SARIPA Insolvency Law Update 3 of 2017 dated 26 July.

The views expressed in this update are those of the writer, Martinus

(Tienie) Cronje.

HEADLINES

BUSINESS RESCUE

Maroos v GCC Engineering (Pty) Ltd

An application for business rescue suspends the powers of provisional liquidators in a winding up and revests the property of the company in the director of the company.

The court appointed a manager of the company with the powers and capacity

of a director of the company, to manage its business affairs from date of the

court order until date of finalization of the pending application for the business

rescue of the company, the manager is to provide security to the satisfaction

of the Master of the High Court for the proper performance of his duties, he

may not dispose of any assets of company without the written consent of the

Master or the consent of the Court, he is ordered to provide the Court hearing

the business rescue application with a full report of his management of the

company, and with specific detail as to the possibility of the company being

rescued as a result of business rescue proceedings.

Read more

Energydrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd and Others

Sale by business rescue practitioner of assets subject to reservation of ownership in terms of a lease.

Section 134(3)(b) of the Companies Act 71 of 2008 requires the business

rescue practitioner to promptly pay the debt due to a secured creditor or

owner or provide security therefore to the reasonable satisfaction of the

owner.

Read more

INSOLVENCY AND LIQUIDATION

Pieterse v Master of the High Court Cape Town

Deduction of PAYE by liquidator of a company

Awards in terms of the section 98A of the Insolvency Act to the preferent

portion of claims of former employees due by a company for salaries and

wages up to the commencement of the winding up, leave or holiday due to the

former employees accrued up to the date of the commencement of the

winding up and severance or retrenchment pay due to former employees as a

result of termination of the contracts of employment in terms of section 38 of

the Insolvency Act enjoy preference above PAYE deductions in terms of

section 99.

Read more

Louw NO and another v Sobabini CC and others

Collusive dealings in terms of section 31 of the Insolvency Act 24 of 1936

In order to establish collusion, a person need not prove that the intention of

the parties to collusion was to defraud the insolvent estate. If the parties to the

collusion know that the debtor is insolvent and also know that the disposition

will have the effect of prejudicing creditors or of preferring one of the creditors

above another then it follows that the collusion is fraudulent in relation to

creditors in the sense that the object thereof is to do them out of their rights.

Read more

Nel NO and others v Bank of Baroda

Disposition in terms of section 31 of the Insolvency Act 24 of 1936

There is no disposition without an instruction or an agreement, in terms

whereof a “disposition” is made or intended to be made by the insolvent to

another person or the bank account of another person.

Collusion in terms of section 31 necessarily implies the involvement of at least

two parties.

Read more

A Melamed Finance (Pty) Ltd (in liquidation) v Harris

Evidence tendered at an enquiry in terms of section 417 of the

Companies Act 61 of 1973.

The absence of other corroborating documentation does not dent the effect of

the acknowledgement at the enquiry. That acknowledgement is sufficient

proof of a claim.

Read more

OA Noordman NO and another v JFB DE Bruin

Liability for reckless or fraudulent conduct in terms of section 424 of the

Companies Act 71 of 1973

Non-compliance with a contract, in the absence of grounds for suspicion, may

properly be regarded as negligent rather that reckless conduct and does not

justify a claim within the ambit of section 424(1).

Read more

Swart and Others v Fourie and Others

Interrogation in terms of section 414 of the Companies Act 61 of 1973

The notion that actual or perceived bias by a liquidator was sufficient ground

to disqualify him or her from interrogating someone was trenchantly rejected

by the appeal court. Applicants have not attempted to show any conflict of

interest that would disqualify the petitioning creditor’s attorneys from

accepting instructions from the liquidators. They have not taken up the issue

of any abuse of the process with the presiding officer. They have also not

shown that the presiding officer would not appropriately acquit himself of his

responsibilities should they do so.

Read more

Kalianjee NO and Another v Ramlotan and Others

Property transferred by sheriff after provisional sequestration in terms

of sale in execution

The court set aside the transfer of the property even though the sheriff did not

receive notice of the sequestration. The value of the property was more than

the proceeds of the sale by the sheriff.

Read more

Nelson Mandela Bay Municipality v Amber Mountain Investments

Clearance certificate for payment of property rates

A municipality is not entitled to withhold a property rates clearance certificate

until it had received payment of the property rates for the entire financial year,

but only the rates which was due on the date of the certificate. Further,

section 118(1) of the Local Government: Municipal Systems Act 32 of 2000

applies to municipal debts which have become due in the two years preceding

the date of application for the certificate and does not apply to future

municipal debts.

Read more

Genesis Medical Scheme v Registrar of Medical Schemes and Another

Funds in members’ personal medical savings account of a medical

scheme.

Funds to be treated as liabilities of the scheme; not trust property.

Read more

BUSINESS RESCUE

Maroos v GCC Engineering (Pty) Ltd

(36777/2017) [2017] GP (15 June 2017)

An application for business rescue suspends the powers of provisional liquidators in a winding up and revests the property of the company in the director of the company.

The court appointed a manager of the company with the powers and

capacity of a director of the company, to manage its business affairs

from date of the court order until date of finalization of the pending

application for the business rescue of the company, the manager is to

provide security to the satisfaction of the Master of the High Court for

the proper performance of his duties, he may not dispose of any assets

of company without the written consent of the Master or the consent of

the Court, he is ordered to provide the Court hearing the business

rescue application with a full report of his management of the company,

and with specific detail as to the possibility of the company being

rescued as a result of business rescue proceedings.

At the time of the hearing of the application, the relevant business rescue

application had been lodged and served. (Par [2])

Section 131 (6) of the Companies Act 71 of 2008, reads as follows: "If liquidation

proceedings have already been commenced by or against the company at the time

an application is made in terms of subsection (1), the application will suspend those

liquidation proceedings until -

a) The court has adjudicated upon the application; or

b) The business rescue proceedings end, if the court makes the applied

for".

The court was also referred to the provisions of section 361 of 1973

Companies Act, which provides that the First Respondent's property shall be

deemed to be in the custody and under the control of the Master until a

provisional liquidator has been appointed and has assumed office, If the office

of liquidator is vacant, or if the liquidator is unable to perform his duties, the

property of the company shall be deemed to be in the custody and under the

control of the Master. (Par [7])

In PMG Motors Kyalami Pty (Ltd) v First Rand Bank Ltd 2015 (2) SA 634

(SCA) at p. 640 C the following was said: "Further, in terms of the business

rescue provisions of the new Companies Act 71 of 2008, a company in

liquidation may be placed under business rescue by the court. Once an

application to do so is launched. the liquidation is suspended until it is

finalized. If an order is granted. the liquidation is suspended until the business

rescue proceedings come to an end. During the time the liquidation is

suspended, the company will resume trading so as to enhance the possibility

of the business being rescued". (Par [9])

In Jansen van Rensburg N.O. and Another v Cardio-Fitness Properties (Pty) Ltd and

Others [2014] JOL 31979 (GSJ) the factual situation was that the particular company

had been provisionally liquidated and that the directors had therefore been divested

of their responsibilities, duties and functions. A final liquidator had not yet been

appointed and a business rescue practitioner had not been appointed. Kgomo J held

that in his view an "unhealthy lacuna" existed in the Act. To avoid the negative

consequences of such a lacuna, he held that the liquidation proceedings did not

suspend the appointment of the joint liquidators. Section 131 (6) of the Companies

Act of 2008, was silent as to whether their powers were affected. It was his view that

had the legislature intended that provisional liquidators would be relieved of control

before a business rescue practitioner was appointed, it would have said so clearly

and unambiguously (par. [52]). It was his finding that it was not the intention of the

legislature that the liquidated company at any stage be a "rudderless ship or a ship

without a captain". The reasoning was that if the Respondents' contentions in that

case were anything to go by, the suspension of the liquidation proceedings meant

the forthwith departure of the Applicants (the provisional liquidators). As no business

rescue practitioner had yet been appointed as at date of argument in that case, then

the First Respondent would remain without anybody to control and protect its assets

and safeguard its takings. (Par [12])

The judgment in the Jansen van Rensburg decision was delivered on 4 March 2014.

In March 2015, the judgment in Knipe and Another v Noordman N.O. and Others

2015 (4) SA 338 (NCK), was delivered. It was held therein with reliance on Richter v

Bloempro CC 2014 (6) SA 38 (GP) that an application for business rescue does not

suspend the completed liquidation proceedings and that provisional liquidators could

continue with their functions. The Richter decision was overruled by the SCA in

Richter v ABSA Bank Ltd [2015} ZASCA 100 (1 June 2015). That decision was

delivered on 1 June 2015 and no reference appears in that judgment to the Knipe

decision. In Knipe supra, the Court was also referred to the decision of Van Zyl v

Engelbrecht N. O. 2014 (5) SA 312 (FP), in which Lekhale J stated that based on the

provisions of s. 131 (6), a business rescue application suspended the liquidation

proceedings and in turn the office of the liquidator. The Judge in Knipe supra did not

agree with this judgment and its reasoning and regarded the facts as being

distinguishable. (Par [13])

Respondents' argument was, amongst others, the following: Section 131 (6) does not

contemplate that the company is left with no-one in charge of its assets or affairs;

The powers and duties of a provisional joint liquidator are not rendered nugatory and

are not suspended pending the outcome of the application for business rescue. In

fact, the provisional joint liquidator is under a continued obligation to secure and

preserve the assets pending the outcome of the business rescue application. The

Jansen van Rensburg decision supra was correctly decided; Even if the contentions

were correct that the powers and duties of the provisional joint liquidator are

suspended by virtue of section 131 (6) of the 2008 Act, the result would be that the

provisional joint liquidator would be unable to act. In such circumstances, the assets

and affairs of the company would vest in the Master of the High Court in accordance

with the provisions of section 361 (2) of the 1973 Act. (Par [14])

The court argued as follows:

It must be remembered that the business rescue plan in section 128(1)(b)(iii),

contemplates two objects or goals, a primary goal, which is to facilitate the

continued existence of the company in a state of solvency and, a secondary

goal, which is provided for as an alternative, in the event that the

achievement of the primary goal proves not to be viable, namely, to facilitate

a better return for the creditors or shareholders of the company that would

result from immediate liquidation. See: Oakdene Square Properties v Farm

Bothasfontein (Kyalami) 2013 (4) SA 539 SCA at 549 [par. 23]

In Richter v ABSA Bank supra. it was also decided that "liquidation

proceedings' include Court proceedings, and the complete process of

winding-up or liquidation of a company. The complete process is suspended

by the relevant application for business rescue proceedings in accordance

with the provisions of section 131 (6). This would mean that the powers of the

liquidators are suspended. The control of the assets falls under the Master of

the High Court in accordance with the provisions of section 131(2) (should be

361(2)). If the particular company trades. such as is envisaged by PMG

Motors Kyalami (Pty) Ltd supra and the powers of the liquidators are

suspended, the Master cannot assume the powers and obligations of the

previous directors, and the powers in this context are re-vested with the

particular directors, to control and manage the company pending the

determination of the pending business rescue application, so as to promote

the objects of the Act with all attended social benefits. The court does not

agree with the reasoning of the learned Judges in Jansen van Rensburg N.O.

supra, and Knipe supra. In its view, these decisions were wrongly decided

and ought not to be followed, They do not achieve the purpose of the Act.

Also, if there is a lacuna in an Act, it must be interpreted so as to achieve its

stated purpose, and certainly not restrictively. (Par [15])

Counsel for Respondents warned the court that its interpretation would in future lead

to an abuse of proceedings inasmuch as interested parties dissatisfied with the

liquidation order would connive to launch business rescue proceedings with the aim

to avoid the consequences of liquidation proceedings, The court notes that

unfortunately, there is an opportunity for deceit and dishonesty wherever one looks,

but the court is convinced that in the present context the Courts would be alert to

such an approach, and would carefully examine all relevant facts and circumstances.

A purposeful interpretation of a statute should not be defeated by the possibility of

possible deceitful conduct in the future. [Remark: It is not clear how the court

would be able to avoid an abuse of proceedings in the time between the filing

of the application and the hearing of the application by the court. It has been

suggested that the Master could direct the Sheriff in terms of Regulation 2 of

the Regulations in terms of Section 15 of the Companies Act, 1973 (Act 61 of

1973) For the Winding-Up and Judicial Management of Companies to attach

movable assets and take care of animals, if any, and deposit cash, if any, with

the Master. This regulation applies in respect of the assets of a “company in

liquidation”. Section 361(2) which vests assets in the Master applies “in any

winding up of a company”. The court notes that the complete process of

winding-up or liquidation of a company is suspended by the application for

business rescue proceedings. Why does this not include vesting in the Master

(and attachment by the Sheriff)? Why would the liquidators be suspended but

not vesting in the Master and attachment by the Sheriff? It also seems that the

provisional liquidator would not be able to recover any costs incurred or

remuneration earned. Where liquidation lasted for a long time the costs could

be considerable.]

The following order is made:

1. In terms of section 387 (3) of the Companies Act of 1973, the provisional joint

liquidators are authorized to oppose the present application and sign and file

all necessary Affidavits.

2. Mr E. Naude is appointed as manager of the company, with the powers and

capacity of a director of the company, to manage its business affairs from

date hereof until date of finalization of the business, rescue application for the

business rescue of the company, currently pending.

3. The said Mr E. Naude is to provide security to the satisfaction of the Master of

the High Court for the proper performance of his duties.

4. He may not dispose of any assets of the company without the written consent

of the Master or the consent of the Court.

5. Mr E. Naude is ordered to provide the Court hearing the business rescue

application with a full report of his management of the company, and with

specific detail as to the possibility of the First Respondent being rescued as a

result of business rescue proceedings.

6. The costs of this application shall be costs in the business rescue

proceedings.

Extracts

2. ... At the time of the hearing of the application, the relevant business rescue application had been lodged and served.

6. Despite the new Companies Act of 2008 being in operation, s. 9 of Schedule 5 to this Act provides that Chapter 14 of the 1973 Companies Act continues to apply with respect to the winding-up and liquidation of companies under the Act.

The effect of the grant of the provisional liquidation order was that the directors of the First Respondent ceased to be such functionally, officially and nominally, their powers and duties were terminated, and they were deprived of all control of the company's property.

See: Secretary for Customs and Excise vs Millman, N. O. 1975 (3) SA 544 (AD) at 552H.

7. The submission was that such power would re-vest in the director, who could then appoint a manager.

Section 131 (6) of the Companies Act of 2008, reads as follows: "If liquidation proceedings have already been commenced by or against the company at the time an application is made in terms of subsection (1), the application will suspend those liquidation proceedings until -

a) The court has adjudicated upon the application; or

b) The business rescue proceedings end, if the court makes the applied for".

I was also referred to the provisions of s, 361 of 1973 Act, which provides that the First Respondent's property shall be deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed and has assumed office, If the office of liquidator is vacant, or if the liquidator is unable to perform his duties, the property of the company shall be deemed to be in the custody and under the control of the Master.

9. In Boschpoort Ondememings v ABSA Bank 2014 (2) SA 518 (SCA) at par. [25], the Court said the following: "In terms of s. 131 (6) of the new Act, an application for business rescue proceedings to commence has the effect of suspending an application for the liquidation of a company. The subsection provides that the suspension of the liquidation proceedings against the company operates until the court has adjudicated upon that business rescue application or the business rescue proceedings have come to an end". In PMG Motors Kyalami v First Rand Bank 2015 (2) SA 634 (SCA) at p. 640 C the following was said: "Further. in terms of the business rescue provisions of the new Companies Act 71 of 2008, a company in liquidation may be placed under business rescue by the court. Once an application to do so is launched. the liquidation is suspended until it is finalized. If an order is granted. the liquidation is suspended until the business rescue proceedings come to an end. During the time the liquidation is suspended, the company will resume trading so as to enhance the possibility of the business being rescued". I was asked by Mr N. Maritz SC: how one would give effect to this dictum? He supplied the answer: the assets of the company do indeed fall under the control of the Master, but the company, if it is to resume trading and to do business. must be under the direction of its previous director, the present Applicant. There is therefore a clear and logical distinction, so he submitted, between the assets of the company and the trading aspect. According to him, the provisions of s. 131 of the Act suspend liquidation proceedings in every respect, and that means that the powers of the liquidators are suspended, and such powers are then re-vested in the directors of a

company. The submission was that this was the only practical and business-like interpretation to be applied to the relevant provisions read together, inasmuch as the Act itself was silent who would be in control the business activities of the company once the liquidation proceedings were suspended.

There is no doubt that proper interpretation of a statute requires an approach that leads to a sensible 'and business-like result and promotes the apparent purpose of the particular statute.

See: Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 SCA at 604 B.

The purpose of business rescue orders is to provide for efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders. It is meant to be a flexible, effective process of extending the life-span of companies and businesses. The very scheme of business rescue envisaged by the Act is aimed at fulfilling the objectives of providing for revival of a financially distressed company with all its attended social benefits. In the present matter a large number of employees are involved and the social benefit aspect is an important consideration when interpreting the Act so as to fulfil its stated purpose. An unduly restrictive approach in this context is not justified.

See: Dawid Jacques Richter v ABSA Bank Ltd [2015} ZASCA 100 (1 June 2015), at par. [15] and [16]

It was also submitted that the mentioned dictum in PMG Motors supra was in line with the scheme of the Act, although this was not the issue before that Court.

10. Mr N. MarilZ SC therefore argued that in order for a company to resume trading so as to enhance the possibility of the business being rescued, someone must obviously be vested with the power to manage the company and to conduct its affairs. The Master does not do so. The answer to the question posed was that the sole director of the company, being the First Applicant herein, would be re-vested with the power and authority to manage the company, and he would then obviously be entitled to appoint a manager and to delegate to that manager the same powers and authority which he, a sole director of the company would have. He wished to appoint Mr Naude as manager and accordingly I would be able to make that order.

11. It was added that to safeguard the interests of creditors, I should and could order that Mr Naude provide security to the satisfaction of the Master and that he also file monthly reports as to his activities and state of the company with the Master.

Respondent’s argument

12. Mr C. A. Boonzaaier submitted that in the Richter decision supra, the SCA did not consider the issues raised in this application, namely the assertion that no-one is in control of a company by virtue of the operation of s. 131 (6) of the 2008 Act, or the assertion by a director that the assets and affairs of the company has re-vested in him. He relied on an unreported judgment of Jansen van Rensburg N.O. and Another v Cardio-Fitness Properties (Pty) Ltd and Others [2014] JOL 31979 (GSJ). In that decision the factual situation was that the particular company had been provisionally liquidated and that the directors had therefore been divested of their responsibilities, duties and functions. A final liquidator had not yet been appointed and a business rescue practitioner had not been appointed. Kgomo J held that in his view an

"unhealthy lacuna" existed in the Act. To avoid the negative consequences of such a lacuna, he held that the liquidation proceedings did not suspend the appointment of the joint liquidators. Section 131 (6) of the Companies Act of 2008, was silent as to whether their powers were affected. It was his view that had the legislature intended that provisional liquidators would be relieved of control before a business rescue practitioner was appointed, it would have said so clearly and unambiguously. (par. [52]) It was his finding that it was not the intention of the legislature that the liquidated company at any stage be a "rudderless ship or a ship without a captain". The reasoning was that if the Respondents' contentions in that case were anything to go by, the suspension of the liquidation proceedings meant the forthwith departure of the Applicants (the provisional liquidators). As no business rescue practitioner had yet been appointed as at date of argument in that case, then the First Respondent would remain without anybody to control and protect its assets and safeguard its takings.

Mr N. Maritz SC submitted that the judgment was clearly wrong in that it proceeded from the wrong premise. In terms of the provisions s. 361 of the 19?3 Act, property of the company shall be deemed to be in the custody and under the control of the Master until a provisional liquidator has been appointed and has assumed office. As far as the assets of the company were concerned, the ship was therefore not "rudderless". Even if no business rescue practitioner had been appointed as yet, the Master would control and protect the assets of the company.

13. The judgment in the Jansen van Rensburg decision was delivered on 4 March 2014. In March 2015, the judgment in Knipe and Another v Noordman N.O. and Others 2015 (4) SA 338 (NCK), was delivered. It was held therein with reliance on Richter v Bloempro CC 2014 (6) SA 38 (GP) that an application for business rescue does not suspend the completed liquidation proceedings and that provisional liquidators could continue with their functions. The Richter decision was overruled by the SCA in Richter v ABSA Bank supra. That decision was delivered on 1 June 2015 and no reference appears in that judgment to the Knipe decision. In Knipe supra, the Court was also referred to the decision of Van Zyl v Engelbrecht N. O. 2014 (5) SA 312 (FP), in which Lekhale J stated that based on the provisions of s. 131 (6), a business rescue application suspended the liquidation proceedings and in turn the office of the liquidator. The Judge in Knipe supra did not agree with this judgment and its reasoning and regarded the facts as being distinguishable.

14. Respondents' argument was therefore the following:

1. Upon an application being made in terms of s. 131 (1) of the 2008 Act, liquidation proceedings are suspended in terms of s. 131 (6);

2. Section 131 (6) does not contemplate that the company is left with no-one in charge of its assets or affairs;

3. The powers and duties of a provisional joint liquidator are not rendered nugatory and are not suspended pending the outcome of the application for business rescue. In fact, the provisional joint liquidator is under a continued obligation to secure and preserve the assets pending the outcome of the business rescue application.

4 . The Jansen van Rensburg decision supra was correctly decided;

5. Insofar as the business of the company in these circumstances is concerned, it appears impermissible for a company to carry on business where it has been placed under Winding-up, and even where application for business rescue was brought. If it were allowed to do so, it would be trading in either insolvent circumstances or in circumstances where it is financially distressed.

6. Even if the First Applicant's contentions were correct, i. e. that the powers and duties of the provisional joint liquidator are suspended by virtue of s. 131 (6) of the 2008 Act, the result would be that the provisional joint liquidator would be unable to act. In such circumstances, the assets and affairs of the company would vest in the Master of the High Court in accordance with the provisions of s, 361 (2) of the 1973 Act. Section 361 (2) reads as follows:

"In any winding-up of any company, at all times while the Office of liquidator is vacant or he is unable to perform his duties, the property of the company shall be deemed to be in the custody and under the control of the Master".

My reasoning

15. It must be remembered that the business rescue plan in s. 128(1)(b)(iii), contemplates two objects or goals, a primary goal, which is to facilitate the continued existence of the company in a state of solvency and, a secondary goal -.which is provided for as an alternative, in the event that the achievement of the primary goal proves not to be viable, namely, to facilitate a better return for the creditors or shareholders of the company that would result from immediate liquidation.

See: Oakdene Square Properties v Farm Bothasfontein (Kyalami) 2013 (4) SA 539 SCA at 549 [par. 23]

In Richter v ABSA Bank supra. it was also decided that "liquidation proceedings' include Court proceedings. and the complete process of winding-up or liquidation of a company. The complete process is in my view suspended by the relevant application for business rescue proceedings in accordance with the provisions of s. 131 (6). This would mean that the powers of the liquidators are suspended. The control of the assets falls under the Master of the High Court in accordance with the provisions of s. 131 (2) [should be 361(2) of the Companies Act 61 of 1973]. If the particular company trades. such as is envisaged by PMG Motors Kyalami (Pty) Ltd supra. and the powers of the liquidators are suspended. the Master cannot assume the powers and obligations of the previous directors, and the powers in this context are re-vested with the particular directors, to control and manage the company pending the determination of the pending business rescue application, so as to promote the objects of the Act with all attended social benefits. I therefore, with respect. do not agree with the reasoning of the learned Judges in Jansen van Rensburg N.O. supra, and Knipe supra. In my view, these decisions were wrongly decided and ought not to be followed, They do not achieve the purpose of the Act. Also, if there is a lacuna in an Act, it must be interpreted so as to achieve its stated purpose, and certainly not restrictively.

16. Counsel for Respondents kindly warned me that if this interpretation were to be applied, it would in future lead to an abuse of proceedings inasmuch as interested parties dissatisfied with the liquidation order would connive to launch business rescue proceedings with the aim to avoid the consequences of liquidation proceedings, Unfortunately, there is an opportunity for deceit and dishonesty wherever one looks, but I am convinced that in the present context the Courts would

be alert to such an approach, and would carefully examine all relevant facts and circumstances. A purposeful interpretation of a statute should not be defeated by the possibility of possible deceitful conduct in the future.

17. As a result. the following order is made:

1. In terms of s. 387 (3) of the Companies Act of 1973, the provisional joint liquidators (the Second, Fourth and Fifth Respondents) are authorized to oppose the present application and sign and file all necessary Affidavits.

2. Mr E. Naude is appointed as manager of the First Respondent, with the powers and capacity of a director of First Respondent, to manage its business affairs from date hereof until date of finalization of the business, rescue application for the business rescue of First Respondent, currently pending.

3. The said Mr E. Naude is to provide security to the satisfaction of the Master of the High Court for the proper performance of his duties.

4. He may not dispose of any assets of First Respondent without the written consent of the Master or the consent of this Court.

5. Mr E. Naude is ordered to provide the Court hearing the business rescue application with a full report of his management of the company, and with specific detail as to the possibility of the First Respondent being rescued as a result of business rescue proceedings.

6. The costs of this application shall be costs in the business rescue proceedings.

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Energydrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd

and Others

2017 (3) SA 539 (GJ)

Sale by business rescue practitioner of assets subject to reservation of ownership in terms of a lease.

Section 134(3)(b) of the Companies Act 71 of 2008 requires the business

rescue practitioner to promptly pay the debt due to a secured creditor or

owner or provide security therefore to the reasonable satisfaction of the

owner.

The Lessor leased equipment to a company which was later placed under

business rescue by way of a written lease. The lease contained a reservation-

of-ownership clause in favour of the lessor. (Par [4])

The Business Rescue Practitioner sold assets subject to the lease to a

purchaser. (Par [5])

The purchaser disputes that the lessor acquired ownership of the equipment.

That defence would not have been available to the business rescue

practitioner. [Van der Westhuizen J in Mighty Solutions CC t/a Orlando

Service Station v Engen Petroleum Ltd 2016 (1) SA 621 (CC) para 28.] The

practitioner could not transfer more rights than it had. Consequently this

defence is also not available to the purchaser who acquired its rights from the

business rescue practitioner. The common law does not allow the practitioner

to transfer ownership of the property of another (the lessor) because a

transferor of rights cannot transfer more rights than it has. (Par [7] and [8])

The purchaser also relies on a statutory right in terms of section 134(3) of the

Companies Act 71 of 2008. That subsection provides:

(3) If, during a company's business rescue proceedings, the company wishes to dispose of any property over which another person has any security or title interest, the company must —

(a) obtain the prior consent of that other person, unless the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by that person's security or title interest; and

(b) promptly —

(i) pay to that other person the sale proceeds attributable to that property up to the amount of the company's indebtedness to that other person; or

(ii) provide security for the amount of those proceeds, to the

reasonable satisfaction of that other person.' (Par [9])

The purchaser argues that the business rescue practitioner had the right to

sell the equipment without the consent of the lessor because the proceeds of

the disposal were sufficient to fully discharge the indebtedness of the

company to the lessor. It follows that the court must determine whether the

equipment constitutes 'security or title interest' in terms of section 134(3). This

is a matter of interpretation. A number of recent judgments dealt with the

correct approach to interpretation. They include the summary by Wallis JA in

para 18 of Natal Joint Municipal Pension Fund v Endumeni Municipality 2012

(4) SA 593 (SCA). (Par [10])

The court commences with a consideration of the words used in the

Companies Act. The Act does not define the word 'security' as used in section

134. Other statutes assist: The Insolvency Act 24 of 1936 defines the word

'security' in relation to the claim of a creditor of an insolvent estate, as

property of that estate over which the creditor has a preferent right by virtue of

any special mortgage, landlord's legal hypothec, pledge or right of retention;

The Security by Means of Movable Property Act 57 of 1993 does not define

the word 'security' but its focus on the legal consequences of special notarial

bonds over movable property indicate that special notarial bonds constitute

'security'; Section 50(2) of the Deeds Registries Act 47 of 1937 provides that a

mortgage bond or notarial bond may be registered to secure payment of

specified debts. The court concludes that, in general terms, the phrase

'property over which another person has any security' in section 134(3) of the

Companies Act refers to property of the company under business rescue

which secures an indebtedness of the company, for an example property

subject to a notarial bond. The lessor’s case is not that the equipment was the

property of the company over which the applicant held 'security'. It follows that

the reference to 'security' in s 134(3) does not assist the lessor. (Par [11])

The reference to 'title interest' in section 134(3) is more difficult to deal with.

Counsel have not been able to refer to authority that explains the meaning of

this phrase in South African law, neither has the court been able to find such

authority. The comment of Henochsberg [Delport et al Henochsberg on the

Companies Act 71 of 2008 (LexisNexis 2011) is that —

'(t)he term title interest is not one which is used in the South African context,

but is a term that tends to be used in countries where security rights have been codified'.

The court accepts this to be correct, but it is not helpful. The difficulty in

defining 'title interest' does not provide a valid reason to disregard the use of

this term by the legislature as an alternative to 'security'. (Par [12] and [13])

Separately from each other, the words 'title' and 'interest' can be defined

without too much difficulty. In short, the relevant meaning of the word, 'title' is

the right or claim to ownership of property, [The Concise Oxford Dictionary]

the basis of such right or the document substantiating such right, such as a

title deed. [The Concise Oxford Dictionary.] The word 'interest' in property

refers to a legal concern, title or right in such property. [The Concise Oxford

Dictionary.] (Par [14])

The meaning of the combination of these two words, 'title interest' is novel in

South African law. The legislature chose to refer to 'title interest' as an

alternative to security. It follows that it must have been intended to mean

something other than 'security'. The last portion of subsection (a) indicates

that, like 'security', 'title interest' is something which safeguards the payment

of the indebtedness due to the creditor of the company under business

rescue. (Par [15])

In South Africa it is not unusual for creditors to safeguard their rights by way

of reservation of ownership clauses in contracts such as contracts for the sale

of goods where the purchase price is paid over time. The use of the word title

as a synonym or alternative for ownership is also not unusual; for example,

ownership of immovable property is based on a title deed. The term 'title

interest' would include a reservation of ownership clause such as the one in

the lease between the lessor and the company. (Par [16])

The purpose and context of business rescue are not aimed at the destruction

of the rights of a secured creditor. The court concludes that section 134(3) of

the Companies Act allows a company under business rescue to dispose of

property which is subject to 'security' or a reservation of ownership clause

without the consent of the creditor concerned only if the proceeds of the

disposal would be sufficient to fully discharge the indebtedness protected by

the security. If that is so, section 134(3)(a) authorises a business rescue

practitioner to dispose of the property of the company under business rescue

by selling and delivering such property. In such event section 134(3)(b)

requires the practitioner to promptly pay the debt due to secured creditor or

owner or provide security therefore to the reasonable satisfaction of the

applicant. (Par [19])

The court does not regard the obligation to pay or secure the debt as a mere

personal right against the practitioner. The effect of such an interpretation

would be to destroy the agreed security or ownership and replace it with a

personal right against the practitioner. The court interprets the obligation to

promptly pay or secure the debt and the consideration as a requirement for

the valid transfer of ownership by the practitioner by way of a sale and

delivery in terms of section 134 without consent of the creditor. The rights of

the creditor will only be terminated on payment or the provision of other

security. (Par [20])

The purchaser was ordered to deliver to the lessor the movable property

identified in the court order.

Extracts

[Applicant leased equipment to the 2nd respondent (company under business rescue). The business rescue practitioner (4th respondent) sold moveable assets on the premises to the 1st respondent.]

[4] The applicant leased a power-saving variable-speed drive system (the equipment) to the second respondent by way of a written lease. The applicant says that the equipment consisted of the goods listed in its founding papers. The lease contained a reservation-of-ownership clause in favour of the applicant. The value of the equipment is approximately R800 000. The equipment was installed in the plant of the second respondent on the latter's premises.

[5] The second respondent went into business rescue. The fourth respondent is the business-rescue practitioner of the second respondent. In that capacity the fourth respondent concluded the written sale agreement with the first respondent. The selling price was more than R35 million. The sale agreement described the goods sold (referred to as 'the assets') as 'the items set out in annexures A to O hereto, being the subject matter of the sale and all movable items situated in the premises' of the second respondent. Elsewhere in the sale agreement the assets are referred to with reference to annexures A to O, without reference to 'and all movable items situated in the premises'. It does not follow that I can disregard this phrase in the definition section of the sale agreement. The 'movable items situated in the premises' includes the equipment.

[7] The first respondent disputes that the applicant acquired ownership of the equipment. That defence would not have been available to the second respondent. [Van der Westhuizen J in Mighty Solutions CC t/a Orlando Service

Station v Engen Petroleum Ltd 2016 (1) SA 621 (CC) para 28.] The second respondent could not transfer more rights than it had.

[8] Consequently this defence is also not available to the first respondent who acquired its rights from the second respondent. The common law does not allow the second respondent to transfer ownership of the property of another (the applicant) because a transferor of rights cannot transfer more rights than it has.

[9] The first respondent, however, also relies on a statutory right in terms of s 134(3) of the Companies Act 71 of 2008. That subsection provides:

(3) If, during a company's business rescue proceedings, the company wishes to dispose of any property over which another person has any security or title interest, the company must —

(a) obtain the prior consent of that other person, unless the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by that person's security or title interest; and

(b) promptly —

(i) pay to that other person the sale proceeds attributable to that property up to the amount of the company's indebtedness to that other person; or

(ii) provide security for the amount of those proceeds, to the reasonable satisfaction of that other person.'

[10] The argument on behalf of the first respondent is that the fourth respondent had the right to sell the equipment without the consent of the applicant because the proceeds of the disposal were sufficient to fully discharge the indebtedness of the second respondent to the applicant. It follows that I must determine whether the equipment constitutes 'security or title interest' in terms of s 134(3). This is a matter of interpretation. A number of recent judgments dealt with the correct approach to interpretation. They include the following summary by Wallis JA in para 18 of Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) ...

[11] I commence with a consideration of the words used in the Companies Act. The Act does not define the word 'security' as used in s 134. Other statutes assist: The Insolvency Act [24 of 1936] defines the word 'security' in relation to the claim of a creditor of an insolvent estate, as property of that estate over which the creditor has a preferent right by virtue of any special mortgage, landlord's legal hypothec, pledge or right of retention. The Security by Means of Movable Property Act [57 of 1993] does not define the word 'security' but its focus on the legal consequences of special notarial bonds over movable property indicate that special notarial bonds constitute 'security'. Section 50(2) of the Deeds Registries Act [47 of 1937] provides that a mortgage bond or notarial bond may be registered to secure payment of specified debts. I conclude that, in general terms, the phrase 'property over which another person has any security' in s 134(3) of the Companies Act refers to property of the company under business rescue which secures an indebtedness of the company, for an example property subject to a notarial bond. The applicant's case is not that the equipment was the property of the second respondent over which the applicant held 'security'. It follows that the reference to 'security' in s 134(3) does not assist the applicant.

[12] The reference to 'title interest' in s 134(3) is more difficult to deal with. Counsel have not been able to refer to authority that explains the meaning of this phrase in South African law, neither have I been able to find such authority. The comment of Henochsberg [Delport et al Henochsberg on the Companies Act 71 of 2008 (LexisNexis 2011) is that —

(t)he term title interest is not one which is used in the South African context, but is a term that tends to be used in countries where security rights have been codified'.

[13] I accept this to be correct, but it is not helpful. The difficulty in defining 'title interest' does not provide a valid reason to disregard the use of this term by the legislature as an alternative to 'security'.

[14] Separately from each other, the words 'title' and 'interest' can be defined without too much difficulty. In short, the relevant meaning of the word, 'title' is the right or claim to ownership of property, [The Concise Oxford Dictionary] the basis of such right or the document substantiating such right, such as a title deed. [Id.] The word 'interest' in property refers to a legal concern, title or right in such property.[Id]

[15] The meaning of the combination of these two words, 'title interest' is novel in South African law. The legislature chose to refer to 'title interest' as an alternative to security. It follows that it must have been intended to mean something other than 'security'. The last portion of ss (a) indicates that, like 'security', 'title interest' is something which safeguards the payment of the indebtedness due to the creditor of the company under business rescue.

[16] In South Africa it is not unusual for creditors to safeguard their rights by way of reservation of ownership clauses in contracts such as contracts for the sale of goods where the purchase price is paid over time. The use of the word title as a synonym or alternative for ownership is also not unusual; for example, ownership of immovable property is based on a title deed. In my view the term 'title interest' would include a reservation of ownership clause such as the one in the lease between the applicant and the second respondent.

[18] The purpose and context [of business rescue] are not aimed at the destruction of the rights of a secured creditor.

[19] I conclude that s 134(3) of the Companies Act allows a company under business rescue to dispose of property which is subject to 'security' or a reservation of ownership clause without the consent of the creditor concerned only if the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by the security. If that is so, s 134(3)(a) authorises a business rescue practitioner to dispose of the property of the company under business rescue by selling and delivering such property. In such event s 134(3)(b) requires the practitioner to promptly pay the debt due to secured creditor or owner or provide security therefore to the reasonable satisfaction of the applicant.

[20] I do not regard the obligation to pay or secure the debt as a mere personal right against the practitioner. The effect of such an interpretation would be to destroy the agreed security or ownership and replace it with a personal right against the practitioner. I interpret the obligation to promptly pay or secure the debt and the consideration as a requirement for the valid transfer of ownership by the practitioner by way of a sale and delivery in terms of s 134 without consent of the creditor. The

rights of the creditor will only be terminated on payment or the provision of other security.

[21] In the present matter the fourth respondent did not pay or secure the debt due to the applicant. On my interpretation of s 134(3) it follows that the practitioner did not validly destroy the right of ownership of the applicant. The applicant is still owner of the equipment.

[22] The rule of law requires that a court order must be couched in clear terms and its purpose must be readily ascertainable from the language of the order. [Eke v Parsons 2016 (3) SA 37 (CC) (2015 (11) BCLR 1319; [2015] ZACC 30) para 64.] Applied to the present matter, this means that my order must be formulated such that the sheriff can with reference to the order identify the equipment to be returned to the applicant. The notice of motion does not describe all of the equipment sufficiently for this purpose. The equipment includes, for example, a reference to 100 metres' cable. The applicant is not owner of any 100 metres of unidentified cable on the erstwhile premises of the second respondent. The applicant's papers do not identify the specific 100 metres cable that is part of the equipment. Other items are clearly defined, for example by reference to serial numbers. My order is aimed at allowing the delivery of the identifiable items.

[23] I grant the following order:

(1) The first respondent is hereby directed to deliver to the applicant the movable property identified as [XXX]

(2) The first respondent is ordered to pay the applicant's costs.

[Back to top]

INSOLVENCY AND LIQUIDATION

Pieterse v Master of the High Court Cape Town

Case No (4909/15) Western Cape Division

Deduction of PAYE by liquidator of a company

Awards in terms of the section 98A of the Insolvency Act to the

preferent portion of claims of former employees due by a company for

salaries and wages up to the commencement of the winding up, leave or

holiday due to the former employees accrued up to the date of the

commencement of the winding up and severance or retrenchment pay

due to former employees as a result of termination of the contracts of

employment in terms of section 38 of the Insolvency Act enjoy

preference above PAYE deductions in terms of section 99.

The key issue for determination in this matter is whether paragraph 2 of the

Fourth Schedule of the Income Tax Act No 58 of 1962 ("the Income Tax Act")

applies to payments of awards made in terms of claims preferent pursuant to

section 98A of the Insolvency Act No 24 of 1936 ("the Insolvency Act"). (Par

4)

The Master sustained an objection and directed that· the joint liquidators

amend the first liquidation and distribution account to include the payment of

PAYE as an administrative expense on all remuneration earned by the

employees of the company on the amount of R 9 580 319.12 made in terms of

section 98A of the Insolvency Act. The Master further directed that if the said

employees had already been paid, the applicants were directed to deduct all

PAYE that would have been paid to CSARS out of their fees and lodge an

amended first liquidation and distribution account within 14 days of the ruling.

(Par 6.12)

The order of preference in sections 95 to 104 of the Insolvency Act does not

make provision for the deduction of employees' tax from preferent awards

payable in terms of section 98A of the Act. (Par 10.3)

The liquidators contend that the claims of CSARS are dealt with in order of

preference and the order of preference does not provide for the collection of

PAYE as a form of "super preference" as contended for by CSARS. (Par 11)

CSARS approaches this matter on the basis that there is no incongruity

between the statutory obligation of an employer to deduct PAYE from an

employee's remuneration and the scheme of preferences prescribed by

sections 95 to 104 of the Insolvency Act in respect of the concursus

creditorum. According to CSARS while there is no specific reference in

section 98A of the Insolvency Act to the application of the sections of the

Income Tax Act, it is plain that the intention of the legislature is that section

98A of the Insolvency Act on the one hand and the applicable sections of the

Tax Administration Act, are to be read together. (Par 12)

In Van Der Merwe and Others v UTI South Africa Proprietary Limited and

Others (11033/2014) [2014] ZA KZDHC 61 (17 December 2014) at par 12,

the Court recognised the fundamental principle of insolvency law as follows:

"The fundamental principle of insolvency law is that all creditors are subject to its provisions, save in exceptional cases where statutes specifically provide otherwise. This fundamental principle is given effect to in two ways. Firstly by the creation of a concursus creditorum in terms of which the claims and rights of all creditors of an insolvent company are determined as at the date of insolvency, with the result that one creditor is not entitled to improve its position in relation to others after the date of the concursus. Secondly, by ensuring that every asset belonging to the insolvent company is properly realised by its liquidator so that the proceeds can be distributed amongst the company's creditors in the order preference dictated by insolvency law and determined as at the concursus. So it is then that section 391 of the old Companies Act obliges a liquidator to recover "all the assets and property" of

the insolvent company, "all" being a word of the widest possible import. (Par 20)

The legal principles as regards the approach to interpretation in such

instances (where more than one provision must be interpreted) are well

established:

(a) According to the SCA where there is legislation dealing

generally with a topic and, either before or after the enactment of that

legislation, the legislature enacts other legislation dealing with a

specific area otherwise covered by the general legislation, the two

statutes coexist alongside one another, each dealing with its own

subject-matter and without conflict. In both instances the general

statute's reach is limited by the existence of the specific legislation.

[Minister of Justice & Constitutional Dev v SA Litigation Centre

2016 (3) SA 317 (SCA) at par 102.] (Par 24)

(b) In Minister of Defence & Military Veterans v Motau 2014 (5)

SA 69 (CC), in determining the breadth of two different statutes, the

Constitutional Court assessed the ambit of the issues covered by each

piece of legislation and ultimately found that they fell to apply

concurrently. [At par 77.] It also reiterated the principle that statutes,

where possible "must be read together". [At par 78.] (Par 25)

(c) A fundamental tenet of statutory interpretation is that the words

in a statute must be given their ordinary grammatical meaning, unless

to do so would result in an absurdity. There are three important

interrelated riders to this general principle, namely:

(i) Statutory provisions should always be interpreted purposively.

(ii) The relevant statutory provision must be properly

contextualised; and

(iii) All statutes must be construed consistently with the

Constitution, that is, where reasonably possible, legislative

provisions ought to be interpreted to preserve their

constitutional validity. This proviso to the general principle is

closely related to the purposive approach referred to in (i).

Cool Ideas 1186 CC v Hubbard and Another 2014 (4) SA

474 (CC) at par 28. (Par 27)

In considering the inter-relationship between the Insolvency Act and the

Income Tax Act, the following issues are of relevance:

First, when the Insolvency Act is considered as against the Income Tax Act, it

is clear that the Insolvency Act regulates the order of preference on

insolvency. The issue of preference on insolvency is not dealt with in the

Income Tax Act. (Par 300

Second, there is no acknowledgement or provision in the ranking of

preferences for exceptions outside of the statutory straitjacket of sections 95

to 104 of the Insolvency Act. On the contrary, the Insolvency Act suggests

that its ranking of preferences apply without exception. If the Income Tax Act

were to create a preference outside of the framework provided for under the

Insolvency Act, it would have to do so in the clearest of terms. (Par (31)

Third, while CSARS relies on the Fourth Schedule of the Income Tax Act,

those provisions do not impose any such preference and nor do they indicate

any intention to trump the carefully framed order of preference as provided for

in the Insolvency Act. In Cooper v Die Meester 1992(3) SA 60 CA) at page

82, it was held that sections 96(1) to 102 contain an exhaustive list of

priorities of statutory preferences on insolvency, and that there is no room in

that list of order of preferences for a preference that is not expressly stated

therein. (Par 31)

Fourth, it is not insignificant that sections 98A to 100 of the Insolvency Act

were introduced by amendment of the Insolvency Act by Act 22 of 1998. Prior

to the amendment, claims by CSARS (section 99) were given preference to

salaries and wages. After the amendment, the order was reversed. The

consequence of this amendment is that preference under certain statutory

obligations, including under the Fourth Schedule, now ranks below the

preference in respect of salary/wages of former employees. To this end, the

legislature expressly provided for a possible claim that CSARS may have as

a creditor in respect of PAYE, which it provided for under section 99. The

effect of the argument advanced by CSARS is that this ranking would have to

be altered. In fact, it would have the effect of rendering section 99(1)(b)(iv)

superfluous. The ranking of claims (with due regard to the legislative

amendment), shows that the legislature has identified the interests of

employees as ranking above other claimants. It did so with due regard to the

special protection that employees are afforded. (Par 32)

As regards the reference to an employer, on the express wording of

paragraph 2 of Part II of the Fourth Schedule, it is apparent that it relates to

an employer paying salaries or wages and that such employer includes a

trustee in insolvency. However, when read in light of paragraph 5(3), it

appears that the structure is designed to cater for a situation where there is an

ongoing relationship of employment. For instance, where a trading company,

with employees is liquidated and prior to its liquidation, it withheld PAYE both

from previous salaries paid and from salaries that it was about to pay; after

liquidation, the liquidators elect to retain the service of the employees and

their employment contracts continue. (Par 35)

In LDR Van Der Merwe and Another v The Master and SARS (44677/2014)

(Gauteng Division), the Court also found that the Insolvency Act determines the

precedence of distribution in terms of sections 95 to 104 and concluded that the

applicants were not obliged to withhold any amounts in respect of PAYE when

making awards or distributions to former employees in terms of section 98 of the

Insolvency Act. (Par 45)

CSARS contends that the remuneration and other amounts owing to the

employees only became payable after liquidation. On the evidence, this

contention is not borne out in that the founding affidavit avers that the awards

of R 9 580 319,12 pertains to the preferent portion of claims of former

employees due by the company for salaries and wages up to the

commencement of the winding up, leave or holiday due to the former

employees accrued up to the date of the commencement of the winding up

and severance or retrenchment pay due to former employees as a result of

termination of the contracts of employment in terms of section 38 of the

Insolvency Act. (Par 46)

Paragraph 3(2) of Part II to the Fourth Schedule provides as follows: "The

provisions of paragraph 2 shall apply in respect of all amounts payable by way

of remuneration, notwithstanding the provisions of any law which provide that

any such amount shall not be reduced or shall not be subject to attachment."

While this may suggest that the Income Tax Act trumps the Insolvency Act, on

balance and with regard to the aforementioned factors it does not do so. In

particular, this provision cannot have the effect of the Income Tax Act taking

precedence over the Insolvency Act in circumstances where the Income Tax

Act does not, in any way, regulate preference on insolvency. (Par 47)

The position as regards the payment of PAYE on insolvency is governed by

the Insolvency Act. In light of this conclusion, the Master’s decision is

reviewed and set aside. (Par 49)

Extracts

4. The key issue for determination in this matter is whether paragraph 2 of the Fourth Schedule of the Income Tax Act No 58 of 1962 ("the Income Tax Act") applies to payments of awards made in terms of claims preferent pursuant to section 98A of the Insolvency Act No 24 of 1936 ("the Insolvency Act").

6.12. On 5 March 2015 the Master published his decision. The Master sustained the objection lodged and directed that· the joint liquidators amend the first liquidation and distribution account to include the payment of PAYE as an administrative expense on all remuneration earned by the employees of the company on the amount of R 9 580 319.12 made in terms of section 98A of the Insolvency Act. The Master further directed that if the said employees have already been paid, the applicants are directed to deduct all PAYE that would have been paid to CSARS out of their fees

and lodge an amended first liquidation and distribution account within 14 days of the ruling.

10.3. The order of preference in sections 95 to 104 does not make provision for the deduction of employees' tax from preferent awards payable in terms of section 98A of the Insolvency Act.

11. In short, the liquidators contend that the claims of CSARS are dealt with in order of preference and the order of preference does not provide for the collection of PAYE as a form of "super preference" as contended for by CSARS.

20. In Van Der Merwe and Others v UTI South Africa Proprietary Limited and Others (11033/2014) [2014] ZA KZDHC 61 (17 December 2014) at par 12, the Court recognised the fundamental principle of insolvency law as follows:

"The fundamental principle of insolvency law is that all creditors are subject to its provisions, save in exceptional cases where statutes specifically provide otherwise. This fundamental principle is given effect to in two ways. Firstly by the creation of a concursus creditorum in terms of which the claims and rights of all creditors of an insolvent company are determined as at the date of insolvency, with the result that one creditor is not entitled to improve its position in relation to others after the date of the concursus. Secondly, by ensuring that every asset belonging to the insolvent company is properly realised by its liquidator so that the proceeds can be distributed amongst the company's creditors in the order preference dictated by insolvency law and determined as at the concursus. So it is then that section 391 of the old Companies Act obliges a liquidator to recover "all the assets and property" of the insolvent company, "all" being a word of the widest possible import."

12. CSARS, on the other hand approaches this matter on the basis that there is no incongruity between the statutory obligation of an employer to deduct PAYE from an employee's remuneration and the scheme of preferences prescribed by sections 95 to 104 of the Insolvency Act in respect of the concursus creditorum. According to CSARS while there is no specific reference in section 98A of the Insolvency Act to the application of the sections of the Income Tax Act, it is plain that the intention of the legislature is that section 98A of the Insolvency Act on the one hand and the applicable sections of the Tax Administration Act, are to be read together.

20. In Van Der Merwe and Others v UTI South Africa Proprietary Limited and Others (11033/2014) [2014] ZA KZDHC 61 (17 December 2014) at par 12, the Court recognised the fundamental principle of insolvency law as follows:

"The fundamental principle of insolvency law is that all creditors are subject to its provisions, save in exceptional cases where statutes specifically provide otherwise. This fundamental principle is given effect to in two ways. Firstly by the creation of a concursus creditorum in terms of which the claims and rights of all creditors of an insolvent company are determined as at the date of insolvency, with the result that one creditor is not entitled to improve its position in relation to others after the date of the concursus. Secondly, by ensuring that every asset belonging to the insolvent company is properly realised by its liquidator so that the proceeds can be distributed amongst the company's creditors in the order preference dictated by insolvency law and determined as at the concursus. So it is then that section 391 of the old

Companies Act obliges a liquidator to recover "all the assets and property" of the insolvent company, "all" being a word of the widest possible import."

24. The legal principles as regards the approach to interpretation in such instances (where more than one provision must be interpreted) are well established: According to the SCA where there is legislation dealing generally with a topic and, either before or after the enactment of that legislation, the legislature enacts other legislation dealing with a specific area otherwise covered by the general legislation, the two statutes coexist alongside one another, each dealing with its own subject-matter and without conflict. In both instances the general statute's reach is limited by the existence of the specific legislation. [Minister of Justice & Constitutional Dev v SA Litigation Centre 2016 (3) SA 317 (SCA) at par 102.]

25. In Minister of Defence & Military Veterans v Motau 2014 (5) SA 69 (CC), in determining the breadth of two different statutes, the Constitutional Court assessed the ambit of the issues covered by each piece of legislation and ultimately found that they fell to apply concurrently. [At par 77.] It also reiterated the principle that statutes, where possible "must be read together". [At par 78.]

27. As regards the general approach to statutory interpretation, in Cool Ideas 1186 CC v Hubbard and Another 2014 (4) SA 474 (CC) at par 28 the Constitutional Court held as follows 8:

“A fundamental tenet of statutory interpretation is that the words in a statute must be given their ordinary grammatical meaning, unless to do so would result in an absurdity. There are three important interrelated riders to this general principle, namely:

(a) that statutory provisions should always be interpreted purposively;

(b) the relevant statutory provision must be properly contextualised; and

(c) all statutes must be construed consistently with the Constitution, that is, where reasonably possible, legislative provisions ought to be interpreted to preserve their constitutional validity. This proviso to the general principle is closely related to the purposive approach referred to in (a)."

28. In considering the inter-relationship between the Insolvency Act and the Income Tax Act, the following issues are of relevance:

29. First, when the Insolvency Act is considered as against the Income Tax Act, it is clear that the Insolvency Act regulates the order of preference on insolvency. The issue of preference on insolvency is not dealt with in the Income Tax Act.

30. Second, there is no acknowledgement or provision in the ranking of preferences for exceptions outside of the statutory straitjacket of sections 95 to 104 of the Insolvency Act. On the contrary, the Insolvency Act suggests that its ranking of preferences apply without exception. If the Income Tax Act were to create a preference outside of the framework provided for under the Insolvency Act, it would have to do so in the clearest of terms.

31. Third, while CSARS relies on the Fourth Schedule of the Income Tax Act, those provisions do not impose any such preference and nor do they indicate any intention

to trump the carefully framed order of preference as provided for in the Insolvency Act. In Cooper v Die Meester 1992(3) SA 60 CA) at page 82, it was held that sections 96(1) to 102 contain an exhaustive list of priorities of statutory preferences on insolvency, and that there is no room in that list of order of preferences for a preference that is not expressly stated therein.

32. Fourth, it is not insignificant that sections 98A to 100 of the Insolvency Act were introduced by amendment of the Insolvency Act by Act 22 of 1998. Prior to the amendment, claims by CSARS (section 99) were given preference to salaries and wages. After the amendment, the order was reversed. The consequence of this amendment is that preference under certain statutory obligations, including under the Fourth Schedule, now ranks below the preference in respect of Salary/wages of former employees. To this end, the legislature expressly provided for a possible claim that CSARS may have as a creditor in respect of PAYE, which it provided for under section 99. The effect of the argument advanced by CSARS is that this ranking would have to be altered. In fact, it would have the effect of rendering section 99(1)(b)(iv) superfluous. The ranking of claims (with due regard to the legislative amendment), shows, in my view, that the legislature has identified the interests of employees as ranking above other claimants. It did so, in my view, with due regard to the special protection that employees are afforded.

35. As regards the reference to an employer, on the express wording of paragraph 2 of Part II of the Fourth Schedule, it is apparent that it relates to an employer paying salaries or wages and that such employer includes a trustee in insolvency. However, when read in light of paragraph 5(3), it appears, in my view, that the structure is designed to cater for a situation where there is an ongoing relationship of employment. For instance, where a trading company, with employees is liquidated and prior to its liquidation, it withheld PAYE both from previous salaries paid and from salaries that it was about to pay; after liquidation, the liquidators elect to retain the service of the employees and their employment contracts continue.

44. In Commissioner, South African Revenue Service v Van der Merwe and Others (598/2015) 2017(3) 34 at par 20 the SCA dealt with the relevance of the Insolvency Act to the Customs Act. While the Customs Act does not arise in the present instance, I am of the view that the principle is of relevance, viz:

"[20] The important aspect o/these provisions is that they are all addressed to the ordinary} situation where goods' are brought into the country and attract a liability to pay customs duty. They are directed at the obligation of the importer and others liable to pay duty, and do not address the special situation of insolvency. Thai is not surprising because that is dealt with in the Insolvency Act, a general statue intended to deal with all cases of insolvency. In brief: when one looks at the liability to pay customs duly in the ordinary course, one looks to the provisions of the Customs Act alone. When insolvencv intervenes one turns to the Insolvency Act . ..

45. In LDR Van Der Merwe and Another v The Master and SARS (44677/2014) (Gauteng Division), the Court also found that the Insolvency Act determines the precedence of distribution in terms of sections 95 to 104 and concluded that the applicants were not obliged to withhold any amounts in respect of PAYE when making awards or distributions to former employees in terms of section 98 of the Insolvency Act.

46. Finally and to the extent that this may be of relevance, CSARS contends that the remuneration and other amounts owing to the employees only became payable after liquidation. I am of the view that on the evidence, this contention is not borne out in that the Deponent to the founding affidavit avers that the awards of R 9 580 319,12 pertains to the preferent portion of claims of former employees due by the company for salaries and wages up to the commencement of the winding up, i.e. 7 December 2012, leave or holiday due to the former employees accrued up to the date of the commencement of the winding up and severance or retrenchment pay due to former employees as a result of termination of the contracts of employment in terms of section 38 of the Insolvency Act; this averment is not disputed in the answering affidavit.

47. I am mindful that paragraph 3 (2) of Part II to the Fourth Schedule provides as follows: "The provisions of paragraph 2 shall apply in respect of all amounts payable by way of remuneration, notwithstanding the provisions of any law which provide that any such amount shall not be reduced or shall not be subject to attachment." While this may suggest that the Income Tax Act trumps the Insolvency Act, on balance and with regard to the aforementioned factors, I am of the view that it does not do so. In particular, this provision, in my view, cannot have the effect of the Income Tax Act taking precedence over the Insolvency Act in circumstances where the Income Tax Act does not, in any way, regulate preference on insolvency.

49. I find for reasons given that the position as regards the payment of PAYE on insolvency is governed by the Insolvency Act. In light of this conclusion, the First Respondent's decision of 5 March 2015, falls to be reviewed and set aside.

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Louw NO and another v Sobabini CC and others

[2017] JOL 37791 (ECG

Collusive dealings in terms of section 31 of the Insolvency Act 24 of

1936

In order to establish collusion, a person need not prove that the

intention of the parties to collusion was to defraud the insolvent estate.

If the parties to the collusion know that the debtor is insolvent and also

know that the disposition will have the effect of prejudicing creditors or

of preferring one of the creditors above another then it follows that the

collusion is fraudulent in relation to creditors in the sense that the

object thereof is to do them out of their rights.

The crux of the plaintiffs' case is that at a time when the trust's liabilities

exceeded the value of its assets, a number of the defendants, with the

knowledge of the other defendants, resolved and colluded with one of the

trustees of the trust to take possession of all of the cattle on the trust's farm

and to "divide and distribute the cattle in the possession of the Trust between

them as they saw fit". The appropriation and distribution by the defendants of

the livestock was not an appropriation and distribution of the livestock owned

by the them but included livestock owned by the Trust in that none of the

livestock appropriated and distributed was identified, or capable of being

identified as the livestock leased by the various Defendants to the Trust. (Par

[7])

The plaintiffs alleged that when the distribution occurred the defendants knew

that the trust was indebted to the the co-operative" in the amount of

R1,3 million; that the trust was insolvent; that the co-operative held a statutory

pledge over all of the trust's livestock and a special notarial bond in the

amount of R1 050 000 over 150 dairy cows owned by the trust; that the

defendants were aware that proceedings for the sequestration of the trust

were imminent; and that the livestock in the possession of the trust included

livestock "which was the progeny of livestock leased from Defendants and

was owned by the Trust". (Par [8])

The appropriation of the livestock and the disposal of the equipment to the

Jackson had the effect, so the plaintiffs alleged, of preferring the defendants

as creditors of the trust over other creditors; was done with the intention of

preferring them over other creditors; was consequent upon collusion between

the trust and the defendants; and were not transfers in the ordinary course of

business. (Par [10])

It is more probable than not that the trust owned a large number of the

animals that were distributed among the lessors. First, tag numbers indicated

that some of the 150 heifers put up in 2009 as security in favour of the co-

operative were among the animals distributed to the lessors. Secondly, the

trust owned the progeny of the cattle leased from all of the lessors. Jackson

asserted that because his lease with the trust was silent on this aspect, the

trust did not own the progeny of his herd but he did. He is not correct in his

view. The essence of a lease such as this is that the lessee obtains the milk

and the progeny produced by the leased animals. In the absence of an

express term, the trust's ownership of the progeny was a tacit term of the

agreement of lease between the trust and Jackson. It is noteworthy that

Jackson never sought the delivery of the progeny of his herd, never enquired

about them and never required them to be identified. Jackson never sought

payment for the expense of raising them. These are strong indications that the

parties considered the lease to include a tacit term to the effect that the

progeny of the leased cattle became the property of the trust. (Par [34])

Jackson's defence that he was the owner of the animals that he took has no

merit and must fail. (Par [42])

In this instance, section 83 of the Insolvency Act was not complied with at all.

Section 83(10) provides as follows: “Whenever a creditor has realized his

security as hereinbefore provided he shall forthwith pay the net proceeds of

the realization to the trustee, ...” In Venter NO v Avfin (Pty) Ltd 1996 (1) SA

826 (A), a case with strikingly similar facts to the present case, the creditor

having failed to give notice of its security and having sold the security, argued

that it was not obliged to pay the amount realised to the trustee because

section 83 had not been complied with and thus had no application. Scott AJA

rejected this argument: “The reference in the phrase in question to the

preceding provisions was intended to be no more than a general reference to

the realisation of securities as contemplated in the earlier subsections of

section 83. It was not intended to import into section 83(10) a requirement of

compliance with those subsections as a precondition to the obligation of the

creditor to pay over the proceeds of his security to the trustee." It could not

have been intended that a creditor by his own non-compliance with the

provisions of the Act could notionally place himself in a more favourable

position vis-à-vis the trustee and avoid his statutory obligation to pay over the

proceeds to the trustee. (Par [57])

Jackson's case was that he was simply acting in accordance with his rights

under the special notarial bond when he assumed ownership of the

equipment. In this he was incorrect. He was entitled to attach the equipment

and then, on the trust's insolvency, to deal with it and to claim in terms of

section 83 of the Insolvency Act. In truth, the "voluntary surrender" had

nothing to do with the special notarial bond, even though it referred to it: the

"voluntary surrender" recorded the terms of a scantly disguised sale and set-

off. (Par [59])

The cattle that Jackson took were not his but, for the most part, the property

of the trust. They were disposed of by the trust to Jackson. The facts of this

case are similar to those of Meyer NO v Transvaalse Lewendehawe

Koöperasie Bpk en andere 1982 (4) SA 746 (A). It was common cause that

the equipment belonged to the trust and was given to Jackson by the trust.

Dispositions have been proved in respect of both the cattle and the

equipment. Those dispositions were in favour of Jackson, a creditor of the

trust. It has been established that the dispositions occurred within six months

of the trust's sequestration. (Par [66])

In Klerck NO v Kaye 1989 (3) SA 669 (C) at 675E Scott AJ held that when

deciding whether a disposition had the effect of preferring one creditor over

others, the "true enquiry" is whether the disposition involved one creditor

"being paid proportionately more than the other creditors or being paid in

advance of the others". The effect of the disposition of the cattle was to prefer

Jackson and the other lessors over the rest of the trust's creditors, particularly

the co-operative, in both of these senses. The effect of the disposition of the

equipment was to prefer Jackson over the trust's other creditors including the

other lessors and the co-operative, also in both sense referred to by Scott AJ:

in Jackson's own words, he "had to make a call as far as my movables were

concerned in order to minimise my damages" and he "chose not to submit a

claim" but instead to take the equipment, with its value to be deducted from

what was owed by the trust. (Par [67])

Jackson took an active interest in the financial position of the trust. He was

aware at all material times that the trust did not have the cattle to return to the

lessees when the leases ended. He knew that the shortfall was substantial.

He also knew that Jackson was unable to pay rental to the lessors, himself

included, and that it owed them all money that it could not pay. Once all of the

cattle on the trust's farm had been taken by the lessors, its source of income

no longer existed. Jackson also knew that the trust owed money to the co-

operative and that it held security for the debt owed to it. He knew that the

amount owed was in the region of R1,3 million. He was aware that the co-

operative was contemplating bringing an application for the sequestration of

the trust. All of these facts establish objectively on a balance of probabilities

that the trust's liabilities exceeded the value of its assets both before the

dispositions and immediately after the dispositions were made. (Par [68])

It was Jackson's case that he was entitled to take both the cattle and the

equipment. It was not pleaded by him, and consequently was also not proved

by him, that the dispositions of the cattle and the equipment were made in the

ordinary course of business and that they were not made with the intention of

preferring him over other creditors. Indeed, the facts viewed holistically

compel one to the conclusion that the dispositions occurred precisely because

of the insolvent circumstances of the trust. (Par [69])

The requirements of section 29 have thus been established by the plaintiffs.

(Par [70])

Were the dispositions were made by Winfield in collusion with Jackson?

In Finn's Trustees v Prior 1919 EDL 133 at 137 Kotze AJP defined collusion

as "a conniving together between two persons . . . to practise a fraud on the

creditors". It was argued in Gert de Jager (Edms) Bpk v Jones NO and

McHardy NO 1964 (3) SA 325 (A) that, in order to establish collusion, a

person had to prove that the intention of the parties to collusion was to

defraud the insolvent estate. This argument was rejected by Rumpff JA who

held that:

". . . if the parties to the collusion know that the debtor is insolvent and

also know that the disposition will have the effect specified in s 31(1)

[prejudicing creditors or of preferring one of the creditors above

another] then it follows that the collusion is fraudulent in relation to

creditors in the sense that the object thereof is to do them out of their

rights" ". . . (Translated from Afrikaans at 330H–331A.) (Par [73])

It is clear that the trustee of the trust colluded with the lessors, including

Jackson, in relation to the disposition of the cattle and with Jackson in relation

to the disposition of the equipment: he co-operated fully with the lessors who

had decided to take all of the cattle in the possession of the trust and divide

them among themselves, he agreed to this arrangement and helped to

facilitate it; he agreed with Jackson to transfer ownership of the equipment in

return for a set-off of its value against whatever the trust owed Jackson, and

he then delivered the equipment to Jackson. Both Winfield and Jackson knew

that the trust was insolvent and that their conduct had the effect of preferring

Jackson over other creditors of the trust and of prejudicing those other

creditors. It follows therefore that their intention was to do those other

creditors out of their rights and that they acted fraudulently in this sense. The

requirements of section 31(1) have been established. (Par (74)]

In terms of section 31:

First, on the setting aside of the dispositions, section 31(2) envisages

Jackson having to make good any loss occasioned to the trust by his

actions. In this matter, that is simple enough. The court ordered him to

return the cattle and equipment that he took or pay their value.

Secondly, section 31(2) makes provision for a penalty to be imposed

on the person guilty of collusive dealing. The use of the word "shall" in

this respect, followed close on the heels of the same word used in

relation to making good any loss occasioned by the collusion indicate

that the imposition of a penalty is not discretionary. The quantum of the

penalty, however, lies within the discretion of the court but may not

exceed the value of the benefit which would have accrued to the

person had the disposition not been set aside. Jackson's conduct was

particularly reprehensible, such was his contempt for other creditors

and the law. He helped himself to as much as he could lay his hands

on. Nothing mitigates his conduct. The court imposed a penalty equal

to the value of the cattle, which has been agreed upon, and of the

equipment, which was agreed to be R310 000 between Jackson and

Winfield.

Thirdly, section 31(2) makes provision for the forfeiture of the creditor's

claim against the insolvent estate – and that means any claim which

the creditor may have against the insolvent estate. This is an automatic

consequence of the finding of collusive dealing. The court has no

discretion in this regard. The court made an order to this effect in

respect of any claim that Jackson might have had against the insolvent

estate of the trust. (Par 76 to 78)

Extracts

[7] The crux of the plaintiffs' case is that on or about 25 August 2011, at a time when the trust's liabilities exceeded the value of its assets, a number of the defendants, with the knowledge of the other defendants, resolved and colluded with Winfield [one of the trustees of the trust] to take possession of all of the cattle on the trust's farm and to "divide and distribute the cattle in the possession of the Trust between them as they saw fit". This agreement was given effect to, it was alleged, on 7 September 2011. The particulars of claim continue to say:

"The appropriation and distribution by the Defendants of the livestock was not an appropriation and distribution of the livestock owned by the Defendants but included livestock owned by the Trust in that none of the livestock appropriated and distributed was identified, or capable of being identified as the livestock leased by the various Defendants to the Trust."

[8] The plaintiffs alleged that when the distribution occurred the defendants knew that the trust was indebted to the Humansdorp Co-operative ("the co-operative") in the amount of R1,3 million; that the trust was insolvent; that the co-operative held a statutory pledge over all of the trust's livestock and a special notarial bond in the amount of R1 050 000 over 150 dairy cows owned by the trust; that the defendants were aware that proceedings for the sequestration of the trust were imminent; and that the livestock in the possession of the trust included livestock "which was the progeny of livestock leased from Defendants and was owned by the Trust".

[10] The appropriation of the livestock and the disposal of the equipment to Jackson had the effect, so the plaintiffs alleged, of preferring the defendants as creditors of the trust over other creditors; was done with the intention of preferring them over other creditors; was consequent upon collusion between the trust and the defendants; and were not transfers in the ordinary course of business.

[34] In my view, it is more probable than not that the trust owned a large number of the animals that were distributed among the lessors on 7 September 2011. First, tag numbers indicated that some of the 150 heifers put up in 2009 as security in favour of the co-operative were among the animals distributed to the lessors. Secondly, the trust owned the progeny of the cattle leased from all of the lessors. Jackson asserted that because his lease with the trust was silent on this aspect, the trust did not own the progeny of his herd but he did. In my view, he is not correct in his view. It seems to me that the essence of a lease such as this is that the lessee obtains the milk and the progeny produced by the leased animals. In the absence of an express term, the trust's ownership of the progeny was, in my view, a tacit term of the agreement of lease between the trust and Jackson. It is noteworthy that Jackson never sought the

delivery of the progeny of his herd, never enquired about them and never required them to be identified. Jackson never sought payment for the expense of raising them. These are strong indications that the parties considered the lease to include a tacit term to the effect that the progeny of the leased cattle became the property of the trust.

[42] My conclusion is that Jackson's defence that he was the owner of the animals that he took on 7 September 2011 has no merit and must fail. I shall deal in due course with the consequences of this finding.

[46] The special notarial bond is one contemplated by the Security by Means of Movable Property Act 57 of 1993. Section 1(1) of the Act provides:

"If a notarial bond hypothecating corporeal movable property specified and described in the bond in a manner which renders it readily recognizable, is registered after the commencement of this Act in accordance with the Deeds Registries Act, 1937 (Act 47 of 1937), such property shall–

(a) subject to any encumbrance resting upon it on the date of registration of the bond; and

(b) notwithstanding the fact that it has not been delivered to the mortgagee, be deemed to have been pledged to the mortgagee as effectually as if it had expressly been pledged and delivered to the mortgagee."

[57] In this instance, section 83 was not complied with at all. In Venter NO v Avfin (Pty) Ltd, [Venter NO v Avfin (Pty) Ltd 1996 (1) SA 826 (A)] a case with strikingly similar facts to the present case, the creditor having failed to give notice of its security and having sold the security, argued that it was not obliged to pay the amount realised to the trustee because section 83 had not been complied with and thus had no application. Scott AJA dealt with this argument as follows: [At 833F–834B.]

"The interpretation, I think, becomes all the more unlikely when the phrase is considered in the broader context of the Act. The trustee is the person burdened with the task of administering and winding up the insolvent estate. In terms of s 20 of the Act the effect of insolvency is to divest the insolvent of his estate and to vest it in the trustee upon the latter's appointment. The trustee, in turn, is required in terms of s 69 of the Act to take into his possession or under his control all movable property, books and documents belonging to the insolvent. At common law a creditor who held movable property as security for his claim could not realise it himself. He had to deliver it to the trustee who had the right to administer it subject to the preference of the creditor in relation to the proceeds derived from its realisation (see National Bank of South Africa Ltd v Cohen's Trustee 1911 AD 235 at 250). Section 83, however, permits a creditor who holds movable property as security for his claim, subject to certain limitations, to retain possession of such property and to realise it himself. But once the property is realised he must pay the proceeds to the trustee. The provisions in s 83(10) requiring him to do so are consistent with the general scheme of the Act and, to the extent that the trustee is entitled to receive such proceeds, with the common law.

Viewed against this background it could not, I think, have been intended that a creditor by his own non-compliance with the provisions of the Act could notionally place himself in a more favourable position vis-à-vis the trustee and avoid his statutory obligation to pay over the proceeds to the trustee. That the trustee may himself have failed earlier to recover the property in terms of s 83(6)

does not detract from the obvious anomaly which would result from such a construction. Indeed, the non-compliance by the creditor may occur prior to the second meeting of creditors.

In my view, therefore, the reference in the phrase in question to the preceding provisions was intended to be no more than a general reference to the realisation of securities as contemplated in the earlier subsections of s 83. It was not intended to import into s 83(10) a requirement of compliance with those subsections as a precondition to the obligation of the creditor to pay over the proceeds of his security to the trustee."

[58] The effect of section 1(1) of the Security by Means of Movable Property Act and the special notarial bond was that the equipment mentioned in the special notarial bond was pledged to Jackson. The "voluntary surrender" recorded Jackson's entitlement to "take all or some of the movable assets encumbered by the Notarial Bond into pledge". It then stated, however, that the value of the equipment would be deducted from the value of Jackson's herd and that ownership of the equipment would pass to Jackson.

[59] Jackson's case was that he was simply acting in accordance with his rights under the special notarial bond when he assumed ownership of the equipment. In this he was incorrect. He was entitled to attach the equipment and then, on the trust's insolvency, to deal with it and to claim in terms of section 83 of the Act. In truth, the "voluntary surrender" had nothing to do with the special notarial bond, even though it referred to it: the "voluntary surrender" recorded the terms of a scantly disguised sale and set-off. The trust sold the equipment to Jackson for R310 000 which was set off against the amounts the trust owed him.

[66] I have found that the cattle that Jackson took were not his but, for the most part, the property of the trust. They were disposed of by the trust to Jackson. [The facts of this case are similar to those of Meyer NO v Transvaalse Lewendehawe Koöperasie Bpk en andere 1982 (4) SA 746 (A).] It was common cause that the equipment belonged to the trust and was given to Jackson by the trust. Dispositions have been proved in respect of both the cattle and the equipment. Those dispositions were in favour of Jackson, a creditor of the trust. [See generally, Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D).] The disposition of the equipment occurred on 31 August 2011 and the disposition of the cattle occurred on 7 September 2011. The trust was provisionally sequestrated on 29 September 2011 and finally sequestrated on 17 November 2011. It has thus been established that the dispositions occurred within six months of the trust's sequestration.

[67] In Klerk NO v Kaye [Klerck NO v Kaye 1989 (3) SA 669 (C) at 675E. See too Simon NO and others v Coetzee [2007] 2 All SA 110 (T).] Scott AJ held that when deciding whether a disposition had the effect of preferring one creditor over others, the "true enquiry" is whether the disposition involved one creditor "being paid proportionately more than the other creditors or being paid in advance of the others". The effect of the disposition of the cattle was to prefer Jackson and the other lessors over the rest of the trust's creditors, particularly the co-operative, in both of these senses. The effect of the disposition of the equipment was to prefer Jackson over the trust's other creditors including the other lessors and the co-operative, also in both sense referred to by Scott AJ: in Jackson's own words, he "had to make a call as far as my movables were concerned in order to minimise my damages" and he "chose not to submit a claim" but instead to take the equipment, with its value to be deducted from what was owed by the trust.

[68] Jackson took an active interest in the financial position of the trust. He had done so since about April 2011 at least. He was aware at all material times – on 31 August 2011 and on 7 September 2011 – that the trust did not have the cattle to return to the lessees when the leases ended. He knew that the shortfall was substantial. He also knew that Jackson was unable to pay rental to the lessors, himself included, and that it owed them all money that it could not pay. Once all of the cattle on the trust's farm had been taken by the lessors, its source of income no longer existed. Jackson also knew, before 31 August 2011, that the trust owed money to the co-operative and that it held security for the debt owed to it. On 6 September 2011, he knew that the amount owed was in the region of R1,3 million. He was aware that the co-operative was contemplating bringing an application for the sequestration of the trust. All of these facts establish objectively [Venter v Volkskas Ltd 1975 (3) SA 175 (T) at 178H–179A] on a balance of probabilities [Lipschitz and another NNO v Landmark Consolidated (Pty) Ltd 1979 (2) SA 482 (W) at 494D] that the trust's liabilities exceeded the value of its assets both before the dispositions and immediately after the dispositions were made.

[69] It was Jackson's case that he was entitled to take both the cattle and the equipment. It was not pleaded by him, and consequently was also not proved by him, that the dispositions of the cattle and the equipment were made in the ordinary course of business and that they were not made with the intention of preferring him over other creditors. Indeed, the facts viewed holistically compel one to the conclusion that the dispositions occurred precisely because of the insolvent circumstances of the trust.

[70] The requirements of section 29 have thus been established by the plaintiffs.

[73] I turn now to the central question of whether the dispositions were made by Winfield in collusion with Jackson. In Finn's Trustees v Prior [Finn's Trustees v Prior 1919 EDL 133 at 137] Kotze AJP defined collusion as "a conniving together between two persons . . . to practise a fraud on the creditors". It was argued in Gert de Jager (Edms) Bpk v Jones NO and McHardy NO [Gert de Jager (Edms) Bpk v Jones NO and McHardy NO 1964 (3) SA 325 (A)] that, in order to establish collusion, a person had to prove that the intention of the parties to collusion was to defraud the insolvent estate. This argument was rejected by Rumpff JA who held that:

". . . as die partye tot die samespanning weet dat die skuldenaar insolvent is en ook weet dat die vervreemding die gevolg sal hê wat in art. 31(1) genoem word, dan volg dit dat die samespanning bedrieglik is ten opsigte van die skuldeisers in die sin dat die oogmerk daarvan is om hulle tekort te doen." [At 330H–331A (". . . if the parties to the collusion know that the debtor is insolvent and also know that the disposition will have the effect specified in s 31(1) then it follows that the collusion is fraudulent in relation to creditors in the sense that the object thereof is to do them out of their rights").]

[74] It is clear that Winfield colluded with the lessors, including Jackson, in relation to the disposition of the cattle and with Jackson in relation to the disposition of the equipment: he co-operated fully with the lessors who had decided to take all of the cattle in the possession of the trust and divide them among themselves, he agreed to this arrangement and helped to facilitate it; he agreed with Jackson to transfer ownership of the equipment in return for a set-off of its value against whatever the trust owed Jackson, and he then delivered the equipment to Jackson. I have found already that both Winfield and Jackson knew that the trust was insolvent and that their conduct had the effect of preferring Jackson over other creditors of the trust and of prejudicing those other creditors. It follows therefore that their intention was to do

those other creditors out of their rights and that they acted fraudulently in this sense. The requirements of section 31(1) have been established.

[75] Having found that Jackson had engaged in collusive dealing with the trust, section 31(2) of the Act becomes of application. It provides that a party to a collusive disposition:

". . . shall be liable to make good any loss thereby caused to the insolvent estate in question and shall pay for the benefit of the estate, by way of penalty, such sum as the court may adjudge, not exceeding the amount by which he would have benefited by such dealing if it had not been set aside; and if he is a creditor he shall also forfeit his claim against the estate."

[76] First, on the setting aside of the dispositions, section 31(2) envisages Jackson having to make good any loss occasioned to the trust by his actions. In this matter, that is simple enough. I shall order him to return the cattle and equipment that he took or pay their value.

[77] Secondly, section 31(2) makes provision for a penalty to be imposed on the person guilty of collusive dealing. The use of the word "shall" in this respect, followed close on the heels of the same word used in relation to making good any loss occasioned by the collusion indicate to me that the imposition of a penalty is not discretionary. The quantum of the penalty, however, lies within the discretion of the court but may not exceed the value of the benefit which would have accrued to the person had the disposition not been set aside. In my view, Jackson's conduct was particularly reprehensible, such was his contempt for other creditors and the law. He helped himself to as much as he could lay his hands on. I can see nothing that mitigates his conduct. I intend to impose a penalty equal to the value of the cattle, which has been agreed upon, and of the equipment, which was agreed to be R310 000 between Jackson and Winfield.

[78] Thirdly, section 31(2) makes provision for the forfeiture of the creditor's claim against the insolvent estate – and that means any claim which the creditor may have against the insolvent estate. This is an automatic consequence of the finding of collusive dealing. The court has no discretion in this regard. [Gert de Jager (Edms) Bpk v Jones NO and McHardy NO (fn 11) at 337E–F; Mahomed's Estate v Khan 1927 EDL 478 at 488.] Accordingly, I shall make an order to this effect in respect of any claim that Jackson may have had against the insolvent estate of the trust.

[79] For the reasons set out above, I make the order that follows.

(a) The disposition of the Greenacres Trust to the sixth defendant of 55 cows, 11 steam-up heifers, 26 dry cows, 25 large heifers, 28 small heifers and 18 yard heifers on 7 September 2011 is set aside in terms of sections 29, 30 and 31 of the Insolvency Act 24 of 1936.

(b) The disposition of the Greenacres Trust to the sixth defendant of a Holland 56304X4 tractor, a Ford 66104X4 tractor, a Duncan 15 row planter, an Aguirre twin disc fertiliser spreader and a blue tip trailer with drop sides on 31 August 2011 is set aside in terms of sections 29, 30 and 31 of the Insolvency Act.

(c) The sixth defendant is directed to return to the plaintiffs the livestock described in paragraph (a) and the equipment described in paragraph (b) and, in the

event that he cannot do so or does not do so within 10 days of the date of this order, he is directed to pay to the plaintiffs the amounts of R660 000, being the value of the livestock described in paragraph (a), and R310 000, being the value of the equipment described in paragraph (b), together with interest on these amounts calculated at the legal rate from date of judgment to date of payment.

(d) The sixth defendant is ordered to pay to the plaintiffs, as a penalty in terms of section 31(2) of the Insolvency Act, the amounts of R660 000 and R310 000, together with interest on these amounts calculated at the legal rate from date of judgment to date of payment.

(e) The sixth defendant's claims against the insolvent estate of the Greenacres Trust are declared forfeit.

(f) The sixth defendant is directed to pay the plaintiffs' costs.

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Nel NO and others v Bank of Baroda

[2017] JOL 37751 (KZD)

Disposition in terms of section 31 the Insolvency Act 24 of 1936

There is no disposition without an instruction or an agreement, in terms

whereof a “disposition” is made or intended to be made by the insolvent

to another person or the bank account of another person.

Collusion in terms of section 31 necessarily implies the involvement of

at least two parties.

Central to the various alternative grounds upon which the plaintiffs' claim is

based, whether as a disposition without value, avoidable preference, an

undue preference, or a collusive disposition, is the need to allege (and at the

trial, based on such averments, establish) a "disposition". (Par [5])

Disposition" is defined in section 2 of the Insolvency Act to mean:

"any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefore but does not include a disposition in compliance with an order of the Court".

The word "property" is defined as:

"movable or immovable property wherever situate within the Republic, and includes contingent interests in property other than the contingent interest of a fideicommissary heir or legatee".

PM Meskin Insolvency Law and Its Operation in Winding Up at 5–99 in para

[5.31.2]] in dealing with the "meaning of disposition" points out that in any

case seeking to impeach a transaction on the grounds averred by the plaintiffs

"it is fundamental that the transaction should have involved a disposition by

the insolvent of his or, in the case of a company or of a corporation, of its

property".(Par [7])

The definition of "disposition" is not exhaustive. Langeberg Koöperasie Bpk v

Inverdoorn Farming and Trading Company Ltd 1965 (2) SA 597 (A) at 602.

A wide meaning must be given to the word "disposition", for very good

reasons. It covers not only "any conceivable means of disposing of

property" but 'also the conclusion of "any contract therefore" ie a

contract involving payment, delivery or transfer, for whatever reason, of

property. Estate Jager v Whittaker and another 1944 AD 246 at 250.

Thus a contract of sale of immovable property is a disposition on the

date of the conclusion of such contract Sackstein NO v Van der

Westhuizen en 'n ander 1996 (2) SA 431 (0) at 435–436, and the

transfer of immovable property is a disposition by the transferor.

But the repudiation of an inheritance by an heir or legatee is not a

disposition [Wessels NO v De Jager en 'n ander

NNO 2000 (4) SA 924 (SCA)], nor is a refusal to accept a benefit

under an insurance policy, since the insolvent's competence to accept

the benefit in terms of a will or insurance policy is not a "right" which

vests in an insolvent's trustee until such benefit is accepted by the

insolvent.

There is no disposition by an insolvent where it is effected by another

without the insolvent's authorisation or ratification. Wessels NO v De

Jager en 'n ander NNO, supra.

In a banker customer relationship, the customer's right of disposal in

respect of the amounts standing to his credit in the account is

"property" within the meaning of the Insolvency Act and when the

customer "issues a cheque drawn on his account he transfers or

abandons in favour of the other party his right of disposal over the

claim to that part of the amount in his account as was represented by

the amount of the cheque"; hence it is "a disposition" of "property".

Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D) at 113. (Par [7])

In short "a disposition of property" includes every act by which an insolvent

parts with an asset in his estate, whether such asset is a corpus, a sum of

money or a right of action. Grobler v Trustees Estate de Beer 1915 AD 265 at

273 and Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D). In order to found an

action against a particular defendant though, the disposition must have been

made to the defendant or reached the defendant, in the sense of being

received or the benefit thereof accruing to the defendant. Thus E

Bertelsman et al MARS The Law of Insolvency in South Africa (9ed) para

[13.3] at 251] continues that:

"Where A instructs or requests his debtor B to pay the amount of that debt directly to C, and B does so, there is a disposition of A's property to C . . . It is also a disposition if, by arrangement, a loan to the insolvent is paid into the bank account of another person to channel the funds to a creditor of the insolvent."

It is significant that in both the aforesaid examples referred to by Mars the

disposition is preceded by an instruction or an agreement, in terms whereof

the disposition is made or intended to be made by the insolvent to C or the

bank account of the other person. (Par [8])

There simply was no disposition of the sum of R1 600 000 to the Bank of

Baroda. To the extent that the sum of R1 600 000 became due by Bexstar to

Ludba as part of the purchase price of the property upon transfer on 22

September 2010, Ludba would have a claim against Bexstar but not against

the defendant. In conclusion the plaintiffs submitted that the disposition lay in

the right of Ludba to recover the sum of R1 600 000 against Bexstar. That

right however is a right of recovery against Bexstar. It is not a right of recovery

as against the Bank of Baroda unless (possibly) the successive payments of

an amount of R1 600 000 through Crown Wheels, Gharafory Enterprises CC

(in liquidation) to the Bank of Baroda was in terms of a "contract" in terms

whereof Ludba's entitlement to the sum of R1 600 000 due by Bexstar was

transferred or abandoned to the Bank. The allegations lack averments

necessary to sustain a valid cause of action against the Bank of Baroda. (Par

[12])

Section 31(1) does not require "a disposition" but merely "any transaction". It

was also argued by the plaintiffs with reference to section 31(2) providing for

"making good any loss" and or a "penalty" only from "any person who was a

party to such collusive disposition" that section 31(1) seemingly also does not

require that the Bank of Beroda be a party to such collusive disposition. (Par

[14])

Even accepting that it is not necessary to prove that the Bank of Baroda was

party to any collusion, collusion necessarily implies the involvement of at least

two parties namely Ludba and another. No averments have been made in this

regard, specifically whether such collusion was with Bexstar, Crown Wheels

CC, the liquidators of Gharafory Enterprises CC (in liquidation) and possibly

the Bank of Baroda, or any combination of them. (Par [16])

Extracts

[5] Central to the various alternative grounds upon which the plaintiffs' claim is based, whether as a disposition without value, avoidable preference, an undue preference, or a collusive disposition, is the need to allege (and at the trial, based on such averments, establish) a "disposition". In each instance the prayer for relief is then also for an order "setting aside of the disposition of the sum of R1 600 000.00 by Ludba Investments CC (in liquidation) to the defendant". [Footnote dealing with the pleadings omitted.]

[6] "Disposition" is defined in section 2 of the Insolvency Act to mean:

"any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefore but does not include a disposition in compliance with an order of the Court".

The word "property" is defined as:

"movable or immovable property wherever situate within the Republic, and includes contingent interests in property other than the contingent interest of a fideicommissary heir or legatee".

[7] Meskin, [PM Meskin Insolvency Law and Its Operation in Winding Up at 5–99 in para [5.31.2]] in dealing with the "meaning of disposition" points out that in any case seeking to impeach a transaction on the grounds averred by the plaintiffs "it is fundamental that the transaction should have involved a disposition by the insolvent of his or, in the case of a company or of a corporation, of its property". The definition of "disposition" is not exhaustive. [Langeberg Koöperasie Bpk v Inverdoorn Farming and Trading Company Ltd 1965 (2) SA 597 (A) at 602.] A wide meaning must be given to the word "disposition", for very good reasons. It covers not only "any conceivable means of disposing of property" but 'also the conclusion of "any contract therefore" ie a contract involving payment, delivery or transfer, for whatever reason, of property. [Estate Jager v Whittaker and another 1944 AD 246 at 250.] Thus a contract of sale of immovable property is a disposition on the date of the conclusion of such contract [Sackstein NO v Van der Westhuizen en 'n ander 1996 (2) SA 431 (0) at 435–436], and the transfer of immovable property is a disposition by the transferor. But the repudiation of an inheritance by an heir or legatee is not a disposition [Wessels NO v De Jager en 'n ander NNO 2000 (4) SA 924 (SCA)], nor is a refusal to accept a benefit under an insurance policy, since the insolvent's competence to accept the benefit in terms of a will or insurance policy is not a "right" which vests in an insolvent's trustee until such benefit is accepted by the insolvent. There is no disposition by an insolvent where it is effected by another without the insolvent's authorisation or ratification. [Wessels NO v De Jager en 'n ander NNO, supra.] In a banker customer relationship, the customer's right of disposal in respect of the amounts standing to his credit in the account is "property" within the meaning of the Insolvency Act and when the customer "issues a cheque drawn on his account he transfers or abandons in favour of the other party his right of disposal over the claim to that part of the amount in his account as was represented by the amount of the cheque"; hence it is "a disposition" of "property". [Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D) at 113.]

[8] In short, "a disposition of property" includes every act by which an insolvent parts with an asset in his estate, whether such asset is a corpus, a sum of money or a right of action. [Grobler v Trustees Estate de Beer 1915 AD 265 at 273 and Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D).] In order to found an action against a particular defendant though, the disposition must have been made to the defendant or reached the defendant, in the sense of being received or the benefit thereof accruing to the defendant. Thus Mars [E Bertelsman et al MARS The Law of Insolvency in South Africa (9ed) para [13.3] at 251] continues that:

"Where A instructs or requests his debtor B to pay the amount of that debt directly to C, and B does so, there is a disposition of A's property to C . . . It is also a disposition if, by arrangement, a loan to the insolvent is paid into the bank account of another person to channel the funds to a creditor of the insolvent."

It is significant that in both the aforesaid examples referred to by Mars the disposition is preceded by an instruction or an agreement, in terms whereof the disposition is made or intended to be made by the insolvent to C or the bank account of the other person.

[12] There simply was no disposition of the sum of R1 600 000 to the defendant. To the extent that the sum of R1 600 000 became due by Bexstar to Ludba as part of the purchase price of the property upon transfer on 22 September 2010, Ludba

would have a claim against Bexstar but not against the defendant. In conclusion the plaintiffs submitted that the disposition lay in the right of Ludba to recover the sum of R1 600 000 against Bexstar. That right however is a right of recovery against Bexstar. It is not a right of recovery as against the defendant unless (possibly) the successive payments of an amount of R1 600 000 through Crown Wheels, Gharafory Enterprises CC (in liquidation) to the defendant was in terms of a "contract" in terms whereof Ludba's entitlement to the sum of R1 600 000 due by Bexstar was transferred or abandoned to the defendant. But absent such factual allegations the conclusion pleaded in paragraph 13 is not justified and the proposed amendment, certainly in so far as they relate to a disposition without value or a voidable or undue preference lack averments necessary to sustain a valid cause of action against the defendant.

[14] Section 31(1) does not require "a disposition" but merely "any transaction". It was also argued by the plaintiffs with reference to section 31(2) providing for "making good any loss" and/or a "penalty" only from "any person who was a party to such collusive disposition" that section 31(1) seemingly also does not require that the defendant be a party to such collusive disposition. I am not persuaded that the remedy of "making good" or recovering a "penalty" from "any person who was a party to such collusive dealings" would mean that a valid claim for impeaching a disposition to a defendant will lie where the defendant was not a party to the collusive transaction. It is however not necessary to decide that issue and I accordingly refrain from considering those issues any further.

[15] The plaintiffs aver that the "disposition" or transaction relating to the payment of the sum of R1 600 000 was made to the defendant in collusion with one "Mohamed Rafiek Ahmed Gharafory, the former sole member of Ludba". The averment is not that the transaction was in collusion with Ludba duly represented by Mohamed Gharafory. The way it is pleaded the primary party to the collusion was Gharafory who incidentally happened to be "the former sole member of Ludba". Whether he was the sole member at the relevant time is unclear.

[16] However, even assuming that the reference to Gharafory being the former sole member of Ludba necessarily implies that the collusion was with Ludba represented by Mohamed Gharafory, and even accepting that it is not necessary to prove that the defendant was party to any collusion, collusion necessarily implies the involvement of at least two parties namely Ludba and another. No averments have been made in this regard, specifically whether such collusion was with Bexstar, Crown Wheels CC, the liquidators of Gharafory Enterprises CC (in liquidation) and possibly the defendant, or any combination of them.

[17] Again even accepting contrary to the wording of the averment in paragraph 20 that proof of a "disposition" is not necessary and that proof of "any transaction" would suffice, the simple averment that such "disposition of the sum of R1 600 000.00" was "in collusion with one Mohamed Rafiek Ahmed Gharafory" is a conclusion of law rather than a factual averment which, if proved, would establish collusion, or from which collusion can be inferred. Accordingly, the proposed amendments dealing with a "collusive disposition" lack particulars necessary to sustain a valid cause of action.

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A Melamed Finance (Pty) Ltd (in liquidation) v Harris

(2016/A5028) [2017] GJ (23 June 2017)

Evidence tendered at an enquiry in terms of section 417 of the

Companies Act 61 of 1973.

The absence of other corroborating documentation does not dent the

effect of the acknowledgement at the enquiry. That acknowledgement is

sufficient proof of the claim.

The appellant claimed a loan agreement existed between the appellant and

the respondent, and that the sum of R8,004,697.96 was due and repayable.

To substantiate that claim the appellant relied wholly on the respondent's

admissions in the section 417 enquiry. (Par [4])

One part of the judgment of the court of first instance deals with the

admissibility of the section 417 enquiry evidence but did not conclude that the

evidence was inadmissible. Indeed, no challenge to its admissibility was

raised by the parties and both cited extensively from that body of evidence.

No objective grounds exist upon which to question the accuracy or reliability

of the transcript. That part of the judgment is a tangent which does not require

further attention. The sole remaining consequence of the exploration of that

issue by the court a quo seems to have been the notion that the 'weight' of

that evidence had to be assessed carefully. It is not obvious precisely what

point is sought to be made, as such an approach would apply to all evidence,

regardless of source. There is no special cautionary rule about testimony

garnered in a section 417 enquiry. The 'careful assessment' was also said, in

the judgment, to require examination of the implications of 'lacunae' in the

transcript. It is not apparent that any lacunae exist and the judgment does not

describe what supposedly was omitted. (Par 5.1)

It is plain that the approach of the court a quo to deciding a matter on affidavit

was misconceived. The Court seems to have thought it was appropriate to

speculate on whether the allegations in the answering affidavit were more

probable than those in the founding affidavit. The proper approach is set out

in Plascon -Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA

623 (AD) at 634F- 635A. Also, the subsequent caution issued by Harms JA in

NDPP v Zuma 2009 (2) SA 227 (SCA) is apposite:

'[26] Motion proceedings, unless concerned with interim relief, are all

about the resolution of legal issues based on common cause facts.

Unless the circumstances are special they cannot be used to resolve

factual issues because they are not designed to determine

probabilities. It is well established under the Plascon-Evans rule that

where in motion proceedings disputes of fact arise on the affidavits, a

final order can be granted only if the facts averred in the applicant's ...

affidavits, which have been admitted by the respondent ..., together

with the facts alleged by the latter, justify such order. It may be different

if the respondent's version consists of bald or uncreditworthy denials,

raises fictitious disputes of fact, is palpably implausible, far-fetched or

so clearly untenable that the court is justified in rejecting them merely

on the papers. The court below did not have regard to these

propositions and instead decided the case on probabilities without

rejecting the NDPP's version.' (Par 5.3.2)

The pleaded claim is that a determined sum was lent to the respondent and it

now due and payable. The evidence tendered for that allegation is the

testimony of the respondent who said exactly that in the section 417 enquiry.

(Par [12])

There is no sound reason not to rely on oral acknowledgement of a debt.

Moreover, the respondent supplied a schedule attached to his answering

affidavit listing the transactions between the appellant and him, totalling a

sum owed to the appellant by him which is exactly the sum claimed. The

absence of other corroborating documentation, assuming it existed, does not

dent the effect of the acknowledgement. (Par [14])

The preliminary argument is made that the deponent to the founding affidavit

is a liquidator who has no personal knowledge of the underlying transactions.

Obviously, she could not have such knowledge, and nor does she purport to

say so. What the deponent has done is marshal the facts assembled in the

liquidation process, which are facts with which she is required to acquaint

herself and which include the admissions, under oath, by the respondent as

already described above. The contention is, under such circumstances,

misdirected. (Par [17])

Set off cannot apply to the indebtedness of a third party to the respondent as

regards an indebtedness of the respondent to the appellant. At best, for the

respondent, if the third promised to pay part of the respondent's debt to

appellant, then the appellant shall have to enforce that obligation against that

party. He could have joined the person as a third party. He did not. He is not

relieved of his obligations to the Appellant. (Par [21])

The contention is that a creditor who violates section 11 of the Banks Act 94

of 1990 by accepting or soliciting deposits without being a registered financial

institution cannot enforce a debt. This is incorrect. The very argument was

rejected in Gazit Properties v Botha & Others NNO 2012 (2) SA 306 (SCA) at

[10]- [11]. (Par [23])

The appeal must succeed and the order dismissing the application must be

set aside. (Par [25])

The appellant seeks punitive costs against the respondent on the basis that

there was never a bona fide dispute about the indebtedness which he had

admitted in the section 417 enquiry and at which time he had sought terms to

pay. This is an appropriate submission in the circumstances. The answering

affidavit was a constellation of meritless skittles tossed up to obscure the

simple reality of an admitted obligation to pay. Its aim could only have been to

gamble on securing a unjustified delay, Attorney and client costs are indeed

called for. (Par [26])

Extracts

(4] The appellant claimed a loan agreement existed between the appellant and the respondent, and that the sum of R8,004,697.96 was due and repayable. To substantiate that claim the appellant relied wholly on the respondent's admissions in the section 417 enquiry.

[5] The judgment a quo falls into two parts.

5.1. One part deals with the admissibility of the section 417 enquiry evidence but did not conclude that the evidence was inadmissible. Indeed, no challenge to its admissibility was raised by the parties and both cited extensively from that body of evidence. No objective grounds exist upon which to question the accuracy or reliability of the transcript. That part of the judgment is a tangent which does not require further attention. The sole remaining consequence of the exploration of that issue by the court a quo seems to have been the notion that the 'weight' of that evidence had to be assessed carefully. It is not obvious precisely what point is sought to be made, as such an approach would apply to all evidence, regardless of source. There is no special cautionary rule about testimony garnered in a section 417 enquiry. The 'careful assessment' was also said, in the judgment, to require examination of the implications of 'lacunae' in the transcript. It is not apparent to me that any lacunae exist and the judgment does not describe what supposedly was omitted. It is true that certain documents alluded to in the evidence were not also presented to the court, but the materiality thereof is not evident, given the statements made by the respondent in his testimony. But in any event, insofar as the parties willingly addressed the record of the testimony of the respondent, if any material remarks were omitted, it was for them to address it and amplify the record if needs be. They did not. The respondent was invited to address us on the failure or need to amplify or correct the 'record' in the subsequent answering affidavit filed, but offered only the empty answer that he felt that he had not told the full story. Axiomatically, the opportunity existed in the answering affidavit to do exactly that and a failure to seize the opportunity does not assist his case.

5.2.3. It is plain that the approach of the court a quo to deciding a matter on affidavit was misconceived. The Court a quo seems to have thought it was appropriate to speculate on whether the allegations in the answering affidavit were more probable than those in the founding affidavit. The proper approach is set out in Plascon -Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (AD) at 634F- 635A. Also, the subsequent caution issued by Harms JA in NDPP v Zuma 2009 (2) SA 227 (SCA) is apposite:

'[26] Motion proceedings, unless concerned with interim relief, are all about the resolution of legal issues based on common cause facts. Unless the circumstances are special they cannot be used to resolve factual issues because they are not designed to determine probabilities. It is well established under the Plascon-Evans rule that where in motion proceedings disputes of fact arise on the affidavits, a final order can be granted only if the facts averred in the applicant's (Mr Zuma's) affidavits, which have been admitted by the respondent (the NDPP), together with the facts alleged by the latter, justify such order. It may be different if the respondent's version consists of bald or uncreditworthy denials, raises fictitious disputes of fact, is palpably implausible, far-fetched or so clearly untenable that the court is justified in rejecting them merely on the papers. The court below did not have regard to these propositions and instead decided the case on probabilities without rejecting the NDPP's version.'

[12] The pleaded claim is that a determined sum was lent to the respondent and it now due and payable. The evidence tendered for that allegation is the testimony of the respondent who said exactly that in the section 417 enquiry.

[14] These contentions purport to re-describe the facts alleged and are incorrect. There is no sound reason not to rely on oral acknowledgement of a debt. Moreover, the respondent supplied a schedule attached to his answering affidavit listing the transactions between the appellant and him, totalling a sum owed to the appellant by him which is exactly the sum claimed. The absence of other corroborating

documentation, assuming it existed, does not dent the effect of the acknowledgement. Moreover, the respondent's answering affidavit alludes to an oral agreement about the lending of money to him by the appellant.

[16] Accordingly, the appellant did make out a valid cause of action, unrebutted by the respondent. Insofar as the judgment a quo held otherwise, it was in error.

[17] The preliminary argument is made that the deponent to the founding affidavit is a liquidator who has no personal knowledge of the underlying transactions. Obviously, she could not have such knowledge, and nor does she purport to say so. What the deponent has done is marshal the facts assembled in the liquidation process, which are facts with which she is required acquaint herself and which include the admissions, under oath, by the respondent as already described above. The contention is, under such circumstances, misdirected.

[18] Naturally, any relevant dispute of fact needs to be material to the claim by the appellant against the respondent and to a valid defence. No facts are adduced which contradict the appellant's admissions in the section 417 enquiry; indeed, the answering affidavit fortifies the admissions.

[21] The critical point is that the set off cannot apply to the indebtedness of Wainbergass to the respondent as regards an indebtedness of the respondent to the appellant. At best, for the respondent, if Wainbergass promised to pay part of the respondent's debt to appellant, then the appellant shall have to enforce that obligation against Wainbergass. He could have joined Wainbergass as a third party. He did not. He is not relieved of his obligations to the Appellant.

[23] The contention is that a creditor who violates section 11 by accepting or soliciting deposits without being a registered financial institution cannot enforce a debt. This is incorrect. The very argument was rejected in Gazit Properties v Botha & Others NNO 2012 (2) SA 306 (SCA) at [10]- [11].

[25] In the result, the appeal must succeed and the order dismissing the application must be set aside.

[26] The appellant seeks punitive costs against the respondent on the basis that there was never a bona fide dispute about the indebtedness which he had admitted in the section 417 enquiry and at which time he had sought terms to pay. This is an appropriate submission in the circumstances. The answering affidavit was a constellation of meritless skittles tossed up to obscure the simple reality of an admitted obligation to pay, Its aim could only have been to gamble on securing a unjustified delay, In my view attorney and client costs are indeed called for.

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OA Noordman NO and another v JFB DE Bruin

Liability for reckless or fraudulent conduct in terms of section 424 of the Companies Act 71 of 1973

Non-compliance with a contract, in the absence of grounds for

suspicion, may properly be regarded as negligent rather that reckless

conduct and does not justify a claim within the ambit of section 424(1).

Plaintiffs seek an order in terms whereof defendant is declared personally

liable for payment of the total debts of the insolvent company plus interest a

tempore morae and costs. The claim is based on section 424 of the

Companies Act, 61 of 1973, which provides as follows:

"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."

(emphasis added) (Par [4] and [23])

It is important to emphasize the words "recklessly", "with intent to defraud

creditors" and "for any fraudulent purpose". Fraud, or at the very least

recklessness, must be proved. Normal breach of contract or negligence would

not suffice. See:Ebrahim & Another v Airport Cold Storage (Pty)

Ltd 2008 (6) SA 585 SCA paragraph 15:

". . . (T)he function of the statutory provision also shapes its application. . . . The section retracts the fundamental attribute of corporate personality, namely separate legal existence, with its corollary of autonomous and independent liability for debts, when the level of mismanagement of the corporation's affairs exceeds the merely inept or incompetent and becomes heedlessly gross or dishonest. . . .. . ..those running the corporation may not use its formal identity to incur obligations recklessly, grossly negligently or fraudulently. If they do, they run the risk being made personally liable". (emphasis added). (Par [24])

In Philotex (Pty) Ltd v Snyman; Braitex (Pty) Ltd v Snyman 1998 (2) SA 138

SCA the Supreme Court of Appeal held that it is not necessary to prove a

causal link between the relevant conduct and the debts or liabilities for which

a declaration of personal liability is sought in terms of s 424. However in

Saincic & Others v Industro-Clean (Pty) Ltd & Another 2009 (1) SA 538 SCA

at paragraph [20] Farlam JA stated that the absence of a causal link is a

factor to be taken into account when the court exercises its discretion whether

or not to grant the declaration. In a separate judgment Harms JA confirmed

this at paragraph [30]. It is clear from a reading of section 424 (1) that the

court has a general discretion to hold a person personally responsible for all

or any of the debts or other liabilities of the company. The word "may" is used

and not "shall" which latter word is generally associated with a peremptive

provision. (Par [25])

Howie JA (as he then was) proceeded at 144B of the Philotex judgment as

follows:

"In the application of the recklessness test to the evidence before it a Court should have regard, inter alia, to the scope of operations of the company, the role, functions and powers of the directors, the amount of the debts, the extent of the company's financial difficulties and the prospects, if any, of recovery:. . .." (Par [26])

In Meskin, Henochberg on the Companies Act, vol 1 at 916 (2) the author

makes the following submission:

"It is submitted that, based on the above dicta in the Philotex case and the Fourie case, supra, [Fourie v Newton [2010] JOL 26517 (SCA)] mere non-compliance with a duty, in the absence of grounds for suspicion (Fisheries Development Corporation supra [Fisheries Dev Corp of SA Ltd v Jorgensen;

Fisheries Dev Corp of SA Ltd v AWJ Inv (Pty) Ltd 1980 (4) SA 156 (W)] at 165) may properly be regarded as negligent rather than reckless conduct (eg, books of the company not being written up and the director failing to determine the true facts (Howard v Herrigel NO 1991 (2) (SA) 660 (A) at 678)), but, if there are clear suspicious circumstances in respect of a company's transactions, the director has a duty to act and a failure to so, or mere reliance on information given by a third party, must be reckless conduct according to the test postulated in the Van As case supra [S v Van As 1976 (2) SA 921 (AD)] (but cf the Triptomania Twee case supra [Triptomania Twee (Pty) Ltd v Connolly [2003] 1 All SA 374 (C))] at 374, where failure by a highly qualified director to investigate clear inconsistencies in the financial statements in respect of tax payments was determent to be negligent and not reckless.)" (Par [27])

The aspects "with the intent to defraud" or "for a fraudulent purpose" ordinarily play a role where the company is carrying on its business and incurs debts at a time when to the knowledge of the directors there is no reasonable prospect of the creditors ever receiving payment. See Henochsberg loc cit at 916 (2). One single reckless or fraudulent transaction is sufficient to bring the conduct within the ambit of section 424(1). (Par [28])

By the end of May Feedex failed to pay defendant for grain delivered and it is apparent that defendant was dissatisfied with the situation. This was contrary to the practice that had been developed notwithstanding the terms and

conditions of the written contracts. The question to be considered is whether defendant's failure to make further deliveries in such circumstances, especially in so far as Feedex insisted that payment would only be made when Elysium complied with all its contractual obligations fully, could be found to be reckless or fraudulent conduct. It must have been clear to defendant at that stage that it was objectively impossible to comply with all its contractual obligations and therefore, even if the R278 906 was to be paid on receipt of the five extra freights as offered by Mr Botha and confirmed in his letter of 7 June 2006, chances were that Feedex might withhold payment in respect of these further deliveries, causing defendant to be out of pocket and unable to pay its producers. Ex facie the transcript of the insolvency interrogation defendant personally borrowed money to settle claims of producers in order to prevent them from suffering losses due to Feedex's attitude. (Par [31])

Although defendant may be blamed for not delivering the five extra freights of sunflower as allegedly agreed upon in order to receive payment of the R278 906, the failure to deliver these freights cannot be regarded as reckless or fraudulent conduct by the director of the insolvent company. There was no undertaking by Feedex to also pay for the five freights of sunflower upon delivery and based on its attitude to hold money back, the reasonable supplier might have been under the impression that Feedex would not pay for these five freights until there was full compliance by Elysium in respect of all its contractual obligations. Defendant's fear was real. The submission that defendant misled Feedex when he undertook to deliver five freights while at that stage instructing attorneys to sue Feedex and that such conduct was fraudulent in the circumstances is without substance. In any event, this was not relied upon as a ground for liability in terms of section 424(1). (Par [32])

The court found that the defendant did not act recklessly, fraudulently or with the intention to defraud creditors, and Feedex in particular, although there can be no doubt that his company failed to comply with its contractual obligations. The plaintiffs failed to bring their claim within the ambit of section 424 (1) of the Old Companies Act. (Par [37])

Even in the event of the court finding that defendant acted recklessly to an extent, it still has a discretion whether or not to issue a declaratory order in accordance with the aforesaid subsection. Bearing in mind the conduct of Feedex and Mr Botha in particular, and their obvious intention from the onset that Elysium would be held to its contractual obligations, come what may, until the very last moment when it was prepared to advance a possible solution, the manner in which defendant dealt with the matter is such that he should in the view of the court not be held personally liable for the debts of the insolvent company. (Par [38])

After the close of pleadings any party may deliver a notice

requesting only such further particulars as are strictly necessary to enable him

or her to prepare for trial. Such a request shall be complied with within ten

days of receipt thereof. See rule 21(2) of the High Court rules. Although rule

21(2) stipulates that a party may request his or her further particulars by a

notice delivered not less than twenty days before trial, the High Courts, and

the Free State Division in particular, have approached the matter differently in

recent times following the need to have a proper case flow management

system in place. Therefore, as a general rule, the case flow management

judge shall not certify a defended civil action as trial-ready unless further

particulars have been requested and supplied, to mention just one aspect

relating to pre-trial procedure. The court accepts that there was uncertainty

amongst practitioners as to the exact ambit of the practice in the Free State

Division notwithstanding the introduction of a case flow management

procedure in the beginning of 2014. Therefore it should not be held against

the parties and plaintiffs in particular that no certificate had been issued

indicating that the main action was trial-ready. (Par [43])

There is much criticism to be levelled at the manner in which plaintiffs elected

to litigate. They acted grossly unreasonable in requiring irrelevant particulars

or particulars to which they were not entitled to prepare for trial, but their

blatant disregard for the directions issued by Kruger J and the approach to

wait until the eleventh hour on two occasions to launch their interlocutory

applications must be penalised. The information the plaintiffs required in

respect of contracts and the parties involved thereto could easily be obtained

from Feedex who is really the driving force behind the plaintiffs' case. Other

information required was either irrelevant or so obvious that the application

could really be regarded as frivolous. If the usual costs order is made,

defendant as petitioning creditor in the winding-up application will have to

bear such costs as no claims have been proved. Even if claims are proved at

a later stage which is highly unlikely, there is no reason why such creditors

shall be saddled with payment of such costs. Plaintiffs should never have

instructed their attorneys to launch the two applications in the manner they did

and in so doing acted unreasonably and improper. They should be ordered to

pay the costs of the application issued on 21 April 2015 de bonis

propriis notwithstanding the general rule. The same order should be made in

respect of the wasted costs pertaining to the postponement of the hearing set

down for 25, 26 and 28 November 2014. (Par [60])

Extracts

[4] Plaintiffs seek an order in terms whereof defendant is declared personally liable for payment of the total debts of the insolvent company in the amount of R2 952 836,37 plus interest a tempore morae and costs. The claim is based on s 424 of the Companies Act, 61 of 1973 ("the Old Companies Act"), which deals with the liability of directors and others for reckless and / or fraudulent conduct in respect of a company's business. In terms of this section a Court may, on application of inter alia the liquidator of a company, declare that any person who was knowingly a party to the carrying on of the business of the company, recklessly, or with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, 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.

[23] As mentioned, the plaintiffs' claim is based on s 424 of the Old Companies Act which still applies as chapter 14 of that Act has not been repealed. Section 424(1) reads as follows:

"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." (emphasis added)

[24] It is important to emphasize the words "recklessly", "with intent to defraud creditors" and "for any fraudulent purpose". Fraud, or at the very least recklessness, must be proved. Normal breach of contract or negligence would not suffice. See: Ebrahim & Another v Airport Cold Storage (Pty) Ltd 2008 (6) SA 585 SCA [also reported at [2008] JOL 22698 (SCA) – Ed] paragraph 15:

". . . (T)he function of the statutory provision also shapes its application. . . . The section retracts the fundamental attribute of corporate personality, namely separate legal existence, with its corollary of autonomous and independent liability for debts, when the level of mismanagement of the corporation's affairs exceeds the merely inept or incompetent and becomes heedlessly gross or dishonest. . . .. . ..those running the corporation may not use its formal identity to incur obligations recklessly, grossly negligently or fraudulently. If they do, they run the risk being made personally liable". (emphasis added)

[25] In Philotex (Pty) Ltd v Snyman; Braitex (Pty) Ltd v Snyman 1998 (2) SA 138 SCA [also reported at [1998] JOL 1881 (A) – Ed] at 142 (H – I) the Supreme Court of Appeal held that it is not necessary to prove a causal link between the relevant conduct and the debts or liabilities for which a declaration of personal liability is sought in terms of s 424. However in Saincic & Others v Industro-Clean (Pty) Ltd & Another 2009 (1) SA 538 SCA at paragraph [20] Farlam JA stated that the absence of a causal link is a factor to be taken into account when the court exercises its discretion whether or not to grant the declaration. In a separate judgment Harms JA confirmed this at paragraph [30]. It is clear from a reading of s 424 (1) that the court has a general discretion to hold a person personally responsible for all or any of the debts or other liabilities of the company. The word

"may" is used and not "shall" which latter word is generally associated with a peremptive provision.

[26] Recklessness, as the term is understood in legal parlance is a totally different concept than negligence, although it might be seen as "growwe nalatigheid" or "gross negligence". See: Fourie v Newton 2010 JDR 1437 SCA [also reported at [2010] JOL 26517 (SCA) – Ed] at paragraph [29]:

". . . acting 'recklessly' consists in an entire failure to give consideration to the consequences of one's actions, in other words, an attitude of reckless disregard of such consequences."

Put otherwise, as in Philotex loc cit at 144A,

". . .., 'recklessly' does not connote mere negligence but at the very least gross negligence and nothing in s 424 warrants the word's being given any other than its ordinary meaning."

Howie JA (as he then was) proceeded at 144B of the judgment as follows: "In the application of the recklessness test to the evidence before it a Court should have regard, inter alia, to the scope of operations of the company, the role, functions and powers of the directors, the amount of the debts, the extent of the company's financial difficulties and the prospects, if any, of recovery:. . .."

[27] In Meskin, Henochberg on the Companies Act, vol 1 at 916 (2) the author makes the following submission:

"It is submitted that, based on the above dicta in the Philotex case and the Fourie case, supra, [Fourie v Newton [2010] JOL 26517 (SCA)] mere non-compliance with a duty, in the absence of grounds for suspicion (Fisheries Development Corporation supra [[Fisheries Dev Corp of SA Ltd v Jorgensen; Fisheries Dev Corp of SA Ltd v AWJ Inv (Pty) Ltd 1980 (4) SA 156 (W)]at 165) may properly be regarded as negligent rather than reckless conduct (eg, books of the company not being written up and the director failing to determine the true facts (Howard v Herrigel NO 1991 (2) (SA) 660 (A) at 678)), but, if there are clear suspicious circumstances in respect of a company's transactions, the director has a duty to act and a failure to so, or mere reliance on information given by a third party, must be reckless conduct according to the test postulated in the Van As case supra [S v Van As 1976 (2) SA 921 (AD)] (but cf the Triptomania Twee case supra [[Triptomania Twee (Pty) Ltd v Connolly [2003] 1 All SA 374 (C))] at 374, where failure by a highly qualified director to investigate clear inconsistencies in the financial statements in respect of tax payments was determent to be negligent and not reckless.)"

[28] The aspects "with the intent to defraud" or "for a fraudulent purpose" ordinarily play a role where the company is carrying on its business and incurs debts at a time when to the knowledge of the directors there is no reasonable prospect of the creditors ever receiving payment. See Henochsberg loc cit at 916 (2). One single reckless or fraudulent transaction is sufficient to bring the conduct within the ambit of s 424(1).

[31] By the end of May Feedex failed to pay defendant for grain delivered and it is apparent that defendant was dissatisfied with the situation. This was contrary to the practice that had been developed notwithstanding the terms and conditions of the written contracts. The question to be considered is whether defendant's failure to make further deliveries in such circumstances, especially in so far as Feedex insisted

that payment would only be made when Elysium complied with all its contractual obligations fully, could be found to be reckless or fraudulent conduct. It must have been clear to defendant at that stage that it was objectively impossible to comply with all its contractual obligations and therefore, even if the R278 906 was to be paid on receipt of the five extra freights as offered by Mr Botha and confirmed in his letter of 7 June 2006, chances were that Feedex might withhold payment in respect of these further deliveries, causing defendant to be out of pocket and unable to pay its producers. Ex facie the transcript of the insolvency interrogation defendant personally borrowed money to settle claims of producers in order to prevent them from suffering losses due to Feedex's attitude.

[32] Although defendant may be blamed for not delivering the five extra freights of sunflower as allegedly agreed upon in order to receive payment of the R278 906, the failure to deliver these freights cannot be regarded as reckless or fraudulent conduct by the director of the insolvent company. There was no undertaking by Feedex to also pay for the five freights of sunflower upon delivery and based on its attitude to hold money back, the reasonable supplier might have been under the impression that Feedex would not pay for these five freights until there was full compliance by Elysium in respect of all its contractual obligations. Defendant's fear was real. The letter of 7 June 2006, the last paragraph in particular, confirms this. The parties knew, as was the case several months earlier in that defendant played open cards with Mr Botha, it would not be possible to deliver fully in respect of all contracts. At that stage defendant was already instructing attorneys as the simple summons was issued as soon as 12 June 2006. Mr Zietsman's submission that defendant misled Feedex when he undertook to deliver five freights while at that stage instructing attorneys to sue Feedex and that such conduct was fraudulent in the circumstances is without substance, bearing in mind my comments supra. In any event, this was not relied upon as a ground for liability in terms of s 424(1).

[37] In my view defendant did not act recklessly, fraudulently or with the intention to defraud creditors, and Feedex in particular, although there can be no doubt that his company failed to comply with its contractual obligations. The plaintiffs failed to bring their claim within the ambit of s 424 (1) of the Old Companies Act and therefore the action should be dismissed.

[38] Even in the event of a finding that defendant acted recklessly to an extent, I still have a discretion whether or not to issue a declaratory order in accordance with the aforesaid subsection. Bearing in mind the conduct of Feedex and Mr Botha in particular, and there obvious intention from the onset that Elysium would be held to its contractual obligations, come what may, until the very last moment when it was prepared to advance a possible solution, the manner in which defendant dealt with the matter is such that he should in my view not be held personally liable for the debts of the insolvent company. Feedex, and Mr Zietsman in his argument before me, maintained that Feedex was within their rights to withhold payment notwithstanding the evidence presented by Mr Botha referred to above. Contrary to the wording of its written contracts, it paid producers on delivery in the past. Defendant had reason to believe that if he, his son and other producers were to deliver grain in circumstances where it was impossible for Elysium to comply fully with its contractual obligations, Feedex might have refused to pay. In the process blameless "onskuldige" producers might be prejudiced.

[39] The plaintiffs having been unsuccessful, there is no reason why the claim should not be dismissed with costs.

[43] After the close of pleadings any party may deliver a notice requesting only such further particulars as are strictly necessary to enable him / her to prepare for trial. Such a request shall be complied with within ten days of receipt thereof. See rule 21(2) of the High Court rules. Although rule 21(2) stipulates that a party may request his / her further particulars by a notice delivered not less than twenty days before trial, our High Courts, and this division in particular, have approached the matter differently in recent times following the need to have a proper case flow management system in place. Therefore, as a general rule, the case flow management judge shall not certify a defended civil action as trial-ready unless further particulars have been requested and supplied, to mention just one aspect relating to pre-trial procedure. I accept that there was uncertainty amongst practitioners as to the exact ambit of the practice in this division notwithstanding the introduction of a case flow management procedure by Erasmus AJP (as he then was) in the beginning of 2014. Therefore it shall not be held against the parties and plaintiffs in particular that no certificate has been issued indicating that the main action was trial-ready. Fact of the matter is that on 28 May 2015 the case was not ready for trial as the parties were still at loggerheads as to whether or not better further particulars ought to be supplied.

[60] Therefore I conclude in saying that there was no basis on which the application could succeed and I would have dismissed it with costs. It is so that in terms of an agreement entered into defendant provided some of the particulars required. Even in so far as I might have found that plaintiffs were strictly speaking entitled to some better further particulars, I would have exercised my discretion closed eighteen months earlier and the parties were at the door steps of the trial court for a second time. Again, as was the case in November 2014, plaintiffs decided to wait until the eleventh hour to launch exactly the same interlocutory application as before. Such approach cannot be countenanced. There is much criticism to be levelled at the manner in which plaintiffs elected to litigate. They acted grossly unreasonable in requiring irrelevant particulars and / or particulars to which they were not entitled to prepare for trial, but their blatant disregard for the directions issued by Kruger J and the approach to wait until the eleventh hour on two occasions to launch their interlocutory applications must be penalised. The information the plaintiffs required in respect of contracts and the parties involved thereto could easily be obtained from Feedex who is really the driving force behind the plaintiffs' case. Other information required was either irrelevant or so obvious that the application could really be regarded as frivolous. If the usual costs order is made, defendant as petitioning creditor in the winding-up application will have to bear such costs as no claims have been proved. Even if claims are proved at a later stage which is highly unlikely, there is no reason why such creditors shall be saddled with payment of such costs. Plaintiffs should never have instructed their attorneys to launch the two applications in the manner they did and in so doing acted unreasonably and improper. They should be ordered to pay the costs of the application issued on 21 April 2015 de bonis propriis notwithstanding the general rule. See: Cooper N.O. v First National Bank of SA Ltd 2001 (3) SA 705(SCA) [also reported at [2001] JOL 7527 (A) – Ed] at paragraph 37; Ex parte Klopper N.O.: in re Sogervim SA (Pty) Ltd (in liquidation), (Sogervim SA intervening) 1971 (3) SA 791 (TPD) [also reported at [1971] 4 All SA 123 (T) – Ed] at 797G and Grobbelaar v Grobbelaar 1959 (4) SA 719 (AD) [also reported at [1959] 4 All SA 439 (A) – Ed] at 725B. The same order should be made in respect of the wasted costs pertaining to the postponement of the hearing set down for 25, 26 and 28 November 2014.

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Swart and Others v Fourie and Others

(2488/2017) [2017] ZAWCHC 58 (22 May 2017)

Interrogation in terms of section 414 of the Companies Act 61 of 1973

The notion that actual or perceived bias by a liquidator against a

member was sufficient ground to disqualify him or her from

interrogating someone was trenchantly rejected by the appeal court.

Applicants have not attempted to show any conflict of interest that

would disqualify the petitioning creditor’s attorneys from accepting

instructions from the liquidators. They have not taken up the issue of

any abuse of the process with the presiding officer. They have also not

shown that the presiding officer would not appropriately acquit himself

of his responsibilities should they do so.

The applicants seek two things in these proceedings. Firstly, to have the

subpoenas set aside. Secondly, and, in a sense, more fundamentally, the

applicants seek to have any examination to which they might nevertheless be

subject in terms of section 415 of the Act stayed for so long as the liquidators

of the corporation are represented by the same legal representatives as those

that currently also represent the petitioning creditor. The first head of relief

bears on an alleged failure by the Magistrate to have exercised his authority in

the manner required by the Act. The second head of relief is related to how

the applicants apprehend the examination process might be used for improper

purposes. The first goes to what has already happened, and the second to

what it is feared could happen. (Par [3])

The application for the second head of relief is founded on the contention that,

in seeking to procure the examinations on the basis adumbrated in the

subpoenas, the liquidators acted pursuant to the dictates of the petitioning

creditor and its attorneys, rather than upon an independent and impartial

assessment by themselves of the appropriate means to discharge their

statutory duties. It is alleged that the liquidators have thereby made

themselves a mere instrument of the petitioning creditor. The applicants aver

that in the circumstances they apprehend that, for so long as the liquidators

are represented by the petitioning creditor’s attorneys, any interrogation in

terms of sections 414 and 415 will be misused to harass and oppress them in

furtherance of the hostility and animosity that Mr Lambertus van Zyl (the

moving spirit behind the petitioning creditor) and his representatives have

allegedly shown towards the applicants in the course of the winding-up and

related pending litigation. The applicants also contend that while the

liquidators use the services of the petitioning creditor’s attorneys any

examinations that take place under the statutory provisions are likely to be

used to improperly further the petitioning creditor’s position in respect of the

other litigation. (Par [5])

The applicants have alleged that the affidavits in some of the other litigation

were characterised by ‘a remarkable display of aggressive, vexatious drafting,

motivated by what is a clearly-held antipathy towards the members and

Theron held not only by Van Zyl, but by those preparing the affidavits’. It

would be fair to allow that it is evident that Bella Rosa and its legal

representatives adopted a conspicuously robust and no holds barred

approach to the litigation. (Par [12])

The applicants’ heads of argument also identified 11 passages in the various

sets of papers delivered by Bella Rosa containing explicit accusations of

dishonest and unprofessional conduct by Theron. It has not been necessary

for any court to pronounce on these allegations, and the court is not called

upon to do so in these proceedings, but their very existence does bear out the

applicants’ contention that the proceedings have been marked by an

exceptional degree of animosity and extraordinary ad hominem

recriminations. (Par [13])

The applicants also drew attention to the circumstances in which the

ejectment order was executed after the application for leave to appeal against

it had been refused. The ejectment was carried out by the sheriff, acting on

the instructions of Bella Rosa’s attorneys, on the very day that the application

was refused. It was effected while the restaurant was serving the evening

meal to its customers. It appears that it was attended by a heated

confrontation at the scene between the respective attorneys of Bella Rosa

and the corporation. So confrontational was the event that the police were

called upon to assist in the eviction. The court is neither called upon, nor

indeed in a position, to determine the rights and wrongs concerning the

contentious and contested events attending the eviction, but the

circumstances in which it was effected demonstrated notable animus by Van

Zyl or Bella Rosa’s attorneys against the members of the corporation. (Par

[14])

The members of the corporation do not suggest that they may not be

legitimately examined in terms of the provisions; their challenge is founded on

their apprehension that the examination on the basis of the issued subpoenas

and in circumstances in which the liquidators have engaged Bella Rosa’s

legal representatives for the purpose would be unfair, vexatious and

oppressive. In the context of the liquidators allegedly having been unable thus

far to obtain from the members a coherent set of accounting records in

respect of the corporation of the nature required in terms of section 56 of the

Close Corporations Act 69 of 1984, the liquidators unarguably have a basis to

pursue an examination. Such an examination might also be justified to explore

any difference between the state of affairs of the corporation found by the

liquidators upon assuming office and that described by the members in the

answering papers in the winding-up proceedings. The court refers to these

matters in passing, not to suggest by mentioning them that they are the only

matters that the liquidators could consider worthy of investigation. (Par [19])

The statutory provisions are intended to assist liquidators and creditors in

effectively achieving the objects of a compulsory winding-up of a corporation

that is unable to pay its debts – the identification and realisation of the

corporation’s assets for the redemption of its liabilities in accordance with the

rules of insolvency, and the reporting by the liquidator of the cause(s) of its

failure and any delinquencies on the part of its management that might have

played a part. The effective achievement of those objects is obviously in the

interests of the creditors and also in the public interest. (For a more detailed

statement of the duties of liquidators and the objects of such enquiries or

interrogations see Ferreira v Levin NO and Others, Vryenhoek and Others v

Powell NO and Others 1996 (1) SA 984 (CC); at paras. 122-124 and Bernstein

and Others v Bester NO and Others 1996 (2) SA 751 (CC) at paras. 15-16.

(There is no difference for relevant purposes between sections 414 and 415

and sections 417 and 418, respectively, of the Act.) Provision for enquiries of

this nature has a long pedigree and it is mirrored in the statutory regimes of

other countries to whose law comparative reference is commonly made in our

company law. See Ferreira supra, at paras. 115-120 and Roering NO and

Another v Mahlangu and Others 2016 (5) SA 455 (SCA), at para 20. Section

415 contains a number of inbuilt protections for examinees. (Par [21])

Save to the extent that the challenge had already been vindicated in the

court’s earlier judgment in Ferreira (Ferreira supra, at paras. 115-120

and Roering NO and Another v Mahlangu and Others 2016 (5) SA 455 (SCA),

at para 20) the provisions were held otherwise not to be incompatible with the

Interim Constitution. It is not necessary to go into the detail of the court’s

reasons for dismissing the challenges. The challenge that was sustained

in Ferreira has subsequently been addressed by remediating amendments to

ss 415(3) and 415(5) and 417(2)(b) and (c) of the Act. It is enough for present

purposes to note that the decision was made in the context of a sensitive

consideration of the adversely intrusive and taxing effects that the provisions

potentially can have on examinees. The context makes especially significant

the Constitutional Court’s acknowledgment in several passages in Bernstein

that, subject to effective controls against their abusive use, the far-reaching

effects of the provisions are justified in the public interest and accordingly

have to be borne with stoicism by those upon whom they are properly brought

to bear. (Par [24])

A proportionate approach is indicated, the more obvious and important the

need for investigation in the peculiar circumstances, the more rigorously the

provisions can fairly and legitimately be applied. See, for

example, Bernstein at paras. 24-25. The judgment in Bernstein appears to

call into question the assertion by Galgut AJA in Pretorius v Marais 1981 (1)

SA 1051 (A) that the fact that the information sought might easily be obtained

by alternative, less intrusive, means does not affect the legitimacy of a

decision to require a witness by subpoena to submit to an examination. The

potential scope for such an enquiry ‘is extremely wide’. (Roering supra, at

para. 21, and Pretorius v Marais supra, at 1063-1065A.) The Constitutional

Court in Bester was keenly conscious, however, of the susceptibility of the

provisions to be used oppressively and vexatiously for inappropriate or ulterior

purposes. The Court, moreover, confirmed the power and duty of the High

Court to intervene in appropriate cases to prevent the abusive application of

the examination procedures. It has been observed in this connection that

‘[t]he more difficult issue lies in determining what constitutes an abuse’.

(Roering supra, at para. 34.) Plainly, the determination will depend on the

peculiar circumstances of the given case. It is unlikely to be an abuse if it is

apparent that the examination is being used for the purposes contemplated by

the statutory provisions. (Roering supra, at para. 37.) (Par [25])

It is clear from the appeal court jurisprudence that the ‘quasi-judicial’ role of

the Master, presiding officer, or commissioner, as the case might be, is

regarded as the examinee’s primary protection against the abusive, vexatious

or oppressive use of the interrogation procedures. It is when that resource of

primary protection against abuse fails or when it is shown that it would

probably prove to be inadequate that it is appropriate for the court to

intervene. (Par [26])

Our courts have confirmed the importance of independence and impartiality

by liquidators in the discharge of their duties; see, for example, Standard

Bank of South Africa v The Master of the High Court and Others 2010 (4) SA

405 (SCA), at para. 1. The principle is that liquidators should not, because

their fiduciary relationship to the corporation in liquidation, the body of

creditors as a whole and the body of members or contributors, ever be in a

position in which their personal interests do, or could, put them in conflict with

their fiduciary duties. But the notion that actual or perceived bias by a

liquidator against a member was sufficient ground to disqualify him or her

from interrogating the member was trenchantly rejected by the appeal court

in Receiver of Revenue, Port Elizabeth v Jeeva and Others; Klerck and

Others NNO v Jeeva and Others [1996] ZASCA 5;1996 (2) SA 573 (A). (Par

[32])

The applicants’ counsel suggested that the extent to which the judgment

in James v Magistrate, Wynberg, and Others 1995 (1) SA 1 (C) had been

disapproved by the appeal court was confined only to the question of whether

a liquidator was disqualified from examining a member under the provisions

when it was reasonably perceived that he was biased against the

witness. The court does not agree. The judgment does indeed remain

authoritative in respect of the principle that the courts will intervene, when

appropriate, to prevent an abuse of the provisions. But insofar as the issues

in the current matter are concerned, the decisions in Jeeva and Roering

clearly held, expressly or by necessary implication, that the judgment of the

court in James v Magistrate, Wynberg, and Others 1995 (1) SA 1 (C) had

proceeded on a fundamentally misconceived conception of the role of a

liquidator in the statutory enquiry proceedings under sections 415 and 418 of

the Act. The appeal court judgments in these two cases have made it clear

that the applicants should first seek protection, if it is needed, against an

abusive examination from the presiding officer. (Par [35])

Even in Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24, the engagement by the

official liquidator of the same attorneys as those who acted for the petitioning

creditor was, of itself, regarded as ‘innocuous and, indeed, commonplace’

(Allebart, at p. 29D). The judge has had occasion twice recently to consider

the propriety in the local context of liquidators using the services of the

petitioning creditor’s attorneys; see Ex p. Steenkamp and others NNO (WCC

case no. 19265/13), reported on SAFLII sub nom. Steenkamp N.O and others

v Liquidators of Monoceros Trading 111 CC (19265/13) [2014] ZAWCHC

82 (10 January 2014), and Trustees for the Time Being of the Bermack Trust

(IT 1730/1996) and Another v Patel NO and Another [2014] ZAWCHC 105, at

paras. 72-81. (Par [38])

In the current matter the liquidators’ position in respect of whether or not to

pursue the pending action by the corporation against Bella Rosa is not

something on which they should be dependent upon advice from their current

attorneys. The merits of that case seem to depend on an objectively

determinable question; the physical extent of the let premises determined

according to the SAPOA method. That is a matter of measurement, which is

not something one would expect that they would engage attorneys or counsel

to determine. Bella Rosa’s claim against the sureties seems to turn on exactly

the same point. The court therefor does not see that it is a matter that is likely

to give rise to a conflict of interest situation at an enquiry in terms of section

415 of the Companies Act. But, if the unexpected happens, the liquidators and

the legal representatives will have to deal with the situation. Their failure to

do so appropriately would expose the liquidators to proceedings to remove

them from office and the legal representatives to a finding of professional

misconduct. (Par [40])

In the current case the applicants have not attempted to show any conflict of

interest that would disqualify the petitioning creditor’s attorneys from

accepting instructions from the liquidators. They do not suggest that the

liquidators should be barred from using the services of the same legal

representatives as Bella Rosa. Their complaint is confined to the allegation

that the engagement by the liquidators of those legal representatives has and

will probably continue to cause an abuse of the interrogation process. (Par

[41])

It should be clear from the jurisprudence that has been canvassed so far that

the applicants have misconceived their remedy. They have not taken up the

issue of any abuse of the process with the presiding officer. They have also

not shown that the presiding officer would not appropriately acquit himself of

his responsibilities should they do so. The relief that has been sought has also

not been framed as it should have been had the suggestion been that

anything about the liquidators’ conduct disqualified them from continuing in

office as such. (A matter, in the court’s view, that should ordinarily first be

raised with the Master before an approach is made to the court.) The

application for the second head of relief, whether in terms of paragraph 3 of

the notice of motion, or paragraph 2 of the draft order handed up by the

applicants counsel during argument, is dismissed. (Par [42])

The attorney averred that he approached the presiding officer with an oral

request to issue the subpoenas. He testified that Bella Rosa’s claim form,

attached to which was ‘a summary of facts and the background to Bella

Rosa’s claim’ had been in the file before the presiding officer. He said that he

‘properly explained the background and reasons for the issuing of the various

subpoenas’. He stated that he had ‘inter alia explained to [the first

respondent] …(i) the reason why Silver Falcon was wound up; (ii) that Silver

Falcon seemingly has no assets of real value; (iii) that after inspection of

Silver Falcon’s bank statements, it seemed that its income had not been

retained, and had most likely been distributed to members, but that no record

of such distribution had been found to date; (iv) Silver Falcon had no real or

proper accounting records [and] (v) that it may be that Silver Falcon and its

members had contravened the Close Corporations Act’. These superficially

recounted factors could have afforded the magistrate sufficient reason to

issue at least some of the subpoenas. But they do not explain why the

subpoenas should have been formulated in the manner that they were. (Par

[45])

They do not, for example, explain why the members should have been

required to produce ‘all documentation, correspondence and information

including but not limited to bank statements, management accounts and

financial statements, applications for credit facilities and/or applications for

overdraft facilities, asset financing, applications for mortgage bonds, salary

receipt documentation, loan payment account, payment receipt

documentation, invoices received from attorneys and advocates and any

other documents of whatsoever nature, relating to the income, expenditure,

asset and liabilities of’ not only the corporation in liquidation, but also of 12

other businesses or corporate entities. They also do not explain why the fifth

applicant should be required to produce ‘all accounts, invoices, advocates’

invoices’ rendered to such other businesses or entities. The subpoena served

on the corporation’s bank requires it, amongst other things, to produce bank

statements for ten identified banking accounts, of which only one was

operated by the corporation. There is nothing to indicate that the first

respondent was, or could have been satisfied that production of this

information, which on the face of it is extremely wide, was potentially of

relevance in the enquiry. (Par [46])

The first respondent did not make an affidavit. He wrote a letter, which was

clearly for the purpose of being introduced as a form of report to this

court. The applicants’ counsel sought to make something of the absence of

an affidavit by the first respondent. Their position in that respect was

misconceived. It is not ordinarily expected of someone in the position of the

presiding officer to make an affidavit in proceedings of this nature. The

convention is that he or she puts in a report for the assistance of the court. As

it was, the presiding officer’s letter, insofar as it was material, did no more

than confirm the content of the liquidators’ attorneys’ affidavit that I have just

related. (Par [47])

The liquidators’ counsel submitted that in the event that it should be found, as

it has been, that the subpoenas were overbroad, this court should trim them

down instead of setting them aside. That course does not commend itself to

the court. Apart from the fact that fresh subpoenas will in any event be

required because the currency of the summonses that were served has

expired by reason of the passage of time, it seems, more importantly, that the

first respondent’s decision to issue them was legally invalid and that they are

consequently void. It would be inappropriate in the circumstances for this

court to in effect validate them, even if only partially. If the liquidators wish to

procure the lawful issue of fresh subpoenas, they must go about it in the

proper manner upon a properly motivated written request to the magistrate,

who must apply his mind conscientiously to the request before acceding to it,

whether in part or in full. The application for the first head of relief is not

granted. (Par [48])

Extracts

[1] The applicants in this matter were subpoenaed, in terms of s 414 of the Companies Act 61 of 1973 (‘the Act’), to appear for examination at a creditors’ meeting of Silver Falcon Trading 84 CC (in liquidation). They were also required by the subpoenas to produce various categories of documentation.

[2] The meeting in question had been scheduled to take place on 13 February 2017, but the applicants applied for and obtained an interdict prohibiting their examination pending the determination of the current application. Costs in the interim interdict proceedings were stood over for determination in the current proceedings.

[3] The applicants seek two things in these proceedings. Firstly, to have the subpoenas set aside. In this regard they seek the setting aside, not only of the subpoenas served on themselves, but also those served on the fourth and fifth respondents. [Footnote dealing with procedure omitted.] The fourth respondent was the corporation in liquidation’s banker and is also the bank at which the first to fourth applicants hold other banking accounts. The fifth respondent is an individual who purchased a restaurant business from another close corporation of which the first and second applicants hold the controlling interest. Secondly, and, in a sense, more fundamentally, the applicants seek to have any examination to which they might nevertheless be subject in terms of s 415 of the Act stayed for so long as the liquidators of the corporation are represented by the same legal representatives as those that currently also represent the petitioning creditor. [The second head of relief was claimed in terms of paragraph 3 of the notice of motion, Counsel for the applicants indicated at the commencement of their argument, however, that they considered the relief framed there to have been too widely stated. In a draft order that they put in it was reformulated as follows: ‘[that t]he interrogation in the insolvency of Silver Falcon not proceed for as long as the liquidators are represented by the current or, should they cease to act for it, past attorneys and counsel of Bella Rosa Investment Holdings (Pty) Ltd.’] The first head of relief bears on an alleged failure by the first respondent to have exercised his authority in the manner required by the Act. The second head of relief is related to how the applicants apprehend the examination process might be used for improper purposes. The first goes to what has already happened, and the second to what it is feared could happen.

[4] The first head of relief is sought on two principal footings: that the presiding officer (a magistrate), who has been joined as the first respondent in the proceedings, issued the subpoenas – which had been drafted by the liquidators’ attorneys – without proper cause and without having applied his mind; and that they were in any event overbroad.

The second head of relief

[5] It is convenient to deal first with the second head of relief. The application for that relief is founded on the contention that, in seeking to procure the examinations on the basis adumbrated in the subpoenas, the liquidators acted pursuant to the dictates of the petitioning creditor and its attorneys, rather than upon an independent and impartial assessment by themselves of the appropriate means to discharge their statutory duties. It is alleged that the liquidators have thereby made themselves a mere instrument of the petitioning creditor. The applicants aver that in the circumstances they apprehend that, for so long as the liquidators are represented by the petitioning creditor’s attorneys, any interrogation in terms of ss 414 and 415 will be misused to harass and oppress them in furtherance of the hostility and animosity that Mr Lambertus van Zyl (the moving spirit behind Bella Rosa Investment Holdings (Pty) Ltd, the petitioning creditor) and his representatives have allegedly shown towards the applicants in the course of the winding-up and related pending litigation. The applicants also contend that while the liquidators use the services of the petitioning creditor’s attorneys any examinations that take place under the statutory provisions are likely to be used to improperly further the petitioning creditor’s position in respect of the other litigation.

[6] The business of the corporation was a restaurant. The restaurant was operated from premises leased from Bella Rosa.

[12] The applicants have alleged that the affidavits in some of the other litigation that I have described were characterised by ‘a remarkable display of aggressive, vexatious drafting, motivated by what is a clearly-held antipathy towards the members and Theron held not only by Van Zyl, but by those preparing the affidavits’. The applicants’ counsel listed 55 instances of the allegedly ‘aggressive, vexatious drafting’ in their heads of argument. It is unnecessary to recite them. Suffice it to observe that whilst the inclusion of many of them might be regarded, from an objective perspective, as reflecting varying degrees of oversensitivity, it would nevertheless be fair to allow that it is evident that Bella Rosa and its legal representatives adopted a conspicuously robust and no holds barred approach to the litigation.

[13] The applicants’ heads of argument also identified 11 passages in the various sets of papers delivered by Bella Rosa containing explicit accusations of dishonest and unprofessional conduct by Theron. It has not been necessary to best of my knowledge for any court to pronounce on these allegations, and I am not called upon to do so in these proceedings, but their very existence does bear out the applicants’ contention that the proceedings have been marked by an exceptional degree of animosity and extraordinary ad hominem recriminations.

[14] The applicants also drew attention to the circumstances in which the ejectment order was executed after the application for leave to appeal against it had been refused. The ejectment was carried out by the sheriff, acting on the instructions of Bella Rosa’s attorneys, on the very day that the application was refused. It was effected while the restaurant was serving the evening meal to its customers. It appears that it was attended by a heated confrontation at the scene between the respective attorneys of Bella Rosa and the corporation. So confrontational was the event that the police were called upon to assist in the eviction. I am neither called upon, nor indeed in a position, to determine the rights and wrongs concerning the contentious and contested events attending the eviction, but it must also be allowed, I think, that the circumstances in which it was effected demonstrated notable animus by Van Zyl and/or Bella Rosa’s attorneys against the members of the corporation.

[19] The members of the corporation do not suggest that they may not be legitimately examined in terms of the provisions; their challenge is founded on their apprehension that the examination on the basis of the issued subpoenas and in circumstances in which the liquidators have engaged Bella Rosa’s legal representatives for the purpose would be unfair, vexatious and oppressive. In the context of the liquidators allegedly having been unable thus far to obtain from the members a coherent set of accounting records in respect of the corporation of the nature required in terms of s 56 of the Close Corporations Act, the liquidators unarguably have a basis to pursue an examination. Such an examination might also be justified to explore any difference between the state of affairs of the corporation found by the liquidators upon assuming office and that described by the members in the answering papers in the winding-up proceedings. I refer to these matters in passing, not to suggest by mentioning them that they are the only matters that the liquidators could consider worthy of investigation.

[21] The statutory provisions are intended to assist liquidators and creditors in effectively achieving the objects of a compulsory winding-up of a corporation that is unable to pay its debts – the identification and realisation of the corporation’s assets for the redemption of its liabilities in accordance with the rules of insolvency, and the reporting by the liquidator of the cause(s) of its failure and any delinquencies on the part of its management that might have played a part. The effective achievement of

those objects is obviously in the interests of the creditors and also in the public interest. [For a more detailed statement of the duties of liquidators and the objects of such enquiries or interrogations see Ferreira v Levin NO and Others, Vryenhoek and Others v Powell NO and Others 1996 1 BCLR 1 (CC) at paras. 122-124 and Bernstein and Others v Bester NO and Others [1996] ZACC 2; 1996 (2) SA 751 (CC), 1996 (4) BCLR 449, at paras. 15-16. (There is no difference for relevant purposes between ss 414 and 415 and ss 417 and 418, respectively, of the Act.)] Provision for enquiries of this nature has a long pedigree and it is mirrored in the statutory regimes of other countries to whose law comparative reference is commonly made in our company law. [See Ferreira supra, at paras. 115-120 and Roering NO and Another v Mahlangu and Others 2016 (5) SA 455 (SCA), at para 20 and note 5.] It will be noted from the text quoted in the preceding paragraph that s 415 contains a number of inbuilt protections for examinees.

[24] Save to the extent that the challenge had already been vindicated in the court’s earlier judgment in Ferreira supra, [See Ferreira supra, at paras. 115-120 and Roering NO and Another v Mahlangu and Others 2016 (5) SA 455 (SCA), at para 20 and note 5] the provisions were held otherwise not to be incompatible with the Interim Constitution. It is not necessary to go into the detail of the court’s reasons for dismissing the challenges. [The challenge that was sustained in Ferreira has subsequently been addressed by remediating amendments to ss 415(3) and 415(5) and 417(2)(b) and (c) of the Act.] It is enough for present purposes to note that the decision was made in the context of a sensitive consideration of the adversely intrusive and taxing effects that the provisions potentially can have on examinees. The context makes especially significant the Constitutional Court’s acknowledgment in several passages in Bernstein that, subject to effective controls against their abusive use, the far-reaching effects of the provisions are justified in the public interest and accordingly have to be borne with stoicism by those upon whom they are properly brought to bear.

[25] A proportionate approach is indicated, the more obvious and important the need for investigation in the peculiar circumstances, the more rigorously the provisions can fairly and legitimately be applied. [See, for example, Bernstein at paras. 24-25. The judgment in Bernstein appears to call into question the assertion by Galgut AJA in Pretorius v Marais 1981 (1) SA 1051 (A) that the fact that the information sought might easily be obtained by alternative, less intrusive, means does not affect the legitimacy of a decision to require a witness by subpoena to submit to an examination.] The potential scope for such an enquiry ‘is extremely wide’. [Roering supra, at para. 21, and Pretorius v Marais supra, at 1063-1065A.] The Constitutional Court in Bester was keenly conscious, however, of the susceptibility of the provisions to be used oppressively and vexatiously for inappropriate or ulterior purposes. The Court, moreover, confirmed the power and duty of the High Court to intervene in appropriate cases to prevent the abusive application of the examination procedures; the judgment of this court (per Thring J) in James v Magistrate, Wynberg, and Others 1995 (1) SA 1 (C) was cited as an example of this type of judicial supervision. [Bernstein in para. 35.] It has been observed in this connection that ‘[t]he more difficult issue lies in determining what constitutes an abuse’. [Roering supra, at para. 34.] Plainly, the determination will depend on the peculiar circumstances of the given case.It is unlikely to be an abuse if it is apparent that the examination is being used for the purposes contemplated by the statutory provisions. [Roering supra, at para. 37.]

[26] In Bernstein, the Constitutional Court refrained from prescribing how the protocols for judicial supervision should operate. That was matter that it was

considered appropriate to leave to the then Supreme Court (which comprised what are now the High Court and the Supreme Court of Appeal) to develop. It is clear from the appeal court jurisprudence to which I shall come presently that the ‘quasi-judicial’ role of the Master, presiding officer, or commissioner, as the case might be, is regarded as the examinee’s primary protection against the abusive, vexatious or oppressive use of the interrogation procedures. It is when that resource of primary protection against abuse fails or when it is shown that it would probably prove to be inadequate that it is appropriate for the court to intervene.

[32] Our courts have confirmed the importance of independence and impartiality by liquidators in the discharge of their duties in other judgments; see, for example, Standard Bank of South Africa v The Master of the High Court and Others 2010 (4) SA 405 (SCA), at para. 1. The principle is that liquidators should not, because their fiduciary relationship to the corporation in liquidation, the body of creditors as a whole and the body of members or contributors, ever be in a position in which their personal interests do, or could, put them in conflict with their fiduciary duties. But the notion that actual or perceived bias by a liquidator against a member was sufficient ground to disqualify him or her from interrogating the member was trenchantly rejected by the appeal court in Receiver of Revenue, Port Elizabeth v Jeeva and Others; Klerck and Others NNO v Jeeva and Others [1996] ZASCA 5;1996 (2) SA 573 (A).

[35] The applicants’ counsel suggested that the extent to which the judgment in James had been disapproved by the appeal court was confined only to the question of whether a liquidator was disqualified from examining a member under the provisions when it was reasonably perceived that he was biased against the witness. I do not agree. The judgment does indeed remain authoritative in respect of the principle that the courts will intervene, when appropriate, to prevent an abuse of the provisions. But insofar as the issues in the current matter are concerned, the decisions in Jeeva and Roering clearly held, expressly or by necessary implication, that the judgment of this court in James had proceeded on a fundamentally misconceived conception of the role of a liquidator in the statutory enquiry proceedings under ss 415 and 418 of the Act. The appeal court judgments in these two cases have made it clear that the applicants should first seek protection, if it is needed, against an abusive examination from the presiding officer

[36] The applicants’ counsel’s reliance on Allebart supra - which, as mentioned, was notably influential in Thring J’s reasoning in James – calls to mind the frequently voiced caveats about the dangers of the undiscriminating application of foreign jurisprudence.[Cf. e.g. Bernstein supra, at para. 133 (per Kriegler J) and Roering supra, at para. 49, where Wallis JA cautioned that ‘too facile a reading of foreign legal material is to be eschewed, because, when removed from their own environment, they may mislead’.] The role of the ‘official liquidator’ in Allebart arose for consideration in the context of a contemplated private examination in terms of s 249 of the long since redundant New South Wales Companies Act 71 of 1961. [The NSW Act was formally declared ‘redundant’ in terms of the Statute Law (Miscellaneous Provisions) Act 2008 No 62. I assume that the redundancy set in upon the commencement of the Corporations Act, 2001 (Cth), which operates in all the states of Australia pursuant to intergovernmental agreements.] Winding-up proceedings under the NSW Act were conducted by or under the auspices of the Supreme Court of New South Wales under its equitable jurisdiction. An ‘official liquidator’ was a functionary appointed in terms of s 11 of the Act, not as in South Africa on an ad hoc basis for the winding-up of a particular company, but as one of a standing panel of appointees chosen by the Minister from the ranks of ‘registered

liquidators’ ‘for the purpose of conducting proceedings in winding up companies and assisting the Court therein’. It was in that context that, unlike in South Africa, where it is generally accepted that a liquidator is not properly classified as an ‘officer of the court’, [See Jeeva supra, at 579C-E.] that the ‘official liquidator’ was considered to be an officer of the court. His duties entailed, to some extent, carrying out the court’s functions. The extent to which this appears to have reflected an official liquidator’s position as a manifestation of the court itself is to be gathered by the reference in Allebart to what seems to have been a well-established convention in New South Wales that the liquidator’s reasons for seeking a private examination in terms of s 249 of the NSW Act were regarded as ‘confidential’, in the sense of being kept private between the liquidator and the court. [Allebart at p. 30B-E.]

[37] According to the tenor of its provisions, enquiries under s 249 of the NSW Companies Act were initiated by the court, not by the liquidator. [Quotations of NSW Act omitted.] In motivating for the conduct of such an enquiry the liquidator therefore acted in a sense as an agent of the court charged with the conduct of the enquiry. It seems that the close association of the official liquidator with the identity of the court itself formed the basis of a requirement that he be seen to be impartial and above the fray. [A public examination in terms of s 250 of the NSW Act, by contrast, occurred only after the liquidator had taken a position and reported to the court that in his opinion a fraud had been committed or material facts had been concealed. In other words, such an examination would take place only after the liquidator had taken a position, prima facie at least, adverse to potential examinees.] As the decisions in Jeeva and Roering confirm, the local environment is materially distinguishable.

[38] Even in Allebart, the engagement by the official liquidator of the same attorneys as those who acted for the petitioning creditor was, of itself, regarded as ‘innocuous and, indeed, commonplace’. [Allebart, at p. 29D.] I have had occasion twice recently to consider the propriety in the local context of liquidators using the services of the petitioning creditor’s attorneys; see Ex p. Steenkamp and others NNO (WCC case no. 19265/13), reported on SAFLII sub nom. Steenkamp N.O and others v Liquidators of Monoceros Trading 111 CC (19265/13) [2014] ZAWCHC 82 (10 January 2014), and Trustees for the Time Being of the Bermack Trust (IT 1730/1996) and Another v Patel NO and Another [2014] ZAWCHC 105, at paras. 72-81.

[39] The determinative question is usually whether such engagement would result in the attorneys having a conflict of interest; but, depending on the circumstances, there may be wider considerations. I summed up what I perceive to be the position in this regard at para. 73 in Bermack Trust. After referring to the judgment in Steenkamp, I said -

… In that judgment I held that there was nothing inherently untoward about such an engagement. I noted that whether a conflict of interest presents in any matter is dependent on the facts. If, on an analysis of the facts, the interests of the petitioning creditor and those of the liquidator correspond with each other, there will ordinarily be no conflict of interest. On the contrary, there will often be much to be said in favour of the employment of the petitioning creditor’s attorneys because they may be steeped in the complexities of the issues with which the liquidator will have to engage, and it would be unduly costly and time consuming in such circumstances to appoint other attorneys with no prior involvement to qualify themselves afresh. The fact that the liquidator may, as in the current matter, adopt a position adverse to the position of one or more of the other creditors does not, without more, derogate from the conclusion just stated. It is in the nature of a liquidator’s responsibilities to interrogate creditors’ claims and in that context he may have to adopt an adversarial position; cf. Receiver of Revenue, Port Elizabeth v Jeeva And Others; Klerck And Others NNO v Jeeva and Others [1996] ZASCA 5; 1996 (2) SA 573 (A). The position would

obviously be different if the attorney had also previously acted for the creditor against whom an adverse position was adopted and, in that connection, had been made privy to any relevant confidential information of that creditor. There is also a duty on legal practitioners to be ever astute to the possibility of a conflict of interest not identified at the outset of their engagement subsequently presenting itself, in which case, of course, they are bound to withdraw. In a context like the present, liquidators too are bound to exercise their independence in giving and overseeing the carrying out of instructions to attorneys who act also for one or more of the creditors in the winding-up. It may be necessary or prudent in a given case that separate attorneys be employed to deal with certain questions that may arise in the liquidation. In that manner conflict situations may be managed and grounds for perceptions of partiality avoided.

(The reference to partiality in the context of Bermack Trust concerned allegations in that case that one of the liquidators was seen as having aligned himself with the interests of one creditor - whose attorneys were also employed by the liquidators - against those of another creditor whose interests were in conflict with those of the first creditor. In that case the other creditor had applied to the Master in terms of s 379(1) of the Act for the removal of the liquidators.)

[40] In the current matter it seems to me that the liquidators’ position in respect of whether or not to pursue the pending action by the corporation against Bella Rosa is not something on which they should be dependent upon advice from their current attorneys. The merits of that case seem to depend on an objectively determinable question; the physical extent of the let premises determined according to the SAPOA method. That is a matter of measurement, which is not something one would expect that they would engage attorneys or counsel to determine. Bella Rosa’s claim against the sureties seems to turn on exactly the same point. I therefore do not see that it is a matter that is likely to give rise to a conflict of interest situation at an enquiry in terms of s 415 of the Companies Act. But, if the unexpected happens, the liquidators and the legal representatives will have to deal with the situation. Their failure to do so appropriately would expose the liquidators to proceedings to remove them from office and the legal representatives to a finding of professional misconduct.

[41] In the current case the applicants have not attempted to show any conflict of interest that would disqualify the petitioning creditor’s attorneys from accepting instructions from the liquidators. They do not suggest that the liquidators should be barred from using the services of the same legal representatives as Bella Rosa. Their complaint is confined to the allegation that the engagement by the liquidators of those legal representatives has and will probably continue to cause an abuse of the interrogation process.

[42] It should be clear from the jurisprudence that has been canvassed so far that the applicants have misconceived their remedy. They have not taken up the issue of any abuse of the process with the presiding officer. They have also not shown that the presiding officer would not appropriately acquit himself of his responsibilities should they do so. The relief that has been sought has also not been framed as it should have been had the suggestion been that anything about the liquidators’ conduct disqualified them from continuing in office as such. [A matter, in my view, that should ordinarily first be raised with the Master before an approach is made to the court.] The application for the second head of relief, whether in terms of paragraph 3 of the notice of motion, or paragraph 2 of the draft order handed up by the applicants counsel during argument, will therefore be dismissed.

[45] The attorney concerned averred that he approached the presiding officer with an oral request to issue the subpoenas. He testified that Bella Rosa’s claim form, attached to which was ‘a summary of facts and the background to Bella Rosa’s claim’ had been in the file before the first respondent. He said that he ‘properly explained the background and reasons for the issuing of the various subpoenas’. He stated that he had ‘inter alia explained to [the first respondent] …(i) the reason why Silver Falcon was wound up; (ii) that Silver Falcon seemingly has no assets of real value; (iii) that after inspection of Silver Falcon’s bank statements, it seemed that its income had not been retained, and had most likely been distributed to members, but that no record of such distribution had been found to date; (iv) Silver Falcon had no real or proper accounting records [and] (v) that it may be that Silver Falcon and its members had contravened the Close Corporations Act’. These superficially recounted factors could, as acknowledged earlier in this judgment, have afforded the first respondent sufficient reason to issue at least some of the subpoenas. But they do not explain why the subpoenas should have been formulated in the manner that they were.

[46] They do not, for example, explain why the members should have been required to produce ‘all documentation, correspondence and information including but not limited to bank statements, management accounts and financial statements, applications for credit facilities and/or applications for overdraft facilities, asset financing, applications for mortgage bonds, salary receipt documentation, loan payment account, payment receipt documentation, invoices received from attorneys and advocates and any other documents of whatsoever nature, relating to the income, expenditure, asset and liabilities of’ not only the corporation in liquidation, but also of 12 other businesses or corporate entities. They also do not explain why the fifth applicant should be required to produce ‘all accounts, invoices, advocates’ invoices’ rendered to such other businesses or entities. The subpoena served on the corporation’s bank requires it, amongst other things, to produce bank statements for ten identified banking accounts, of which only one was operated by the corporation. There is nothing to indicate that the first respondent was, or could have been satisfied that production of this information, which on the face of it is extremely wide, was potentially of relevance in the enquiry.

[47] The first respondent did not make an affidavit. He wrote a letter, which was clearly for the purpose of being introduced as a form of report to this court. The applicants’ counsel sought to make something of the absence of an affidavit by the first respondent. Their position in that respect was misconceived. It is not ordinarily expected of someone in the position of the presiding officer to make an affidavit in proceedings of this nature. The convention is that he or she puts in a report for the assistance of the court. As it was, the presiding officer’s letter, insofar as it was material, did no more than confirm the content of the liquidators’ attorneys’ affidavit that I have just related.

[48] The liquidators’ counsel submitted that in the event that it should be found, as it has been, that the subpoenas were overbroad, this court should trim them down instead of setting them aside. That course does not commend itself to me. Apart from the fact that fresh subpoenas will in any event be required because the currency of the summonses that were served has expired by reason of the passage of time, it seems to me, more importantly, that the first respondent’s decision to issue them was legally invalid and that they are consequently void. It would be inappropriate in the circumstances for this court to in effect validate them, even if only partially. If the liquidators wish to procure the lawful issue of fresh subpoenas, they must go about it in the proper manner upon a properly motivated written request to the first respondent, who must apply his mind conscientiously to the request before acceding

to it, whether in part or in full. The application for the first head of relief will therefore be granted.

Costs

[49] Both sides have been substantially successful in these proceedings. The applicants have succeeded in having the subpoenas set aside. And the liquidators have successfully resisted the application to stay any examination of the first to sixth applicants for so long as they are represented by the legal representatives who currently also act for Bella Rosa. It would be difficult to treat the separate heads of relief discretely for taxation purposes. In the circumstances it seems to me that justice would be done were each party to bear its own costs. However, the setting aside of the subpoenas entitles the applicants to the costs of the application for interim interdictory relief. In my judgment the application for interim relief was not of the character that would justify burdening the losing party with the costs of two counsel.

[50] The following order is made:

1. The subpoenas issued by the first respondent in terms of s 414 of the Companies Act 61 of 1973, attached to the first applicant’s founding affidavit, jurat 9 February 2017, requiring the applicants and the fourth to seventh respondents to appear before the first respondent for the purpose of interrogation concerning matters relating to Silver Falcon Trading 84 CC (in liq.) or its business or affairs are hereby set aside.

2. Save as provided in paragraph 1 of this order, the application is otherwise dismissed.

3. Save as provided in terms of paragraph 4, the parties shall bear their own costs in the application proceedings.

4. The second and third respondents shall pay the applicants’ costs of suit in the interim interdict application that were reserved for later determination in terms of the judgment of this court dated 13 February 2017 (per Holderness AJ).

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Kalianjee NO and Another v Ramlotan and Others

(22478/2013) [2017] GJ (7 March 2017)

Property transferred by sheriff after provisional sequestration in terms

of sale in execution

The court set aside the transfer of the property even though the sheriff

did not receive notice of the sequestration. The value of the property

was more than the proceeds of the sale by the sheriff.

During May 2012 Nedbank obtained a judgment against the second

respondent. On the 23rd of October 2012 the sale in execution of the property

was held and the first respondent purchased the property on that date. On the

30th of November 2012 an urgent application was launched for the provisional

sequestration of the second respondent. It was a friendly sequestration by her

brother. On the 11th of December 2012 the provisional sequestration of her

estate was granted and on the 29th of January 2013 the property was

transferred into the name of the first respondent, and on 4 February 2013 the

second respondent's estate was finally sequestrated. (Par [5])

The problem that arises quite clearly is that the provisional sequestration was

granted prior to the transfer of the property into the name of the first

respondent. It is common cause that the first respondent is currently the

owner of the property, that it was a bona fide innocent third party purchaser of

the property and had no knowledge of the sequestration proceedings. It is

also common cause that no caveat was registered against the transfer of the

property. (Par [6])

The sequestration did not come to the notice of the appropriate sheriff,

because as soon as the sheriff or messenger whose duty it is to execute any

judgment given against an insolvent becomes aware of the sequestration of

the insolvent's estate, he has to stay that execution unless the court directs

otherwise. That process of execution would also include the process of

transfer. In this case the sheriff did not become aware of it because no caveat

was registered against the property. (Par [16])

The question to be decided is whether the concursus creditorum, brought

about by the sequestration order, trumps everything. (Par [22])

The law as it stands must be applied . See Fourie and Another NNO v

Edkins 2013 (6) SA 576 (SCA); Simpson v Klein NO and Others 1987 (1)

SA 405 (W); Syfrets Bank Limited and Others v Sheriff of the Supreme

Court Durban Central and Another 1997 (1) SA 764 (D). There seems to be

a set and well-established practice as to what happens in matters such as

this. (Par [23])

The concursus does take precedence in this matter and there is evidence

which cannot be disputed that is the value of the insolvent's property. The

trustees must be given an opportunity to have the sale set aside to try and

resell the property. The original buyer will have its rights for loss of interest

because the court ordered that the bondholder who received the proceeds of

the sale must repay the money. The papers were served on the third

respondent and they are not represented in these proceedings and I must

assume they abide by the decision. The capital sum paid by the first

respondent must be returned. (Par [24])

The court ordered as follows:

1. The transfer of the property is set aside.

2. The fifth respondent [Registrar of Deeds, Johannesburg] is directed to

cancel the registration of the property in the name of the purchaser and to

reflect the insolvent as the registered owner of the property.

3. That the purchaser of property be authorised to sign all the necessary

documents and should the first respondent fail or refuse to give effect to this

order, then the parties must approach the court for the appropriate relief.

4. The first respondent must pay the cost of the application. The cost shall

include the cost of two counsel.

5. The third respondent [Nedbank] is ordered to repay the surn of R2 390 000

to the first respondent within seven days of date of this order. (Par [27])

Extracts

[5] The first respondent has set out in its heads of argument a timeline of events as they appear from the affidavit. During May 2012 Nedbank obtained a judgment against the second respondent. On the 23rd of October 2012 the sale in execution of the property was held and the first respondent purchased the property on that date. On the 30th of November 2012 an urgent application was launched for the provisional sequestration of the second respondent. It was a friendly sequestration by her brother. On the 11th of December 2012 the provisional sequestration of her estate was granted and on the 29th of January 2013 the property was transferred into the name of the first respondent, and on 4 February 2013 the second respondent's estate was finally sequestrated.

[6] The problem that arises quite clearly is that the provisional sequestration was granted prior to the transfer of the property into the name of the first respondent. It is common cause that the first respondent is currently the owner of the property, that it

was a bona fide innocent third party purchaser of the property and had no knowledge of the sequestration proceedings. It is also common cause that no caveat was registered against the transfer of the property.

[13] When the new order came into effect the Department of Justice did not immediately appoint a sheriff for Sandton-South, but appointed the Sheriff Halfway House as the acting sheriff for Sandton-South. So, quite clearly this property fell within the area of jurisdiction of Sheriff Sandton-South. The papers for the sequestration which were purportedly served on the 30th of November 2012 and the return of service issued by the Office of the Sheriff Sandton-South were dealt with at that office.

[16] There is a lengthy background to this matter and what the first respondent contends is that the sequestration did not come to the notice of the appropriate sheriff, because as soon as the sheriff or messenger whose duty it is to execute any judgment given against an insolvent becomes aware of the sequestration of the insolvent's estate, he has to stay that execution unless the court directs otherwise. That process of execution would also, in my view, include the process of transfer. In this case the sheriff did not become aware of it because no caveat was registered against the property. One of the questions that need to be addressed is whether this transfer must be assessed in the light of the abstract theory of the transfer of property or whether a causal jurisprudential basis should be applied.

[17] The second issue is whether the question of the concursus creditorum trumps everything. In a number of cases this has been dealt with. None of the cases seem to have the exact facts as this case where the transfer had already occurred and where the problem came to everyone's notice after the sale in execution.

[22] However, be that as it may, at the end of the day the question to be decided is whether the concursus trumps everything despite the very few facts that have been set out in the affidavit, a more detailed explanation as to the value of the claims by the concursus and whether the sum of R2 390 000 was not sufficient.

[23] In my view, the law as it stands must be applied . See Fourie and Another NNO v Edkins 2013 (6) SA 576 (SCA); Simpson v Klein NO and Others 1987 (1) SA 405 (W); Syfrets Bank Limited and Others v Sheriff of the Supreme Court Durban Central and Another 1997 (1) SA 764 (D). There seems to be, in my view, a set and well-established practice as to what happens in matters such as this.

[24] The concursus does take precedence in this matter and however poorly presented the applicant's case has been in this matter, there is evidence before me which cannot be disputed and that is the value of the insolvent's property and it seems to me that the applicants must be given an opportunity to have the sale set aside to try and resell this property. The first respondent will have its rights for loss of interest because I intend ordering that the third respondent must repay the money. The papers were served on the third respondent and they are not represented in these proceedings and I must assume they abide by the decision. The capital sum paid by the first respondent must be returned.

[25] Just prior to my granting the order, counsel on behalf of the applicants drew to my attention the fact that the money was paid to the deputy-sheriff, the fourth respondent. He took his commission so that the third respondent, Nedbank, received much less than the amount achieved at the sale.

[27] The order that I intend making is that set out in the notice of motion, save for an addition in prayer 5. I therefore make the following order:

ORDER

1. The transfer of the property in respect of Earth 195, Morningside, Extension 14 known as 26 French Lane, Morningside is set aside.

2. The fifth respondent [Registrar of Deeds, Johannesburg] is directed to cancel the registration of the property in the narne of the first respondent and to reflect the second respondent as the registered owner of the property.

3. That the first respondent [purchaser of property] be authorised to sign all the necessary documents and should the purchaser fail or refuse to give effect to this order, then the parties must approach the court for the appropriate relief.

4. The trustee must pay the cost of the application. The cost shall include the cost of two counsel.

5. The third respondent [Nedbank] is ordered to repay the surn of R2 390 000 to the first respondent within seven days of date of the order.

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Nelson Mandela Bay Municipality v Amber Mountain

Investments

(576/2016) [2017] ZASCA 36 (29 March 2017)

Clearance certificate for payment of property rates

A municipality is not entitled to withhold a property rates clearance certificate

until it had received payment of the property rates for the entire financial year,

but only the rates which was due on the date of the certificate. Further,

section 118(1) of the Local Government: Municipal Systems Act 32 of 2000

applies to municipal debts which have become due in the two years preceding

the date of application for the certificate and does not apply to future

municipal debts.

The import of sections 12 and 13(1) of the Local Government: Municipal Property

Rates Act 6 of 2004 (Rates Act) is that the rate may be recovered on a monthly

basis or annually, subject to an election by the owner. In respect of both

payment options, it is the municipality that determines the date by which

payment must be made. It is the responsibility of the municipality to produce a

statement reflecting the amount due in respect of rates and the date on which

the amount is payable. Section 28(1) is of particular significance. Once the

municipality has determined the amount due and the date on which such

amount is payable, and the owner fails to make payment on the due date, the

municipality may recover the amount due from the tenant or occupier of the

property. Section 28(1) does not entitle a municipality to recover the rate

levied for the financial year from the tenant or occupier. (Par [16])

In terms of s 27 of the Rates Act, payment of the rate is subject to the

happening of an event, namely, the municipality‘s determination of the amount

to be paid and the date by which payment must be made. A property owner‘s

obligation in respect of property rates arises at the start of the financial year

when the municipality determines the rate. If the rate is payable in

instalments, an owner‘s obligation to make payment arises once the

municipality has determined the date of payment and amount due. Put

differently, a portion of the debt in respect of rates becomes due from time to

time. For these reasons, the argument advanced on behalf of the municipality,

that the determination of an annual property rate is indicative of an intention

that a single rate for the entire year is payable at the start of each financial

year cannot be sustained. (Par [19])

Adopting the tools of interpretation and having regard to the definition of

‘financial year‘ and the provisions of sections 12(1), 26, 27 and 28, the words

‘payable as from‘ in section 13(1)(a), must be interpreted to mean that the rate

is payable within the period of the financial year and not on 1 July as

contended by the municipality. Counsel for the municipality conceded that the

legislature could have inserted the words ‘due and‘ payable in section

13(1)(a), without offending the scheme of the Act if it was the intention that the

rates should be due and payable on 1 July of each year. (Par [20])

It is rule of statutory construction that provisions which interfere with protected

rights should be narrowly interpreted. It is clear that the municipality‘s

requirement for rates to be paid for a full year, as a condition for the issue of a

clearance certificate in terms of section 118 of the Local Government:

Municipal Systems Act 32 of 2000, adversely affects the rights of property

holders to alienate their property. Section 13 (1)(a) of the Rates Act should

therefore be interpreted narrowly to mean that the word ‘payable‘ only fixes

the rate for the financial year, but does not mean that rate is also due at the

same time. [City of Cape Town v Real People Housing (Pty) Ltd 2010 (5)

SA 196 (SCA) para 9.] (Par [21])

The final question to determine is whether a municipality can, prior to issuing

a rates clearance certificate in terms of section 118(1) , insist on payment of

all rates, fees and charges in respect of the property for the current financial

year, even if this period extends beyond the date of the certificate. (Par [22])

The clear intention of the legislature was to limit the period in section 118(1) to

two years preceding the date of application for the certificate. The

municipality‘s policy contradicts the express terms of the statute and ‘would

frustrate its terms‘. To the extent that the municipality‘s policy is inconsistent

with section 118(1), it is ultra vires and void. (Par [26])

To sum up: the relevant provisions of the Rates Act, the Local Government:

Municipal Finance Management Act 56 of 2003 and the Local Government:

Municipal Systems Act 32 of 2000 read together, buttress the contention of

the respondent that the municipality was not entitled to withhold the property

rates clearance certificate until it had received payment of the property rates

for the entire financial year. Such property rates became payable (but not

due) from the start of the financial year. Further, section 118(1) clearly applies

to municipal debts which have become due in the two years preceding the

date of application for the certificate and does not apply to future municipal

debts. (Par [27])

Extracts

[1] This court is called upon to determine whether, following upon the sale of immovable property, the property owner is liable to pay the total rates on the property determined for the financial year or only the rates calculated until the property is transferred. The outcome of this appeal turns on the interpretation of various provisions of the Local Government: Municipal Property Rates Act 6 of 2004 (the Rates Act), the Local Government: Municipal Systems Act 32 of 2000 (the Systems Act) and the Local Government: Municipal Finance Management Act 56 of 2003 (the Finance Act). These Acts must be read together as they form the basis for the

current system of local government. [The preamble of the Systems Act reads: ‘Whereas this Act is an integral part of a suite of legislation that gives effect to the new system of local government‘. South African Property Owners Association v Johannesburg Metropolitan Municipality & others [2012] ZASCA 157; 2013 (1) SA 420 (SCA) para 8.]

[7] Of particular relevance to this dispute are ss 12 and 13(1) of the Rates Act [Local Government: Municipal Property Rates Act 6 of 2004]. Section 12 reads:

12(1) When levying rates, a municipality must levy the rate for a financial year. A rate lapses at the end of the financial year for which it was levied.

(2) The levying of rates must form part of a municipality's annual budget process as set out in Chapter 4 of the Municipal Finance Management Act. A municipality must annually at the time of its budget process review the amount in the Rand of its current rates in line with its annual budget for the next financial year.

Section 13(1) reads:

(1) A rate becomes payable-

(a) as from the start of a financial year; or

(b) if the municipality's annual budget is not approved by the start of the financial year, as from such later date when the municipality's annual budget, including a resolution levying rates, is approved by the provincial executive in terms of s 26 of the Municipal Finance Management Act‘.

[16] The import of these sections is that the rate may be recovered on a monthly basis or annually, subject to an election by the owner. In respect of both payment options, it is the municipality that determines the date by which payment must be made. It is the responsibility of the municipality to produce a statement reflecting the amount due in respect of rates and the date on which the amount is payable. Section 28(1) is of particular significance. Once the municipality has determined the amount due and the date on which such amount is payable, and the owner fails to make payment on the due date, the municipality may recover the amount due from the tenant or occupier of the property. Section 28(1) does not entitle a municipality to recover the rate levied for the financial year from the tenant or occupier.

[19] In terms of s 27 of the Rates Act, payment of the rate is subject to the happening of an event, namely, the municipality‘s determination of the amount to be paid and the date by which payment must be made. A property owner‘s obligation in respect of property rates arises at the start of the financial year when the municipality determines the rate. If the rate is payable in instalments, an owner‘s obligation to make payment arises once the municipality has determined the date of payment and amount due. Put differently, a portion of the debt in respect of rates becomes due from time to time. For these reasons, the argument advanced on behalf of the municipality, that the determination of an annual property rate is indicative of an intention that a single rate for the entire year is payable at the start of each financial year cannot be sustained.

[20] Adopting the tools of interpretation already referred to, and having regard to the definition of ‘financial year‘ and the provisions of ss 12(1), 26, 27 and 28, the words ‘payable as from‘ in s 13(1)(a), must be interpreted to mean that the rate is payable

within the period of the financial year and not on 1 July as contended by the municipality. Counsel for the municipality conceded that the legislature could have inserted the words ‘due and‘ payable in s 13(1)(a), without offending the scheme of the Act if it was the intention that the rates should be due and payable on 1 July of each year.

[21] It is rule of statutory construction that provisions which interfere with protected rights should be narrowly interpreted. It is clear that the municipality‘s requirement for rates to be paid for a full year, as a condition for the issue of a clearance certificate in terms of s 118 of the Systems Act, adversely affects the rights of property holders to alienate their property. In my view s 13 (1)(a) of the Rates Act should therefore be interpreted narrowly to mean that the word ‘payable‘ only fixes the rate for the financial year, but does not mean that rate is also due at the same time. [City of Cape Town v Real People Housing (Pty) Ltd 2010 (5) SA 196 (SCA) para 9.]

[22] The final question to determine is whether a municipality can, prior to issuing a rates clearance certificate, insist on payment of all rates, fees and charges in respect of the property for the current financial year, even if this period extends beyond the date of the certificate.

Section 118 of the Systems Act reads:

‘(1) A registrar of deeds may not register the transfer of property except on production to that registrar of deeds of a prescribed certificate-

(a) issued by the municipality or municipalities in which that property is situated; and

(b) which certifies that all amounts that became due in connection with that property for municipal service fees, surcharges on fees, 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.‘ (Emphasis added.)

[23] In my view the section is clear and unambiguous. The certificate is issued in respect of municipal debts which have become due in the two years preceding the date of application for the certificate and does not apply to future municipal debts. In City of Johannesburg v Kaplan NO & another [City of Cape Town v Real People Housing (Pty) Ltd 2010 (5) SA 196 (SCA) para 9], this court said:

No property may be transferred unless a clearance certificate is produced to the registrar of deeds that certifies full payment of all municipal debts as described in s 118(1) which have become due during a period of two years before the date of application for the certificate‘.18 (Emphasis added.)

[25] This court in City of Cape Town v Real People Housing (Pty) Ltd [City of Cape Town v Real People Housing (Pty) Ltd [2009] ZASCA 159; 2010 (5) SA 196 (SCA)] was faced with a policy in terms of which the municipality sought to ensure payment of debts for more than two years preceding the date of application for clearance certificate. Nugent JA said that [paras 14 and 15]:

‘... any proviso that would have the effect of entitling the City to withhold a certificate until all debts were paid – would nullify the express language of the section and it might just as well not be there. I do not think it is necessary to cite authority for the trite proposition that a term cannot be implied in a statute if it would contradict its

express terms. Had it been intended not to limit the period to two years then the words would not have appeared at all.

The dilemma in which the City finds itself is that it has left debts outstanding for more than two years albeit that the statute contemplates prompt collection. No doubt there are understandable reasons why that is so but the City cannot resolve its dilemma by subjugating the statute to a policy that would frustrate its terms‘.

[26] The clear intention of the legislature was to limit the period in s 118(1) to two years preceding the date of application for the certificate. The municipality‘s policy contradicts the express terms of the statute and ‘would frustrate its terms‘. To the extent that the municipality‘s policy is inconsistent with s 118(1), it is ultra vires and void.

[27] To sum up: the relevant provisions of the Rates Act, the Finance Act and the Systems Act read together, buttress the contention of the respondent that the municipality was not entitled to withhold the property rates clearance certificate until it had received payment of the property rates for the entire financial year. Such property rates became payable (but not due) from the start of the financial year. Further, s 118(1) clearly applies to municipal debts which have become due in the two years preceding the date of application for the certificate and does not apply to future municipal debts. The question posed in para [3] above must therefore be answered in favour of the respondent.

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Genesis Medical Scheme v Registrar of Medical Schemes

and Another

[2017] ZACC 16

Funds in members’ personal medical savings account (PMSA) of a

medical scheme.

Funds to be treated as liabilities of the scheme; not trust property.

The decision does not deal with insolvency and is not discussed in detail

Does a medical scheme hold any portion of its members’ contributions in trust

for them as a trustee? That is the issue. Behind it lurks a practical question,

which is not directly at issue in this litigation. What happens to members’

contributions if the scheme becomes insolvent? (Par [1])

At stake were just two issues – those that now require decision. Is Genesis

the right-holder of PMSA funds or does it hold them in trust? And, flowing from

this, may Genesis claim the interest earned on the PMSAs? (Par [9])

Registrar of Medical Schemes v Ledwaba NO [2007] ZAGPHC 24

(Omnihealth) was effectively the be-all and end-all of the Registrar’s decision.

Without Omnihealth, the Registrar would not have taken it. (Par [22])

Since a trust can be created by agreement between parties, nothing stops a

particular medical scheme, subject to approval from the Registrar, from

agreeing with its members that it holds particular funds it receives “for, or on

behalf of” them in trust. So whether the Financial Institutions (Protection of

Funds) Act 78 of 2001 (FIA) definition of “trust property” applies may depend

on any pertinent agreement between the scheme and its members as to a

specified benefit option that the Registrar has approved. (Par [31])

A medical scheme does not receive a member’s premium or contribution as

trustee or fiduciary. It receives the funds as a debtor in respect of the liability it

undertakes to provide a service in return for the contribution it receives. In the

language the FIA employs to define “trust property”, a medical scheme

receives its members’ contributions for or on behalf of its own business, and

not as trustee on behalf of the members. In short, the funds enter the

scheme’s bank account without being impressed by a trust or fiduciary

relationship. (Par [37])

Are funds allocated to a PMSA any different? The answer is No. Section

30(1)(e) of the Medical Schemes Act 131 of 1998 (MSA) provides that a

scheme “may in its rules make provision for the allocation to a member of a

personal medical savings account, within the limit and in the manner

prescribed from time to time, to be used for the payment of any relevant

health service”. The provision entails that “the allocation” is done by the

scheme itself, for it is into the scheme’s bank account that the funds allocated

have already been received and credited. The allocation is done by the

scheme as right-holder in respect of the funds it so allocates. From the point

of view of the MSA, no question of fiduciary relationship arises. (Par [38])

The language, logic and practical sense of the statutory scheme thus negate

the notion that a medical scheme ordinarily holds PMSA funds as a trustee for

its members. It follows from this that section 35(9)(c) entails that Genesis, not

its members, are the right-holders of the PMSA funds. (Par [44])

It must follow from the conclusion that PMSAs are not trust assets that the

scheme may, in accordance with section 26(1)(c)(ii),62 keep the interest

accruing from PMSAs in its bank account. (Par [52])

It transpired from the rules of Genesis that PMSAs are stipulated to “remain

the property of the member”. It may be, as postulated earlier, [see par [31]]

that this has the effect that the amounts in PMSAs are trust property. If so,

Genesis will have to open a separate bank account for PMSAs. And it will

have to comply with the accounting provisions of the MSA, regardless of any

negative commercial consequences. And it may be that, if Genesis does so,

and becomes insolvent, rule 14.5 will have the effect of protecting the

amounts in the PMSAs from Genesis’s creditors. But that was not what was at

stake in this litigation, and that is not what need be decided now. (Par [53] and

[54])

The circulars of the Registrar of Medical Schemes derive their sole force and

impact from Omnihealth. When Omnihealth tumbles, as it must, they must

tumble too. It would be a far-going misconstruction not only of the statute, but

of the parties’ dispute, to require Genesis to have sought, separately, to set

the circulars aside – when what it did do was to challenge the Registrar’s

decision that sought to enforce the circulars. When Omnihealth tumbles, the

Registrar’s decision tumbles, and with it the circulars, all in one. (Par [62])

Extracts

Medical Schemes Act 131 of 1998 — section 35(9)(c) – funds in members’ personal medical savings account to be treated as liabilities of the scheme — nature of funds in members’ personal medical savings account — funds not trust property — relationship between scheme and member not trustee and beneficiary

Majority decision by Cameron J supported by 8 of the 11 judges.

[1] Does a medical scheme hold any portion of its members’ contributions in trust for them as a trustee? That is the issue. Behind it lurks a practical question, which is not directly at issue in this litigation. What happens to members’ contributions if the

scheme becomes insolvent? [The following cases instance several medical scheme insolvencies: Sechaba Medical Solutions v Sekete [2015] ZASCA 8; Muller NO v Community Medical Scheme [2011] ZASCA 228; 2012 (2) SA 286 (SCA); and Registrar of Medical Schemes v Ledwaba NO [2007] ZAGPHC 24 (Omnihealth).] This case does not involve insolvency, but the parties are at odds about how to characterise members’ contributions to medical schemes, which, in turn, may shed light on the insolvency problem. Two conflicting judgments in the High Court and a divided Supreme Court of Appeal bench necessitate a decision. (Par [1])

Genesis seeks leave to appeal against a decision of the Supreme Court of Appeal [Registrar of Medical Schemes v Genesis Medical Scheme [2016] ZASCA 75; 2016 (6) SA 472 (SCA) (SCA judgment)] that overturned a decision of the High Court of South Africa, Western Cape Division, Cape Town (High Court). [Genesis Medical Scheme v Registrar of Medical Schemes [2014] ZAWCHC 206; 2015 (4) SA 91 (WCC) (High Court judgment).] The dispute between Genesis and the Registrar arose on 19 June 2013 when the Registrar rejected Genesis’s annual financial statements. The MSA [Medical Schemes Act 131 of 1998] does not invest independent legal authority in the Registrar’s circulars or prescripts. Instead, it requires that a scheme’s annual financial statements be furnished to the Registrar “in the medium and form determined by the Registrar”. [Section 37(2).] And it then adds bite – by empowering the Registrar to reject a scheme’s annual financial statements if they do not comply with the statute’s provisions or do not “correctly reflect the revenue and expenditure or financial position” of the scheme. [Footnote with quotation of section omitted.] And here the Registrar rejected Genesis’s financial statements. That rejection, and that alone, was the crucial decision at issue here. (Par [3])

[7] The terms “assets” and “liabilities” in section 35(3) are pivotal to answering the question before us. This is because the third key provision, section 35(9), spells out how a medical scheme must reflect the amount standing to the credit of a PMSA [Personal medical savings account] on its balance sheet. The section specifies that PMSAs must be reflected as liabilities of the medical scheme. Because of its importance to the argument, it claims space here:

“For the purposes of this Act, the liabilities of a medical scheme shall include—

(a) the amount which the medical scheme estimates will be payable in respect of claims which have been submitted and assessed but not yet paid;

(b) the amount which the medical scheme estimates will become payable in respect of claims which have been incurred but not yet submitted; and

(c) the amount standing to the credit of a member’s personal savings account.”

Completing the rigorous statutory framework within which medical schemes operate, the MSA also requires them to prepare and furnish audited annual financial statements to the Registrar. [Section 36 requires a medical scheme to appoint at least one auditor, with attendant provisions. Section 37, titled “Annual financial statements”, [quoted provisions omitted].] (Par [7])

[9] With this, battle was joined. At stake were just two issues – those that now require decision. Is Genesis the right-holder of PMSA funds or does it hold them in trust? And, flowing from this, may Genesis claim the interest earned on the PMSAs?

[22] The Registrar’s decision to reject Genesis’s financial statements was not merely influenced by Omnihealth. That decision was what caused, created and drove the rejection. Omnihealth was effectively the be-all and end-all of the Registrar’s decision. Without Omnihealth, the Registrar would not have taken it. The parties would never have been at odds. In lawyers’ language, Omnihealth was “material” to the disputed decision. [Johannesburg Metropolitan Municipality v Gauteng Development Tribunal [2010] ZACC 11; 2010 (6) SA 182 (CC); 2010 (9) BCLR 859 (CC) at para 91.] And if Omnihealth was wrong, that means the Registrar’s decision was wrong then – and that it is wrong now.

[27] Why this is important becomes evident when we turn to the definitions of the FIA [Financial Institutions (Protection of Funds) Act 28 of 2001]. The statute expressly defines “financial institution” to include any medical scheme under the MSA. [Section 1 of the FIA defines a “financial institution” as— “(b) any medical scheme contemplated in section 1 of the Medical Schemes Act, 1998.”] So its strict framework applies in general to medical schemes. The FIA specifically provides that a financial institution must “keep trust property separate from assets belonging to [it], and must in its books of account clearly indicate the trust property as being property belonging to a specified principal”.[Section 4(4) of the FIA. It follows that, if the funds in PMSAs are trust assets, and not those of the scheme, this provision requires the scheme in its books to clearly indicate that the trust property is trust property of a “specified principal”. It would appear, from a book-keeping perspective, that each PMSA would have to be separately entered with each member indicated as a “specified principal”.] The FIA also provides that despite anything to the contrary elsewhere, trust property held by a financial institution “under no circumstances forms part of the assets or funds of the financial institution”. [Section 4(5) of the FIA.]

[31] These principles prompt an immediate observation. Since a trust can be created by agreement between parties, nothing stops a particular medical scheme, subject to approval from the Registrar, [Section 33(1) and (2) of the MSA [provisions omitted]] from agreeing with its members that it holds particular funds it receives “for, or on behalf of” them in trust. So whether the FIA definition of “trust property” applies may depend on any pertinent agreement between the scheme and its members as to a specified benefit option that the Registrar has approved. The MSA itself contains no provision that precludes a medical scheme from agreeing with its members to hold their contributions, or a portion of them, in trust. I return to this later.

[32] That is not the problem this litigation presents. The parties’ dispute, in the form the Registrar’s rejection of Genesis’s financial statements precipitated, is whether, where no specific agreement is at issue, the provisions of the MSA and FIA, without more, impose a trust relationship on the scheme and its members regarding PMSA funds. That is the question the Supreme Court of Appeal, affirming Omnihealth and reversing the High Court, answered Yes.

[37] The medical scheme here is the bank’s creditor. It is empowered, as title-holder to the money, to instruct the bank how to dispose of it. [Fuhri v Geyser NO 1979 (1) SA 747 (N) at 749C-D: “But, despite the separation of trust moneys from an attorney’s assets thus affected by section 33(7), it is clear that trust creditors have no control over the trust account: ownership in the money in the account vests in the bank or other institution in which it has been deposited . . . and it is the attorney who is entitled to operate on the account and to make withdrawals from it.”] A medical scheme does not receive a member’s premium or contribution as trustee or fiduciary. It receives the funds as a debtor in respect of the liability it undertakes to provide a service in return for the contribution it receives. In the language the FIA employs to

define “trust property”, a medical scheme receives its members’ contributions for or on behalf of its own business, and not as trustee on behalf of the members. In short, the funds enter the scheme’s bank account without being impressed by a trust or fiduciary relationship.

[38] Are funds allocated to a PMSA any different? The answer is No. Section 30(1)(e) of the MSA provides that a scheme “may in its rules make provision for the allocation to a member of a personal medical savings account, within the limit and in the manner prescribed from time to time, to be used for the payment of any relevant health service”. The provision entails that “the allocation” is done by the scheme itself, for it is into the scheme’s bank account that the funds allocated have already been received and credited. The allocation is done by the scheme as right-holder in respect of the funds it so allocates. [Fuhri above.] From the point of view of the MSA, no question of fiduciary relationship arises.

[41] Section 35(3) requires a medical scheme at all times to have aggregate–value assets that exceed aggregate–value liabilities and nett assets. It would flout logic, accounting practice, and principles of trust law for any funds held in trust to be included in the calculation of “assets” for the purposes of this “solvency margin”. Because of this, section 35(9)(c) became pivotal in argument. This provision requires medical schemes to include PMSAs in their liabilities. And section 35(3), in turn, requires a scheme’s “liabilities” to be exceeded by, on any day, its total assets.

[42] Genesis contended that, if PMSAs were trust funds to be excluded as assets for all purposes, these provisions would require a scheme – to meet the section 35(3) “solvency margin” – to find outside, non-PMSA assets to the value of the PMSA trust assets section 35(9)(c) obliges it to include in its liabilities. The logic of this contention is irrefutable. And its implication – that the statute requires medical schemes, running as businesses, to sustain a solvency margin to off-set an accounting-entry liability it may not mirror as an asset – is at odds with the plain commercial logic the statute imposes from the outset on medical schemes. It follows that I differ from the conclusion in the third judgment, by Mojapelo AJ, that there is “no confusion created and there is no need for the medical scheme to raise additional funds to cover the PMSA fund liability”. [See [152].]

[44] The language, logic and practical sense of the statutory scheme thus negate the notion that a medical scheme ordinarily holds PMSA funds as a trustee for its members. It follows from this that section 35(9)(c) entails that Genesis, not its members, are the right-holders of the PMSA funds.

[49] PMSA liabilities are thus not treated separately or differently from any other run-of-the-mill liabilities the scheme must account for in its ledger. They are simply part of the ordinary receipt-and-payment business of the scheme.

[50] The MSA, in requiring that PMSAs be accounted for as liabilities of the scheme, proceeds from the premise that Genesis is the right-holder of PMSA funds and these funds are indeed unencumbered assets of the scheme; but the statute insists that, together with unpaid claims, amounts standing to the credit of PMSAs must be considered liabilities. That makes both statutory sense and common sense. No conceptual or practical difficulties arise if one accepts, in accordance with the definition of a medical scheme’s “business”, that all members’ contributions, including those later allocated to PMSAs, are received, not as trust property, but as debts the scheme owes the member in return for services it has yet to render.

[52] It must follow from the conclusion that PMSAs are not trust assets that the scheme may, in accordance with section 26(1)(c)(ii),62 keep the interest accruing from PMSAs in its bank account. Counsel for Genesis explained lucidly in argument why this entitlement makes business sense. Members are entitled at the start of any financial year to the benefit of a three-month projected total of their own PMSA. [Rule 1.2 of Appendix 2 to Annexure B of Genesis’s rules (effective 1 January 2017) provides [quotation omitted].]

[53] Some days before the hearing,64 the Court directed Genesis to make its Rules available to the Court. These were mentioned in the parties’ argument, but were nowhere in the record. Genesis did so. From them, it transpired that PMSAs are stipulated to “remain the property of the member”. [Directions dated 31 January 2017 were issued on 1 February 2017 directing Genesis to “make available to the Court, on or before Thursday, 2 February 2017, an electronic copy of its rules as referred to in the respondents’ written argument in this Court”.] It may be, as postulated earlier, [see par [31]] that this has the effect that the amounts in PMSAs are trust property. If so, Genesis will, in accordance with the FIA67 and other comparable statutory provisions dealing with trust property, [section 79 of the Attorneys Act 53 of 1979; section 88 of the Legal Practice Act 28 of 2014; and sections 10 and 12 of the Trust Property Control Act 57 of 1988] have to open a separate bank account for PMSAs. And it will have to comply with the accounting provisions of the MSA, regardless of any negative commercial consequences. And it may be that, if Genesis does so, and becomes insolvent, rule 14.5 will have the effect of protecting the amounts in the PMSAs from Genesis’s creditors.

[54] But that was not what was at stake in this litigation, and that is not what need be decided now. What was at stake is whether the Registrar’s decision under section 38 to reject Genesis’s annual financial statements was materially influenced by the judgment in Omnihealth. Plainly it was. In listing the PMSAs as its assets, Genesis’s statements were properly drawn in accordance with the requirements of the statute.

[56] What seems clear is that it was wrong to approach PMSAs as though the MSA creates them for the benefit of poorer medical scheme members. This cannot be, simply as a matter of logic, since those who choose to set aside savings must, to do so, have at least some disposable income additional to those who choose options entirely without PMSAs. The fact that they have less disposable income than members who are able to afford the “Rolls Royce” option of total cover puts them, at best, in the “missing middle” category – and not in a category that requires us to twist the ordinary meaning of the statute’s language.

[61] The second judgment considers the Registrar’s circulars binding on Genesis as they have not been set aside. It follows from the discussion above that this approach does not take into account two aspects. First, the statutory bite of the Registrar’s determination under section 37 of what “medium and form” a scheme’s statements must take springs from section 38. [See [45] to [46].] It is this provision that empowers the Registrar to reject a scheme’s financial statements if they do not comply with the statute or if they do not “correctly reflect” its “financial position”. And it is this power that the Registrar exercised here, and that Genesis was obliged to contest.

[62] Second, the circulars themselves derive their sole force and impact from Omnihealth. When Omnihealth tumbles, as it must, they must tumble too. It would be a far-going misconstruction not only of the statute, but of the parties’ dispute, to require Genesis to have sought, separately, to set the circulars aside – when what it

did do was to challenge the Registrar’s decision that sought to enforce the circulars. When Omnihealth tumbles, the Registrar’s decision tumbles, and with it the circulars, all in one.

[65] It follows that Genesis must succeed and the order of the Supreme Court of Appeal be reversed.

Decision by Zondo J, supported by 8 of the Judges

[161] The second judgment [supported by two of the Jdges] concludes that Genesis has failed to show the section 6(2)(d) ground in this matter and that, therefore, the appeal falls to be dismissed. For this conclusion, the second judgment gives three reasons. The first is that there was no error of law here. The second is that, even if it could be said that there was an error of law, that error of law was not material as required by section 6(2)(d). The third is in effect that, even if there was a material error of law, the appeal should still fail because Genesis did not seek to have Circulars 38 and 41 that were issued by the Registrar stipulating the form in which medical schemes were to submit their annual financial statements, set aside. The second judgment is to the effect that those Circulars are administrative actions and, as such, until they are set aside, they remain valid and binding upon medical schemes which would be required to comply with them even if there was an error of law. I deal with these topics in turn.

[179] For these additional reasons, I agree with the conclusion of the first judgment that the appeal should be upheld and with the order it proposes.

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