By Tim Fletcher and Zahira Bhana

Company A owed rent to Company B and a large amount of unpaid tax to the South African Revenue Service (SARS). A was liquidated but had no assets because an associated company C had taken over its assets without paying for them. An insolvency inquiry was convened but before proceeding a settlement was reached between the liquidator and C in terms of which C agreed to pay B's claim and the claim of any other proved creditor. C duly paid an amount over to the liquidator sufficient to settle B's claim but was unable to pay the claims of SARS and an additional creditor. C was then liquidated but its creditors received no dividend.

The liquidator distributed the amounts paid by C for the settlement of B's claim, not in accordance with the settlement agreement but in terms of the liquidation and distribution account which reflected SARS as a preferent creditor. B objected unsuccessfully to the Master of the High Court. B then applied to the High Court for an order that it was entitled to have the money paid directly to it in settlement of its claim and was successful in that application. SARS not surprisingly appealed against that decision on the basis that the residue in the estate of A must, notwithstanding the agreement between the liquidator and C, be distributed in the order of preference set out in the Insolvency Act.

The liquidator's duty in terms of the Companies Act is to recover all the assets and property of a company and to realise and apply the proceeds firstly in satisfaction of the costs of winding up and then to distribute any residue to the creditors in the order of preference and in the manner set out in the Insolvency Act. It follows that any agreement which purports to subvert the requirements of the Insolvency Act would be unlawful. The Supreme Court of Appeals accordingly found that the agreement between C and the liquidator was lawful for so long as it provided for the payment both of the costs of liquidation and of the claims of all proved creditors and did not purport to prescribe a payment scheme in conflict with the Insolvency Act. As soon as C was unable to make payment of all proved claims, the agreement could not operate without offending the Insolvency Act and became unlawful.

The court held that the liquidator's duty to the estate and the creditors overrides any particular duty that the liquidator assumes in terms of a settlement agreement. The decision of the liquidator in this case to distribute the residue of the estate in accordance with the requirements of the Insolvency Act and contrary to the settlement agreement with C, which settlement agreement had become unlawful, was accordingly in keeping with the liquidator's duty and the court upheld the appeal of SARS.

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