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The role of liquidators has increased significantly since the formative years of the profession. the Insolvency Act 24 of 1936 (Insolvency Act) and Companies Act 71 of 2008 read with the Companies Act 61 of 1973 together with the transitional provisions contained in Regulation 9 (Companies Act) empower liquidators to approach the court to set aside impeachable dispositions.
This was highlighted in a recent decision by the High Court in Gauteng and was discussed by Werksmans Attorneys.
Case law
The Werksmans article points out that the liquidators’ successes in (i) Van Wyk Van Heerden Attorneys v Gore N.O. and Another (828/2021) [2022] ZASCA 128 (30 September 2022) (Gore N.O.), (ii) Mazars Recovery & Restructuring (Pty) Ltd and Others v Montic Dairy (Pty) Ltd (in liquidation) and Others (526/2021) [2022] ZASCA 135 (13 October 2022) (Montic Dairy), and (iii) Kullmann v Hill N.O (A5077/2021) [2022] GJP (28 October 2022) (Kullmann) are powerful judgments to be added to the arsenal of liquidators seeking to set aside impeachable transactions.
In brief, in Gore N.O. and Montic Dairy, the liquidators were successful in having the attorneys’ and business rescue practitioners’ (BRPs) remuneration declared void dispositions in terms of the Insolvency Act and Companies Act respectively. The full bench in Kullmann unveiled a purportedly arm’s length disposition in favour of the joint liquidators of Muga Design CC.
These three judgments redeem and reinforce the powers of liquidators.
Dispositions
The Werksmans article points out that Section 2 of the Insolvency Act defines the term disposition as “any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefor, but does not include a disposition in compliance with an order of the court“.
However, not all dispositions are voidable. Unfortunately, more must be done by liquidators to show that the relevant dispositions have been made to the detriment of the liquidated entity and its body of creditors.
Impeachable dispositions in terms of the Insolvency Act
The article adds that the four relevant forms of impeachable dispositions are:
- Section 26 governs dispositions made without value. The relevant provisions of section 26(1) of the Insolvency Act provide that ‑
“[e]very disposition of property not made for value may be set aside by the court if such disposition was made by an insolvent – […]
- within two years of the sequestration of his estate, and the person claiming under or benefited by the disposition is unable to prove that, immediately after the disposition was made, the assets of the insolvent exceeded his liabilities […]“
Recently, the SCA in Strydom N.O and Another v Snowball Wealth (Pty) Ltd and Others (356/2021) [2022] ZASCA 91 (15 June 2022) (Strydom) clarified the third criterion listed above, in finding that ‘not made for value’ in section 26(1) means for no value at all. Dr E Levenstein, Ms K Reddy, and Mr B Starr discuss the Strydom case in further detail here
- Section 29 of the Insolvency Act governs voidable preferences. Section 29(1) reads –
“[e]very disposition of his property made by a debtor not more than six months before the sequestration of his estate […] which has had the effect of preferring one of his creditors above another, may be set aside by the Court if immediately after the making of such disposition the liabilities of the debtor exceeded the value of his assets, unless the person in whose favour the disposition was made proves that the disposition was made in the ordinary course of business and that it was not intended thereby to prefer one creditor above another.”
- Section 30 governs undue preference to creditors. Section 30(1) reads –
“[i]f a debtor made a disposition of his property at a time when his liabilities exceeded his assets, with the intention of preferring one of his creditors above another, and his estate is thereafter sequestrated, the court may set aside the disposition.”
- Section 31 of the Insolvency Act governs collusive dealings before sequestration. Section 31(1) reads –
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“[a]fter the sequestration of a debtor’s estate the court may set aside any transaction entered into by the debtor before the sequestration, whereby he, in collusion with another person, disposed of property belonging to him in a manner which had the effect of prejudicing his creditors or of preferring one of his creditors above another.”
The Werksmans article points out that, as is the case in Kullmann, a single disposition may satisfy the criteria of a number of the above impeachable dispositions. As such, it is prudent for liquidators to seek strategic legal input when deciding which of the relevant sections best suit their questionable transaction.
Voidable dispositions in terms of the Companies Act
In terms of section 341(2) of the Companies Act:
“[e]very disposition of its property […] by any company being wound-up and unable to pay its debts made after the commencement of the winding-up, shall be void unless the Court otherwise orders.“
The article adds that, according to section 348, the winding up of a company is deemed to have commenced when the application for winding up is made to the court. In Nedbank Ltd v Cooper NO and Others 2013 (4) SA 353 (FB), the court held that the purpose of section 348 of the Companies Act to nullify ‑
“a possible attempt by a dishonest company, or directors, or creditors or others, to snatch some unfair advantage during the period between the presentation of the petition for a winding-up order and the granting of that order by a Court“.
Gore N.O.: Dispositions not made for value in terms of the Insolvency Act
The Werksmans article points out that in Gore N.O., Van Wyk Van Heerden Attorneys (the attorneys) received three payments into their trust account in respect of a transaction in terms of which an ostensible third party was purchasing a claim against one of the attorneys’ clients, BRP Livestock CC (BRP Livestock). The attorneys, on the instruction of BRP Livestock, transferred the purchase price of R1 250 000 to the purchaser. The other two payments of R75 000 and R200 000 were used by the attorneys to settle their fees, counsel’s fees, and other disbursements, which related to the attorneys’ representation of BRP Livestock in the transaction.
It was later discovered that the company that had paid the purchase price together with the professional legal fees was a separate company, Brandstock Exchange (Pty) Ltd (Brandstock), which was not party to the instant transaction. Brandstock’s sole director was, however, also the sole director of BRP Livestock. Upon Brandstock’s liquidation, the liquidators applied to have the payments declared void and set aside under section 26(1)(b).
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The article adds that the court listed the following elements under section 26(1)(b) –
- A disposition;
- by an insolvent;
- not made for value;
- within two years of liquidation; and
- the person claiming under or benefited by the disposition is unable to prove that, immediately after the disposition was made, the assets of the insolvent exceeded his liabilities.
The court highlighted the need for the recipient of a disposition to benefit therefrom for section 26(1) to be triggered. As such, the inquiry in respect of the payment of the purchase price rested on who benefited from the disposition. The court found that the attorneys in this regard acted as a mere intermediary or conduit in respect of the purchase price, and section 26(1) on a plain reading does not allow for liability to attach to one who does not benefit from the disposition. As such, the deposit of the purchase price was not a disposition in respect of the attorneys and was thus not impeachable under section 26(1)(b).
However, the SCA found that the two deposits of R75 000 and R200 000 in respect of the attorneys’ professional legal fees were indeed impeachable dispositions under section 26(1)(b). In reaching its decision, the court noted that it was clear that the attorneys benefitted from these deposits. The deposits for the professional legal fees were made by Brandstock, which did not receive any value in return. Rather, it was BRP Livestock that received value in the form of the attorneys’ professional services. Consequently, the SCA set aside the two payments in respect of the professional legal fees and ordered the attorneys to pay back an amount of R275 000 to the liquidators of Brandstock.
The Werksmans article points out that, although the attorneys’ remuneration was set aside in Gore N.O., the SCA went to great lengths to emphasise that the attorneys were not at fault for accounting to their client for fees and disbursements and then appropriating monies held in trust for that purpose. Indeed, the deposits were dealt with in accordance with principles governing trust accounts. Had the attorneys acted for Brandstock in any capacity, the deposits would have been made for some value and would not fall within the purview of section 26(1)(b).
In my next thought leadership editorial, I will focus on the remaining cases.
Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner.
