The Supreme Court of Appeal ruling establishes a principle that; when dealing with a possible disposition, it is important to establish whether the rights of the property, which was transferred or abandoned by a party, vested in that party.
In Cloete Murray NO and Others v Humansdorp Co-operative Limited (1274/2021) [2022] ZASCA 187 ("Humansdorp Co-operative" case), the Supreme Court of Appeal had to consider the following:
- Whether payment was made by the attorneys who held monies on its trust account on behalf of Cape Concentrate (Pty) Ltd (now in liquidation)("Cape Concentrate"), or whether it was payment made by or on behalf of Standard Bank of demand guarantees issued in favour of Humansdorp Co-Operative ("the Co-op") for the liabilities of the Tyefu Community Farming Trust ("the Trust");
- Whether payment was made in terms of a bank guarantee or whether the payment constituted a disposition in terms of Section 2 of the Insolvency Act 24 of 1936 ("the Act");
- In the event of the payment constituting a disposition, whether such disposition was not made for value as provided for in Section 26 of the Act;
- In the event of the disposition not being made for value, whether Humansdorp Co-Operative ("the Co-op") is entitled to be indemnified in terms of Section 33(1) and (2) of the Act.
Cape Concentrate experienced financial difficulties and as a result thereof was placed in business rescue during May 2013. The business rescue practitioner ("BRP") of Cape Concentrate was a director of a Law firm ("the attorneys").
In December 2013, the BRP established the Trust to involve local community farmers in the production of tomatoes for supply to Cape Concentrate. Cape Concentrate was one of the founders of the Trust. The BRP made applications for a production loan to the Co-op on behalf of the Trust, in his capacity as the BRP for Cape Concentrate, and then in his capacity as a director at the attorneys.
As security for the loan from the Co-op, Cape Concentrate deposited monies into the trust account of the attorneys. The Co-op then agreed to grant loan facilities to the Trust subject to bank guarantees. Bank guarantees were then issued by Standard Bank. The BRP provided the Co-op with six demand guarantees in the total amount of R25 million. These demand bank guarantees were issued by the attorneys utilising the Standard Bank electronic system, Third Party Fund Administration (TPFA).
The Trust was unable to make payments towards the loan facility provided to it by the Co-op. As a result, the Co-op's attorneys addressed a letter to the attorneys demanding payment of the guarantees to the value of R22,268,848.84. The attorneys then made payment of the aforesaid amount to the Co-op.
The final order for the liquidation of Cape Concentrate was granted on 29 March 2016. The Appellants, being the joint liquidators of Cape Concentrate, lodged an application in the Grahamstown High Court for the payment in the amount of R22,268,848.84 to be set aside as a payment without value. The High Court dismissed the application and held that the aforesaid payment was of demand guarantees made by Cape Concentrate to the Co-op and was therefore a disposition with value.
On appeal, the liquidators argued that the attorneys paid the Co-op the amount required to settle the loan it had granted to the Trust, using the funds of Cape Concentrate. As such, it was a disposition without value in terms of Section 26 of the Act. The Co-op's argued that the payment was pursuant to a demand guarantee and that, with the issuing of the guarantees, the monies deposited in the Standard Bank TPFA accounts became subject to a pledge and cession in favour of Standard Bank and payable on demand. Cape Concentrate was the pledgor to the pledge and cession.
In terms of the pledge and cession, Cape Concentrate's rights to the monies were divested once they were paid into the TPFA system accounts. Those rights became vested in Standard Bank.
The Court held that the guarantees were presentable and payable by electronic means, when a demand was made to the attorneys. When the demand was made by the Co-op for payment under the guarantees, the attorneys made payment of the pledged and ceded monies in terms of its obligations under the guarantees.
It is evident that the rights to the monies vested in Standard Bank and not in Cape Concentrate. As a result, the payment of the monies did not constitute a disposition. Therefore, the payment was made in terms of the demand guarantees. When dealing with a possible disposition, it is important to establish whether the rights of the property, which was transferred or abandoned by a party, vested in such party.
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