklet used by the motor industry to establish the trade-in and retail prices of vehicles. I would have expected him to take pictures of the vehicle and to show on his valuation report the condition of the tyres, the interior, the exterior and whether or not the vehicle was fitted with extras such as radio and air-conditioning. There is no evidence that he established, for example by studying the registration papers of the vehicle, that it was indeed a 2008 model. [38] Like Daffue J, I conclude that the valuator in the present case has failed to provide a proper factual foundation and cogent reasons for his conclusions in clear and logical terms. (para 29 of Ex Parte Cloete). [39] On the exposition of the facts, it is plain that the applicants in Oberholzer and Nchabeleng have failed to take the court into their confidence as regards their financial affairs, as well as other relevant information. Our courts have emphasised that in applications for voluntary surrender, full and frank disclosure and well founded evidence was necessary. Failure to do so is fatal to

17 17 the application. See for example, Ex Parte Bouwer para 7; Ex Parte Arntzen para 5; Ex Parte Ford para 12. Advantage to creditors and calculation of dividend [40] Section 6(1) of the Insolvency Act decrees that the court must be satisfied that it will be to the advantage of creditors of the debtor if his or her estate is sequestrated before it can accept the surrender of a debtor s estate. The more onerous test is set for voluntary surrenders than for compulsory sequestration because the debtor himself or herself should have all essential information available and be in a position to make full disclosure to the court. See Amod v Khan 1947(2) SA 432 (N). [41] In order to demonstrate an advantage to creditors, applicants make certain calculations. In this Division, a dividend of 20 cents in a rand is the minimum benefit that would have to be established before an application for surrender of an estate will be accepted. See Ex Parte Ogulanja [2011] JOL (GNP) para 9; Smit v Absa Bank Ltd; Smit v Absa Bank Ltd (24086/10; 24088/10) [2011] ZAGPPHC 208 (8 November 2011) para 3. [42] In the application of Oberholzer, no specific provision has been made separately for each of the administrative costs such as advertising, furnishing of security, and notices. Instead, provision has been made for R under an umbrella taxed legal costs and expenses. On these figures, a dividend of 20 cents in a rand is projected. One thing is apparent here uncertainty about any of the amounts. The amounts projected need to be stated expressly for each item, for the obvious reason that those amounts are crucial for the calculation of a dividend. With regard to the legal costs, it must be mentioned that there are two firms of attorneys involved in the application in Vanderbiljpark and

18 18 Pretoria. The amount of legal fees, apart from being uncertain (since it is subject to determination by the taxing master) is also unrealistic for two firms of attorneys. [43] In the application of Nchabeleng the projected dividend is 22 cents in a rand. However, no provision has been made for legal fees, and other costs in respect of advertisements, notices and postage. There is no explanation why these have not been provided for, but an irresistible suspicion is that the attorney who drafted the papers realized that once these items are factored in, it would be plain that no dividend would accrue to creditors. [44] As demonstrated in Ex Parte Kelly, what often happens is that after the voluntary sequestration had been accepted, the attorneys fees would be submitted for taxation, which, more often than not, would result in amounts much higher than those stated in the application for purposes of calculating a dividend. Therefore, the taxed costs might, and are likely to, exceed the estimated amount, which would obviously affect the calculation of the dividend downwards, resulting in no dividend at all to creditors. Instead, those creditors who lodge their claims against the estate will in all likelihood, be expected to make a contribution. [45] This practice (of relying on an estimate of costs to be taxed in future) was deprecated by this court in Ex Parte Kelly, and in Ex Parte Ogunlaja Bertelsmann J, relying on Ex Parte Kelly, said: [42] By making provision for a later taxation, the attorney introduces an element of uncertainty into the process of calculating the advantage to creditors. Empirical studies have shown that bills of costs are presented for taxation that reflect a multiple of the amount that was provided for in the application under oath, and that was factored into the calculation of the existence of an advantage to creditors. This represents another abuse of the process of

19 19 voluntary surrenders and unopposed sequestration applications. Attorneys who prepare applications of this nature are bound by the estimate presented in the papers as a realistic expectation of the costs involved in the process, subject of course to the court s power to limit the legal representative s costs to a lower figure in order to ensure a true advantage to creditors. Summary and conclusion [46] To sum up. The applicants have all failed to adequately explain their preference to voluntary surrender over the elaborate and sophisticated mechanism of debt review provided in the NCA. The applicants in Oberholzer and Nchabeleng have failed to fully place relevant facts before the court in respect of their income. In the application of Van Der Walt, the value of the applicants assets is based on a dubious and totally inadequate valuation report. In all the circumstances, I am drawn to the conclusion that the monetary advantage to creditors in any of the applications is non-existent. For these reasons the applications were dismissed. TM Makgoka Judge of the High Court APPEARANCES: For the Applicants in all three applications: Instructed by: M. Loibner Herman Esterhuizen Smalman Attorneys, Pretoria

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