Subject index outline

Safari Thatching Lowveld CC v Misty Mountain Trading 2 (Pty) Ltd 2016 (3) SA 209 (GP) 
Business rescue — Moratorium on legal proceedings against company — Where business rescue proceedings instituted at time when legal proceedings against company already commenced — Leave to proceed with legal proceedings may be sought during those proceedings themselves — Substantive, separate application not required — Companies Act 71 of 2008, s 133(1)(b).
Where already commenced legal proceedings against a company have been suspended as a result of the institution of business rescue processes, leave to proceed, in terms of s 133(1)(b) of the Companies Act 71 of 2008, may competently be sought during such main proceedings themselves; a substantive, separate application is not required.

Ex parte Concato and similar matters [2016] 2 All SA 519 (WCC)

Voluntary surrender – Formulaic applications – Bona fides and advantage to creditors – Court held that provided that the process was conducted in accordance with the law, the interests of the general body of creditors were given due and proper consideration, and such application was dealt with by the practitioner on its merits, was bona fide, they should not be dismissed due to the manner in which the attorney dealt with them – In casu, it was found that insolvent retains the use of all his assets, and eventually reaches an arrangement with the trustee to purchase them back, and is immune from his existing creditors by virtue of the voluntary surrender order which has been granted.

In five applications for voluntary surrender, the applicants were represented by the same lawyers, and the format of the applications was strikingly similar. The court in which the applications were first called expressed scepticism about the merits of the application – and, in particular, the fact that in each instance it was contended that upon voluntary surrender a dividend of either 16 or 17 cents would accrue to creditors. That led to the attorney acting for the applicants filing a supplementary affidavit in an attempt to satisfy the court that his firm conducted a proper, lawful and ethical practice and that it relied in these applications on no documents which were inappropriate or which might mislead the court.

Held – It is open to any debtor to seek escape from financial difficulties via the route of voluntary surrender provided that he or she is able to make a proper and bona fide case in compliance with the provisions of the Insolvency Act 24 of 1936. In such applications, the need for full and frank disclosure and well-founded evidence is even more pronounced. A further factor relevant to voluntary surrender applications is the institution of machinery for debt relief in terms of the National Credit Act 34 of 2005.

Even after the filing of the supplementary affidavit, the present Court remained troubled by the formulaic and often superficial nature of the applications and the striking similarities between them, not only in their format and general allegations, but in the projected dividend which, as mentioned above, was invariably either 16 or 17 cents. The Court held that provided that the process was conducted in accordance with the law, the interests of the general body of creditors were given due and proper consideration, and such application was dealt with by the practitioner on its merits, was bona fide and was not being shoe-horned into some pre-determined formula designed only to achieve a favourable result, they should not be dismissed due to the manner in which the attorney dealt with them.

In friendly sequestrations and voluntary surrenders, the question of the accuracy and integrity of the valuation is of primary importance. Due to its concerns in that regard, the Court called for further information to be reported to ascertain whether the projected dividends would be achieved and whether such orders would be in the interests of creditors. The most conspicuous feature revealed by the report was that in the great majority of cases the arrangement eventually arrived at was that the insolvent bought back the assets in his surrendered estate, invariably by way of payments in instalments. The Court could not find that such arrangement was to the advantage of creditors. The insolvent retains the use of all his assets, and eventually reaches an arrangement with the trustee to purchase them back, and is immune from his existing creditors by virtue of the voluntary surrender order which has been granted.

Turning to consider each of the applications individually, the Court held that none of them were bona fide or that the orders of voluntary surrender would be to the advantage of creditors.

The applications were, accordingly, refused.

Ngwato v Van der Merwe NO (2014/28470) [2016] GJ (6 May 2016)

Claims-employees-starting date of suspension-section 38(1) of the Insolvency Act, 24 of 1936, as read with section 339 of the Companies Act 61 of 1973, means that the contracts of service of employees whose employer, which is a company, has been liquidated, are suspended with effect from the date of the granting of a provisional or final liquidation order (if no provisional order was granted) and not from the date of the presentment of the application for liquidation. The employees may proof claims for the period until the granting of the liquidation order.

Section 38(1) of the Insolvency Act 24 of 1936 provides as follows:

The contracts of service of employees whose employer has been sequestrated are suspended with effect from the granting of a sequestration order.

By virtue of the transitional provisions in item 9(1) of Schedule 5 of the Companies Act 71 of 2998, chapter 14 of the Companies Act 61 of 1973 continues to apply with respect to the winding-up and liquidation of companies, as if the 1973 Companies Act had not been repealed.

Section 339 of the 1973 Companies Act provides as follows:

In the winding-up of a company unable to pay its debts the provisions of the law relating to insolvency shall, in so far as they are applicable, be applied mutatis mutandis in respect of any matter not specially provided for by this Act.

The court was satisfied that the relevant sections in the Labour Relations Act 66 of 1995 - “LRA” (the court referred to sections 197B and 189(1)) ensured the protection of fair labour practices in terms of section 23(1) of the Constitution, which should not be limited unless the limitation was reasonable and justifiable in terms of section 36 of the Constitution. (Par [53])

Cilliers and others v Steenkamp and others [2016] JOL 34781 (WCC)

Liquidator-duty to insurance assets-no duty on the liquidator of a company to insure assets of a wholly owned subsidiary of the company-Macadamia Finance BK en 'n ander v De Wet en andere NNO 1993 (2) SA 743 (A) mentioned and distinguished

There is no duty on the liquidator of a company to insure assets of a wholly owned subsidiary of the company.

In Macadamia Finance BK en 'n ander v De Wet en andere NNO 1993 (2) SA 743 (A) the plaintiffs sued the defendants as liquidators of two companies in liquidation. They contended that they were liable for damage caused by fire to a plantation of macadamia nut trees on a farm belonging to the second company because they had negligently failed to insure the assets of the second company. The defendants were appointed as liquidators of the second company long after the fire. The court found that although there was in general a duty on a liquidator to insure the assets of a company, no such duty arose in respect of the assets of a company if the liquidator was not appointed as such for the company. The close relationship between two companies did not affect the legal distinction between a holding company and a wholly owned subsidiary. (Par [33])

Judge Cloete distinguished this case from Macedamia:”[35]  Moreover to the extent that the pleading in the present matter might seek to allege some form of de facto control by KCM over Bo-Karoo, the findings inMacadamia Finance are equally decisive. In any event no primary facts are alleged by the plaintiffs to support a conclusion of de facto control.”

The case was about exceptions. The plaintiffs were shareholders in a company (“KCM”) over which the first to third defendants were the duly appointed liquidators. In January 2014, the plaintiffs issued summons against the liquidators and the fourth to sixth defendants (the latter on the basis of vicarious liability for alleged acts or omissions on the part of the individual liquidators during the course and scope of their respective employment).

The third and sixth defendants excepted to the amended particulars of claim, contending that the claims advanced by the plaintiffs, as currently pleaded, failed to disclose a cause of action, alternatively were vague and embarrassing and that they were severely prejudiced as a result.

Held that a pleader is required to allege the primary facts upon which he relies as well as the conclusion sought to be drawn from those facts. A pleading will be defective if a conclusion is asserted without pleading the primary facts to support it. The particular facts that a party must plead in order to disclose the cause of action relied upon, pertain not to matters of procedure but to substantive law, given that they must form the foundation for the legal conclusion which in the ordinary course, would support the party’s right to judgment. If that is not done, the pleading will be excipiable for failing to disclose a cause of action.

An exception on the ground that a pleading is vague and embarrassing is aimed at the formulation of the cause of action rather than its legal validity per se, but this type of exception can only be taken if the vagueness goes to the cause of action itself, and will only be allowed if the excipient will be seriously prejudiced as a result.

The grounds of the exception in this case related to the assertion by the plaintiffs of the existence of a duty on the liquidators of KCM to take control of its wholly owned subsidiary; the absence of the assertion of any such duty as pleaded in the third claim (an unspecified duty of care is instead relied upon); and the fact that the claims were all for pure economic loss but lacked averments necessary to sustain same.

The excipients contended that although the pleading alleged a failure to discharge the duty to take control of the subsidiary, it did not allege any primary facts from which a conclusion of the duty to take control could be drawn. The plaintiffs pinned their colours to the sole mast that the fiduciary duty imposed upon the liquidators includes the duty to take control of KCM’s wholly owned subsidiary. The excipients correctly submitted that not only had the plaintiffs failed to allege any primary facts to support that legal conclusion, but the conclusion itself was wrong in law. The Court held that the pleading failed to disclose a cause of action in respect of the first three claims, or alternatively was vague and embarrassing.

The excipients’ remaining attack was directed at the fact that all of the claims were for pure economic loss. That exception was also upheld. The plaintiffs were given leave to further amend their particulars of claim by a stipulated date.

Knoop NO and others v Birkenstock Properties (Pty) Ltd and others
[2015] JOL 33788 (FB)

Piercing the corporate veil- Conduct of insolvent – Alleged fronting by trust – Anti-dissipation order – Piercing corporate veil – The corporate veil will be pierced where there is proof of fraud, dishonesty or other improper conduct in the establishment or use of a company and the conducting of its affairs – A court will not lightly disregard a corporate entity’s separate legal personality and will endeavour to maintain the separate personality

An insolvent estate, in which the applicants were trustees, was finally sequestrated on 14 December 2004. In the performance of their duties the applicants conducted an investigation into the insolvent’s affairs and arrived at the conclusion that the insolvent was using a trust as well as the first respondent as a front for her own benefit even though her estate had been sequestrated without assets for the benefit of creditors. The applicants discovered that the first respondent was due to be paid a substantial amount of money, and that the insolvent had made demands for payment from the first respondent. Consequently, the applicants brought the present application for an anti-dissipation order.

Amongst several preliminary issues raised was the averment that the applicants had not made out a prima facie case in respect of the claim in the action which they intended to institute. If that submission was found to be correct, it would dispose of the matter.

Held that as the trust had been formed a considerable period of time before the insolvency, the insolvent could not legally lay any claim to the trust property. Therefore, in order to lay claim to the funds, the applicants were constrained to make out a prima facie case that the trust and the first respondent had misused or abused the principle of corporate personality and that the court had to lift the corporate veil so as to attribute liability to the person behind the corporate entity. The applicants also had to show that the property of the first respondent and the trust were in truth that of the insolvent.

The corporate veil will be pierced where there is proof of fraud, dishonesty or other improper conduct in the establishment or use of a company and the conducting of its affairs. A court will not lightly disregard a corporate entity’s separate legal personality and will endeavour to maintain the separate personality. When there is fraud, dishonesty or some other improper conduct, policy dictates that the court engage in a balancing exercise by considering the circumstances and facts of each case to determine whether in the appropriate case, it is proper to disregard the corporate personality and apportion liability where it belongs. It is irrelevant whether the corporate entity is a trust or a company. If it can be established on a balance of probabilities that the particular transactions complained of were the tainted fruits of fraud or other improper conduct, a court would, in appropriate circumstances, disregard the separate legal personality.

Piercing the veil is a drastic remedy, and therefore must be resorted to sparingly. Although the Court acknowledged that the insolvent treated assets of the first respondent and the trust in a manner which was suspicious and highly irregular, none of the actions complained of resulted in the property vesting in the applicants.

The application was accordingly dismissed.

Shanmugam v Peter NO and others [2016] JOL 36072 (KZD)

Liquidators-Close corporation – Liquidation of – Contract signed by liquidators – Requirement that liquidators act jointly

The first and second respondents were appointed as liquidators of a close corporation which owned certain immovable property. They decided to sell the property to the applicant and signed a written agreement of sale on 5 June 2012. The agreement was not signed by the third respondent, who was appointed as the third liquidator on 4 June 2012. On 2 July 2012, a firm of attorneys gave the applicant written notice that he was in breach of the agreement in that he had not made certain payments and on 16 August 2012, they notified him of the cancellation of the agreement.

The property was sold by public auction nearly three years later, with the successful bidders being the applicant’s sister and a third party, whose wife was the sole member of the close corporation in liquidation. That agreement was cancelled on 16 September 2015 due to a failure by the purchasers to comply with their obligations. On 3 November 2015, the property was again sold by public auction. During the confirmation period, a higher offer was accepted by the liquidators and the property was sold by private treaty. On 3 November 2015, the applicant instituted action, seeking an order for the transfer of the property to him, against a tender to perform all his obligations as purchaser in terms of the agreement of 5 June 2012. He then launched an application to interdict the transfer of the property pending the final determination of the action. A rule nisi together with an interim interdict was granted, and the matter came before the present court for confirmation of the rule.

Held that in terms of section 2(1) of the Alienation of Land Act 68 of 1981, no alienation of land shall be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority. Corporate entities, being unable to act other than through natural persons, cannot give written authority to their representatives, and therefore the written authority requirement does not apply when a functionary of a company signs a contract for the sale of land. In the present matter the agreement was not signed by a member of the close corporation, but by two of the three liquidators. In terms of section 282 of the Companies Act 61 of 1973 liquidators are required to act jointly in performing their functions. The third respondent was appointed as a joint liquidator the day before the other two signed the agreement. It was not disputed that he had not authorised them to do so. The agreement of 5 June 2012 was therefore invalid as the two liquidators who signed it could not bind the close corporation without the authority of the third liquidator.

In the premises, the applicant had not made out a prima facie case, with the result that the rule nisi was discharged with costs.

Griffiths v Janse Van Rensburg and another NNO 2016 (3) SA 389 (SCA)

Voidable dispositions — Voidable preference — What constitutes — Semble: Payment under condictio ob turpem vel iniustam causam could be disposition in ordinary course of business — Insolvency Act 24 of 1936, s 29(1).

Voidable dispositions — Voidable preference — Interest — Debt created when court sets aside disposition and declares right to recover property — Mora begins and mora interest runs from this date — Insolvency Act 24 of 1936, s 32(3).
The issue in this case was whether dispositions were 'ordinary' in the sense in s 29(1) of the Insolvency Act 24 of 1936.

The facts were that Griffiths loaned a trust R100 000 for three months, which at the end of the period the trust repaid along with a separate payment of R12 000 in interest (a rate of approximately 42 % per annum). Thereafter Griffiths again loaned R100 000, this time for two months, at the end of which he was repaid separately the R100 000 and R12 000 interest (an interest rate of about 74 % per annum).

The trust was later sequestrated, and its trustees in insolvency acted to set aside all four of the payments as 'dispositions' within the meaning of s 29(1).

It was agreed that each payment was a 'disposition'; that each was made in the period six months before the trust's sequestration; that after each payment the trust's liabilities exceeded its assets; and that each preferred Griffiths. It was also conceded that no preference was intended. In issue was whether the payments were dispositions within the ordinary course of business. 

The further agreed facts were that the trust's business was a pyramid scheme; that it contravened the Consumer Affairs (Unfair Business Practices) Act 71 of 1988 and the Banks Act 94 of 1990; and that each of the loan agreements was illegal and void.

It was also agreed that a bank employee had introduced Griffiths to the trust; that he had never met any of its representatives; that Griffiths received no documentation of the first loan and, only after applying 'duress', documentation of the second; that he struggled to obtain payment in both cases; that he had only vague knowledge of the trust's business, no knowledge of its illegality, and that he had 'decided to take a chance'.

The High Court held that none of the dispositions were in the ordinary course of business; set all four aside; and ordered Griffiths to make repayment. It also ordered Griffiths to pay interest on the amounts, running from the date of judgment.

It later granted leave to Griffiths to appeal, and to the trustees to cross-appeal.The trustees contended that the court ought to have ordered mora interest to run from the date of service of summons. (Paragraphs [10] and [32] at 394F and 400I – 401A.)

In the Supreme Court of Appeal, Griffiths was faced with the requirement for a disposition to be in the ordinary course of business, that it have a lawful basis. He contended that the repayment of the loans had such a basis — a right under the condictio ob turpem vel iniustam causam. (He conceded that there was no lawful basis for payment of the interest sums.)

Held, that, in principle, a payment under the condictio could be a disposition in the ordinary course of business. However, at the time, Griffiths was unaware that the agreements were void, and that he had a right under the condictio; and he had demanded payment, and the trust had made payment, on the basis of the void agreements. Accordingly the payments had not been in the ordinary course of business.

The question in the cross-appeal was when mora interest on the debt was to run from — from date of summons or judgment. Held, that the debt only arose on judgment, and consequently mora interest could only run on it from then.

Appeal and cross-appeal dismissed.

Petse JA agreed that the cross-appeal should be dismissed, but would have upheld the appeal. In his view the loans were valid and the dispositions in the ordinary course; or alternatively if the loan agreements were invalid, Griffiths had a right to repayment of the loan sums under the condictio. That Griffiths had demanded repayment in terms of the loan agreements did not debar his later reliance on the condictio.

Ex Parte Concato and similar cases 2016 (3) SA 549 (WCC)
Voluntary surrender — Application — Multiple applications brought on batch basis — Permissible, provided applications dealt with on merits, were bona fide, and not shoehorned into predetermined formula designed only to achieve a favourable result.

Voluntary surrender — Application — Requirement that surrender be to advantage of creditors — Strong likelihood that order of voluntary surrender would result in buy-back agreement under which insolvent would buy back assets at forced-sale value in instalments — Unlikely to be in best interests of body of creditors.

Voluntary surrender — Application — Requirement that surrender be brought in good faith — Where outcome of order of voluntary surrender predetermined — Lack of good faith.

The court in this matter was seized with five voluntary-surrender applications, all unopposed. In each case the respective applicant(s) were represented by the same counsel and firm of attorneys, the latter of which operated a specialised insolvency practice and often brought voluntary-surrender applications to court in large numbers. Having heard argument, the court expressed its concern as to the formulaic and superficial nature of the applications, the striking similarities in format and allegations, and the fact that in each case the projected dividend was either 16 or 17 cents to the rand. To allow it to properly consider whether the projected dividend would be achieved and whether the orders sought would be to the benefit of creditors, the court requested that the applicants' attorneys furnish particulars of the outcomes of similar applications in which it had been involved. The exercise was carried out, and the resulting report dealt with a total of 90 matters in which voluntary-surrender orders were made in the recent past, and revealed the following pertinent features, among others:

• In a large proportion (73%) of the matters, the projected dividend was either 16 or 17 cents in the rand.

• Of the cases where there was no fixed asset (79 out of 90), the vast majority (90%) concluded 'a buy-back' arrangement in terms of which the insolvent purchased back his or her assets at the forced-sale value. And further, in most of these cases, the purchase price was payable by way of instalments.

In the course of its judgment the court considered, in some detail, the principles and requirements applicable to voluntary surrenders, in particular, having regard to the risk of potential abuse in such applications, the need for full disclosure and the presence of good faith on the part of an applicant. Furthermore, the court addressed the particular problems that might arise where multiple applications were brought by a single firm of attorneys on a batch basis.

Held: In itself there was nothing wrong with a firm of attorneys bringing a number of voluntary-surrender applications to court in a batch. However, this was subject to the proviso that such applications were always dealt with by the practitioner on their merits (ie on the basis of reliable and, where appropriate, detailed information); were bona fide; and were not being shoehorned into a predetermined formula designed only to achieve a favourable result.