The Western Cape High Court recently illustrated that timing and the nature of a transaction are key when relying on section 26(1) of the Insolvency Act 24 of 1936 (Act) for the purpose of setting aside voidable dispositions.
The case involved a claim by the liquidators of Free Agape Enterprises (Pty) Ltd (Free Agape) (the liquidators) for the repayment of money made by Free Agape to Ms Le Roux (the defendant) within the two-year period prior to the winding up of Free Agape.
An interesting business model
Prior to its winding up, Free Agape conducted an investment scheme under the name and style “Free Agape” and other trading names. The nature of the scheme was such that Free Agape collected deposits from clients/investors. These funds were then used either to repay earlier deposits or to distribute what were termed as “dividends” to other clients. During March 2018, Free Agape was placed in liquidation and its business, along with all investment-related agreements with third parties were declared illegal, unlawful and void.
The liquidators advanced two claims against the defendant, one for R1,044,500 in terms of section 26(1) of the Act (which allows for the setting aside of dispositions of property made without value by an insolvent person within two years before the sequestration of their estate) and the other for R240,000 in terms of section 29(1) of the Act. While the second claim was successful, the court declined to grant judgment in terms of the first claim and provided reasons for this decision. In our view, these reasons serve as a useful guideline for liquidators seeking to set aside dispositions in terms of section 26 of the Act.
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Section 26(1) of the Act provides that if a person, who later becomes insolvent, transfers property without receiving its equivalent value in return:
- more than two years before their assets are seized, the transfer can be reversed if, right after the transfer, their debts exceeded their assets; or
- within two years before their assets are seized, the transfer can be reversed unless the beneficiary can show that after the transfer, the person’s assets were greater than their debts.
However, if the liabilities ever exceeded the assets by an amount smaller than the transferred property’s value, only that excess amount can be reversed.
Section 29(1) of the Act provides that any property transfer by a debtor made less than six months before their assets are seized (or their death if they die insolvent) can be reversed if such a transfer unfairly favoured one creditor over others. This is the case unless the beneficiary can prove the transfer was routine business and was not meant to favour any particular creditor.
The liquidators argued that the payment of R1,044,500 made by Free Agape to the defendant should be set aside in terms of section 26(1) of the Act because (i) the payment was made less than two years prior to the liquidation; (ii) that they were entitled to reclaim all payments made by Free Agape to the defendant which exceeded payments/investments made by the defendant to Free Agape; and (iii) since during the two-year period the defendant made no payments to Free Agape, the entire amount of R1,044,500 was reclaimable.
Findings
In coming to its decision, the court focused on three specific aspects.
Firstly, the court made it clear that relief under section 26 is time-bound. For dispositions made more than two years prior, the trustee must show that the transfer was without equivalent value and the debtor’s liabilities exceeded their assets. For dispositions within the two-year period, the recipient has the burden to demonstrate that, post-transfer, the debtor had more assets than liabilities. In this case, however, the liquidators only relied on a six-month period within which it claimed that the defendant had made no payments to Free Agape, yet received payment in return. The court held that the entire two-year period should be considered.
Secondly, the court held that in order to satisfy the onus set out in section 26, a trustee or liquidator cannot merely claim that after a transfer, the debtor’s liabilities surpassed their assets. In cases where trustees aim to reverse transfers to third parties, it is unreasonable for courts to speculate whether the second requirement set out in section 26 has been met and whether the burden of proof is accordingly fulfilled. On the liquidators’ own version, repayments or dividends were only made by Free Agape to the defendant, after having received a deposit for investment from the defendant.
Thirdly, the court found that just because Free Agape’s business was deemed illegal, unlawful, and void, and all its investment agreements with third parties were nullified, it does not automatically imply that every transaction it made was without value. It is a well-established principle that “disposition not for value” essentially means “without any value whatsoever”. This concept is closely tied to the type of transactions that persons in insolvency engage in before their assets are seized, or they are liquidated. With reference to previous cases, the court found that just because an agreement could not be enforced by a court of law, does not mean it cannot be recognised by the law for certain purposes.
In dismissing the claim under section 26(1), the court held that based on the liquidators’ own account, it is not accurate to claim that the payments made to the defendant were dispositions without value as per section 26(1). If a creditor, who benefited from a transaction, can show that the insolvent individual gained value directly from that transaction, then value was indeed derived. In the end, it is up to the court’s discretion to reverse a disposition without value, but only if it’s demonstrated that right after the transaction, the insolvent party’s debts exceeded their assets.
At a glance
- The Western Cape High Court recently illustrated that timing and the nature of a transaction are key when relying on section 26(1) of the Insolvency Act 24 of 1936 (Act) for the purpose of setting aside voidable dispositions.
- The liquidators advanced two claims against the defendant, one for R1,044,500 in terms of section 26(1) of the Act (which allows for the setting aside of dispositions of property made without value by an insolvent person within two years before the sequestration of their estate) and the other for R240,000 in terms of section 29(1) of the Act.
- In dismissing the claim under section 26(1), the court held that based on the liquidators’ own account, it is not accurate to claim that the payments made to the defendant were dispositions without value as per section 26(1).
Lucinde Rhoodie is a Director at CDH;
Kara Meiring is an Associate at CDH;
Luke Kleinsmidt is a Candidate Attorney at CDH.
