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[2016] ZAGPJHC 147
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Duro Pressings (Pty) Ltd (In Liquidation) and Others v Mercantile Bank Limited (11588/2015) [2016] ZAGPJHC 147 (21 April 2016)
REPUBLIC
OF SOUTH AFRICA
IN THE HIGH COURT OF SOUTH AFRICA
GAUTENG LOCAL DIVISION,
JOHANNESBURG
CASE NO: 11588/2015
DATE: 21 APRIL 2016
In the matter between:
DURO PRESSINGS (PTY) LTD (IN
LIQUIDATION)
................................................
First
Applicant
SUMAIYA ABDOOL GAFAAR KHAMMISSA
N.O
...............................................
Second
Applicant
CHRISTIAAN FREDERIK DE WET
N.O
..................................................................
Third
Applicant
DESIRE JUDITH MASEGE
N.O
...............................................................................
Fourth
Applicant
BERTHUEL BILLYBOY MAHLATSI
N.O
..................................................................
Fifth
Applicant
GURWANTRAI LAXMAN BHIKHA
N.O
...................................................................
Sixth
Applicant
And
MERCANTILE BANK
LIMITED
.......................................................................................
Respondent
J U D G M E N T
KEIGHTLEY J
:
[1]
There are two applications before me. The
main application,
which I deal with first, and then an application by the respondent
for a special order of costs against the applicants
in the event of
the latters’ application being dismissed.
THE MAIN APPLICATION
[2]
The first applicant in this matter is a company
called Duro Pressings
(Pty) Ltd (“Duro”), which is currently in liquidation.
It is common cause that Duro was
placed in voluntary liquidation on 5
March 2014. On that date the special resolution placing the
company in voluntary liquidation
was registered, and this became the
date on which the winding-up of the company commenced.
[3]
Second to sixth applicants are the final liquidators
who were
appointed by the Master on 8 April 2014. I shall refer to them
simply as “the liquidators”.
[4]
The respondent is Mercantile Bank Limited (“Mercantile”).
Duro held a number of accounts with Mercantile, including a current
account through which Duro accessed and operated an overdraft
facility extended to it by Mercantile. This account was
referred to in the proceedings simply as “account 59”.
It forms the core of the present dispute between the parties.
[5]
The liquidators originally sought the following
relief from this
court:
[5.1]
a declarator to the effect that
the payments made by Mercantile out
of and debited against account 59 over the period 6 March 2014 to 27
August 2014 in the aggregate
sum of R155 749 722. 05 were
unauthorised;
[5.2]
a declarator to the effect that
these payments and debits were
unlawful; and
[5.3]
an order directing Mercantile to
credit account 59 with the sum of
R155 749 722. 05, alternatively to pay such sum into Duro’s
estate account.
[6]
After a dispute was raised by Mercantile in its
answering affidavit
regarding the accuracy of the amount identified in the original
notice of motion, the liquidators amended their
relief. They
did so by substituting the lesser amount of R152 424 947. 04 for the
original amount of R155 749 722. 05 cited
in the Notice of Motion.
[7]
Although this appears to indicate a relatively
small change in
respect of the monetary value attached to the relief sought by the
liquidators, in substance it has greater significance
for the issues
in dispute in this matter.
[8]
It is common cause that the amount now reflected
in the notice of
motion represents the sum total of three payments, or, in one case, a
category of payments, made into account
59 after the commencement of
Duro’s winding up. These are:
[8.1]
on the 18 March 2014 an amount
of R58 million;
[8.2]
on the same date, an amount of
R78 million; and
[8.3]
between 5 March 2014 and 27 August
2014, a total amount of R16 424
947.04, from “incoming debtors”.
[9]
It is also common cause that these amounts were
subsequently
disbursed from account 59 by Mercantile. It did so without
reference to or authorisation from the Master or
the liquidators.
[10] The
effect of the amendment to the notice of motion is that it
focuses
the dispute on these three payments. The question before me is
whether Mercantile’s disbursement of these particular
amounts
from account 59 post the setting in of the
concursus creditorum
in Duro’s estate, and without authorisation, was unlawful.
[11] The
liquidators’ case is a simple one, relying on the basic
principles underlying the law of insolvency. In short, they
submit that:
[11.1]Prior to 5 March 2014, and in terms of the banker customer
relationship that existed between Mercantile and Duro, Mercantile
was
authorised to transact on account 59 on Duro’s behalf.
[11.2]However, on 5 March 2014 the
concursus creditorum
set
in. This meant that by operation of law Mercantile’s
authority to transact on account 59 was terminated.
[11.3]From that date Mercantile was not permitted to do anything in
respect of account 59 without authorisation from the Master
or the
liquidators.
[11.4]In particular, Mercantile could not unilaterally transact on
account 59. It did so in defiance of the
concursus
creditorum
, and the law of insolvency.
[11.5]If Mercantile asserted an entitlement to money standing to the
credit of account 59 its proper recourse was to follow the
path
prescribed for all creditors under insolvency law, viz. to submit and
prove a claim against the estate.
[11.6]Mercantile did not do so. Instead, it resorted to
unlawful self-help of funds standing to the credit of account
59.
[11.7]On this basis, Mercantile must be ordered to return the funds
to account 59 so that the liquidators may properly deal with
them for
the benefit of all creditors in accordance with insolvency due
process.
[12]
There was no dispute between the parties as to the general principles
relied on by the liquidators as the basis for their relief.
[13]
However, what is in dispute is whether, when applied to the facts
of
this case, these principles support the liquidators’ claim.
As I will indicate in more detail below, the answer
to this question
depends in large measure on the events that took place between
Mercantile and Duro shortly before the critical
date of 5 March
2014. These events provide the context within which the
disputed amounts were paid into, and subsequently
disbursed from
account 59.
[14] The
relevant facts in this regard are largely undisputed.
[15] The
relationship between Mercantile and Duro commenced in June
2012 when
Duro applied for a current account (account 59). At the same
time, Mercantile granted Duro certain facilities,
as recorded in
successive facility letters. The final letter was granted in
October 2013. It provided Dura with, among
other facilities, an
overdraft of R100 million, a medium term loan of R35 million, asset
based finance of R20,7 million and bank
guarantees of R4,2 million.
These facilities were operated through account 59.
[16] The
facilities came with an obligation on Duro to provide security
to
Mercantile. The security took the form of a deed of cession in
respect of Duro’s book debts as continuing covering
security
for the payment by Duro of all sums owing or which may have becoming
owing to Mercantile. The written cession was
concluded on 1
June 2012.
[17] On
31 August 2012, Duro registered a notarial special and general
covering bond (“the bond”) in favour of Mercantile.
In terms of the bond, Duro acknowledged its indebtedness
to
Mercantile. It bound and hypothecated its movable assets listed
in an annexure to the bond, as well as all its movable
property of
every description, as security for the full amount of Duro’s
indebtedness to Mercantile.
[18] The
bond also gave Mercantile the right, on Duro’s breach,
forthwith, and without notice, among other things, to claim the full
amount of Duro’s indebtedness to Mercantile, to take
possession
of and retain all Duro’s movable assets, and to sell or dispose
of them in such manner as Mercantile should decide,
and to pass title
to the relevant purchasers or transferees.
[19] In
addition, and as further security under the bond, Duro ceded
all its
claims, rights of action and receivables to the bank. It
undertook on demand by Mercantile to take all such steps
as may be
necessary to enable Mercantile to enforce its rights under the bond.
It gave Mercantile the entitlement to notify
all debtors of the
cession, and to demand and receive all amounts owing by the debtors.
[20] On
20 February 2014 Duro’s indebtedness to Mercantile amounted
to
over R144 million. From a meeting held between Duro and
Mercantile, the latter learnt for the first time that Duro was
in
dire financial straits and that its main shareholder had sold its
shareholding and withdrawn its support to the company.
[21]
Mercantile concluded from this state of affairs that Duro was
in
default of its obligations to the bank, and it instructed its
attorney (on 20 February 2014) to take steps to perfect its security
in terms of the bond. This is not disputed.
[22]
Mercantile also avers in its answering affidavit that on the same
date it further instructed its attorney to take steps to block Duro’s
access to account 59. The liquidators place this
in dispute.
In fact, one of the main issues in dispute on the papers filed by
both sides was the issue of whether Mercantile
had “terminated”
account 59, and the banker customer relationship with Duro, prior to
5 March 2014 or not. The
liquidators contend that account 59
was not terminated, and that Mercantile continued to operate the
account and to honour amounts
drawn on it. I will deal with
this issue in more detail later. For reasons that will become
apparent, my view is that
this particular issue is not determinative
of the matter before me.
[23] A
number of events took place on the following day, being 21 February
2014.
[24]
Mercantile hand delivered a letter to Duro giving it notice of
its
breach, demanding immediate re-payment of all outstanding balances
due to Mercantile, and recording that Mercantile would take
steps to
exercise its rights to recover the amounts due.
[25]
There is some dispute as to whether this letter also amounted
to
notice of termination of Duro’s access to account 59, and of
the banker customer relationship. The liquidator’s
say
that it did not constitute such termination. As I have already
indicated, ultimately this is not an issue of material
importance to
the question before me.
[26] On
the same day, Duro’s board of directors adopted a resolution
in
terms of which it approved “
the voluntary surrender by it of
all its assets subject to the General Notarial Bond and Special Bond
… in favour of (Mercantile)
required for the purposes of
enabling the Bank to perfect its security rights under such Bonds
.”
[27] In
addition, it signed an agreement with Mercantile, which the
parties
referred to as the “perfection agreement”. The
relevant parts of this agreement were as follows:
[27.1]Duro acknowledged its indebtedness to Mercantile for the
outstanding amounts due;
[27.2]it acknowledged its breach of the facilities afforded to it by
Mercantile, and that Mercantile had called up the facilities;
[27.3]Duro acknowledged the bond;
[27.4]Duro agreed to that in order to perfect the bond, and to give
effect to its terms and conditions, it handed over, transferred
and
delivered all its movables to Mercantile;
[27.5]Duro further authorised Mercantile to sell the movables and to
reimburse itself for all amounts in respect of which Duro
was
indebted to it, and to account to Duro for any balance, if any;
[27.6]in addition, it ceded all its right, title and interest in its
debtors to Mercantile, and authorised Mercantile to collect
them;
[27.7]Duro expressly recorded its agreement and acceptance that the
bond was perfected.
[28] The
liquidators do not dispute that the parties entered into the
perfection agreement, or the terms thereof.
[29] The
liquidators also do not dispute that on 21 February 2014 Mercantile
perfected its security in terms of the bond by taking possession of
Duro’s movables, and that it commenced collecting Duro’s
book debts from this date.
[30] It
is also common cause that two further, related events occurred
on 21
February 2014.
[31]
First, Mercantile entered into an “Offer to Purchase agreement”
with an entity called Chello Trading 653 (Pty) Ltd (“Chello”
and the “Chello agreement”). In terms
of the Chello
agreement, Chello offered to purchase “the Assets” from
Mercantile for an amount of R78 million.
The “
Assets”
were defined as being “
the Assets which under-lie (sic)
the Securities
” held by Mercantile against Duro.
[32] It
was a condition precedent to the Chello agreement that Mercantile
obtain perfection of the assets purchased under the agreement.
At first, the perfection was required to be by a process of
court,
but this was amended on 24 February 2014 to remove the reference to
perfection by way of court process, and to record that
perfection in
terms of an agreement between Dura and Mercantile would be
sufficient. A further amendment on 11 March 2014
recorded that
perfection had taken place.
[33] The
liquidators made something of the fact that the latter amendment
took
place after the effective winding-up date. In my view, this is
not a material issue. The 11 March amendment simply
records
that there had been perfection. It does not provide that the
date of perfection was the date of the amendment.
In addition,
the liquidators did not dispute the perfection agreement, which
expressly recorded that there had been perfection,
nor did they
dispute that on 21 February Mercantile took possession of the
movables in pursuance of the perfection of its security.
In my
view, the undisputed facts indicate that perfection occurred prior to
5 March 2014. On this basis, Mercantile is correct
in its
assertion that this condition precedent to the Chello agreement was
fulfilled.
[34] The
second relevant condition precedent in the Chello agreement
required
an entity called Southern Palace 265 (Pty) Ltd (“Southern
Palace”) to obtain a facility in the amount of no
less than
R136 million.
[35] The
second related event on 21 February 2014 was a similar agreement
entered into between Mercantile and an entity call Finair Trading 612
(Pty) Ltd (“Finair” and the “Finair agreement”).
In terms of this agreement, Finair offered to purchase the book debts
ceded by Duro to Mercantile for an amount of R58 million.
[36] The
Finair agreement was subject to the same condition precedent
that
applied in respect of Southern Palace being afforded a facility as
recorded in the Chello agreement.
[37] The
two agreements were each made conditional on the other being
concluded.
[38]
Mercantile points out that the amount of the facility that Southern
Palace was to obtain (as a condition precedent) was the total of the
purchase prices stipulated in the two agreements with Chello
and
Finair. Mercantile asserts that on 26 February 2014 it approved
a facility to Southern Palace of R136 million.
This is not
disputed by the liquidators.
[39] It
is common cause that the two contested amounts paid into account
59
on 18 March 2014 of R78 million and R58 million were the payments
effected on behalf of Chello and Finair in compliance with
their
obligations under the these two agreements.
[40] It
is also common cause that the remaining amount of R16 424 947.
04
credited to account 59 from 5 March to 27 August 2014 was the sum
total of the amounts collected from Duro’s debtors.
[41]
Finally, in this regard, it is common cause that the liquidators
subsequently sought and were provided with a legal opinion to the
effect that the Chello and Finair agreements were lawful.
The
liquidators resolved to abide by the agreements, and they agreed to
ratify the perfection of Mercantile’s rights under
the bond.
There is some dispute as to the effect of this election by the
liquidators. However, I do not need resolve
to that dispute.
[42]
Having set out the relevant factual matrix of the dispute I turn
to
consider and apply the legal principles to the facts.
[43]
Ordinarily, a bank has no entitlement to deal with amounts standing
to the credit of its customer’s account post the effective date
of that customer’s winding up. This is a trite
principle
arising out of the confluence between the legal nature of the banker
customer relationship and the law of insolvency.
[44] In
our law the legal nature of the banker customer relationship
may be
described as follows:
“
the relationship … is one of debtor and creditor.
When a customer deposits money it becomes that of the bank, subject
to the bank’s obligation to honour cheques validly drawn by the
customer
”.
[1]
[45] In
other words, in general the customer has a personal right enforceable
against the bank to demand that monies standing to the customer’s
credit be disbursed on the customer’s instructions.
This
personal right forms part of the customer’s general estate.
[46] The
effect of a winding-up order is to establish a
concursus
creditorum
. What this means is that:
“…
the hand of the law is laid upon the estate, and
at once the rights of the general body of creditors have to be taken
into consideration.
No transaction can thereafter be entered
into with regard to estate matters by a single creditor to the
prejudice of the general
body. The claim of each creditor must
be dealt with as it existed as at the issue of the order.
”
[2]
[47] It
follows from these principles that as from the setting in of
the
concursus creditorum
any personal rights held by a debtor
against his or her banker in relation to amounts standing to the
debtor’s credit
would be subject to the “hand of the
law”, and the banker would have no right to deal with those
amounts without the
authority of the liquidator. My reason for
emphasising what I have underlined will become apparent shortly.
[48] The
liquidators rely on these basic principles as the basis for
their
case. The initial main point of contention between the parties
was on the question of whether Mercantile had actually
terminated
account 59, and the banker customer relationship between it and Duro
on 21 February as it asserted. Mercantile
contended that it had
terminated the relationship on that date, as well as the facility.
Furthermore, it contended that it
had continued to use account 59 for
its own administrative purposes.
[49]
Understandably, the liquidators took issue with these contentions.
They submitted that the termination of the facility did not equate to
the termination of the account itself. Critical to
the
liquidator’s case in this regard was the assertion that for so
long as account 59 remained operative and received credits,
Mercantile was precluded by law from dealing with those credits
without the authority of the Master or the liquidators.
[50] As
the hearing progressed before me, it became apparent that the
issue
of whether the account and/or the banker customer relationship had
been terminated was something of a red herring, masking
the true
nature of the dispute between the parties.
[51] In
Mercantile’s answering affidavit, it asserted that the
amounts
of R78 million and R58 million paid into account 59 were payments
made in settlement of the purchase prices paid under
the Chello and
Finair agreements. It also asserted that Duro had no right to
these funds.
[52]
Mercantile further averred that the amount of R16 424 947. 04
credited to account 59 from 5 March to 27 August 2014 was received
from Duro’s debtors. It had received these payments
on
behalf of and as agent for Finair, under the Finair agreement, and
that these amounts were transferred out of account 59 to
Finair.
Mercantile went further and averred that having ceded its book
debts to the bank, Duro had no entitlement to these
monies either.
[53] The
liquidators did not dispute the provenance of these disputed
payments. What they disputed in their replying affidavit was
Mercantile’s authority, or rather lack thereof, to deal
with
any
credits standing in account 59 as from the 5 March 2014.
[54]
Implicit in the liquidators’ stance is the proposition that
a
customer may assert a claim against the bank in respect of
all
monies
standing to the credit of his or her bank account, and,
further, the related proposition that
only the customer
may
assert that claim. However, these propositions do not find
support in our jurisprudence. In
Joint Stock Company
Varvarinskoye v Absa Bank Ltd
[3]
and Others, the Supreme Court of Appeal held that:
“
It is not correct, as contended for on behalf of Absa, that
it is a universal and inflexible rule that only an account holder may
assert a claim to money held in its account.
”
[4]
[55] The
court referred to the case of
McEwen N.O. v Hansa
[5]
in which the Appellant Division had determined the right to claim
against a credit balance of a bank account on the basis of the
intention of the parties involved, rather than on the basis of whom
the holder of the account was. In that case, the AD found
that
there had never been any intention of the account holder acquiring
these rights (to the credit balance in his account), and
that they
accordingly did not vest in his insolvent estate. The court in
Joint Ventures
concluded that:
“
The funds in an account may also ‘belong’ to
someone other than the account holder or, for that matter the bank or
institution
holding the money.
”
[6]
[56] From
this it follows that the present dispute between the parties
cannot
be resolved by the simple expedient of assuming that because Duro was
the account holder, it had a personal claim against
the bank for all
credits standing to that account. The real question is whether
Duro had any right, enforceable against Mercantile,
to the credit
amounts placed in dispute in this case. If Duro did, then those
rights fell within its estate, and they were
subject to the
concursus
creditorum
. If, on the other hand, Duro did not have a
claim to those disputed amounts standing to the credit of account 59,
then they
did not fall within Duro’s estate on liquidation and
were not subject to the
concursus creditorum
.
[57] For
this reason, it is not necessary for me to resolve the issue
of
whether the banker customer relationship between Duro and Mercantile
was terminated, or whether account 59 was terminated. It
is extraneous to the dispute properly conceived.
[58] As I
have already indicated, there is no dispute that the three
contested
amounts claimed by the liquidators related to the Chello and Finair
agreements.
[59]
Mercantile’s case is that in the perfection agreement Duro
agreed to Mercantile perfecting its rights of security in Duro’s
movable assets and in the cession and collection of Duro’s
book
debts. Further, Duro specifically agreed that Mercantile was
entitled to sell or otherwise transfer the assets and book
debts.
[60]
Acting on this, Mercantile submits that it proceeded to exercise
its
real rights of security by selling the movable assets underlying the
notarial bond to Chello, and by ceding the book debts
to Finair.
This took place prior to 5 March 2014.
[61] It
is so that payment of the amounts due under each agreement
was only
made into account 59 on 18 March 2014, and that the book debts were
collected into that account until 27 August 2014.
However,
Mercantile contends that this does not make any difference.
Duro had divested itself of all its interests in its
secured assets
and book debts on 21 February, and it had no further interest in the
amounts received under the Chello and Finair
agreements.
Mercantile says that in terms of these agreements, the right to the
two capital payments vested in Mercantile,
and the right to the book
debts collected vested in Finair.
[62] Mr
Gautschi for the liquidators accepted in principle that if
Duro had
divested itself of its rights in these amounts prior to the winding
up date, then it had no further interest in them and
they would not
fall under the liquidators’ control. He agreed that in
the present case this depended on what the parties
had intended when
they entered into the perfection agreement and the Chello and Finair
agreements.
[63] He
submitted that the perfection agreement did not constitute
an out and
out divestment by Duro of its rights in its secured assets and book
debts. Instead, Mr Gautschi submitted that
what the parties
really intended by the perfection agreement, and then by the Chello
and Finair agreements was to enter into a
new security arrangement.
In terms of this arrangement, the parties intended that the capital
amounts paid under the latter
two agreements were to act as security
for Duro’s debt to Mercantile in place of the movables and book
debts.
[64] In
other words, it was submitted on behalf of the liquidators
that
Chello did not purchase the secured assets, and Finair did not take
an out and out cession of the book debts. As such,
Duro
retained an interest in the contested amounts paid into account 59,
as these were supposed to be held as security by Mercantile.
On
this basis, Mr Gautschi submitted that these amounts fell within
Duro’s estate, and under the control of the liquidators.
[65]
There are a number of difficulties with Mr Gautschi’s
submissions.
In the first instance, both parties accepted in
their affidavits that in terms of the perfection agreement Duro gave
Mercantile
the unqualified right to sell the assets for its own
account and to collect Duro’s book debts. The liquidators
did
not suggest in their affidavits that the perfection agreement
should be read as being in the nature of a further security
arrangement,
rather than what it plainly appeared to be, viz. an
acceptance by Duro that it had breached its facility obligations and
that it
accepted Mercantile’s entitlement to act on its
existing rights of security under the bond and to proceed to exercise
those
rights against the secured assets and book debts.
[66]
Furthermore, the liquidators did not take issue in their affidavits
with Mercantile’s averment that in terms of the Chello
agreement Chello “
purchased
all of the assets
secured in terms of the bond
”. Nor did it dispute
that in terms of the Finair agreement Mercantile “
sold
the ceded book debts to Finair
” (emphases added).
[67] In
their supporting affidavits the liquidators took issue with
Mercantile’s authority to deal with any credits in account 59,
but they did not take issue with the origin of the three contested
amounts. Nor did they take issue with the contested amounts
being the proceeds of what were, on the face of it, sale and
purchase
agreements, post perfection, between Mercantile, on the one hand, and
Chello and Finair on the other, in respect of the
assets secured
under the bond.
[68] The
terms of the Chello and Finair agreements are by and large
clear.
The agreements were concluded between Chello and Finair as the
“offerrors” under each agreement respectively,
and
Mercantile as the “offerree”. They were expressly
designated as “options to purchase” agreements.
The
Chello agreement records that Mercantile has taken security against
Duro’s assets, that it intends to perfect its security
and to
sell the assets. It further records that Chello is desirous of
purchasing, and offers to purchase the assets from
Mercantile for the
sum of R78 million.
[69] The
Finair agreement records that Mercantile has taken cession
and pledge
of Duro’s debtors book, and that Finair is desirous of
purchasing and taking cession of the debtors book from
Mercantile.
On this basis, the agreement records Finair’s offer to purchase
the debtors book and associated rights
for the sum of R58 million.
[70] Mr
Gautschi pointed to various aspects of the Chello and Finair
agreements that suggested, he submitted, that the agreements were
intended to be in the nature of further security arrangements
rather
than being in the nature of a purchase and sale of the assets and
book debts. It is so that questions may be raised
as to the
purpose of one or two terms in the agreements, for example, the
warranties given in clauses 4.1 of the Chello and Finair
agreements.
However, in my view these questions are not sufficient to dislodge
the express and clear terms of both of these
agreements, read with
the perfection agreement. In terms of the latter, Duro divested
itself of its rights in its assets
and book debts to Mercantile.
The Chello and Finair agreements in turn are characterized as being
in the nature of a divestment
by Mercantile of its rights in the
assets and book debts to Chello and Finair.
[71]
Neither party annexes any other agreement to their papers as evidence
of a further security arrangement between Duro and Mercantile
indicating that Duro and Mercantile intended that the amounts paid
under the Chello and Finair agreements were to be held by Mercantile
as a new form of security, and that Duro retained a right
over the
amounts so paid.
[72] For
these reasons, I am unable to accept the submissions made
by Mr
Gautschi in oral argument before me.
[73] On
the facts set out in the affidavits before me, I conclude that
the
effect of the perfection agreement was that Duro divested itself of
its rights and interests in the assets and book debts provided
as
security to Mercantile. It agreed that Mercantile could
alienate the assets and book debts for its own account, subject
to
Mercantile accounting to Duro for any excess recovered.
[74] In
terms of the Chello and Finair agreements, Mercantile proceeded
to
sell the secured assets and book debts to these two entities for its
own account. It did not do so on behalf of Duro.
It acted
in pursuance of the rights it acquired firstly under the bond, and
secondly under the perfection agreement. These
events took
place prior to 5 March 2014. The effect of the perfection
agreement, followed by the Chello and Finair agreements,
is that Duro
divested itself of any interest in the proceeds of its secured assets
and book debts prior to its winding up.
[75]
Accordingly, despite the fact that the two capital amounts of
R78
million and R58 million were paid into account 59 after the winding
up and setting in of the
concursus creditorum
, Duro no longer
had any claim to the credit arising out of these payments. The
interest in these credits lay with Mercantile,
flowing from the
Chello and Finair agreements. Similarly, Duro had no claim to
the amounts paid in by debtors between 5 March
and 27 August 2014.
The interest in these amounts vested in Finair, which had purchased
the book debts prior to 5 March 2014.
[76]
Consequently, I conclude that the three contested payments into
account 59 did not form part of Duro’s estate, and hence fell
outside the authority and control of the liquidator.
It follows
that the liquidators have failed to establish their case for the
relief set out in the amended Notice of Motion.
[77] I
stress that the present dispute only concerns the three identified
contested payments. The liquidators have reserved their rights
regarding the payments and disbursements represented by the
difference between the original amount claimed in the Notice of
Motion, and the subsequently amended amount, that I discussed
earlier. I make no finding on any other amounts paid into, or
disbursed from, account 59. Whether other amounts may
have been
lawfully disbursed by Mercantile without the authorisation of the
liquidators will depend on the facts relevant to them.
I have not
been asked to rule on them. The fate of any additional payments
and disbursements must await further litigation,
should the
liquidators decide to follow that path.
THE APPLICATION FOR A SPECIAL ORDER AS TO COSTS
[78] The
only question remaining is that of costs.
[79] It
is trite that in our law the question of costs is a matter
for
determination at the discretion of the court, and that this
discretion must be judicially exercised.
[80]
Ordinarily costs follow the event, and the successful litigant
is
entitled to be indemnified by way of a costs order in its favour
against the expense of having to institute or defend the proceedings
in question.
[7]
[81]
However, in this matter Mercantile asks for something more.
It
has filed an application for a special costs order against the
liquidators in their personal capacities,
de bonis propriis
,
and on the attorney and client scale.
[82] In
terms of our common law, costs orders
de bonis propriis
may be
made against trustees or liquidators in circumstances where they act
negligently, unreasonably, improperly or
mala fides
in
litigating or in opposing litigation on behalf of the insolvent
estate.
[8]
Conduct falling outside of the liquidator’s powers or
outside of the law does not necessarily amount to unreasonable
conduct.
[9]
A liquidator’s conduct must not only be unacceptable, but must
also be improper to attract a
de bonis propriis
costs
order.
[10]
[83] In
addition to these well-established principles applying to persons
litigating in a representative capacity, our courts have more
recently developed the common law to extend their discretion
regarding
costs so as to enable them to order non-litigants to bear
or share in the costs of litigation that they are funding. This
follows similar trends in other Commonwealth jurisdictions,
[11]
[84] In
Price Waterhouse Coopers Inc and Others v IMF (Australia) Ltd and
Another
, the Gauteng Provincial Division granted an order
directing the joinder of a non-party who had entered into an
agreement with the
plaintiff to fund the plaintiff’s
litigation. The joinder was purely for purposes of enabling a
possible costs order
to be made against the funder at the conclusion
of proceedings. In so extending the common law, the court
remarked that:
“
To allow litigants like the applicants to hold funders
directly liable for costs could also be considered to be one of the
measures
that the courts could adopt to counter any possible abuses
arising from the recognition of the validity of champertous
contracts
.”
[12]
[85] In
EP Property Projects (Pty) Ltd v Registrar of Deeds, Cape Town and
Another, and Four Related Applications
[13]
the Western Cape High Court distinguished between “pure
funders” and those who may have acquired a personal, financial
interest in the outcome of the litigation.
[86] The
court took into account that pure funders may play an important
role
in enabling access to justice for those without their own financial
means to litigate. The prospect of an adverse costs
order
against these types of funders may well have an adverse and
unacceptable chilling effect on the right to access to courts
for
financially disadvantaged litigants. The court recognised the
principle laid down in other common-law jurisdictions that
it is in
the public interest that generally the discretion will not be
exercised against pure funders.
[14]
[87]
However, the court distinguished the case before it on the basis
that
the non-party in question was clearly funding the litigation with a
view to gaining substantial financial benefit for herself.
[15]
She was the “real litigant” and had in effect all the
rights of a party to the proceedings.
[16]
The court found that in those circumstances, it would be just that
the funder be held jointly and severally liable
for any adverse costs
order against the party she was funding.
[88] A
similar ruling was made in
Scholtz and Another v Merryweather and
Others
[17]
in which the court ordered that a father be held jointly and
severally liable for costs with his son in an application for
rescission.
The son was the applicant in the rescission
application. The basis for the court’s order was that the
father had funded
the litigation and stood to benefit in that if the
litigation succeeded, he would no longer have the financial burden of
supporting
his son.
[89] The
case made out by Mercantile in its founding affidavit in the
special
costs application is based on the discretion to grant a costs order
against non-parties who are funding litigation.
Their case is
as follows:
[89.1]Following requests made by Mercantile to the liquidators
regarding the free residue of assets in the estate, and any
indemnities
that there might be from creditors for the costs of this
application, the liquidators informed Mercantile that there was no
free
residue of assets, but that this situation might change.
This was in May 2015.
[89.2]The liquidators also informed Mercantile that two other legal
proceedings had been instituted, and that creditors might be
liable
for section 89 costs.
[89.3]Mercantile says that the liquidators have not informed it of
how they are funding the present application, or how they intend
settling an adverse costs order.
[89.4]According to Mercantile, it has incurred substantial costs in
opposing the application. On the basis of the information
provided by the liquidators, it has no prospects of recovering these
costs, given the current situation regarding the estate.
[89.5]Mercantile submits that the only reasonable inference from the
available facts is that the liquidators or a third party are
funding
this application in their own capacity and for their own benefit.
[89.6]If the liquidators succeed in the application, and Mercantile
is ordered to repay the amount to the estate, Mercantile undoubtedly
has a secured claim against the estate. Consequently, it will
be entitled to prove its claim and receive payment from the
estate of
a secured dividend.
[89.7]However, the liquidators stand to benefit personally in this
event, in that their fees would be deducted prior to payment
being
made to Mercantile of its secured dividend.
[89.8]Accordingly, Mercantile submits that there would be no benefit
to the general body of creditors even if the liquidators’
application succeeded. Mercantile would receive the balance of
all amounts repaid, subject only to deduction of the liquidators’
fees.
[89.9]From this, Mercantile says that it must be inferred that the
application was not instituted for the benefit of the general
body of
creditors, but for the benefit of the liquidators. The
liquidators are the real litigants, and are controlling the
course of
the litigation. Their objective is to generate fees for
themselves. This is unreasonable and constitutes
an abuse of
process.
[89.10]
Following repeated and detailed requests from Mercantile regarding
the funding situation, the liquidators’ attorney advised
Mercantile that:
“
I hold instructions to confirm that my clients are
neither
funding the litigation for their own benefit
, nor is
somebody else funding it for their own benefit. The application
has been instituted to benefit the entire body of
creditors
.
”
[89.11]
Mercantile submits that this response does not deal satisfactorily
with the detailed queries made by it in its repeated requests to the
liquidators. It says that the liquidators have failed
to
provide any information to demonstrate that they have the ability to
meet an adverse costs order against the insolvent estate.
[90] In
answer to the application, the liquidators say the following:
[90.1]Not surprisingly, they deny that they are the rougue, greedy
litigators having their own interests at heart as portrayed
by
Mercantile in its application.
[90.2]They record that there is a large number of proven creditors in
the estate.
[90.3]They point out that an inquiry under sections 417 and 418 of
the 1973 Companies Act (“the inquiry”) commenced
in
October 2014. The inquiry is funded by the insurer of 35 of
Duro’s proven creditors.
[90.4]The information gleaned from the inquiry to date (it is not yet
completed) provided the basis for the present application
against
Mercantile.
[90.5]When the liquidators became aware of the facts arising from the
inquiry, they felt duty bound to launch the application,
as it was
clear to them that a claim existed that had reasonable prospects of
success. If they had failed to pursue the claim,
they could
later be accused of dereliction of duty.
[90.6]They aver that there are proved creditors against whom a
contribution could be levied to cover Mercantile’s costs.
A list of proved creditors is annexed to the answering affidavit.
[90.7]The liquidators deny the correctness of Mercantile’s
contention that it is a foregone conclusion that no benefit will
inure to the general body of creditors in the event of a successful
application. They point out that any claim that Mercantile
submits against the estate would have to be scrutinised, and subject
to further verification and objection processes before it
could be
accepted.
[90.8]The liquidators also say that the balance of the estate account
fluctuates from time to time, and that this means that it
is subject
to various levels of liquidity, depending on a variety of factors.
[90.9]Finally, the liquidators make an averment that has caused
further concern to be expressed by Mercantile. It is as
follows:
“
The process of levying contributions on proven creditors is
an arduous and time-consuming one.
The liquidators
therefore decided to be pragmatic and to fund the interim cash flow
required for this application by Christiaan
Frederik De Wet, the
third applicant
. Should, for any reason, this
application prove to be unsuccessful, the liquidators and
specifically Christiaan Frederik
De Wet, the third applicant
will
recoup the costs of this application from the proven creditors by way
of levying a contribution in terms of the Insolvency
laws.
”
(emphasis added)
[91] In
response to this averment, Mercantile submits that the liquidators
have essentially admitted to funding the application in their
personal capacities. This, it says, constitutes a breach of
the
liquidators’ duties to act independently, and not for their own
benefit.
[18]
It gives the liquidators a personal interest in the litigation, and
creates a conflict of interest between the liquidators
and the
estate. Furthermore, the liquidators have no authority to fund
litigation on behalf of the estate, and accordingly,
they are acting
outside the parameters of the law in doing so.
[92] The
question is how I am to exercise my discretion in this case.
[93] I
consider first Mercantile’s contention that as the liquidators
are funders with a personal interest in the litigation I may, and
should, exercise my discretion to grant a personal costs order
against them.
[94] This
case is not on all fours with any of the recent cases in
which
funders have been held liable, or potentially liable for the costs of
litigation. In the cases to which I have referred,
there was
substantial evidence establishing that the non-litigants were funding
the litigation, and on what basis they were doing
so. There was
also clear evidence indicating that the funders had substantial,
direct financial interests in the outcome
of the litigation, and that
this was the basis for their funding.
[95] The
case before me is somewhat different. The liquidators
have
conceded that one of them is “
fund(ing) the interim cash
flow required
” for the application.
[96]
Mercantile submits that this is a concession by the liquidators
that
one of them is funding the application. It submits further that
this concession shows that they misled Mercantile and
the court by
their earlier instructions to the effect that they were not funding
the litigation for their own benefit, but for
the benefit of the
general body of creditors.
[97] I am
not sure why the liquidators did not play open cards earlier
regarding how the application was being funded. Mercantile
would have it that this was because they were trying to cover
up
their own interest in the application. However, it must also be
borne in mind that the litigation has been robust, with
both sides
standing to win or lose substantial sums. It is not uncommon
that in this type of litigation the parties do not
play open hands
with each other. Was the earlier instruction an attempt to
mislead the court? I am not convinced that
I can reach this
conclusion on what I have before me. The earlier instruction
from the liquidators was that they were “not
funding the
application for their own benefit”. They perhaps
obfuscated the issue of where the funding was coming from,
but what
they clearly said was that the application was not for their benefit.
[98] In
any event, it is not very clear what the averment in their
answering
affidavit means. Does it mean that Mr de Wet has put up “cash
flow” to date for purposes of ensuring that
the application
could be prepared and heard, and that his funding is limited to
this? It seems to me that this may be the
case, but
unfortunately the liquidators do not elaborate.
[99] What
they do say is that they will recoup the costs of the application
from creditor’s contributions if the application is not
successful. It appears from this that whatever funding Mr de
Wet has put up to date, it is not unconditional, and that the
intention is that ultimately the proven creditors will be levied
for
the costs.
[100] As regards the
contention that the liquidators have no authority to fund litigation,
this does not in and of itself mean that a
de bonis propriis
costs order should follow. As I pointed out earlier, acting
outside a liquidator’s authority does not warrant such
an order
unless in doing so the liquidator acted unreasonably, or improperly,
or recklessly or
mala fides
.
[101] In my view, even if I
proceed on the assumption that the liquidators are funding
the
application, the real issue is whether they are doing so out of their
personal interest in the litigation, and not in the interests
of the
general body of creditors. It seems to me that if this can be
established, then there may be grounds for the exercise
of my
discretion to grant a
de bonis propriis
costs order.
[102] In this regard, the
principles underlying the exercise of the extended discretion
in
non-party funding cases recently recognised by our courts overlap to
some extent with the established common law principles
regarding
de
bonis propriis
orders against liquidators. What I mean by
this observation is that if it can be established that a liquidator
is personally
funding litigation on behalf of an insolvent estate for
his or her own benefit, and not for the benefit of the general body
of
creditors, it may well be concluded that this in any event amounts
to unreasonable or improper conduct warranting a costs order
under
the established common-law principles.
[103] Regardless of which
approach is taken (the funder-based approach, or the more established
improper conduct approach), the fundamental question must be whether
the applicant for the special costs order is able to establish
that
the liquidator in question was motivated by his or her personal
interest and not that of the general body of creditors.
[104] Mercantile requests
me to draw an inference that this is the case on the basis
I
described earlier. In their submissions, Mercantile pointed out
that the decision to institute the application was made
after the
liquidators had ratified the perfection of the bond and the Chello
and Finair agreements. In other words, according
to Mercantile,
the liquidators cannot honestly say that there would be any grounds
to reject a claim by Mercantile (in the event
of the liquidators
having succeeded in the application) as they had ratified the
agreements upon which the claim was based.
This was one of the
main bases on which Mercantile submitted that the only reasonable
inference to be drawn is that the sole purpose
of the application was
to ensure fees for the liquidators in their personal capacities.
[105] The concern I have
with this contention is that it overlooks the fact that the
ratification of the perfection, Chello and Finair agreements took
place in early June 2014. It was only subsequent to this
(late
in June 2014) that an order was granted for the inquiry, and only in
October 2014 that the inquiry commenced. As I
indicated
earlier, the liquidators’ case has always been that it was
information emanating from the inquiry that led it to
launch the
application. That inquiry is not yet complete. What this
demonstrates is that the ratification of the agreements
preceded what
the liquidators say was information from the inquiry that raised
concerns for them about the validity of those agreements.
[106] According to the
liquidators, therefore, in light of facts only known to them
subsequently, they had grounds to question whether the ratification
had been properly made. Consequently, on the liquidator’s
case, a secured creditor’s claim by Mercantile following the
liquidators’ success in this application would not necessarily
mean that Mercantile’s claim ultimately would be accepted.
This is something that needed to be clarified through a
court
process.
[107] Clearly the
liquidators were influenced in their decision to litigate by new
information
that came to hand as a result of the inquiry. It is
important in my view to bear in mind that as liquidators they have a
duty to inquire into the affairs of Duro and to recover all its
assets and property.
[19]
This must entail the duty to initiate legal proceedings to recover
assets or property, whether tangible or intangible, if
there are
reasonable prospects of success. To fail to do so may give rise
to the criticism that a liquidator acted negligently
in attempting to
make good a possible claim in favour of the estate.
[108] Although the
liquidators did not succeed in the main application, this is not the
test. The question is whether they instituted an application
that had reasonable prospects of success at that time.
[109] If they
did so, then I cannot accept Mercantile’s contention
that the
only reasonable inference to draw is that the liquidators were driven
by their own personal interests in launching and
following through on
the application.
[110] The application was
fiercely contested by both sides, with oral argument lasting
for
longer than one court day. The supporting papers were
substantial. The issues raised were not straightforward.
They raised complex questions of insolvency law and banking law.
Having had to decide the matter, it is plain to me that
the
liquidators’ application had reasonable prospects of success
when it was launched. This was clearly not a case
with no
prospects.
[111] Of course,
Mercantile’s argument is that this is not the issue. The
issue is that the liquidators ought to have known (or, more
accurately, they in fact knew) that even if the application
succeeded,
Mercantile would have a secured claim that was
unassailable, and that the only persons who really stood to benefit
from the application
were the liquidators, through the fees they
would recoup.
[112] As I have already
explained, this ignores the fact that the liquidators were motivated
in launching the application by new information emanating from the
inquiry which raised questions about the legal validity of the
agreements relied on by Mercantile and, consequently, of any claim
that Mercantile might have made against the estate based on
those
agreements.
[113] In these
circumstances, and bearing in mind the obligation on the liquidators
to act to recover assets in the estate, it would be unreasonable to
infer in this case that they were motivated by their own interests
in
instituting the application rather than the interests of the general
body of creditors.
[114] For these reasons, I
cannot accept Mercantile’s contention that the only
reasonable
inference to be made from the facts is that the liquidators funded
the application for their own personal interest,
and that they are
the real litigants in the proceedings.
[115] I also cannot
conclude that the liquidators acted unreasonably, or
mala fides
,
or recklessly or improperly in instituting the application.
Duro’s debts are substantial, and there are a number of
creditors. The liquidators obtained information indicating that
Mercantile had operated account 59 after
concursus creditorum
,
and that over R152 million had been received and disbursed from that
account without the authority of the liquidators or the Master.
In these circumstances, it would have been remiss of the liquidators
not to contemplate litigation. It was not unreasonable
for them
to believe that the application had reasonable prospects of success,
or that there were reasonable prospects (despite
the earlier
ratification) that the general body of creditors would benefit from
the litigation. As I have already indicated, had
they declined to
act, they may well have been criticised for failing to act in the
best interests of creditors.
[116] For these reasons, I
conclude that Mercantile has not succeeded in establishing
a case for
the granting of a
de bonis propriis
costs order against the
liquidators as requested in their notice of motion.
[117] For sake of
completeness, I record that the liquidators sought leave to file a
supplementary affidavit, containing new facts, in the application for
a special costs order. Mercantile indicated by letter
to the
court that it would not agree to the affidavit being filed, and that
if I was minded to grant leave, it would seek to file
an affidavit in
response thereto.
[118] In my view, the
supplementary affidavit does not take the issue of costs any
further.
It is in the interests of both parties that the matter
be brought to a close without any further, unnecessary time or costs
being
spent on the dispute. The costs associated with the
liquidator’s application to file the supplementary affidavit
should
be borne by them.
[119] I make the following
order:
1. The applicant’s
application is dismissed with costs.
2. The respondent’s
application for a special costs order is dismissed with
costs, save
that the applicants are directed to pay the costs associated with
their request for leave to file a supplementary affidavit.
R KEIGHTLEY
JUDGE OF THE HIGH COURT OF SOUTH AFRICA
GAUTENG LOCAL DIVISION, JOHANNESBURG
Date Heard: 22
nd
February 2016
Date of Judgment: 21
st
April 2016
Counsel for the Applicants: A
Gautschi SC and SJ van Niekerk
Instructed by: Smit Sewgoolam Inc
Counsel for Respondent: CHJ
Badenhorst SC and G Wickins
Instructed by: Brooks and Brand Inc
[1]
S v
Kearney
1964 (2) SA 495
(A) at 502H-503A, citing
Baylis’
Trustee v Cape of Good Hope Bank
,
4 S.C. 439
at 422;
Duba and
Others v Ketsikile and Others
1924 EDL 332
at 341 and
R v
Stanbridge
1959 (3) SA 274
(C) at 278-9
[2]
Walker v
Syfret N.O.
1911 AD 141
at 166
[3]
[2008] ZASCA 35
;
2008 (4) SA
287
(SCA)
[4]
At para 31
[5]
1968 (1) SA
465
(A)
[6]
At para 33
[7]
Texas Co
(SA) Ltd v Cape Town Municipality
1926 AD 467
at 488
[8]
Caldwell’s
Trustee v Western Assurance Co
1919 WLD 146
;
Venter v Scott
1980 (3) SA 988
(O);
Williams Hunt (Vereeniging) Ltd v Slomowitz
1960 (1) SA 499
(T)
[9]
Blou v
Lampert & Chipkin
1972 (2) SA 501
(T) at 507
[10]
Cooper v First
National Bank of SA Ltd
2001 (3) SA 705
(SCA) at 717
[11]
See
Dymocks Franchise
Systems (NSW) v Todd and Others
[2004] UKPC 39
;
[2005] 4 All ER 195
at 2815;
Arkin v Borchard Lines Ltd
[2005] EWCA Civ 655
paras 23 and
41;
Carborundum Abrasives Ltd v Bank of New Zealand (No 2)
[1992] 3 NZLR 757
(HC)
[12]
2013 (6) SA 216
(GNP) at
222E-H
[13]
2014 (1) SA 141
(WCC)
[14]
At para 75, citing
Carborandum Abrasives
, above
[15]
At para 83
[16]
At para 86
[17]
2014 (6) SA 90
(WCC)
[18]
Standard Bank of SA v
The Master of the High Court
2010 (4) SA 405
(SCA)
[19]
Section 391 of the 1973
Companies Act. See also
Bernstein and Others v Bester and
Others NNO
[1996] ZACC 2
;
1996 (2) SA 751
(CC) at para 16