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[2020] ZAWCHC 31
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Hyde Construction CC v K2013046547 (South Africa) (Pty) Ltd and Others (9179/2019) [2020] ZAWCHC 31 (29 April 2020)
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
CASE NUMBER:
9179/2019
In the matter between:
HYDE
CONSTRUCTION CC
Applicant
and
K2013046547
(SOUTH AFRICA) (PTY) LTD
First Respondent
INVESTEC
BANK
LIMITED
Second Respondent
BLUE
CLOUD INVESTMENTS 40 (PTY)
LTD
Third Respondent
REGISTRAR
OF DEEDS, CAPE TOWN
Fourth Respondent
JUDGMENT DATED 29
APRIL 2020
KUSEVITSKY,
J:
[1]
This is an application in which the Applicant seeks to set aside an
agreement of sale entered into between the Third Respondent
as seller
and the First Respondent as purchaser in terms of section 34(3) of
the Insolvency Act, No. 24 of 1936 (as amended) and
that the
subsequent transfer of the property to the First Respondent and
registration of the bond in favour of the Second Respondent,
be
declared void and similarly set aside.
[2]
The Third Respondent, (“Blue Cloud”), purchased Erf 2941
in 2003 and developed the property into a shopping centre,
known as
“The Square” which is situated in Plettenberg Bay (“the
property”). During July 2005, Blue Cloud
contracted the
Applicant, (“Hyde Construction”), to undertake
alterations to the shopping centre. The building work
was done over a
period between July 2005 to 3 May 2007. The remainder of Erf 2941 was
subsequently sub-divided into 12 sectional
title units and a
sectional title register opened in 2007. I shall refer to the First
and Third Respondents interchangeably as
the “the Respondents”.
[3]
It is common cause that a dispute arose between the parties and
litigation ensued on the building contract, which action was
instituted by Hyde Construction on 26 April 2010. Due to various
delays, to which I shall return, judgment in favour of Hyde
Construction
was only delivered on 21 May 2019. After Hyde
Construction instituted its claim against Blue Cloud, Blue Cloud then
sold
the property which formed the basis of the dispute, to the First
Respondent (“the K Company”). Transfer of the property
to
the new owners was effected on 14 August 2014. According to Hyde
Construction, the property was sold without notice of the sale
to it
in terms of
s 34(1)
of the
Insolvency Act.
[4
]
A company search done on Blue Cloud reveals that its directors are Mr
Neil Lurie (“Lurie”) and Mr Donald Gavin Borthwick
(“Borthwick”). The same Mr Lurie also happens to be one
of the the directors of the K Company, the company which bought
the
property.
The
history of litigation between the parties
[5]
It is perhaps prudent to firstly deal with the litigation history
between Hyde Construction and Blue Cloud. Hyde Construction
issued summons against Blue Cloud on 26 April 2010
[1]
for amounts due in terms of their building contract. The parties
agreed that merits and
quantum
would be separated in terms of
Rule 33(4)
[2]
.
The merits trial was heard by Schippers J (as he then was) and
judgment was handed down on 12 August 2015. Hyde Construction was
substantially successful
[3]
.
Blue Cloud’s application for leave to appeal was dismissed by
both Schippers J and the Supreme Court of Appeal on 11 May
2016.
[6]
On 4 February 2019, Hyde Construction filed its practice note in
respect of the
quantum
hearing which was set down for hearing on 25 February 2019 before
Hack AJ. On 12 February 2019, Blue Cloud’s attorneys of
record
filed a notice of withdrawel.
[7]
On 22 February 2019, an application was brought for the winding up of
Blue Cloud in the KwaZulu-Natal High Court. The application
was
brought by three entities, Alhock Properties, whose sole member is
Gavin Borthwick, the father of Donald Borthwick who is also
the
co-trustee of Blue Cloud; Forestdene Investments (Pty) Ltd whose
directors are Borthwick and his father Gavin; and the B &
A Trust
made up of trustees Borthwick, his father Gavin and mother Jennifer.
Borthwick in his capacity as director of Forestdene
and trustee of
the B&A Trust, deposed to the liquidation application.
[8]
In the meantime, the
quantum
hearing was heard on 25 February 2019. According to the judgment
[4]
,
it is apparent that Blue Cloud did not appear on the day of the
hearing and that after consideration of correspondence presented
to
the presiding officer, it was clear that Blue Cloud had no intention
of participating in that hearing and accordingly, the court
ordered
that the trial continue in their absence.
[9]
In the judgment
[5]
, Hack AJ
found
[6]
in favour of Hyde
Construction and ordered Blue Cloud to pay Hyde Construction
inter
alia
the sum of R 4 062 380.59 plus Vat and R 4 518 716.03 in compensatory
interest. Blue Cloud was also ordered to pay costs on a punitive
scale.
[10]
In summary, it is common cause that the property was sold by Blue
Cloud and transferred to the K company, on 14 August 2014
after
action was instituted by Hyde Construction against Blue Cloud and
before judgment was handed down. It is also apparent that
there was
an attempt by Borthwick to liquidate Blue Cloud before the hearing of
the
quantum
trial. The effect of the sale was that Lurie
[7]
(and his co-director Borthwick) sold the property back to himself and
others in the form of the K Company, with Lurie also being
a
co-director of the K Company.
[11]
At the start of the proceedings, there was an application by the
First and Third Respondents to file a supplementary affidavit.
It
is trite that a court is vested with the discretion whether or not to
allow the filing of further affidavits. A court
will exercise its
discretion to admit further affidavits only if there are special
circumstances which warrant it or if the court
considers such a
course advisable.
[8]
A court
must furthermore be satisfied that no prejudice is caused to the
opposing party.
[12]
I could find no special circumstances that warranted the filing of a
further affidavit, nor was I convinced that the arguments
advanced by
counsel for the Respondents, that they were entitled (and would be
prejudiced if such application was refused) to file
a further
affidavit in light of ‘new evidence’ ostensibly sought to
be relied on by the Applicant in its Reply. The
‘new evidence’
relied upon was ostensibly based on a document, the so-called Board
paper, to which I shall later return,
attached to the Respondents’
answering affidavit. In its reply, the Applicant rightfully dealt
with the contents of the document
and it is these averments that
ostensibly constituted ‘new evidence’ as alleged by the
Respondents. They argued
that special circumstances may exist
where something unexpected or new emerges from the applicant’s
replying affidavit which
permits the delivery of a further affidavit.
In my view, the Respondents can hardly claim that this is new or
‘unexpected’
evidence when it is evidence within their
knowledge and upon which they themselves sought to rely. I could
therefore find no special
circumstances which warranted such a
deviation. I was also mindful of the previous manner in which the
litigation was conducted
and considered any attempts to file further
affidavits, particularly on the day of the hearing, a dilatory
attempt to stall the
matter, to the prejudice of the Applicant.
[13]
There was also an application by the Applicant for the matter to be
referred to oral evidence in the event that I was of the
view that a
dispute on the papers became evident. In adjudicating the issue of a
referral to oral evidence or to trial, a court
will only exercise its
discretion to do so in the event that it is satisfied that the
balance of probabilities favour the Applicant
and that
viva
voce
evidence will not disturb the balance of probabilities.
[9]
This application was refused as I was of the view that the issue
could be determined on the papers and that no genuine disputes
of
fact existed that would have warranted such a referral.
[14]
In order for Hyde Construction to be successful in setting aside the
sale of the property in terms of
section 34(3)
of the
Insolvency Act,
it
has to prove that Blue Cloud was a “trader”, as
defined in
section 2
of the
Insolvency Act when
it sold the property
to the K Company.
The
legislative framework
[15]
Section 34
of the
Insolvency Act reads
a follows:
"(1)
If a trader transfers in terms of a contract any business belonging
to him, or the goodwill of such business, or any goods
or property
forming part thereof (except in the ordinary course of that business
or for securing the payment of a debt), and such
trader has not
published a notice of such intended transfer in the
Gazette
,
and in two issues of an Afrikaans and two issues of an English
newspaper circulating in the district in which that business is
carried on, within a period not less than thirty days and not more
than sixty days before the date of such transfer, the said transfer
shall be void as against his creditors for a period of six months
after such transfer, and shall be void against the trustee of
his
estate, if his estate is sequestrated at any time within the said
period.
(2) As
soon as any such notice is published, every liquidated liability of
the said trader in connection with the said business,
which would
become due at some future date, shall fall due forthwith, if the
creditor concerned demands payment of such liability:
Provided that
if such liability bears no interest, the amount of such liability
which would have been payable at such future date
if such demand had
not been made, shall be reduced at the rate of eight per cent per
annum of that amount, over the period between
the date when payment
is made and that future date.
(3) If any person who has
any claim against the said trader in connection with the said
business, has before such transfer,
for the purpose of enforcing
his claim
, instituted proceedings against the said trader -
(a) in any court of law,
and the person to whom the said business was transferred knew at the
time of the transfer that those proceedings
had been instituted;
or
(b)
in a Division of the Supreme Court having jurisdiction in the
district in which the said business is carried on or in the
magistrate's
court of that district,
the
transfer shall be void as against him for the purpose of such
enforcement.
(4) or
the purposes of this section 'transfer', when used as a noun,
includes actual or constructive transfer of possession, and,
when
used as a verb, has a corresponding meaning."
[16]
In
McCarthy
Ltd v Gore NO 2007 SA 366 (SCA)
[10]
,
the issue of voidable dispositions of assets as intended by
s 34(1)
of the
Insolvency Act were
enunciated. There, Thereon AJA stated that
the purpose of the legislature in enacting
s 34(1)
is to protect
creditors by preventing traders who are in financial difficulty from
disposing of their business assets to third
parties who are not
liable for the debts of the business, without due advertisement to
all the creditors of the business.
But the provisions of
s
34(1)
can only be invoked if the company is a ‘trader’ as
defined in
s 2
of the
Insolvency Act. Section
34(3) cannot therefore
be read in isolation of
s 34
(1).
[17]
In
section 2
of the
Insolvency Act, a
trader is defined as follows:
“
trader”
means any person who carries on any trade, business, industry or
undertaking in which property is sold, or is bought,
exchanged or
manufactured for purpose of sale or exchange, or in which building
operations of whatever nature are performed, or
an object whereof is
public entertainment , or who carries on the business of an hotel
keeper or boarding-housekeeper, or who acts
as a broker or agent of
any person in the sale or purchase of any property or in the letting
or hiring of immovable property; and
any person shall be deemed to be
a trader for the purpose of this Act (except for the purposes of
subsection (10) of section
twenty one
)
unless it is proved that he is not a trader as hereinbefore defined :
Provided that if any person carries on the trade, business,
industry
or undertaking of selling property which he produced (either
personally or through any servant) by means of farming operations,
the provisions of this Act relating to traders only shall not apply
to him in connection with his said trade, business, industry
or
undertaking’
.
[18]
A ‘trader’ is therefore a person carrying on any trade,
business, industry or undertaking of the types specified
in the
balance of the definition after the words ‘
in
which’
.
This
emerges
from the judgment of Mthiyane JA in
Kevin
and Lasia Property Investment CC v Roos NO and Others
[11]
where it was held that each clause in s 2 of the Act is separate and
distinct from the other:
‘
The
definition commences with the words ‘“trader” means
any person. There follows a number of clauses which commence
with the
word “who” and thereafter, the words “or who”,
i.e. “who carries on any trade … or
who carries on the
business … or who acts as a broker”. Each clause is
separate and distinct from the others.’
[19]
Thus the question is not whether Blue Cloud carries on any trade,
business, industry or undertaking at all, but whether it
carries on
such a trade falling into one of the specified categories and the
approach to be adopted is to ascertain whether the
company is a
trader by having regard to the nature of the undertaking and
determining whether such an undertaking is part of the
core business
of the company, or incidental thereto.
[20]
The Respondents bear the onus of proving that Blue Cloud was not a
‘trader’ at the relevant time of the disposition.
[12]
Thus , even though the onus on a particular issue in motion
proceedings might rest on the respondent, this does not
reverse the
operation of the
Plascon-Evans
rule.
[13]
[21]
According to Hyde Construction, Blue Cloud described their business,
in their liquidation application, by stating that it was
the
intention of the shareholders to purchase properties and to develop
same. However, Hyde Construction contends that they
went a step
further by purchasing the properties, developing same and trading
with such properties. This was denied by Blue Cloud.
The
directors of Blue Cloud at the time in 2002 was
inter
alia
Lurie and Borthwick. Their shareholding in Blue Cloud came in various
forms, being the majority shareholder at the time
[14]
of Amatshe (Pty) Ltd whose directors were Lurie and Borthwick.
[22]
In its founding affidavit, Hyde Construction attached a printout of a
company property search history report in respect of
all the
properties Blue Cloud had purchased and subsequently disposed of, in
order to show that Blue Cloud was a ‘trader’,
as defined
in
s 2
of the
Insolvency Act. Blue
Cloud admitted that it had
purchased these properties but denied it was a trader as contemplated
in
s 2
of the
Insolvency Act. I
will list these properties later.
[23]
The Respondents submit that when Blue Cloud was established in 2002,
the intention was that Blue Cloud would develop and hold
immovable
property for investment purposes and in particular, establishing a
rental enterprise at each property.
[24]
In its answering affidavit, Blue Cloud admitted that it did buy and
sell the properties referred to and that for the period
from
approximately 2002 to 2006, Blue Cloud had sold, as rental
enterprises, a number of properties it had initially invested in.
They also admitted that from 2002 when it was established, its
intention was to develop property, and to hold such property for
investment purposes. It similarly attached a “Windeed Report”
listing the immovable properties it previously owned.
This report
corresponds with the property search report annexed to the founding
affidavit. Hyde Construction therefore submitted
that it was common
cause that the properties mentioned were indeed purchased, developed
and sold.
[25]
The Respondents stated that Blue Cloud did not, on a short-term
basis
,
purchase, develop and sell immovable properties. It was also
not in the business of developing and selling properties in
order to
generate an income stream on that basis. In other words, its business
objective was not the buying and selling property
per
se
as its stock in trade. They argued
that the core business of Blue Cloud was the acquisition and rental
of immovable property and
the fact that “certain of those
properties” were sold off over the years was incidental to that
core business.
[26]
The Respondents also explained that Blue Cloud’s properties
would be sold only if its investment objectives were not
met by the
holding of such properties. Four scenarios under which the properties
were disposed of were given; when the rental income
which was either
not profitable enough for investment purposes or did not meet the
“loan to value” requirements of
the mortgagee; or was not
enough to pay the expenses incurred in respect of the property; or
Blue Cloud would otherwise sell such
properties if approached by
interested purchasers such as the tenants of the property and Blue
Cloud stood to make a substantial
profit from the sale of such asset.
The Respondents maintained that such sales were ancillary to the main
business of Blue Cloud
which was investing in commercial immovable
property and generating rental income from such properties.
[27]
It is therefore common cause between the Applicant and Respondents
that Blue Cloud purchased properties, developed such properties
and
eventually sold such properties. The only issue in dispute is that
the Respondents allege that such sales would only be made
under
specific circumstances and not as a matter of course as its core
business.
[28]
To provide written examples to illustrate the point that the sale of
immovable properties was ancillary to the main or core
business of
Blue Cloud, the Respondents attached
inter alia
two annexures
to their answering affidavit, firstly a document entitled “
Blue
Cloud/Disposal of Properties”
referred to as the “Board
Paper” and secondly their Annual Financial Statement dated 28
February 2010
(“
AFS”
).
The
Board Paper
[29]
It is apparent that Blue Cloud was registered as a company on 22
March 2002 and the Board Paper was dated 10 December 2003,
one year
and nine months after Blue Cloud came into being. The Board Paper
dealt with the subject matter of Blue Cloud’s
property
portfolio and was titled “Blue Cloud/Disposal of Properties”
and indicated that the purpose of the Board Paper
was “
to
dispose of certain properties
”
from Blue Cloud’s property portfolio and then addressed
specifically the aspect “
to
dispose of certain properties in the portfolio
”.
[30]
In respect of the Board Paper, the Respondents stated that Blue Cloud
purchased properties for investment purposes and that
the disposal of
properties occurred only as realisations on investment, within
“investment parameters”, after having
tenanted the
buildings usually with long-term leases of 3 – 10 years’
duration. However, Hyde Construction argued
that this
contradicted the Respondents averments made in their answering
affidavit where they allege that the properties would
be sold because
of the insufficiency of the rental income. Hyde Construction
further argued that what is contained in the
the Board Paper,
supports their contention that the Respondents wanted to make
substantial profits from the sale of such assets
and this, they say
support their contention that Blue Cloud “traded” in
property.
[31]
The introduction to the Board Paper, it was argued, made it clear
that throughout 2003, from at least 10 months after Blue
Cloud had
been established, that Blue Cloud had investigated and pursued the
disposal of its property portfolio in its entirety.
The Board Paper
was therefore a specific document which provided the background and
reasons for Blue Cloud to dispose of certain
of its properties in its
property portfolio.
[32]
At the time of the Board Paper, Hyde construction contends that Blue
Cloud had purchased the following four properties, but
had not
disposed of same:
32.1
La Lucia 2833, purchased on 12 September 2003, which was sold on 12
July 2006 and held for two years and 10 months.
32.2
Pinetown 4599,5 purchased on 8 April 2003 and sold on 12 July 2006
and held for three years and four months;
32.3
Plettenberg Bay 2941 which was purchased during 2003 which was
converted into the Sectional Title Scheme The Square with 12
units on
20 August 2007 of which units 2 to 12 were all sold or exchanged
before 20 August 2007 and unit 1 sold in November 2011
[15]
.
The construction of the 12 units started in July 2005 and was
completed before 20 August 2007. The process of conversion from
a
single stand into a Sectional Title Scheme therefore ran from after
the transfer to Blue Cloud on 11 May 2004 to 20 August 2007
when the
Sectional Title Scheme was registered.
32.4
Mount Edgecombe 143,4 which was purchased on 31 May 2002 and sold on
15 March 2004 and therefore held for one year and 10 months.
[33]
Prior to the Board Paper, Blue Cloud had purchased and had already
disposed of the following two properties:
33.1
La Lucia 2746,5 which was purchased on 31 May 2002 and sold on 30
October 2003 and therefore held for one year and five months;
33.2
La Lucia 2771,3 which was purchased on 31 May 2002 and sold on 19
September 2003 and therefore held for one year and four months.
[34]
After the Board Paper, Blue Cloud purchased the last of its
properties
[16]
, Pinetown Ext.
2, 7502,0 on 18 July 2005 which was sold on 10 March 2009 and
therefore held for three years and 10 months.
[35]
Hyde Construction argued that the above sale transactions, which was
not disputed, did not accord with the Respondents’
contention
that the properties were purchased for investment and rental income.
[36]
In summary, the reliance that the reasons as advanced in the
answering affidavit for the rationale of the disposal
viz
a viz
the intention as stated in the
Board Paper was contradictory. As an example, three properties were
held for just over one year
and less than two years; one property was
held for two years and 10 months; two properties were held for just
over three years
and less than four years; and The Square as Erf 2941
Plettenberg Bay existed for less than four years as a single stand in
which
time the property was converted from a shopping centre only,
into a shopping centre and 11 apartments for which a Sectional Title
Register was opened on 20 August 2007, by which time all the
apartments had been disposed of already and the last unit, unit 1
The
Shopping Centre, was sold within four years and three months (albeit
that the sale was cancelled) from the registration date
of 20 August
2007.
[37]
In its answering affidavit, Blue Cloud contends that the intention
was that Blue Cloud would develop and hold immovable properties
for
investment purposes, in particular establishing a rental enterprise
at each property. According to the Board Paper, it was
argued, that
it is clear that Blue Cloud purchased properties for investment
purposes and the disposal of properties occurred only
as realisations
on investment, within investment parameters and after having tenanted
the buildings, usually with long-term leases
of 3 to 10 years’
duration.
[38]
This further showed, it was argued by the Applicant, that Blue
Cloud’s core business was not the acquisition, development
and
“holding” whereby rental enterprises were established at
each property which were only sold under exceptional circumstances,
but to purchase and develop the properties. It also showed that Blue
Cloud traded in properties after having acquired such properties
in
order to be able to sell it at a profit, as the Board Paper stated.
The rental aspect was not Blue Cloud’s core
business and the
rental aspect was created as an ancillary activity to the property as
developed, to more than likely increase
the value of the property.
[39]
It was therefore submitted that the manner in which Blue Cloud
purchased the properties, developed them, tenanted them and
ultimately sold the properties, brought Blue Cloud’s purchasing
and disposing of properties squarely within the definition
of
“trader” in terms of
s 2
of the
Insolvency Act.
[40]
The Board Paper states expressly that the investment profile for the
property portfolio was always based on “a medium-term
investment horizon (i.e. 3 – 5 years)”. It then
provides that it would be prudent to dispose of those properties
in
its portfolio “where additional value has already been
created”. This, properly interpreted, means that Blue
Cloud would dispose of its properties (after value had been created)
after about 3 – 5 years. Blue Cloud submits that the
quoted
passage cannot, and does not, mean that Blue Cloud should not sell
the properties, because such properties were acquired
to establish
rental enterprises.
[41]
On Mr Lurie’s version, argues Hyde Construction, Blue Cloud
added value to the properties by developing the properties.
According to the Board Paper, where additional value had been
created, the time was ripe to dispose of those properties, also
because Blue Cloud’s intended investment period had been
reached. If the core business and investment profile of Blue Cloud’s
property portfolio was indeed to “hold” properties to
create rental enterprises in order to create an income stream
from
rental income, as was suggested by Mr Lurie, then the aforesaid part
of the Board Paper would have been in direct conflict
with Blue
Cloud’s core business and investment profile.
Annual
financial statement
[42]
Blue Cloud also relied on an annual financial statement dated 28
February 2010, which was to provide support for its contention
that
its core business was that of a rental enterprise and that the rental
was treated as income. This reliance was misguided,
it was contended.
This was because the statements were not as a result of a forensic
audit, but of Blue Clouds. Hyde Construction
also stated that in any
event, the income derived from an incidental activity of renting
commercial space would always be income.
Discussion
[43]
The purpose of the legislature in enacting
s 34(1)
is to protect
creditors by preventing traders who are in financial difficulty from
disposing of their business assets to third
parties who are not
liable for the debts of the business, without due advertisement to
all the creditors of the business.
But the provisions of
s
34(1)
can be invoked only if the company is a ‘trader’ as
defined in s 2 of the Act.
[17]
[44]
The question whether a company is a trader is answered by having
regard to the nature of the undertaking and determining whether
such
an undertaking is part of the core business of the company or
incidental thereto.
[18]
It is
not disputed that Blue Cloud purchased and sold properties.
[45]
As stated, the Board paper was relied upon for the contention that
Blue Cloud was not a trader. This Board Paper was ostensibly
submitted to the directors of Blue Cloud in relation to certain
properties from the portfolio. This document is dated 10 December
2003. The rationale for the disposal of properties was based on the
prevailing market conditions such as a drop in interest rates.
According to the annual financial statement, the principal activity
is recorded as the acquisition and rental of immovable property.
The
immovable property is recorded as ‘investment property under
the heading ‘non-current assets’. The Respondents
argued
that the disposal of section 1 of the Square was subject to capital
gains tax paid by Blue Cloud to the South African Revenue
Service.
They further argued that a
company holding
property comprising a shopping complex purchased for the sole purpose
of conducting a
letting
business in order to generate income, was found by
the courts to not be a trader within the definition of
s 2
of the
Insolvency Act.
[46]
In this regard, reliance was placed by the Respondents on
Roos
NO and Another v Kevin & Lasia (BK) and Another 2005 JDR 0977
(T).
In that case, the liquidators of a
company, IJ van der Lith Family Holdings (Pty) Ltd (“the
company”) instituted an
application against the purchaser of a
building (Kevin & Lasia Property Investments CC) and Absa Bank
Limited for an order
setting aside the transfer by the company to
Kevin & Lasia Property Investments CC of certain immovable
property over which
a bond was registered in favour of Absa. In
the court a
quo
Kevin & Lasia Property Investments CC opposed the application by
the liquidators and on behalf of Kevin & Lasia Property
Investments CC a certain Mr Luther deposed to an opposing affidavit
for the purchaser (Kevin & Lasia Property Investments CC)
and
stated that the company (which was in liquidation) was merely a
property owner whose only asset, comprising six erven was let
out to
tenants in order to generate income. He furthermore stated that
the company was a “property holding” company
with the
only significant assets the erven and improvements thereon, which was
sold to the purchaser (Kevin & Lasia Property
Investments CC).
In the course of the proceedings, Kevin & Lasia Property
Investments CC and Absa admitted, through their
counsel, that the
company was a trader within the meaning of the
Insolvency Act.
The
application was initially argued before Southwood J, and,
in the absence of a replying affidavit having been filed, the court
found
in favour of the applicants. The second responded took the
matter on appeal and the Supreme Court of Appeal held that the order
should be:
“
set
aside [and] to refer the matter back to the court a
quo
for any further facts to be placed before the court. That would
enable an informed decision to be taken as to whether the company
is
or is not a ‘trader’ as defined in section 2 of the Act.”
[19]
[47]
When the matter was reheard, the first respondent submitted that the
insolvent company was a property holding company and did
not fall
within the ambit of ‘trader’ as contemplated by section
34. The second respondent argued that the applicants
also failed to
establish that the insolvent company was a trader as contemplated in
section 34 and even if the insolvent company
did fall within the
purview of a trader, the applicants failed to establish that it did
not sell the property in the ordinary course
of such a trader. The
applicants, on the other hand, after filing a comprehensive replying
affidavit, sought to bolster their case
by relying on two
propositions: the first that it conceded that historically, the
insolvent company did not sell any property;
and secondly, they
contended that since building operations were performed on the
property for the purposes of enhancing its letting
and hiring
business, that this made the company a trader.
[20]
[48]
The facts in
Roos
are distinguishable from the present matter and the court in
Roos
rightly dismissed the application because it can never be said that
building operations conducted on a property could by any stretch
of
the imagination, bring a company within the definition of a trader.
The court then commented that there appeared to be
a deliberate
omission to draw the courts attention to the limited stated
objectives of the company, namely investment and immovable
property.
The court also stated that (without more) the assertion that the
company operated as a property investment company and
held immovable
property for capital investment was too wide. On the aforementioned
basis, the court found that that investment
company was not a trader
as envisaged in s 34.
[49]
In the present matter, the Respondents admitted that they purchased
properties, developed such properties and then tenanted
the
properties whereafter Blue Cloud would sell those properties.
Hyde Construction indicated, that there was a business
conducted by
Blue Cloud wherein they purchased, developed and sold the properties
with a degree of continuity or regularity which
constituted trading
in properties. As already indicated, Blue Cloud admitted the
purchase, development and sale of these
properties and added that
these properties were tenanted with long leases between 3 and 10
years and sold as “rental enterprises”.
In my view,
the reliance on
Roos
by the Respondents is misguided.
[50]
Blue Cloud argued that the properties were bought for the purpose of
investment and generating rental income. They were not
purchased for
the purpose of sales and were not deemed as ‘stock’ as
one would expect in a property development company
where properties
are developed to be sold. However objectively it seems as though this
is in fact what Blue Cloud did – it
held onto properties until
circumstances were favourable to sell.
[51]
The Respondents argued that there is a distinction between the core
business of the company and the activities which are incidental
to
that core business. Thus the fact that a business is sold after five
years is incidental to the core of the business, which
was the
acquisition and rental of the immovable property. They argued that
incidental trading activities do not fall within the
definition of a
trader for purposes of s 2.
[52]
In 2007, Erf 2941 was subdivided into 12 sectional title units. The
Square consisted of a retail as well as a residential component.
They
argued that they did not ordinarily invest in holding residential
units as investment returns on them were generally low but
stated
that they were required by the municipality to include a residential
component in the development of Erf 2941. However,
the history of its
activities require further mention. Blue Cloud was established on 22
March 2002 and by December 2003, some of
its properties had already
matured to be sold and in fact, had already been sold.
[53]
The AFS was for the year ending 28 February 2010. In the financial
statement, the property is described as ‘investment
property’
as listed under ‘non-current assets’. The answering
affidavit stated the property was an investment
in commercial
property and the generating of income and that Blue Cloud was an
investment company. The property was sold in 2014
and SARS did not
levy income tax on the proceeds of sale. It was argued that they
would have done so had it been stock in trade.
However, Capital Gains
Tax was paid because it was an investment sale.
[54]
According to the Collins Dictionary, non-current assets are described
as an asset that is not going to be consumed or converted
into cash
within one year. Current assets on the other hand are considered
short term assets such as cash or resources that a company
needs to
run its day-to-day operations.
[55]
Blue Cloud argued that whether the company owns one or more
investment properties is irrelevant. The principles relating to
the
investment company remains the same. I disagree.
[56]
The onus is on Blue Cloud to show that it was not a trader at the
relevant time. In 2003, there was a consideration to dispose
of their
entire portfolio. This was eleven years prior to the sale of Erf
2941. Blue Cloud bought the property in 2003 and opened
a register
for it in 2007. It was held for 7 years until 2014. The Respondents
contended that Blue Cloud would sell the assets
due to the reasons
advanced. They also stated that in the event that they sold, that the
consideration was whether the directors
would generate a substantial
profit from the sale of such asset.
[57]
The Board paper was dated 10 December 2003; one year and 9 months
after Blue Cloud was established. Thus it is clear that at
the time
of purchasing the property, Blue Cloud was firmly managing its
property portfolio and had set out guidelines for the disposal
of
certain properties in the portfolio.
[58]
In 2007, the sectional title register was opened and Blue Cloud
developed and in two instances, exchanged two of the units
-
units
11 and 12 of The Square were transferred by Blue Cloud to the Bitou
Municipality in lieu of payment for the lease of land
on which the
parking next to the shopping complex was built – in effect
these two units were exchanged for Blue Cloud’s
rent
obligations to the Bitou Municipality.
In
‘The Square’, 12 units were all sold and exchanged before
20 August 2007. Prior to that, some other properties which
were
purchased in 2003, were sold in 2006. Blue Cloud also purchased Mount
Edgecombe on 31 May 2002 and sold it on 15 March 2004.
[59]
After the Board paper, Blue Cloud purchased the last of its
properties, Pinetown Ext 2 on 18 July 2005 which was sold on 10
March
2009. The reliance on the AFS in 2010 is of no moment because by this
time – it had traded in most of its properties
and had only the
one property left. No reliance can therefore be placed on the 2010
AFS and the fact that it had paid capital gains
tax on the sale of
the remaining property is irrelevant. It is also instructive to note
that the Respondents failed to annex the
AFS for the previous years
between 2003 and 2009, given the onus lay on them to prove that Blue
Cloud was not a trader. Thus the
inference which Blue Cloud seeks to
make, that the property was an investment property and was not
‘stock-in trade’,
which attracted CGT, is in my view is
misguided.
[60]
Prior to that, Blue Cloud was happily trading in property from 2003
to 2009. This made it a trader within the definition of
section 2.
The selling of the properties was not incidental to its business, as
contended by Blue Cloud but according to its own
Board paper, the
intention of the business or undertaking was for it to hold the
properties for a period of between 3 to 5 years,
to add value and
then to dispose of it. The selling of the property was not
‘incidental’ to the business, but
went to the very core
of the business.
[61]
As I have stated before, Blue Cloud contracted Hyde Construction on
25 July 2005 in order to undertake work and alterations
to the
Square. In 2007, Hyde Construction cancelled the contract for
non-payment and breach of contract on 3 May 2007. It is therefore
important to note that Blue Cloud was still trading in property
during this time. During 2007 to 2008, certain disputes were referred
to arbitration. In 2010, as a result of the issues not having been
resolved, Hyde Construction instituted action during 2010. Between
2010 to the time that the property was sold, they were embroiled in
litigation. In 2014, just before judgment in that matter was
handed
down, the property was sold.
[62]
Since I have found that Blue Cloud was a trader for purposes of
s 2
of the
Insolvency Act, the
next enquiry would be to ascertain whether
Blue Cloud was a ‘trader’ at the time of the disposition
of the immovable
property to the K Company. Blue Cloud alleged that
the purpose of the sale of the immovable property was for no other
reason than
the fact that it was in dire financial trouble. On
Lurie’s own version, the shareholders were paying up to R 120
000 per
month in respect of the shortfall on the property. In
Kelvin
Park Properties CC v Paterson NO
2001 (3) SA 31
(SCA),
the court held that trading or carrying on of a business continued
until sums due are collected and debts paid and that a
person who
still had debts to discharge does not cease to be a trader merely
because he has closed up shop.
[21]
I am therefore satisfied that Blue Cloud was a trader at the time
that the property was sold to the K Company.
What
are the consequence of an unlawful disposition?
[63]
In its notice of motion, the Applicant
inter
alia
sought the following orders:
63.1
That the transfer of the property from the Third Respondent, Blue
Cloud to the First Respondent, the K Company on 14 August
2014, in
terms of the agreement of sale entered into between the Third
Respondent, as seller, and the First Respondent, as purchaser,
be
declared void in terms of
s 34(3)
of the
Insolvency Act No. 24 of
1936
and that the transfer of the following assets to the First
Respondent accordingly be declared void:
[22]
63.2
The transfer of the aforesaid property in terms of Title Deed No
ST11986/2014; and;
63.3
That the registration of mortgage bond SB4942/2014 registered over
the aforesaid property in favour of the Second Respondent
(“Investec”) be declared void.
[23]
[64]
In its application, the Applicant contended that the K company did
not acquire valid title to the immovable property and therefore
could
not validly grant the bank a real right right thereon by
hypothecating or encumbering the immovable property. Thus the
mortgage
bond registered simultaneously with registration of transfer
of the immovable property to the K company were void.
[65]
The Second Respondent on the other hand advanced the argument that
s
34(3)
did not permit a transfer of property to be declared void in
its entirety, as is the case under
s 34(1).
It argued that Hyde
Construction is only entitled to a portion of the proceeds from any
future sale in execution of the immovable
property. In Applicant’s
heads of argument, this point seems to have been conceded.
[66]
This issue was dealt with in
Weltmans
Custom Office Furniture (Pty) Ltd (In Liquidation) v Whislers CC
1999
(3) SA 1116
(SCA)
where a
creditor
had instituted proceedings before the transfer of the property to the
company were made and were for claims which totaled
R22 188,57.
The question which arose was whether the transfer was void only to
the extent of R22 188,57. The expression "any
claim" which
was relied upon by the Provincial Division, is qualified by the words
which precede and follow it. Stripped
of its inessentials, for
present purposes,
s 34(3)
reads:
"If
any person who has any claim against the said trader ... has before
such transfer, for the purposes of enforcing his claim,
instituted
proceedings against the said trader ... the transfer shall be void as
against him for the purpose of such enforcement."
[67]
Melunsky
AJA
held
that the relevant portions of the sub-section show that there is a
direct relationship between the creditor's claim and the
proceedings
for enforcing it. Secondly the transfer is said to be void for
the purpose of the enforcement. There is,
therefore, also a
clear correlation between the enforcement of the claim and the extent
to which the transfer is void.
[24]
The court held that the grammatical construction of
s 34(3)
,
that
the transfer shall be void as against him (the creditor) for the
purpose of such enforcement
,
and that the transfer is void only to the extent to which the
creditor had previously instituted proceedings. Thus the court
concluded that it followed that the transfer from
Weltman
to the company was void as against the respondent only to the extent
of property having the value of R22 188,57. Nienaber
JA
concurred
[25]
stating that the
transfer is void but only to a point and that point is the amount of
the claims for which proceedings had been
instituted prior to the
transfer of the business to the new purchaser. Thus the respondent’s
entitlement to the proceeds
of a future sale should accordingly be
restricted to the um of R 22188.57.
[68]
In
casu
, I
am of the view that the Applicant’s claim, to the extent that
the sale and subsequent transfer falls to be set aside,
is restricted
to the sum of its judgment amount.
[69]
Much like
Weltmans
,
the seller of the property was also the purchaser of the property and
this made Nienaber JA conclude that the sale was a contrived
affair.
The similarity to the facts in
casu
is striking to the extent that it is inconceivable that Lurie as
seller of the property, and represented by Borthwick, on his own
version could not make a success of the property, yet chose to
purchase the same property, with unnamed investors. A striking
similarity is also that the sale in
Weltman
was deliberately withheld from
Weltmans
creditors as appeared from clause 13 of their agreement which reads
that “The parties hereby agree that the sale pursuant
shall not
be advertised in terms of
section 34
of the
Insolvency Act.” In
casu
,
the auditors of Blue Cloud provided a letter stating that in their
opinion, the company is not a trader and that
section 34
of the
Insolvency Act does
not apply to the proposed sale of the land and
buildings from the company. Blue Cloud then used the proceeds of the
sale to settle
its legal fees, rates and settle Investec so that Blue
Cloud’s bond could be settled. It is also apparent that
Investec was
not an innocent bystander in that they were a party to
the sale agreement between Blue Cloud and the K Company
[26]
It seems ironic that despite the settling of Blue Cloud’s bond
in favour of Investec, that Investec was again called upon
to
mortgage the very same property in favour of the K Company. Perhaps
the fact, as argued by the Applicant, that Investec had
negotiated
25% profit participation in the disposal of Blue Cloud as far as unit
1 The Square was concerned by which it profited
beyond the interest
which Blue Cloud had already paid, was incentive enough to be a
party.
[27]
In my view, not
only was the entire sale and purchase contrived, but it was a
systematic endeavor to retain the property and escape
the payment of
the judgment debt that it owed to Hyde Construction, facilitated by
the Second Respondent who was not an innocent
bystander,
alternatively, should be censored for a dereliction of peforming a
proper and credible due diligence. Taking into
account the
principles of
Plascon
Evans
,
I am of the view that the Applicant has discharged its onus on the
totality of the evidence presented and that the arguments advanced
by
the Respondents falls to be rejected as false. I similarly find that
Blue Cloud and the K-Company did not discharge their onus
in
disproving that Blue Cloud was not a trader for purposes of
s 34(3)
of the
Insolvency Act.
[70
]
The Second Respondent argued that in respect of Applicant’s
ancillary relief declaring the property to be specially executable,
that the Applicant has failed to make any allegations to support this
item of relief. It is common cause that a court has the discretion
to
declare a property specially executable. In the normal course, where
a court is faced with a property that is a primary residence,
different criteria would apply and the court would be obliged to make
the necessary inquiries. In this case however, it is common
cause
that the property in question in a Shopping Centre and on Blue
Cloud’s own version, it is hopelessly insolvent which
would put
paid to the idea that it has sufficient movable property to satisfy
its debt. I am therefore satisfied that equity
permits me to
order that the property is declared specially executable, the value
of which is restricted to the value of the Applicant’s
claim.
[71]
In the circumstances, the application succeeds and there is no reason
why costs should not follow the result.
The
following order is made:
1.
The Application succeeds.
2.
The transfer of
Section 1
of Building 1 of
the Sectional Title Scheme The Square, Sectional Plan No.556/2007
situated on Remainder Erf 2941, Plettenberg
Bay, Municipality of
Bitou, Administrative District of Knysna (‘the property”)
of the Third Respondent, to the First
Respondent, the K Company on 14
August 2014, in terms of the agreement of sale entered into between
the Third Respondent, as seller,
and the First Respondent, as
purchaser is declared void in terms of
s 34(
3) of the Insolvency Act
No. 24 of 1936 (as amended) in respect of Hyde Construction and that
the transfer of the following assets
to the First Respondent
accordingly is declared void, limited to Hyde Construction:
2.1
The transfer of the aforesaid property in
terms of Title Deed No ST11986/2014.
3.
The registration of the following mortgage
bond is declared void in respect of Hyde Construction:
3.1
Mortgage Bond SB4942/2014 registered over
the aforesaid property in favour of Second Respondent.
4.
The property is declared specially
executable and the Sheriff of Knysna (or his/her Deputy) is
authorised, upon a duly issued writ
of execution, to attach the
property, limited to the sum of Hyde Construction’s judgment.
5.
The First, Second and Third Respondents are
ordered to pay the costs, including the costs of 31 May 2019, jointly
and severally,
the one paying the other to be absolved.
D.S KUSEVITSKY
Judge of the High
Court
Counsel
for Appellant: Advocate ECD Bruwer
Instructed
by De Beer Attorneys c/o Vanderspuy Cape Town
Counsel
for Respondents 1 and 3: Advocate G Woodland SC
Instructed
by Edward Nathan Sonnenbergs Inc
Counsel
for 2
nd
Respondent: Adv: AL Christison
Instructed
by Cox Yeats
Judgment
delivered in Court 28
Delivered
on 29 May 2020
[1]
Case
No. 8293/2010
[2]
Consolidated
Practice Notes
[3]
A
partial claim for attendant costs of R 34 650.75 was disallowed as
is evident from paragraph (d) of the judgment.
[4]
Paragraph
1 of the judgment
[5]
Judgment
handed down on 21 May 2019
[6]
Paragraph
46 of the judgment
[7]
as
co-director of Blue Cloud
[8]
Standard
Bank of SA Ltd v Sewpersadh and Another
2005 (4) SA 148
(C) at para
10
[9]
Roos
NO and Another v Kevin & Lasia (BK) and Another 2005 JDR 0977
(T) at para 10
[10]
at
para
8
[11]
2004
(4) SA 103
(SCA) at para 14
[12]
Gainsford
NNO v Tiffski Property Investments (Pty) Ltd
2012 (3) SA 35
(SCA) at
44G-H; para 31
[13]
Ngqumba
en ‘n Ander v Staatspresident en Andere
1988 (4) SA 224
(A) at
259E-263D;
Plascon
Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A)
[14]
Nedbank
was initially a shareholder but after disposal of its shares, the
shareholding was made up as follows: Amatshe (Pty) Ltd
with 54 3663
shares; The B & A Trust with 22 240 shares; and the Jeldal
Trust, with Lurie and Borthwick as trustees, with
22, 240 shares
[15]
which
sale was subsequently cancelled
[16]
as
contained in paragraph 50.2 of the founding affidavit
[17]
McCarthy
Ltd v Gore NO
2007 (6) SA 366
(SCA) at para 8
[18]
McCarthy
supra
at para 11
[19]
Roos
at para 4
[20]
Roos
at para 11 and 13
[21]
Axal
Properties 2 CC v Kotze 2013 JDR 2086 (SCA) at para 7 - 8
[22]
Paragraph
2.3 and 2.3.1 of the Notice of Motion
[23]
Paragraph
2.4 of the Notice of Motion
[24]
Para
18
[25]
In
a dissenting judgment at p1126 para 7
[26]
See
para 4.1.1.1 of the Sale of Rental Enterprise Agreement
[27]
See
para 2.1.5.3 “Security Conditions” of the Investec Loan
Agreement