Subject index outline

Griessel and another v Lizemore and others [2016] JOL 34038 (GJ)

Business rescue – Resolution by director of company – Setting aside of

Between them, the applicants held 67% of the shareholding in the third respondent company, with the remaining 33% of the company’s issued share capital being held by the first respondent. In July 2015, the first respondent passed a resolution on behalf of the board of directors placing the company under business rescue. The second respondent was appointed the business rescue practitioner. The resolution was passed without the knowledge of the other shareholders and despite a meeting of shareholders, held three days earlier in which the suggestion that business rescue proceedings be considered was rejected. The first respondent contended that he did not have to notify the other shareholders of his intention to pass the directors resolution, since at that time he was the sole director of the company and could unilaterally resolve to begin business rescue proceedings and place the company under supervision in terms of section 129(1) of the Companies Act 71 of 2008.

In an urgent application, the applicants sought a declaration that the resolution to begin business rescue proceedings and to place the company under supervision had lapsed and was a nullity. They also sought the setting aside of the resolution, alternatively, of the appointment of the business practitioner; and the removal of the first respondent as director of the company.

Held that the primary objective of business rescue is to prevent a viable company from closing down by allowing it an opportunity to regain solvency through the mechanism of business rescue provided it can be achieved within a reasonable time. It is for the person who wishes to place a company under business rescue on this alternative ground to prove that the company is financially distressed as required under section 129(1)(a); that it is not reasonably likely (or perhaps possible) for the company to be rehabilitated and continue in existence on a solvent basis as contemplated in section 128(1)(b)(iii). (It was not necessary to argue the appropriate threshold test); and that the development and implementation of a plan to rescue the company would result in a better return for creditors or shareholders than would occur from its immediate liquidation.

The Court found that each of the requirements to set aside the resolution in terms of section 130(5)(a) read with 130(1)(a) had been met. The effect of setting aside the resolution under section 130(1)(a) meant that the business rescue proceedings had ended.

The application succeeded.

Button NO and others v Akbur and others [2016] JOL 34153 (KZD)

Voidable preferences – Recovery of-section 29

Motion proceedings-for voidable preferences-allowed

Motion proceedings-dispute of facts-robust approach

In terms of section 29 of the Insolvency Act 24 of 1936, the applicants sought an order declaring that payment made by or on behalf of the first respondent totalling an amount of R2 493 000 in the two-and-a-half-month period prior to the liquidation of the close corporation of which the first respondent was a member, were voidable preferences – and authorising the applicants to recover the amount from the first respondent and / or the second respondent. The application is opposed by the first and second respondents on the ground that there were innumerable material disputes of facts and therefore the applicants ought not to have proceeded by way of motion court proceedings. It was also contended that the first and second respondents had been deprived of their rights to the audi alteram partem principle in terms of section 8(1) of the Constitution of the Republic of South Africa, 1996. Finally, it was argued that the payments which the applicants sought to recover were made in the ordinary course of business and did not constitute voidable preferences.

Held that the respondents bore the onus of proving that the dispositions were made in the ordinary course of business. The test is an objective one, namely, whether having regard to the fact that business methods and customs necessarily differ amongst the different spheres of the business world, the ordinary, honest and solvent businessman would have acted likewise in similar circumstances, or would have thought the transaction extraordinary. The Court found that the disposition was not a lawful one in the sense that it was not made in the course of business of the close corporation.

The defence by the insolvent that it did not intend to prefer one creditor above the others had to be proven by the beneficiary. The test in that regard was a subjective one, being the subjective intention of the insolvent, which is often inferred, in the absence of direct evidence, from the surrounding circumstances. The Court found that the first respondent had a clear intention to prefer either himself and / or the second respondent.

The application accordingly succeeded.

In determining when was the disposition made, the date of the actual disposition is relevant, not the date when on which authority was granted to the agent to make such a disposition. In proving that the disposition was to prefer one creditor above others, it is necessary to prove the effect of the disposition, namely, that all creditors were not equally treated in the distribution of assets. It must also be borne in mind that the person who benefitted from the disposition is necessarily always a creditor, which includes a surety or a person in a position analogous to that of a surety in terms of section 30(2) of the Insolvency Act, though not always the person to whom the disposition was made, and that the value at the date of the disposition is the relevant determining factor to ascertain that immediately after such a disposition was made, the debtors liabilities exceeded the value of his assets.

The respondents bear the onus of proof in proving that the dispositions were made in the ordinary course of business, the test is being an objective one, namely, whether having regard to the fact that business methods and customs necessarily differ amongst the different spheres of the business world, the ordinary, honest and solvent businessman would have acted likewise in similar circumstances, or would have thought the transaction extraordinary.

For example, a tripartite arrangement between the insolvent, one of his debtors and a creditor of the insolvent in terms of which a debtor makes a direct payment to a creditor of the insolvent, cannot be described to be in the ordinary cause of business. The disposition must be legal and valid in law to qualify for it to be within the ordinary course of business.

 The other part of the defence by the insolvent in that it did not intend to prefer one creditor above the others has to be proven by the beneficiary. The test applied being a subjective one, being the subjective intention of the insolvent, which is often inferred, in the absence of direct evidence, from the surrounding circumstances eg a disposition made whilst contemplating a liquidation or sequestration.

The applicants submit that payments were made by the close corporation to the first respondent totalling R2 493 000 between 26 June and 30 September 2013 in favour of the respondents and/or on behalf of the second respondent.

The first respondent's explanation for the transfer of funds from the close corporation on behalf of the second respondent to the attorney's trust account, was that these funds were due and payable to the second respondent and these were part of the repayments by the close corporation of loans taken from the second respondent, which payments he had directed that be made to the third party. Irrespective that there was no separate loan account for the second respondent, he believed that Vather, the close corporation's accounting officer, knew that he and the second respondent were the sole lenders of funds to the close corporation. According to the first respondent, these payments were always prioritised and paid in the course of business of the close corporation.

The applicants' case is that Peter Andrews received funds without any specific instructions and upon enquiry, the first respondent informed him that the instructions for distribution thereof would follow in due course. This was odd as the funds were transferred in their ongoing conveyancing account, which had been previously opened for the first respondent. Peter Andrew had no knowledge that these funds were for the second respondent's account and the file was opened in the first respondent's name. The second respondent did not feature at all. According to Peter Andrews, the funds were disbursed at the express instructions of the first respondent as per annexure JDM3 of the founding papers. He referred to the funds as his, as per instructions dated 8 October 2013, "pay balance of my funds held in trust to the following account. . ." and gave the second respondent's account details.

I have undertaken an objective analysis of such disputes of facts, I have also taken a robust approach to such dispute of facts as advocated in Buffalo Freight Systems (Pty) Ltd v Castleigh Trading (Pty) Ltd and another. I therefore find that it is just and equitable to proceed with this matter by way of motion of proceedings. All the parties to the application were able to address and make submissions on the points at issue, irrespective of the dispute of facts that have been raised by the respondents. It is my view that there is no genuine dispute of facts in this matter as raised in the pre-trial conference and at the hearing of this application in so far as this application is concerned.

I therefore find that the applicants have discharged the onus placed upon them and are entitled to the following order:Declaring that the following amounts paid by the corporation from its Nedbank Kingsmead Branch bank account number: 1442014814 to the following persons in the following amounts, namely:1.1R41 000 (Asharf sal July) on 26 July 2013;1.2R11 000 (Ash expenses) on 12 August 2013;1.3R1 900 000 (n/l trust) on 16 August 2013;R200 000 (inv return) on 2 September 2013;1.5R50 000 (inv return) on 10 September 2013;1.6R41 000 (Ash salary) on 30 September 2013; and1.7R250 000 (inv return) on 7 October 2013.TOTAL: R2 493 000

Constitute voidable preferences of the property of the corporation, as debtor to, in favour of and for the benefit of the first respondent and/or the second respondent as the corporation's other creditors, within a period of 6 (six) months preceding the winding-up of the corporation at a time when its liabilities exceeded the value of its assets, were not made in the ordinary course of the business of the corporation and were intended to prefer one or more of the respondents' creditors above another, under and pursuant to the provisions of section 29 of the Insolvency Act 24 of 1936, as read with sections 32, 31, 30(1)(2) and 26(1)(b) of the Insolvency Act.

ABSA Bank Limited v Hammerle Group (Pty) Ltd [2016] JOL 33570 (SCA)

Winding-up application – Subordination of debt to other creditors of insolvent – Applicant a contingent creditor and was entitled to institute winding-up proceedings against the respondent

Alleging that the respondent was commercially insolvent and unable to pay its debts as envisaged in section 345 of the Companies Act 61 of 1973, the appellant brought an application in the high court for the winding-up of the respondent. The application was dismissed on the basis that part of the debt giving rise to the application was extinguished by prescription; and the remainder thereof was not yet due and payable as it had, by agreement between the parties, been subordinated to the debts of other creditors of the respondent. The present appeal was with leave of the court a quo.

The debt referred to by the appellant arose from a loan which it had advanced to the respondent. The respondent denied in the answering affidavit that it was indebted to the appellant and raised two defences. First, that the appellant's claim under the loan agreement had prescribed and consequently that the debt had become extinguished. Secondly, that the loan advanced to the respondent had, in terms of the agreement between the parties, been subordinated in favour of the respondent's creditors, and as the respondent was indebted to its creditors in the amount of R2 205 657,07, the amount claimed by the appellant was not due and payable. Insofar as the defence based on the subordination clause was concerned, reliance was placed on a judgment in an earlier liquidation application in which the appellant's application to wind-up the respondent was dismissed on the basis that the amount claimed under the subscription agreement was not due and payable as it was subordinated to other creditors to whom the respondent owed money. Therefore, the respondent argued that the issue as to whether or not any amounts were due and payable under the agreement were res judicata and could not be raised again in the present pleadings.

Held that in light of the subordination clause in the agreement, the appellant was a contingent creditor of the respondent in terms of section 346 of the Companies Act 61 of 1973. The appellant was accordingly well within its right to have applied, on that ground alone, for the winding-up of the respondent. Consequently, the court a quo erred in refusing to wind-up the respondent on the basis that the debt, specifically under the subscription agreement, was not as yet due and payable, because it had been subordinated to other creditors of the respondent.

Next, the Court addressed the issue of the respondent's liability to the appellant with regard to the loan agreement and the plea of prescription raised by the respondent. In June 2011, the appellant sent the respondent a letter of demand. The respondent replied with a settlement proposal, which the Court recognised as an unequivocal acknowledgement of indebtedness. The letter also confirmed that the respondent was unable to pay its debts and, was in consequence, commercially insolvent. Those unequivocal admissions of liability by the respondent were such that the plea of prescription could not be sustained because such admission would have interrupted the running of prescription.

The appeal was upheld with costs, and a liquidation order granted.

Mayo NO v De Montlehu  2016 (1) SA 36 (SCA) ¹¹

Claim against company in liquidation — Proof — Late proof — Statutory framework — Time period stipulated in s 44(1) of Insolvency Act 24 of 1936 not affected by s 366(2) of Companies Act 61 of 1973 — Three-month period for lodging of claims applying to both sequestrations and liquidations.

Statute — Interpretation — 'Mutatis mutandis' — Meaning 'subject to necessary alterations' — Necessary changes must be required, not merely permitted.
Mr De Montlehu argued that a claim against his company, which was being wound up, was wrongly allowed because the master admitted it to proof I some five months after the second meeting of creditors. Mr De Montlehu relied on s 44(1) of the Insolvency Act 24 of 1936, which stipulated that a creditor who wishes to prove a claim more than three months after the second meeting of creditors had to obtain leave from the master, which was not obtained in the present case.

The appellants (the company, its liquidators and the creditor in question) contended that the claim should stand because the matter was governed by s 366(2) of the Companies Act 61 of 1973, which gave the master a broad discretion to extend the time period for the proof of claims. (No time period had been set by the master in this case.)

The appellants initially argued that Mr De Montlehu lacked locus standi because he was not a creditor of the company, but locus standi was later conceded (and correctly so, according to the SCA) on the ground that he was a 'person aggrieved' in terms of s 151 of the Insolvency Act.

The Johannesburg High Court agreed with Mr De Montlehu and granted his B application for the setting-aside of the master's decision to allow the claim. In an appeal to the SCA the court analysed the effect of the words 'mutatis mutandis' in s 366(1)(a) of the Companies Act, which provided that claims against a company would be proved 'mutatis mutandis in accordance with the provisions relating to the proof of claims against an insolvent estate under the law relating to insolvency'.

Held Since mutatis mutandis meant 'subject to the necessary alterations', the fixed time period provided for in s 44(1) of the Insolvency Act would not be pushed aside by s 366(2), which related to participation in a distribution and not late proof of claims. Hence the three-month period in s 44(1) applied to both sequestrations and liquidations. Appeal dismissed

Minnaar v Van Rooyen NO 2016 (1) SA 117 (SCA)¹²

Directors and officers — Liability for debts of company — Court cannot make prescribed finding of recklessness or intent to defraud without hearing evidence — Grant by default of order under s 424(1) of Companies Act 61 of 1973 not permitted.

A court cannot without hearing evidence make a finding under s 424(1) of the Companies Act 61 of 1973 that a director or officer is guilty of recklessness or intent to defraud, and hence liable for company debts. The grant by default of an order under s 424(1) is therefore erroneous within the meaning of rule 42(1)(a) of the Uniform Rules, and liable to be set aside. 

Mr Casper Minnaar, the appellant, appeals against the refusal to grant the rescission of an order made against him by default. The order was made by Van der Merwe DJP (in the North Gauteng High Court) in terms of s 424(1) of the Companies Act 61 of 1973, applicable at the time when the default judgment was sought. It read:

    'When it appears, whether it be in a winding-up, judicial management or otherwise, that any business of the company was or is being carried on recklessly or with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the Court may, on the application of the Master, the liquidator, the judicial manager, any creditor or member or contributory of the company, declare that any person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct.'

Default judgment, under s 424(1), was sought against Minnaar on 22 February 2012 by the then liquidator of a company, Askari Mining and Equipment Ltd (Askari), who had instituted action against Minnaar and four other former directors, on the basis that they had acted recklessly in the conduct of the affairs of the company and should thus be liable for all the debts of the company. The respondent, Mr AW van Rooyen, is the current liquidator of the company.

The only passage in the report of the enquiry that is in the record, and which deals with Minnaar's role, stated that he had testified about the 'main financial transactions of the company while he was its financial director. He contributed significantly to the establishment of the facts on the strength of which the main creditors of the company may be able to establish that the affairs of the company were conducted recklessly.' In May 2008 the liquidators indeed instituted action against the five directors, claiming an order that they be held personally liable for the debts of Askari. 
“In this matter, in my view, the liquidators were not entitled procedurally to default judgment against Minnaar without leading evidence. By its very nature, the right to the relief sought under s 424(1) of the Companies Act had to be proved on a balance of probabilities.  The liquidators were not entitled to rely on allegations made in the particulars of claim and denied in the defendants' joint plea. At the very least they should have led witnesses to show that the directors had acted recklessly or with intent to defraud creditors. The order in terms of s 424(1) was thus erroneously sought, and, as a result, erroneously granted. It must accordingly be rescinded in terms of rule 42(1)(a).

There is thus no need to consider whether Minnaar's default was deliberate, such that he would not be entitled to relief under the common law. Van Rooyen argued, however, that when the application for rescission was brought, Minnaar was seeking the court's indulgence and  that he should not be entitled to the costs of the application. Moreover, his account of why he had not appeared in court on the trial date was not entirely credible or consistent. I agree, and consider that the costs of the application should be costs in the cause.”

Panamo Properties 103 (Pty) Limited v Land and Agricultural Development Bank of South Africa 2016 (1) SA 202 (SCA)¹³
Mortgage bond — Validity — May secure debt arising from enrichment claim.
The Land and Agricultural Development Bank of South Africa and Panamo Properties 103 (Pty) Ltd entered into an agreement in terms of which the Bank would lend Panamo money to buy land and to develop a township on it. They also concluded a mortgage over the property which was duly registered, which secured any of Panamo's debts, both existing and future, to the Bank. Thereafter the Bank advanced money to Panamo.

Ultimately, the Bank sought a declaration that the agreement was void because it failed to comply with the Land and Agricultural Development Bank Act 15 of 2002 (the Act) and the Public Finance Management Act 1 of 1999 (the PFMA); and that the bond secured a claim for enrichment in respect of the money advanced. The High Court granted the orders sought, and the matter was appealed to the Supreme Court of Appeal.

CJ Claassen J in the court a quo concluded that the bond was valid, despite the fact that the contract pursuant to which it was passed was not. The bond agreement, he said , was a separate agreement of hypothecation and its 'validity is not dependent upon the validity of the anterior transaction'. A mortgage bond is of course always accessory to an obligation, no matter its origin. If the obligation is unenforceable the security in respect of it is unenforceable too. That does not mean that a principal obligation must exist before a mortgage is entered into: it may be given as security for a future debt or as a covering bond. But when enforcement of the bond is sought it must be in respect of a valid obligation. And when determining whether an obligation is secured by a bond, one must have regard to its particular terms.
“The Bank says that it has a claim for unjust enrichment under one of the condictiones. No such finding can be made on this issue here. I assume, for the purposes of deciding the question, that such a claim is valid. An enrichment claim gives rise to indebtedness. I know of no reason why a mortgage bond cannot secure a debt arising from an enrichment claim. Indeed, no argument was advanced before us why a debt of that nature cannot be covered. The question is whether that kind of debt is secured by this particular bond.”

“In the first place, the bond is a covering bond. A covering bond may provide security for more than one specific debt. The bond may therefore afford security for more than obligations arising under the loan. It is not necessarily extinguished merely because the loan is void. It complies with the formalities required by s 51 of the Deeds Registries Act for those covering future indebtedness. The nature of the bond thus does not exclude the possibility that an enrichment claim may be covered.”

“In the preamble, the passing of the bond is said to have given expression to an undertaking. This undertaking was by Panamo to pass a 'continuous covering bond as security for [Panamo's] liability towards the Land Bank for whatsoever reason'. It therefore goes further than one to pass a bond to cover indebtedness under the loan and, indeed, under only some form of an agreement. It is stated in the broadest possible terms. The preamble therefore describes the circumstances under which the bond came into existence.”

The first issue there was whether the agreement was valid.

Held, that such a loan was not authorised by the Act (s 3 read with s 26(1) and (2)); and that the PFMA (ss 66 and 68) rendered the loan agreement invalid.

The second issue was whether the bond secured a claim for enrichment. This could be determined by interpreting the bond's terms.

Held, that, in principle, there was no reason why a mortgage bond would not secure a debt arising from an enrichment claim. Here, construing the bond as a whole, it secured such a claim. Appeal dismissed.