In a recent judgment that serves as a cautionary tale for creditors and agents alike, the Supreme Court of Appeal ("SCA") has with characteristic clarity and rigour, delivered a clear reminder: in the realm of insolvency, the rules are not to be circumvented.
The SCA dismissed an appeal concerning a payment made post-liquidation on behalf of Lashka 167 (Pty) Ltd (in liquidation) ("Lashka") to Pick 'n Pay Retailers (Pty) Ltd ("Pick 'n Pay"). The ruling reaffirms the long-standing principle that, once liquidation proceedings commence, a concursus creditorum (the gathering of creditors) comes into effect and no payment may be made to a single creditor to the detriment of the general body of creditors.
Factual background
The dispute centred around the sale of Lashka's business to Enthrall Trading (Pty) Ltd ("Enthrall"), governed by a sale of business agreement ("the Agreement"). Clause 6 of the Agreement was the central focus of the dispute and provided, inter alia, that:
- The purchase price was to be deposited into the trust account of Lashka's attorneys.
- Lashka's attorneys would hold the funds in trust for the benefit of Lashka until the funds were to be released or paid out to certain creditors as stated in the Agreement.
- If Lashka failed to timeously deliver the completed payment instruction as required by the Agreement, then Pick 'n Pay (subject to the terms of the Agreement) was irrevocably and unconditionally authorised to deliver the payment instruction to Lashka's attorney, who were to act accordingly.
- The balance of the funds was to be paid by Lashka's attorneys to Lashka.
- Lashka's attorneys were authorised to rely, without enquiry, on any instruction contemplated in clause 6 of the Agreement which appeared, on the face of it, to be signed by and on behalf of Pick 'n Pay and/or Lashka.
Prior to Lashka being placed into liquidation, Ethrall paid the purchase price of ZAR25 million to Lashka's attorneys. Lashka provided two payment instructions to its attorneys. Unfortunately, in the second payment instruction, Lashka omitted to include in the instruction that Pick 'n Pay be paid and no further payment instructions were given. On 19 February 2018, Lashka went into liquidation. Over a year later, on 2 July 2019, Pick 'n Pay instructed Lashka's attorneys to pay out ZAR21,627,758.21 from funds still held in trust and the attorneys complied. The liquidators, acting in accordance with their statutory duties, applied to the High Court for the payment to be repaid to Lashka as such payment disregarded the concursus creditorum.
Judicial pronouncement: High Court and SCA rulings
Both the High Court and the SCA were unequivocal: upon liquidation, all pre-existing and concluded mandates cease to have effect. Lashka's attorneys, acting as its agent under the Agreement, lost their authority to disburse funds once liquidation commenced. At that point, the law intervenes to ensure that all creditors are treated equally, and no creditor may alter the rights of the other creditors. The SCA, relying on established cases such as Walker v Syfret and Pride Milling v Bekker, emphasised that the concursus creditorum is not a mere technicality, but the very bedrock of fairness in insolvency. No creditor, regardless of their contractual position, can bypass the collective process once liquidation is in effect.
The argument that the Agreement remained an uncompleted executory contract, and that the liquidators had elected to abide by its terms, was rejected. In insolvency law, the liquidator steps into the shoes of the insolvent who is party to an uncompleted contract and must decide whether to perform or repudiate. If the contract is repudiated, the prejudiced party may claim damages. Although Pick 'n Pay was not a party to the Agreement, it held directly enforceable rights (i.e., a claim to payment). However, both Pick 'n Pay's mandate to issue payment instructions and the attorneys' authority to act on such instructions terminated upon liquidation. Thereafter, any authority to disburse funds fell within the exclusive purview of the liquidators.
A cautionary lesson for the profession
The payment to Pick n Pay was declared unlawful. The effect of a winding-up order is to create a concursus creditorum, placing the responsibility for the disbursement of funds and realisation of assets with the appointed liquidator, who must act in the best interests of all creditors.
The judgment serves as a warning: any attempt to pay a single creditor, above the interests of other creditors, will be set aside.
For legal practitioners, the lesson is plain: the courts will not countenance any stratagem that seeks to subvert the equitable distribution at the heart of South African insolvency law. Liquidators are not only entitled, but duty-bound, to recover such payments, thereby upholding the integrity of the concursus creditorum.
In the end, this case stands as a vivid warning: in the theatre of insolvency, the law decrees that all creditors must await their turn, and none may claim precedence by contractual arrangement.
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.
