Subject index outline

Eravin Construction CC v Bekker NO (20736/2014) [2016] ZASCA 30 (23 March 2016)

Business rescue-Disposition in terms of s 341(2) of the Companies Act 61 of 1973- recoverable by creditor or whether enforcement precluded by s 154(2) of the Companies Act 71 of 2008 – whether pre-business rescue debt – meaning of ‘debt owed’. 

The Supreme Court of Appeal (SCA) handed down judgment concerning the recoverability of a payment made by a close corporation after the effective date of its winding-up – a void disposition – to a company that was later placed under business rescue. An application for the winding-up of Ditona Construction (Pty) Ltd (Ditona) was brought in the North West Division of the High Court, Mahikeng on 20 October 2010, being the effective date of the winding-up in terms of s 348 of the Companies Act 61 of 1973 (the old Act). A provisional winding-up order was made on 9 December 2010, and a final order was granted on 3 March 2011. However, on 21 October 2010, a day after the effective date, a payment of R389 593.49 was made by Ditona to the appellant, Eravin Construction CC (Eravin). On 24 September 2012, Eravin’s board resolved to place it under business rescue in terms of s 132 of the Companies Act 71 of 2008 (the new Act). Notice to commence business rescue proceedings was filed in the offices of the Companies and Intellectual Property Commission (CIPC) on 26 September 2012, thus beginning the business rescue process. A business rescue practitioner was appointed on 5 October 2012 and a business rescue plan was adopted on 25 January 2013. The business rescue was terminated on 31 May 2013 and a notice was filed that substantial compliance with the business rescue plan had been achieved. Ditona’s liquidators, the respondents in the appeal, having established that the disputed amount had been paid to a firm of attorneys, Grobler, Levin and Soonius Inc, instructed their attorneys to ascertain the basis of the payment. They did so on the premise of s 341(2) of the old Act, which provides that dispositions of property made by a company being wound-up are void unless the court orders otherwise. Eravin’s argument, on the other hand, was that s 154(2) of the new Act precluded the liquidators from recovering the debt. This section provides that a creditor may not recover a prebusiness rescue debt. It had been argued by the liquidators in the court a quo that the entire business rescue proceedings were void and therefore that s 154(2) of the new Act did not bar the recovery of debt. It was argued that this was so because Eravin had not complied with s 129 of the new Act in that the business rescue practitioner had not been appointed within five business days of the filing of the resolution as required by s 129(3)(b) of the new Act. This argument was rejected by the court a quo. It was also argued that the debt was not a pre-business rescue debt owed by Eravin to Ditona as it only became 2 2 due after the commencement of the business rescue proceedings, and was thus recoverable. The court a quo had found that this was indeed so and had granted the liquidators’ application on that basis. On appeal, in respect of the first argument, the SCA held that it had now been settled by the court in Panamo Properties (Pty) Ltd & another v Nel & others NNO [2015] ZASCA 76; 2015 (5) SA 63 (SCA), that non-compliance with s 129 did not vitiate the business rescue proceedings automatically, but that what was required in order to achieve that result was an application to court. In respect of the second argument, the SCA found that s 341(2) of the old Act and s 154(2) of the new Act are both concerned with when debts are owed, rather than when they are claimable (or fall due). The court found on this account that the prescription analogy that had been adopted by the court a quo was misleading for determining when the debt was owed. The SCA held that s 341(2) of the old Act expressly provides that a disposition in the terms contemplated by it ‘shall be void’; and thus that the recipient has no right, on this account, to retain property so disposed. Consequently, the recipient owes a debt to the body that made the prohibited disposition, and that that debt is owed as soon as the disposition had been received. The SCA further held that s 154(2) of the new Act which provides that if a debt was owed by a company ‘before the beginning of the business rescue process’, ie before the filing of the resolution when a company places itself under business rescue – then the creditor ‘is not entitled to enforce’ that debt. The Court held that in this case, the payment was made on 21 October 2010 and, being void, its repayment was immediately owed by Eravin. Its business rescue proceedings had begun on 26 September 2012, being the date on which the resolution had been filed with the CIPC. As the debt had been owed prior to 26 September 2012, the debt was a pre-business rescue debt and could not be recovered. On the further argument that was raised for the first time on appeal, the SCA held that all creditors – as opposed to only those creditors who had been given notice of the business rescue proceedings, as had been argued by the appellant – are precluded from enforcing pre-business rescue debts. The court held that there was no justification for reading into the section which was not expressly provided for. The appeal thus succeeded and the order of the court below granting the liquidators’ application was set aside and replaced with an order dismissing the application with costs.

Gihwala v Grancy Property Ltd (20760/2014) [2016] ZASCA 35 (24 March 2016)
Directors-Investment agreement – express and tacit terms – breach – damages – heads of damage – claims not excluded by rule in Foss v Harbottle – declaration of delinquency in terms of section 162(5)(c) of the Companies Act 71 of 2008 – section applies in cases of substantial misconduct by directors – not retrospective in its operation – section a rational response to the problem of delinquency by directors – not unconstitutional – circumstances justifying the making of a declaration of delinquency.

The SCA handed down judgment in a commercial dispute between, on the one hand, Mr Dines Gihwala and Mr Lance Manala and Grancy Property Ltd (Grancy). The dispute arose from a BEE transaction in which Spearhead Property Holdings Ltd made available 3.5 million units at a favourable price below the then current market value of the units. A company called Seena Marena Investments (Pty) Ltd (SMI), owned jointly by Mr Gihwala’s family trust and Mr Manala, was given the opportunity to acquire a 40% interest in a company specially established to acquire the BEE units. When a further 18% interest became available they involved a British businessman and friend of theirs, Mr Karim Mawji. The agreement concluded with him led to this dispute. On 3 February 2005 the parties concluded an agreement in terms of which Mr Mawji, through Grancy, would acquire a one-third share in SMI, which would in turn acquire a 58% stake in the company owning the Spearhead units. To that end Grancy provided funding of around R3.5 million. Disputes arose when Mr Gihwala and Mr Manala refused to recognise that Grancy was entitled to a shareholding in SMI or any information about its business or how its money had been invested. This has led to extensive litigation both in the Western Cape Division of the High Court and in the SCA. In the trial the High Court granted judgment in favour of Grancy on a number of monetary claims arising from the breach of the 3 February agreement. It also ordered that books of account be produced and made available to Grancy and that there be a debatement of account between the parties. Lastly it declared Mr Gihwala and Mr Manala to be delinquent directors, an order that had the effect of precluding both of them from being directors of companies for a period of seven years. The SCA upheld the majority of the monetary claims and a crossappeal in regard to one claim, as well as a cross-appeal that Mr Gihwala’s family trust should be jointly and severally liable with him and Mr Manala for most of those claims. It set aside the judgment in regard to two claims and reduced the amount payable in terms of a third. It also varied the order in regard to the provision of access to books and records of SMI and set aside the order to furnish an account, in part on the basis that this was a matter already being dealt with by the High Court in the Western Cape. A constitutional challenge to section 162(5)(c) of the Companies Act 71 of 2008 was rejected. The SCA held that the disqualification of delinquent directors was a proportionate response by the legislature to the problem of delinquent directors. It upheld the orders of delinquency in relation to both Mr Gihwala and Mr Manala, holding that they had been guilty of gross abuses of their positions as directors of SMI, to which they owed a fiduciary duty to ensure that it complied with the terms of the agreement concluded with Grancy. They had grossly misconducted themselves as directors of SMI and conducted themselves in a fashion that amounted to recklessness. All of this justified the orders declaring them to be delinquent directors.

TSHWANE CITY V UNIQON WONINGS (PTY) LTD 2016 (2) SA 247 (SCA)

Local authority — Rates — Imposition — Township — Rates payable by township owner to be calculated over extent or remaining extent of township as single entity, not on unsold erven separately. — Municipal service charges — Municipal clearance certificate — Rates payable by township owner when erven sold — Determination of — Municipal Systems Act 32 of 2000, s 118(1).
Section 118(1) of the Local Government: Municipal Systems Act 32 of 2000 (the Systems Act) provides that Registrars of Deeds —

   'may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate . . . which certifies that all amounts that became due in connection with that property for . . . property rates and other municipal taxes, levies and duties during the two years preceding the date of application for the certificate have been fully paid'.

This case concerns the City's refusal to issue the respondent, a developer, with s 118(1) clearance certificates in respect of three erven it had sold in a township development. This was on the basis that the developer, as owner thereof, first had to pay the arrear rates in respect of each separately rated erf comprising the township. At issue was how to determine what was owed in connection with an erf that had until its sale been rated as part of a township.

Held

The basis upon on which townships were rated was on the value of the whole or the remaining extent thereof. Erven were rated individually only after they were sold by the township owner and transferred to purchasers. The City was accordingly not entitled to levy rates in respect of individual erven that had not yet been sold. A township owner was not obliged to pay all amounts due in respect of the entire township when applying for a clearance certificate in respect of an erf sold and to be transferred. '(A)mounts that became due in connection with that property' in s 118(1) of the Systems Act referred to the property to be transferred. The correct interpretation of s 118(1), on its clear wording, was that a clearance certificate must be applied for in connection with the property that the owner wished to transfer, and that the local authority must certify that all amounts that became due in connection with that property had been fully paid. The practical and equitable way to determine rates for an erf before transfer was to allocate a pro rata share of the rates due in respect of the township as a whole, to such an erf, and for the township owner to make payment of that amount in order to comply with the requirements for obtaining a clearance certificate. In regard to municipal charges, unless they were capable of allocation to specific erven, they should be apportioned in the same way.

Griffiths v Janse van Rensburg NO and another [2016] 1 All SA 643 (SCA)

Dispositions- Setting aside of dispositions in terms of section 29 of the Insolvency Act 24 of 1936 – Whether impugned dispositions were made in the ordinary course of business – Test is whether ordinary, solvent, businesspeople would, in similar circumstances, themselves act as did the parties to the transaction – Dispositions made pursuant to void agreement not satisfying test and fell to be set aside.

Interest – Mora interest – Payment of mora interest on an award setting aside such disposition under section 32(3) of the Insolvency Act 24 of 1936 – Concept of mora relates to the time at which an obligation is due – Debt arises only on judgment and no amount due before judgment, on which mora interest can run.

The appellant received four payments from a trust pursuant to two agreements to “invest” in the trust. The trust was the vehicle through which a pyramid scheme was operated. When the scheme collapsed, the trust was sequestrated. The respondents were the trustees in the insolvent trust. They brought an action in terms of section 29 of the Insolvency Act 24 of 1936, to set aside the four payments made to the appellant, alleging that the appellant was a creditor of the trust and that the dispositions in question should be set aside. The appellant argued that he was a creditor based on an enrichment cause of action against the trust for repayment of capital monies paid to the trust by the appellant in terms of an illegal and void agreement. He went on to plead that the trust had a legal obligation to repay the amounts because the agreements were void and illegal and that the obligation to repay arose when the appellant made the investment payments. Of the four payments, it emerged that two were of capital and two of interest. Although the effect of the plea was that all four of the impugned dispositions were made in the ordinary course of business, it was conceded on appeal that that was not true of two of the amounts which represented interest. The appellant, accordingly, acceded to an order setting those aside. What remained in issue was whether the appellant proved that the two dispositions of capital were made in the ordinary course of business and should thus avoid the same fate.

The High Court found that neither the dispositions nor the interest payments had been made in the ordinary course of business. All four payments were set aside, and the appellant was ordered to repay the relevant amounts. The present appeal was noted against that decision.

Held – In considering what is meant by the phrase “the ordinary course of business”, the test to be applied is an objective one. The question is whether ordinary, solvent, businesspeople would, in similar circumstances, themselves act as did the parties to the transaction. Consideration should not be given to any intention to prefer or to the fact that the party making the disposition was insolvent at the time since these are considered separately under other parts of the section. The question to be answered is whether the transaction is one with conventional terms which ordinary businesspeople would normally have concluded under the given circumstances. The court below, accordingly, erred by focusing on the general nature of the business conducted by the trust, and failed to fully analyse and to give due weight to the relationship between the appellant and the trust.

The focus must be on the dispositions themselves. The appellant had been unaware that the investment agreements were void when he demanded the payments and was therefore unaware that he had a valid claim under the condictio ob turpem vel iniustam causam. Where payments are made pursuant to void agreements, a claim for repayment would ordinarily lie under the condictio, which is one of the enrichment actions. He, accordingly, did not invoke the condictio as the basis for demanding the payments. The demands were made, and acceded to, for payment of the agreed amounts under the void investment agreements. The transactions arising from the business relationship between the appellant and the trust at the time arose from the void agreements, not from the condictio.

Applying the broad, objective test to the facts of this matter, the repayments of the capital amounts did not take place in the ordinary course of business. Therefore, not only the dispositions relating to interest, but also those relating to capital, were correctly set aside. The appeal was dismissed.

In a cross-appeal, the trustees submitted that the order of the court below ought to be varied to allow for the payment of mora interest on the judgment debt, from date of service of summons to date of payment. They submitted that the court below erred in ordering interest to run only from the date of judgment. The submission was based on section 32(3) of the Act which provides that a court which sets aside a disposition shall declare the trustee entitled to recover any property alienated under the said disposition or in default of such property the value thereof. The trustees contended that property had to include money, and that the payment of mora interest is ordered so as to compensate a creditor for the loss suffered by not receiving payment on the due date. The concept of mora relates to the time at which an obligation is due. Where a contract does not fix a time and, after a reasonable time has elapsed, one party demands payment, the demand places the debtor in mora. The debtor is not in mora until the payment is due. For unliquidated debts, the common law has been varied by section 2A of the Prescribed Rate of Interest Act 55 of 1975 so that interest runs from the date of demand, subject to a court’s discretion. Unable to uphold the trustees’ contentions on appeal, the Court dismissed the cross-appeal.

Lagoon Beach Hotel (Pty) Ltd v Lehane NO and others [2016] 1 All SA 660 (SCA)

Cross-border insolvency – Recognition of foreign trustee – While a foreign trustee seeking recognition in South Africa must ordinarily establish that the insolvent party was domiciled within the jurisdiction of the foreign court that appointed him, that is not an inflexible rule, and in exceptional circumstances the requirement of domicile will not be insisted upon.

An Irish businessman (“Dunne”) residing in the United States of America held an interest in the appellant company operating as a hotel and conference centre. In 2013, Dunne was declared bankrupt in the US and Ireland. Pursuant to the order of bankruptcy issued in Ireland, the first respondent (“Lehane”) was appointed as “the Official Assignee in Bankruptcy of Dunne’s estate”. During his investigations, he learned of two contracts in terms of which Dunne had transferred the appellant hotel to his wife. Lehane’s investigations led him to believe that Dunne had been insolvent both at the time he concluded the agreements and made the dispositions. It was contended that the agreements were not genuine, and were intended to frustrate Dunne’s creditors.

Lehane therefore applied in Ireland for the setting aside of the disposition, and for the recovery of the hotel as an asset in Dunne’s bankrupt estate. He then applied to the Western Cape High Court and obtained an order recognising him as the Official Assignee and interdicting the proposed sale of the hotel to a third party pending the outcome of his claim in Ireland. The application having been successful, the present appeal ensued.

Held – The first point for the Court to consider was the appellant’s objection that the court a quo took into account evidence that it alleged was hearsay in nature or which conflicted with the rule that, generally speaking, the fact that a person may have been convicted in criminal proceedings is not admissible in subsequent civil proceedings as proof of his guilt. Essentially, under the rule, a previous conviction amounts to no more than an opinion which has been expressed in regard to certain facts, and does not determine them. It was argued by the appellant that the court a quo, in having regard to the various allegations and documents, that amounted to hearsay, impermissibly elected to allow this into evidence on the basis of the interests of justice without having due regard to the law as to their admissibility, to the prejudice of the appellant who had to answer to largely incomplete and unsubstantiated allegations. In this matter, the Court found that it was understandable that Lehane would have to rely on hearsay evidence. The Court held that a practical and common sense approach is required in cases of this nature. It was critical that the appellant had admitted much of the hearsay and had not sought to challenge additional matter. The relevant evidence could therefore be taken into account.

Turning to the recognition order granted by the court a quo, the present Court addressed the question of Dunne’s domicile. A foreign representative such as a trustee (or in this case, the Official Assignee), who seeks to deal with assets present in this country, must first obtain the active assistance of a South African court by obtaining recognition of the foreign order. Without such recognition, he or she will be precluded from exercising authority and power, for example to convene a statutory meeting in order to interrogate the respondent. Ordinarily, a foreign trustee seeking recognition in South Africa must establish that the insolvent party was domiciled within the jurisdiction of the foreign court that appointed him. However, that is not a law set in stone. It has been accepted that in exceptional circumstances the requirement of domicile will not be insisted upon. The Court found exceptional circumstances to be present that justified a South African court rendering assistance by taking the necessary steps to recognise the Irish Official Assignee in order to protect the interests of Dunne’s creditors.

There was, therefore, no reason to interfere with the court a quo’s recognition of Lehane. It had the discretion to exercise whether or not to do so, and such discretion was properly exercised.

Other than for two limited issues in respect of which the court order needed to be varied, the appeal was unsuccessful.

Du Plooy NO and others v De Hollandsche Molen Share Block Ltd and another
[2016] 1 All SA 748 (WCC)

Company law – Security register of company – Shareholder not reflected in register – Effect on ownership of shares – Owner (or the registered member) can sell certificated shares and cede the rights attached to them, passing the property in them independently of and prior to the registration of the purchaser.

The first and second applicants sought an order that a trust, which was the majority shareholder of first respondent, be entered by the first respondent in the first respondent’s security register as the owner of all the shares referred to as class B-F shares. In the alternative, the applicants sought an order that the trust was entitled to exercise voting rights in respect of the shares at any meeting of the shareholders of the first respondent. The need for the application arose from the first respondent having taken the stance that, as the trust was not reflected in the share register as a shareholder, it would not be permitted to be present and vote at any shareholders meeting.

Held – The question which arose was whether ownership of shares is dependent upon registration thereof in a company’s share register. The Court cited authority for the fact that the owner (or the registered member) can sell certificated shares and cede the rights attached to them, passing the property in them independently of and prior to the registration of the purchaser.

On the available evidence, it was difficult to hold that the shares were not transferred to the trust. All of the B, D, E and F class shares were transferred to the trust in July 2004. The Court concluded that the applicants had succeeded in proving their entitlement to the court’s exercising a discretion in terms of section 161 of the Companies Act 71 of 2008 to clarify the position and thereby ensure that the securities register reflects the trust as the holder of the class B–F shares.

Ex parte Harris (Fairhaven Country Estate (Pty) Ltd as intervening party)
[2016] 1 All SA 764 (WCC)

Rehabilitation – Application to intervene – Such application not a prerequisite to a party being heard in opposition to an application for rehabilitation – Abuse of court’s process – Court dismissed application were such is without merit, not bona fide and an abuse of the process of the court.

Insolvency – Application for rehabilitation – Test – Insolvency Act 24 of 1936 – Section 124 of the Insolvency Act provides for an application for rehabilitation which may be brought within various stipulated time-frames varying between three and five years depending on the circumstances – In casu, that four-year period had lapsed and, under section 124(2)(a), the requisite twelve-month period after the confirmation by the Master of the first trustees’ account in the estate had also lapsed – Applicant satisfied the Court that he was a fit and proper person to be permitted to trade with the public on the same basis as any other honest business person.

His estate having been sequestrated in 2010, the applicant, in 2015, gave notice in the Government Gazette of his intention to apply for his rehabilitation. In that regard, the statutory requirements of the Insolvency Act 24 of 1936 insofar as notice and time limits were concerned were complied with. The application for rehabilitation was brought pursuant to the provisions of section 124(2) of the Act in light of the fact that at the time that the application was launched more than 12 months had elapsed after the date of the confirmation of the liquidation and distribution account. Sometime thereafter, the intervening party (“Fairhaven”) gave notice that it intended making application for leave to intervene in the rehabilitation application for purposes of procuring the dismissal of such application, alternatively for the postponement of the rehabilitation application pending the completion of an envisaged enquiry in terms of section 152(2) of the Act.