South Africa: SCA Sets Aside Dispositions Resulting In Creditors Getting 70c In The Rand

Last Updated: 15 April 2014
Article by Claire Morgan and Brigette Jamieson

Most Read Contributor in South Africa, September 2018

On 28 March 2014, the Supreme Court of Appeal (SCA) handed down judgment in Gavin Cecil Gainsford N.O. & others v Tanzer Transport (Pty) Ltd & others (Tanzer). The liquidators of Costa Logistics SA (Pty) Ltd ("the company") were the appellants. Tanzer was the respondent. The ENSafrica insolvency team acted for the liquidators.

The judgment is important because Tanzer raised a number of technical points to avoid liability, and, in the court of first instance, succeeded in having the matter dismissed on such a technicality. The SCA not only overturned this technicality, but ruled against every other technicality raised by Tanzer. In so doing, the ENSafrica insolvency team respectfully submits that the judgment is one of a number of judgments handed down by the SCA recently that are robust and commercial, and prevent the likes of Tanzer, who received unlawful payments from the company, from evading liability.

There were two applications in the South Gauteng High Court (the court of first instance):

  • in the first application, the liquidators applied for an order declaring certain payments void in terms of section 341(2) of the Companies Act, no. 61 of 1973. The payments, exceeding R14 million, were made to Tanzer by the company after its liquidation. Section 341(2) provides that "every 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";
     
  • in the second counter-application, Tanzer applied for an order setting aside the liquidation of the company.

In the court of first instance, the judge dismissed the first application on the technicality (raised by Tanzer) that the liquidators lacked locus standi, because they had sued in their representative capacities on behalf of the company, rather than in the name of the company itself. The judge simultaneously referred the second application to trial. Both orders were appealed.

In handing down judgment, the SCA dealt with a number of issues relating to the authority of liquidators to sue and the voidable disposition section, s341(2) of the Companies Act.

Section 386(4)(a) of the Companies Act provides that liquidators must bring or defend proceedings "in the name and on behalf of the company."

Tanzer relied on Fey N.O. & another v Lala Govan Exporters (Pty) Ltd 2011 (6) SA 181 (W). In that matter, the judge held that section 386(4)(a) required liquidators to sue in the name of the company, rather than in their own names nomine officio (i.e. by virtue of their official capacities as liquidators). The judge reasoned that the distinction was evident from other provisions in the Companies Act which enabled a liquidator to act in his or her own name.

There is another line of authority in Shepstone & Wylie & others v Geyser N.O. 1998 (1) SA 354 (N), which recognises that, in practice, liquidators often sue in their own names with the letters N.O. (nomine officio) appended, that is, in their representative capacities, as the liquidators had done in this matter.

The SCA held that the distinction between the two forms was "without a difference", "pedantic or illusory. To disqualify liquidators properly appointed from acting on behalf of a company in liquidation would truly be elevating form above substance."

Tanzer raised two more preliminary points.

At the second meeting of creditors of the company, a resolution had been adopted authorising the liquidators "to collect any outstanding debts due to the company." The liquidators relied on this resolution as their authority to sue. However, in case the resolution was not wide enough, they also applied to the court for leave to sue. Tanzer seized on this uncertainty and argued that the resolution was not wide enough, because it made no reference to voidable dispositions.

The SCA disagreed. It held that the resolution was wide enough to include any debt owed to the company, including by virtue of voidable dispositions.

The final preliminary point raised by Tanzer was that the liquidators ought to have proceeded by way of trial action, rather than on application. Tanzer argued that the liquidators should have foreseen that material disputes of fact, not capable of determination on application papers, would arise. The material dispute of fact in question, according to Tanzer, was whether the company was indeed insolvent at the time of its liquidation.

The ENSafrica insolvency team had advised the liquidators to proceed on application – rather than by way of a trial – to save costs. In the team's view, the insolvency of the company could be set out on the papers, with reference to the company's financial statements and a report prepared by KPMG showing that the company had net liabilities of R50 million.

The SCA held that the "evidence [on the papers] demonstrated that at the time the company was liquidated, it was factually insolvent and manifestly unable to pay its debts."

Having thus disposed of Tanzer's preliminary points, the SCA turned to deal with the merits of the first application.

Tanzer contended that the payment to it of R14 million after the company's liquidation was not void, because Tanzer had allegedly been paid "bona fide in the ordinary course of business". According to Tanzer, the company's staff had paid it in ignorance of the company's liquidation.

The SCA was unimpressed with this argument. It held that: "There is ... no acceptable basis provided by Tanzer for justifying a departure from the well-established rule of law which prohibits any disposition by the company after ... its winding-up. Ordinarily a court will consider whether fairness and justice require the rule to be disregarded. No such considerations were disclosed ... On the contrary, the evidence demonstrates that the exercise of a discretion in favour of validity would result in extreme and irreparable prejudice to the creditors of the company."

Having thus dealt with the first application, the SCA turned to the second application for the setting aside of the liquidation of the company. Tanzer argued two points:

  • The company was solvent when it was liquidated – this point was disposed of as above;
     
  • The liquidation of the company was tainted by fraud, in that the company had paid R4.5 million to its holding company, which payment preferred the holding company above the company's other creditors.

The liquidators had already sued the holding company to recover the R4.5 million. The company itself had no staff or operations, and was "less than a shell".

The SCA held: "... one can rightly ask what would the purpose be of setting aside the liquidation, other than preserving the undue preference that Tanzer enjoyed? The interest of the creditors of the company dictates that the company should remain in liquidation and that the unlawful payments made to Tanzer should be repaid into the estate to be distributed by the liquidators amongst the proven creditors of the company in accordance with the laws of insolvency."

The appeal was thus dismissed. Tanzer was ordered to repay the R14 million it had received after the company's liquidation.

The company has four proved creditors. The major creditor is Pick 'n Pay, whose claim exceeds R14 million. Three other creditors have claims totalling about R1 million. Following this judgment, on repayment by Tanzer, Pick 'n Pay and the other creditors will receive an estimated dividend of at least 70c in the Rand.

*The above article refers to provisions in the previous Companies Act, no. 61 of 1973. All these provisions remain in force in terms of item 9 of Schedule 5 to the Companies Act, no. 71 of 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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