About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2014
>>
[2014] ZASCA 46
|
|
Ellerine Brothers (Pty) Ltd v McCarthy Limited (245/13) [2014] ZASCA 46; 2014 (4) SA 22 (SCA) (1 April 2014)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
REPORTABLE
Case
No: 245/13
In
the matter between:
ELLERINE
BROTHERS (PTY)
LTD
..............................................................
APPELLANT
and
McCARTHY
LIMITED
................................................................................
RESPONDENT
Neutral
citation:
Ellerine Bros v McCarthy
(245/13)
[2014] ZASCA 46
(1 April 2014)
Coram
:
Navsa, Mhlantla, Leach, Petse JJA and Van Zyl AJA
Heard:
19 March 2014
Delivered:
1 April 2014
Summary:
Insolvency – s 348 of the
Companies Act – commencement of winding-up – lessor
giving insolvent lessee written
notice to cure breach as required by
contract – insolvent failing to do so – lessor cancelling
the contract after the
commencement of winding-up – right to
cancel the contract not lost – cancellation of the contract
valid.
ORDER
On
appeal from:
North Gauteng High Court,
Pretoria (De Vos J sitting as court of first instance):
The
appeal is dismissed with costs, including the costs of two counsel.
JUDGMENT
Van
Zyl AJA (Navsa, Mhlantla, Leach and Petse JJA concurring)
[1]
The appeal concerns the validity of a cancellation of a lease
agreement. The problem presenting itself is the following: Notice
of
cancellation was given before the commencement of legal proceedings
for the winding-up of the lessee, but the period provided
for had not
yet expired when those proceedings commenced and cancellation
followed thereafter. Put simply, the question is whether
the right to
cancel was lost because of a
concursus creditorum
. This issue
was placed before the high court for decision pursuant to an
agreement between the parties that it be decided on an
agreed
statement of facts as envisaged in rule 33 of the Uniform Rules of
Court. The high court decided the issue in favour of
the respondent
and dismissed the appellant’s claims with costs. The appeal is
with the leave of the high court.
[2]
The agreed facts are the following. In 2006 the appellant, Ellerine
Brothers (Pty) Ltd (Ellerine), concluded a lease agreement
with a
company called Toits Motor Group (Pty) Ltd (the insolvent) in terms
of which it let to it certain business premises. In
the same year the
insolvent entered into a sub-lease agreement with the respondent,
McCarthy Limited (McCarthy) in respect of a
portion of the property.
The events which follow took place in 2009. The insolvent failed to
timeously pay the agreed rental. Ellerine
notified it in writing on
16 January that should it fail to remedy its breach of the lease
within seven days of receipt of
the letter, Ellerine would take steps
to cancel the agreement. The letter was received by the insolvent on
the same day.
[3]
The insolvent did not comply with this demand. On 27 January Ellerine
delivered a letter cancelling the lease with immediate
effect.
Shortly before this, on 21 January, an application for the
liquidation of the insolvent had been lodged by a creditor
with the
registrar of the high court. The application was enrolled for hearing
on 27 January but was postponed to 27 February for
the filing of
answering and replying affidavits. On the latter date a final order
was issued for the winding-up of the insolvent.
[4]
In June, Ellerine and the liquidators of the insolvent entered into a
cession agreement. As consideration for the rental payable
by the
insolvent to Ellerine under the lease, the liquidator ceded to
Ellerine the insolvent’s rights to the rental payable
by
McCarthy under the sub-lease. It was recorded in the deed of cession
that the lease was still in existence; that Ellerine was
not entitled
to cancel the lease from the date of the presentation to court of the
application for the liquidation of the insolvent,
and that the
liquidator had exercised an election to continue the lease.
[5]
In October, relying on the cession Ellerine issued summons against
McCarthy in the high court claiming the rental and other
amounts
allegedly due in terms of the sub-lease. McCarthy denied liability
for the amounts claimed and defended the action. At
the hearing of
the matter the parties agreed that the only issue in dispute was
whether Ellerine could validly cancel the lease
after the
commencement of the proceedings for the winding-up of the insolvent.
The high court was asked to determine this issue
on the stated case.
The legal submissions of the parties recorded in the statement of
agreed facts were premised on their pleadings.
In its plea, McCarthy
did not place the existence of the cession agreement in dispute.
Instead, it alleged that the sub-lease was
terminated when Ellerine,
on 27 January, advised the insolvent that it had elected to
cancel the lease, and that there were
no rights in existence which
the liquidator could cede to it. McCarthy’s defence is
consistent with the legal nature of a
sub-lease.
[1]
As the sub-lessee’s rights to the leased property are subject
to those of the lessee, determination of the lease ipso jure
also
brings the sub-lease to an end.
[2]
Put differently, a sub-lessee cannot acquire more rights from the
lessee than what the lessee himself has.
[6]
Ellerine’s response in its replication was that by reason of
the winding-up of the insolvent, it could not validly cancel
the
lease when it purported to do so on 27 January. This contention
has as its basis the provisions of s 348 of the Companies
Act 61of
1973.
[3]
It reads as follows:
‘
A
winding-up of a company by the Court shall be deemed to commence at
the time of the presentation to the Court of the application
for the
winding-up.’
An
application for the winding-up of a company is presented to the court
when it is lodged with the registrar.
[4]
In this matter that date was 21 January 2009. The case advanced by
Ellerine in this court and in the high court was in essence
that as a
result of the retroactive commencement of the insolvent’s
liquidation the right of Ellerine as the sub-lessor to
cancel the
lease had been lost. It was submitted that the estate of the
insolvent had been frozen on 21 January when an application
for
the liquidation of the insolvent was lodged with the registrar.
[7]
This contention is premised on the creation of a
concursus
creditorum
on that date.
[5]
The argument is
that the
concursus
interposed between the giving of notice on 16 January and the expiry
of the seven day period therein. The interruption of the required
time period by the
concursus
prevented Ellerine from claiming any further performance from the
lessee under the lease until the liquidator had elected to abide
by
the lease. This meant that a condition for the existence of its right
to cancel the lease remained unfulfilled. Relying on the
decisions in
De
Wet NO v Uys NO & andere
and
Roering
NNO & others NNO v Nedbank Ltd
[6]
it was argued that in the absence of a right to cancel which accrued
before the
concursus
,
Ellerine could not validly cancel the lease. This, it was contended,
meant that the sub-lease remained in force and the liquidator
was
entitled after his appointment to cede his right and title in the
sub-lease to Ellerine.
[8]
Furthermore, Ellerine submitted that the provisions of s 37 of the
Insolvency Act 24 of 1936 (the
Insolvency Act), which
applies to the
winding-up of a company, supported its case.
[7]
The relevant sub-sections provide:
‘
(1)
A lease entered into by any person as lessee shall not be determined
by the sequestration of his estate, but the trustee of
his insolvent
estate may determine the lease by notice in writing to the lessor:
Provided that the lessor may claim from the estate,
compensation for
any loss which he may have sustained by reason of the non-performance
of the terms of such lease.
(2) If the trustee
does not, within three months of his appointment notify the lessor
that he desires to continue the lease on behalf
of the estate, he
shall be deemed to have determined the lease at the end of such three
months.
(3) The rent due
under any such lease, from the date of the sequestration of the
estate of the lessee to the determination or the
cession thereof by
the trustee, shall be included in the costs of sequestration.’
It was contended
that the effect of
s 37
is to create a right for the liquidator to
end the lease. That being the position, the liquidator must be given
time to decide
whether to exercise that right. Should the lessor be
permitted to cancel the lease, it would negate the liquidator’s
right
to elect to either terminate or continue the lease.
[9]
The high court (per De Vos J) found that the lease was validly
cancelled and that the provisions of
s 37
of the
Insolvency Act did
not find application. It appears to have arrived at this conclusion
on the basis that Ellerine acquired the right to cancel the
lease
when, in compliance with clause 20.1 of the lease, it gave the
insolvent written notice on 16 January to remedy its breach
of the
agreement and the insolvent failed to comply therewith. Clause 20.1
is a
lex
commissoria
.
It provided that if the lessee failed to pay the rental ‘. . .
and continues that failure for more than 7 (seven) days
after
receipt of a notice demanding payment . . . then the lessor shall
have the right, but shall not be obliged, forthwith to
cancel this
agreement . . . .’ The importance of this clause, in the
context of a lease agreement, is that in the absence
thereof a lessor
cannot cancel the lease unless it has first placed the lessee in
mora
.
[8]
Clause 20.1 was solely for the benefit of Ellerine. It reserved
the right to cancel the lease upon the fulfilment of a condition,
namely the failure of the lessee to comply with the notice within the
required time period. The letter of 16 January was clearly
written in compliance with this clause. Its purpose was to enable
Ellerine to bring the lease to an end should the rental not be
paid
within seven days.
[10]
The conclusion arrived at by the high court is correct. The arguments
advanced by Ellerine lose sight of the effect, or rather
the lack
thereof, that the insolvency of the lessee has on a lease. Following
on the insolvency of the lessee the position is governed
by the
ordinary principles of the common law which apply when a party to an
executory contract goes insolvent.
[9]
As in the case of any other uncompleted contract, the liquidator
inherits the lease in its entirety. The creation of the
concursus
creditorum
therefore does not terminate the continuous operation of a lease
agreement to which the insolvent is a party.
[10]
The
concursus
neither
alters nor suspends the rights and obligations of the parties
thereunder and the liquidator, as the universal successor,
steps into
the shoes of the insolvent and does not acquire any rights greater
than those of the insolvent.
[11]
This means that the liquidator must perform whatever is required of
the insolvent in terms of the lease, including unfulfilled
past
obligations of the lessee.
[12]
[11]
The intended aim of the
concursus
,
or as it has also been described, the ‘community of
creditors’,
[13]
created
immediately upon the liquidation of the insolvent, is to give equal
protection to all the creditors without undue preference
and to
preserve and distribute the estate to the benefit of all of them.
[14]
To give effect to the
concursus
,
the liquidator must decide whether it would be to the benefit of the
community of creditors to continue to perform the inherited
obligations of the insolvent under an uncompleted contract. He may
elect not to do so. In that event a consequence of the
concursus
is that the other party to the contract cannot demand performance by
the liquidator of the insolvent’s contractual obligations.
The
statement, ‘frequently encountered, that a trustee or a
liquidator in insolvency has a “right of election”
whether or not to abide by a contract’ means no more than that
by reason of the existence of the
concursus
‘the other party cannot exact specific performance against the
trustee or liquidator if the latter should decide to abandon
the
contract’.
[15]
The act
of the liquidator in deciding not to continue the lease constitutes
‘. . . a repudiation of the contract, which
would have
afforded the lessor . . . the right, concurrently with other
creditors, to claim from the liquidator the payment of
damages for
the non-performance by the company of its contractual
obligations’.
[16]
The
claims of the other contractant are therefore reduced by the
concursus
to a monetary claim and participation in the insolvent estate as a
concurrent creditor, where it is treated on the same basis as
all the
other creditors in the insolvent estate.
[12]
As stated in
Smith
& another v Parton NO
,
[17]
there is ‘really only one legal principle involved and that is
that there is nothing in the law of insolvency which affects
uncompleted contracts in general; the contract is neither terminated
nor modified nor in any way altered by the insolvency of one
of the
parties (cf
Uys
& another
1998 (4) SA 694
(T)) except in one respect, and that is that, because
of the supervening
concursus
,
the trustee cannot be compelled to perform the contract’.
[18]
The existence of the
concursus
,
does not, on this principle, in any way affect the continued
existence of the rights and obligations of the respective parties
to
an uncompleted contract. There is accordingly nothing, as Galgut AJ
correctly found in
Porteous
v Strydom NO
,
[19]
that ‘excuses the trustee from performing the insolvent’s
obligations which fall due to be performed between the date
of
sequestration and the date upon which the trustee makes his election’
to abide the contract.
[13]
It follows that there is no merit in the appellant’s suggestion
that the demand for payment in the letter of 16 January
offended
against the
concursus
because it constituted a claim for specific performance, nor that
payment of the amount demanded would have meant that one creditor
was
preferred over another. As stated in
Porteous
‘after the
concursus
occurs, the trustee steps into the shoes of the insolvent, and the
trustee is then obliged to perform whatever is required of the
insolvent in terms of the contract, including unfulfilled past
obligations of the insolvent’.
[20]
It is only in the event of the liquidator making an election not to
abide by the uncompleted contract that the lessor, because
of the
concursus
,
cannot compel performance. Absent such an election, the terms of the
lease remain in place and the liquidator must comply with
it.
[14]
Turning to the relevant provisions of
s 37
of the
Insolvency Act
quoted
earlier, its effect must be assessed against the background of
the position under the common law. The reason is that the
Insolvency
Act is
not a codification of the common law of insolvency.
[21]
It follows that save to the extent that it may have been changed by
the
Insolvency Act, or
is inconsistent with it, the common law still
finds application. The provisions of
s 37(1)
to (3) are substantially
no different from the common law position sketched earlier, and do
not otherwise confer any rights and
obligations on the lessor or the
liquidator which are inconsistent with the position under the common
law. The insolvency of the
lessee therefore does not terminate the
lease. The liquidator may, however, elect not to continue the lease
in which event
s 37(1)
authorises him to determine it. Should he
decide to do so,
s 37(1)
requires the liquidator to notify the lessor
of his decision in writing. At common law the liquidator has to give
reasonable notice
of his intention to continue the contract,
otherwise the other party may treat the contract at an end.
[22]
Section 37(2)
, however, requires the liquidator to notify the lessor
of his desire to continue the lease within three months, failing
which he
shall be deemed to have determined the lease. Although the
liquidator’s authority to determine the lease is derived from
s
37(1)
, it is consistent with the election of the liquidator at common
law not to perform uncompleted contracts where it may not be to
the
benefit of the
concursus
.
The proviso to that subsection in turn preserves the lessor’s
right to claim compensation flowing from the liquidator’s
decision to prematurely terminate the lease.
[23]
[15]
Section 37
therefore does not materially change the common law
position and none of its provisions prevent the lessor from
exercising a right
to cancel which became enforceable after the
concursus
. I should mention that in this context it is
unhelpful to speak of an ‘accrued right to cancel’ which
survives the
establishment of the
concursus
or of a right to
cancel which only matures after the commencement of the winding-up
(as has been done in certain cases). The issue
is simply whether
there was an effective and enforceable right at the critical time –
the time of the cancellation. In this
case, Ellerine had such a right
and its cancellation was valid. The conclusion reached in both
Smith
& another v Parton NO
and
Porteous v Strydom NO
are to
be preferred to those relied upon in support of Ellerine’s
present argument.
[16]
In the result the appeal is dismissed with costs, including the costs
of two counsel.
D
van Zyl
Acting
Judge of Appeal
APPEARANCES
For Appellant: S du
Toit SC (with him M A Jonker)
Instructed
by:
Gideon
Pretorius Inc, Cresta
Symington
& De Kok, Bloemfontein
For Respondent: K J
Kemp SC (with him L K Olsen)
Instructed
by:
Cox
Yeats, Durban
McIntyre
& Van der Post, Bloemfontein
[1]
Sewpersadh
v Dookie
2009 (6) SA 611 (SCA).
[2]
Ntai
& others v Vereeniging Town Council & another
1953 (4) SA 579
(A) at 589A-B.
[3]
As
a transitional arrangement, in terms of para 9(1) of Schedule 5 of
the new
Companies Act 71 of 2008
, the provisions of Act 61 of 1973
continue to apply with respect to the winding-up and liquidation of
companies until a date
determined by the relevant Minister.
[4]
J
A Kunst, P Delport and Q Vorster
Henochsberg
on the
Companies Act
(Vol
1, 5 ed) at 740(1) and the authorities referred to.
[5]
Thomas
Construction (Pty) Ltd (in liquidation) v Grafton Furniture
Manufacturers (Pty) Ltd
1988 (2) SA 546
(A) at 566H.
[6]
See
De
Wet NO v Uys NO & andere
1998 (4) SA 694
(T) at 698I;
Roering
NNO & others NNO v Nedbank Ltd
2013 (3) SA 160
(GSJ) at 164E-H.
[7]
Section
339
read with
s 386(4)
(g)
of the 1973
Companies Act.
[8
]
Spies
v Lombard
1950 (3) SA 469
(A) at 487A-C;
Goldberg
v Buytendag Boerdery Beleggins (Edms) Bpk
1980 (4) SA 775
(A) at 793 (C);
Nel
v Cloete
1972 (2) SA 150 (A).
[9]
Norex
Industrial Properties (Pty) Ltd v Monarch SA Insurance Co Ltd
1987 (1) SA 827
(A) at 838H-I.
[10]
Norex
Industrial Properties
above at 838H-I.
[11]
Thomas
Construction (Pty) Ltd (in liquidation) v Grafton Furniture
Manufacturers (Pty) Ltd
above at 568C.
[12]
Goodricke
& Son v Auto Protection Insurance Co Ltd (in liquidation)
1968 (1) SA 717
(A) at 723G;
Bryant
& Flanagan v Muller & another NNO
1978 (2) SA 807
(A) at 812H-813B.
[13]
Richter
NO v Riverside Estates (Pty) Ltd
1946 OPD 209
at 223.
[14]
Ward
v Barrett NO & another NO
1963 (2) SA 546
(A) at 552.
[15]
Thomas
Construction
above at 566J-567A.
[16]
Per
Botha JA in
Norex
Industrial Properties
above at 838J-839A-B.
[17]
Per
Friedman J in
Smith
& another v Parton NO
1980 (3) SA 724
(D) at 728H-729A.
[18]
See
also
Estate
Friedman v Katzeff
1924 WLD 298
at 302;
Mitchell
v Sotiralis’s Trustee
1936 TPD 252
at 254 and
Tangney
& others v Zive’s Trustee
1961 (1) SA 449
(W) at 452-453.
[19]
Porteous
v Strydom NO
1984 (2) SA 489
(D) at 494G-H.
[20]
Porteous
v Strydom NO
above at 494F.
[21]
Fey
NO and Whiteford NO v Serfontein & another
1993 (2) SA 605
(A) at 613A-F;
Millman
NO v Twiggs & another
[1995] ZASCA 62
;
1995
(3) SA 674
(A) at 679H-680A.
[22]
Du
Plessis & another NNO v Rolfes Ltd
[1996] ZASCA 45
;
1997 (2) SA 354
(A) at 363G.
[23]
Norex
Industrial Properties
above at 839I-J.