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[2014] ZASCA 115
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Firstrand Bank Limited v Land and Agricultural Development Bank of South Africa (436/2013) [2014] ZASCA 115; 2015 (1) SA 38 (SCA); [2014] 4 All SA 425 (SCA) (18 September 2014)
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THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case No: 436/2013
In
the matter between:
FIRSTRAND
BANK
LIMITED
..............................................................................................
Appellant
and
THE
LAND AND AGRICULTURAL
DEVELOPMENT
BANK OF
SOUTH
AFRICA
...................................................................................................................
Respondent
Neutral
citation
:
Firstrand
Bank Ltd v The Land and Agricultural Development Bank of South Africa
(436/13)
[2014] ZASCA 115
(18 September
2014)
Coram:
MAYA, SHONGWE, WALLIS and SWAIN JJA and LEGODI AJA
Heard:
12 May 2014
Delivered:
18 September 2014
Summary:
Insolvency –
s 102
of the
Insolvency Act 24 of 1936
affords the
holder of a general notarial bond preference over the free residue of
an insolvent estate – such preference does
not extend beyond
the value of the movable assets hypothecated under the bond.
ORDER
On
appeal from:
The North Gauteng
High Court, Pretoria (Tuchten J sitting as court of first instance).
1. The order of the
court below is amended by the deletion of paragraphs 2 and 4 and the
renumbering of paragraphs 3, 5 and 6 as
paragraphs 2, 3 and 4
respectively.
2. The appeal is
otherwise dismissed with costs, such costs to include those
consequent upon the employment of two counsel.
JUDGMENT
Wallis
JA (Maya, Shongwe and Swain JJA and Legodi AJA concurring)
[1]
This is a case about money. More
particularly it is about the proper disposition of the balance of the
free residue remaining in
the insolvent estate of Rubaco Boerdery
(Edms) Bpk (Rubaco). The appellant, Firstrand Bank Ltd (Firstrand),
claimed the entire
balance of the free residue as the holder of a
general notarial bond over all the movable assets of Rubaco. It said
that this was
the effect of s 102 of the Insolvency Act 24 of
1936 (the 1936 Act). The liquidators, who have played no part in this
litigation,
agreed and in the Second and Final Liquidation and
Distribution Account awarded Firstrand the whole of the free residue
after paying
prior preferent claims. The respondent, the Land and
Agricultural Development Bank of South Africa (the Land Bank), which
was the
largest concurrent creditor of Rubaco, disagreed. It said
that Firstrand had no preferent claim to any part of the balance of
the
free residue arising from the realisation of assets not subject
to its bond. As the bulk of the free residue arose from the disposal
of immovable assets no preference in favour of Firstrand attached to
it. Instead it had to be distributed among the concurrent
creditors
of Rubaco, including Firstrand. An objection it lodged with the
Master was rejected but a review to the high court in
terms of s 151
of the 1936 Act succeeded. Tuchten J upheld the respondent’s
contentions and gave leave to appeal to
this Court.
[2]
The parties formulated the question for
decision as being:
‘
Whether
the preference afforded to the holder of a general notarial bond in
terms of
Section 102
of the
Insolvency Act, 24 of 1936
extends only
to such portion of the free residue as may consist of the proceeds of
moveable property?’
Firstrand
said that we should answer this in the negative and the Land Bank
argued for a positive answer. Before addressing it something
must be
said about the order granted by the court below. It read as follows:
‘
1
That it is declared that the fourth respondent is not entitled to any
allocation from the free residue of Rubaco Boerdery (Pty)
Limited (in
liquidation) (“Rubaco”) in excess of the value of the
nett proceeds of the goods mortgaged under notarial
bond BN20986/97
(at pp22-32 of the papers) less the amount awarded to the fourth
respondent as a secured creditor in relation to
such goods.
2 That for avoidance
of doubt, it is declared that because the fourth respondent was
awarded, as a secured creditor, the value of
the full nett proceeds
of such goods, the fourth respondent is accordingly entitled to no
allocation at all from the free residue
of Rubaco.
3 That the decision
of the first respondent on 01 August 2011, in terms of which the
first respondent rejected the objection by
the applicant to the
allocation of the amount of R1 905 836.76 in the free
residue of Rubaco to the fourth respondent
as a preferred creditor,
is hereby reviewed and set aside.
4 That the objection
of the first respondent is upheld. The amount of R1 905 836.76
in the free residue of Rubaco must
be distributed among the
concurrent creditors of Rubaco.
5 That the second
and third respondents are directed to revise their second and final
liquidation account of Rubaco in accordance
with this order.
6 That the fourth
respondent must pay the applicant’s costs which are to include
the costs of both senior and junior counsel.’
Paragraph
1 was a declaratory order in accordance with the Land Bank’s
contentions and paragraph 3 set aside the Master’s
decision.
However, paragraphs 2 and 4 directed that Firstrand should receive no
preference to any part of the free residue. This
was incorrect. A
portion of the free residue clearly arose from the disposal of
movable assets subject to Firstrand’s bond
and it was entitled
to a preference in relation to that portion. Furthermore, on any
basis Firstrand would also be a concurrent
creditor and entitled to
share in the free residue after all preferent claims had been
satisfied. Even if the Land Bank’s
contentions are upheld that
must be corrected.
[3]
The Land Bank’s argument rested on
three pillars. First, the effect of Firstrand having the preference
that it claimed would
afford it greater rights in the winding up and
distribution of the estate of Rubaco on insolvency than it enjoyed by
way of security
while Rubaco was a trading entity. This was contrary
to the principle that on insolvency a
concursus
creditorum
comes into existence fixing
both the claims against the insolvent estate and the security that
creditors enjoy. Second, clear
dicta
from five different courts, including
this Court, supported the Land Bank’s contentions. Third, those
contentions accorded
with the views expressed, with but one
exception, in the leading textbooks on the law of insolvency
published since the enactment
of the 1936 Act. Cumulatively that was
a powerful argument in its favour and it found favour with the court
below. Against that
Firstrand contended that the language of s 102
of the 1936 Act pointed to the opposite conclusion.
Background
[4]
The
effect of a general notarial bond over movables is clear in all
respects, save that in issue in this appeal. The bondholder
does not
acquire any real right over the hypothecated movables. There is
nothing to prevent the owner dealing freely therewith
and the
bondholder may not pursue them into the hands of a third party or
prevent their attachment in execution. Under the perfection
clause
that is a common feature of such bonds, the bondholder will be
entitled to take possession of the movables and thereby constitute
a
pledge over the movables. When that happens the bondholder acquires a
real right of security over the movables.
[1]
[5]
Firstrand’s
general notarial bond covered all of Rubaco’s movable assets.
Prior to the liquidation of Rubaco it had
obtained an order
perfecting its security up to an amount of R5.5 million. We do not
know why it was limited to that amount as
the limit of the bond was
greater than that. Pursuant to that order the sheriff attached
certain movables thereby converting Firstrand’s
security into a
pledge in respect of the items attached. When Rubaco was liquidated,
Firstrand was therefore a secured creditor
in respect of those
assets.
[2]
In terms of s 83
of the 1936 Act they were realised and the proceeds paid to Firstrand
in terms of encumbered asset account
number 1, which formed part of
the Second and Final Liquidation and Distribution Account. However,
that left an amount of some
R3.8 million owing to Firstrand. The free
residue in the estate, after meeting disbursements, expenses and
certain prior preferences,
amounted to a little more that R1.9
million. Firstrand claimed to be entitled to all of this because
s 102 of the 1936 Act
provides that ‘any balance of the
free residue shall be applied in the payment of any claims proved
against the estate in
question which were secured by a general
mortgage bond’. It said that the bond secured its entire claim
and accordingly that
it was entitled to the entire balance of the
free residue.
[6]
Although it initially contended that,
because Firstrand had perfected its security prior to Rubaco’s
liquidation, it no longer
had any claim against the free residue,
whether a preferent or a concurrent claim, the Land Bank abandoned
that stance. It accepted
in argument in this Court that Firstrand was
entitled to be paid out of the free residue as a preferent creditor
to the extent
that its claim was secured by its general notarial bond
over movables. It also accepted that any balance owing thereafter was
a
concurrent claim. However, it said that Firstrand’s bond only
covered the movable assets of Rubaco and therefore its security
for
its claim was limited to the proceeds of those assets. The preference
given by s 102 therefore only applied to that part
of the free
residue derived from the disposal of movable assets. As the bulk of
the free residue came from assets not subject to
that security its
claim was to that extent both unsecured and not entitled to any
preference.
[7]
These
contrasting contentions can best be illustrated by examining the
sources of the free residue in the estate. Most of it arose
from the
disposal of immovable assets not covered by the bond, namely
registered mineral rights
[3]
and
two erven mortgaged to the Standard Bank and sold for amounts
exceeding the balance outstanding on the mortgage bonds. Together
these accounted for nearly R2 780 000. The only part of the
free residue flowing from the disposal of movables was R222 000
from the sale of livestock. The balance of some R645 000
represented interest on the investment of these amounts prior to
the
Second and Final Liquidation and Distribution Account. In total
before any distribution the free residue came to somewhere
between
R3.6 and R3.7 million. The costs of sequestration, which enjoyed a
prior preference in terms of s 97 of the 1936 Act,
and some
other prior preferences, came to a little over R1.75 million, leaving
some R1.9 million available for distribution.
[8]
The
Land Bank contended that the accrued interest should be apportioned
between the free residue arising from the disposal of movables
and
that arising from the disposal of immovables in the ratio that each
contributed to the free residue. It said that the amounts
paid from
the free residue that enjoyed a prior preference to that under s 102
should similarly be apportioned between these
two sources. The effect
in round numbers would be that Firstrand would enjoy a preference in
relation to about one-fifteenth of
the free residue
[4]
and the balance would then fall to be distributed among concurrent
creditors, including Firstrand in respect of the balance of
its
claim. In that event the Land Bank would receive a significant
further dividend as it has by far the largest concurrent claim
of
some R8.6 million as opposed to the remaining concurrent claim of
Firstrand which would be some R3.7 million. Instead of receiving
R1.9
million Firstrand would receive about R130 000 and a small concurrent
dividend. Hence the statement that this case is about
money.
[9]
Against that background I turn to consider
the legal arguments of the parties. Before analysing s 102 it is
convenient to start
by looking at the rights of the holder of a
general notarial bond in respect of immovable property both before
and after the coming
into force of the 1936 Act.
The
common law and the Insolvency Acts
[10]
Under
the common law a mortgage could relate to specific property, as with
a conventional mortgage over immovable property to secure
a home loan
or a notarial bond over specific movable assets, in which event it
was called a special mortgage. Alternatively it
could hypothecate all
the movable or immovable property of the mortgagor or all their
movable and immovable property, in which
event it was referred to as
a general mortgage.
[5]
[11]
Prior
to 1916 it was the practice to include in mortgages of specified
movable or immovable property a general clause hypothecating
all the
movable (and sometimes all the movable and immovable) property of the
mortgagor.
[6]
This practice
conferred a preference in insolvency on the mortgagee in respect of
the movable assets covered by such a clause.
[7]
However, it was nullified
[8]
by
the provisions of s 87(1) of the Insolvency Act 32 of 1916 (the
1916 Act), which provided that:
‘
No
general bond registered after the commencement of this Act shall
confer any preference in respect of immovable property, and
no
general clause in a special mortgage registered after the
commencement of this Act shall confer any preference in respect of
immovable property or of movable property which was not delivered to
the mortgagee at the time of the mortgage and retained by
him during
the term thereof.’
[12]
This
section did not affect the preference on insolvency over movables
enjoyed by the holder of a notarial bond, but it had two
other
effects. It excluded from any preference on insolvency movable assets
covered by a general clause in a special mortgage executed
after
1916. A special mortgage was not defined but the court in
Adolph
Mosenthal & Co v The Master and Feinberg’s Trustees
[9]
held it to be a mortgage that took an asset out of the free residue
of the estate, because the security it gave the mortgagee was
a real
right in the property hypothecated. Only a bond over specific
immovable property had that effect. Such a bond was similar
in effect
to a pledge or tacit hypothec based on possession. The effect was to
confine special bonds to bonds over immovable property.
The bond in
issue in that case was held to be a general bond and to enjoy a right
of preference unaffected by s 87(1) of the
1916 Act. When the
1936 Act was passed the court’s conclusion was incorporated in
the definition of a special mortgage in
s 2.
[13]
The second effect of s 87(1) of the
1916 Act, and the one more important for present purposes, was that
it prohibited a general
notarial bond from creating any preference on
insolvency in respect of immovable property. It did so by
invalidating any clause
in a general notarial bond purporting to
extend its reach to immovable property. That remains the present
position in terms of
s 86 of the 1936 Act, which commences with
the same words as s 87(1) of the 1916 Act, namely: ‘No
general mortgage
bond registered after the thirty-first day of
December, 1916, shall confer any preference in respect of immovable
property …’.
The year after the 1936 Act was passed
provisions were inserted in the
Deeds Registries Act 47 of 1937
to
prevent bonds contravening
s 87(1)
from being registered.
Section
53(1)
of that Act prohibits registration of a
notarial bond over immovables, as well as the registration of a
mortgage or notarial bond
containing the general clause purporting to
bind all the immovable and movable property of the debtor.
[14]
The resulting proposition that a
notarial bond does not provide any security over the immovable
property of the debtor was fundamental
to the argument on behalf of
the Land Bank. It submitted that prior to insolvency Firstrand
enjoyed no right of security over the
immovable assets of Rubaco,
which were not covered by the terms of the bond. Firstrand could
perfect its security or enjoy a preference
in the free residue under
s 102 but only in respect of movable property. Thus far it was
undoubtedly correct. It went on to
contend that it would fly in the
face of the established common law position, as amended by the 1916
Act and the 1936 Act, to construe
s 102 in a way that conferred
on the mortgagee under a general notarial bond over movables a
preference in insolvency over
the proceeds of immovable property,
that being the very preference that the common law and our Insolvency
Acts in 1916 and 1936
had been at pains to deny it.
Judicial
dicta and academic writing
[15]
Section
102 was a novel provision introduced in the 1936 Act specifically
affording a preference to the holder of a general notarial
bond over
movables.
[10]
The 1916 Act
contained no corresponding section. From the outset, the leading
textbooks on insolvency law expressed the view that
its effect was no
more than to state the common law position, namely that the holder of
such a bond enjoyed a preference in the
distribution of the free
residue to the extent of the realised value of the movable assets
covered by the bond. A brief consideration
of their views is called
for.
[16]
In
the edition of Wille and Millin’s
Mercantile
Law of South Africa
[11]
immediately preceding the 1936 Act dealing with distributions of the
free residue on insolvency it was said:
‘
General
securities. The holders of general securities participate next in the
free residue. The following are the forms of general
securities which
are effected today, and they confer a preference
to
the extent mentioned
:
(a)
…
(b)
A general bond registered after 1916
confers a preference
over movable
property only
(Section 87(1);
Sonday
v McCarthy NO
1932 CPD 336)
…’
(My emphasis.)
When
the 10
th
edition of that
book
was published in 1941, after the 1936 Act had come into force, the
quoted passage was repeated save that reference was made
after the
heading ‘General securities’ to s 102. Professor
Wille expressed the same view in his subsequent publications.
[12]
So did the author of Mars on
The
Law of Insolvency in South Africa
.
[13]
[17]
It
is fair to say that until recently this view could be taken as the
received wisdom. It was repeated in every edition of
Mars
up to and including the eighth,
[14]
and similar statements are to be found in other textbooks.
[15]
The most recently published,
Meskin’s
Insolvency Law
is clear that the holder of a general notarial bond enjoys a
preference in relation to ‘the proceeds remaining in the free
residue of the realisation of all the insolvent’s movable
property’.
[16]
[18]
The
only potentially dissenting voices are those of the authors of the
most recent edition of
Mars
[17]
who say that the issue is controversial, but who read the decision of
this Court in
Cooper
[18]
as saying that the preference is not limited to the proceeds of
movable property. I am unable to find anything in the decision
in
Cooper
that
supports this view. The case was concerned with a special notarial
bond, not a general notarial bond, and it held, contrary
to earlier
authority,
[19]
that outside
the specific list of preferences contained in ss 96 to 102 of
the 1936 Act there was no room for the recognition
of any other
preference even though such preference would have been recognised by
the common law. The court did not express a view
on the
interpretation or effect of s 102. The effect of the decision
was reversed by the Security by Means of Movable Property
Act 57 of
1993 (the Security Act) to which I will revert.
[19]
Judicial
opinion on the rights in insolvency of the holder of a general
notarial bond over movables has consistently been that such
a
creditor enjoys a preference out of the free residue of the estate,
but only up to the value of the assets hypothecated. Friedman
J,
giving the judgment of the full court, in
Geyser
NO v Fuhri
,
[20]
said:
‘
His
claim will then be preferent to the extent to which he receives
payment out of the proceeds of the movable assets
covered
by the general bond but his claim will be concurrent in respect of
the difference and
to the extent that a
distribution may be made out of the proceeds of immovable property
forming part of the insolvent estate, he
will only be paid a dividend
on that difference
.’ (My
emphasis.)
To
similar effect is the statement by Harms JA in
Contract
Forwarding
[21]
that it is trite that:
‘
The
rights of the bondholder are of importance mainly upon insolvency.
The bondholder is not a secured creditor and is entitled
to a
preference over the concurrent creditors of the insolvent only with
respect to the proceeds of assets subject to the bond.’
[20]
All
the judicial statements on the point were for one or other reason
obiter
dicta
,
and some of the earlier judgments may have been referring to both
general and special notarial bonds, because, until
Cooper
,
special bonds over movables were accepted as conferring a preference
to payment out of the free residue up to the value of the
goods
hypothecated. However, they represent considered statements of the
law and cannot be disregarded. Nor can the substantial
and
long-standing consensus among writers on insolvency law. The argument
urged upon us on behalf of Firstrand flies in the face
of accepted
wisdom on the rights of the holder of a general notarial bond on
insolvency. It is an argument described by one writer
[22]
in the following terms:
‘
[W]hile
the literal and textual reading of s 102 would then give to the
limited general bond holder a right of preference in
relation to the
whole free residue … it is very unlikely that this would ever
be held to be the intention of the Act.’
[21]
It is appropriate therefore to approach the
construction of s 102 with caution. In
Cooper
,
this Court disregarded the accepted view and commercial practice in
relation to the preference enjoyed by the holders of special
notarial
bonds. The disruptive and commercially unacceptable result of the
decision led to a need for remedial legislation in the
form of the
Security Act. That is not a result to be lightly contemplated.
Section
102
[22]
The
1936 Act distinguishes between secured claims and unsecured claims.
Secured claims are those claims secured by special mortgages,
a
landlord’s legal hypothec, a pledge or a right of
retention.
[23]
Since 1936
special mortgages have included mortgages of immovable property and
the diminishing class of notarial mortgage bonds
registered prior to
1993 under the Notarial Bonds (Natal) Act 18 of 1932. Since 1993 they
have also included notarial mortgage
bonds hypothecating specially
described property in terms of the Security Act.
[24]
General notarial bonds are expressly excluded. The assets held under
securities recognised by the 1936 Act do not fall into the
free
residue of the estate.
[25]
Where the realisation of the security held by a secured creditor is
insufficient to satisfy the claim, that creditor is an unsecured
creditor in respect of the balance.
[23]
Within the class of unsecured creditors
there is a distinction between those creditors who enjoy a preference
in the distribution
of the free residue and those who do not. The
preferences are those set out in ss 96 to 102 of the 1936 Act.
In terms of the
decision in
Cooper
that
constitutes a closed list of preferent claims, each of which succeeds
the previous one as one progresses from s 96 to
s 102. All
other creditors are concurrent creditors. In terms of s 103 of
the 1936 Act, after the claims enjoying a preference
have been
satisfied, concurrent creditors share in the balance of the free
residue in proportion to the value of their claims.
[24]
Preferent creditors are not necessarily
paid in full from the free residue, but only to the extent of their
preference. Thus funeral
and deathbed expenses under s 96(1) are
limited to R300. The taxed costs of execution, other than the fees of
the sheriff
are limited to R50 under s 98(1)
(b)
and the preference in respect of
salaries or wages of former employees is limited in accordance with
ss 98A(1) and 2
(a)
.
To the extent that they are not paid these preferent creditors are
unsecured creditors in relation to the balance of their claims.
[25]
That brings me to s 102 itself, which
reads:
‘
Preference
under a general bond.
—Thereafter
any balance of the free residue shall be applied in the payment of
any claims proved against the estate in question
which were secured
by a general mortgage bond, in their order of preference with
interest thereon calculated in manner provided
in subsection (2) of
section
one hundred and three
.’
The
critical words in this section are ‘any claims … which
were secured by a general mortgage bond’. Do these
words relate
to the entire claim of the holder of a general mortgage bond, or do
they relate only to that part of the claim that
is in fact secured by
the bond? In other words do they apply only to the portion of the
claim equivalent to the realised value
of the hypothecated movables?
The former construction favours Firstrand and the latter the Land
Bank.
[26]
Unfortunately in their initial arguments
neither party to this appeal focussed their arguments on these
critical words. Firstrand
appeared to assume that they bore the
former meaning and concentrated on the words ‘any balance of
the free residue’,
which are hardly controversial. The Land
Bank’s argument was that the effect of Firstrand’s
approach was to nullify
s 86 and give rise to an absurdity
flowing from the matters discussed above. This led to the broad
submission that ‘section
102 must be interpreted to limit the
preference enjoyed by holders of general bonds to a preference in
respect of the free residue
relating to the proceeds of the sale of
movable property’. But while that may be the conclusion of a
process of interpretation
it is not the correct starting point. In
the result it failed to deal with the central issue in construing
s 102 of the meaning
of the expression ‘any claims …
secured by a general mortgage bond’. Both parties delivered
supplementary heads
after the Court pertinently drew the point to
their attention and invited argument on it. Firstrand’s
supplementary argument
merely traversed the ground covered in its
original heads of argument, but it included one very important
concession to which I
will revert. The Land Bank contended in its
supplementary argument that the second construction was correct.
[27]
The
process of interpretation is no longer one in which we seek out a
notional plain meaning of the words used, ignoring context
and the
circumstances in which the document being interpreted, whether a
contract or a statute or a patent specification, came
into being.
[26]
Nonetheless it must start with the actual words used. I pointed out
in
Endumeni
that:
‘
The
“inevitable point of departure is the language of the provision
itself”, read in context and having regard to the
purpose of
the provision and the background to the preparation and production of
the document.’
It
is therefore incumbent on counsel to identify the meaning for which
they contend so that it can be tested against the language
used, not
simply to engage in generalities. The reason is simple. If the words
are unable to bear the meaning contended for then
that meaning is
impermissible.
[27]
[28]
The critical words ‘claims …which
were secured by a general mortgage bond’ may refer either to
the whole of the
bondholder’s claim or to the portion of the
claim that is actually secured by the bond. The former meaning is
supported by
the fact that the bondholder is notionally entitled to
recover its entire claim from the proceeds of the realisation of the
hypothecated
movables. This is so even if neither the bondholder nor
the debtor actually contemplates when the bond is registered that
realising
the encumbered assets will suffice to discharge the debt.
Thus for example they may value the movables at half a million Rand
while
the debt is for several million Rand. However, if it transpires
that the movables include a valuable antique or work of art their
realisation may produce sufficient to discharge the entire debt. But
in that situation the debt is paid from the hypothecated property
alone, which is not the present case.
[29]
In the context of insolvency the other
meaning is also permissible and, in one sense, more realistic in that
it properly reflects
the security that the bondholder enjoys from the
bond. Taking again the example of movable property valued at half a
million Rand
being hypothecated to secure a claim of several million
Rand it is entirely appropriate for the bondholder to say that it has
a
secured claim of half a million rand and an unsecured and
concurrent claim for the balance. That is after all the very
situation
in which any holder of security as defined in the 1936 Act
finds itself if their security is insufficient to satisfy their
claim.
Section 83(12) says so expressly. Firstrand correctly
point out that the holder of a general notarial bond does not hold
security
as defined in the 1936 Act, but it is nonetheless secured in
the general sense that the bond provides it with some security for
its claims. That is the sense in which s 102 uses the word
‘secured’.
[30]
The first meaning is perhaps the one that
is the most obvious linguistically. Indeed it is the one to which I
initially inclined.
But the latter one is certainly a tenable
interpretation to give to the words used in s 102. In that
situation context and
background are the safest guides to selecting
which is more appropriate. As the earlier discussion shows, both are
overwhelmingly
in favour of the second meaning. In addition, there
are I think certain factors that are decisive in its favour.
[31]
The
first of these is the principle that once the company is placed in
liquidation a
concursus
creditorum
arises effectively freezing the rights of creditors as at the date of
liquidation. Not only are claims fixed at that date, but
the security
rights of creditors claiming to hold security in the broadest sense
for their claims are fixed at that date. As Innes
CJ said:
[28]
‘
[T]he
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 at the
issue of the order.’
A
commitment to provide security that has not been implemented prior to
liquidation cannot be implemented thereafter and, if it
is, the
resultant security is null and void.
[29]
The effect of the interpretation of s 102 contended for by
Firstrand would be that the holder of a general notarial bond would
acquire on liquidation greater rights than it enjoyed at the date of
liquidation and its security would be enhanced. I do not say
that the
legislature could not do that, but in the absence of any clear
indication that this was the purpose of s 102 it is
not a
construction that should be favoured.
[32]
Then there is a practical issue. Under
s 51(1)
(b)
of
the
Deeds Registries Act if
a notarial bond is to cover not only
existing but also future debts, a sum must be fixed in the bond as an
amount by which future
debts ‘shall not be secured by the
bond’. That was the case with this bond and many, if not most,
notarial bonds limit
the extent of the debt covered by the bond. In
other words the claim is secured generally but only to a limited
extent. What then
is to happen if after liquidation the amount of the
claim exceeds the sum secured by the notarial bond? Can it be that
the creditor
will enjoy a preference in the distribution of the free
residue of the insolvent estate in an amount greater than the amount
secured
by the bond? The obvious answer is that the creditor does not
receive such a preference, and Firstrand conceded as much in its
supplementary heads of argument. The reason why that concession is
correct must be that the claim is only, in the words of
s 102
,
secured by a general mortgage bond to the extent stated in the bond
and is unsecured and therefore concurrent to the extent that
it
exceeds that amount. But, if that is the case, there is no reason not
to treat the situation where the amount of the claim exceeds
the
value of the movables hypothecated under the bond in the same way. In
other words although there is a single claim, for example,
for money
lent and advanced, only a part of it is secured by the general
mortgage bond and the amount of the claim that is secured
is
determined by the value of the assets hypothecated.
[33]
On Firstrand’s approach the
bondholder in this latter case would be entitled to a preference in
respect of its entire claim
against the free residue because its
claim was one secured by a general mortgage bond. But that heaps
absurdity upon absurdity.
Not only would the preference not be
confined to the value of the property hypothecated, but it would not
be confined by the express
terms of its bond that limited the extent
of the security that it provided. It is inconceivable that this can
be the effect of
s 102
and Firstrand rightly conceded that this
was not correct. It is one thing to afford a creditor that has taken
security in this
form a preference in respect of the proceeds of that
security. It is another matter entirely to afford it a preference
that ignores
and goes beyond the terms of that security. There is
nothing in
s 102
or the 1936 Act to suggest that its purpose was
to provide a windfall gain on insolvency to this particular class of
creditor.
[34]
One further matter illustrates why the
contentions by Firstrand cannot be correct. Take the situation where
the movable assets prove
worthless or perhaps have been destroyed.
Any free residue would then be derived entirely from the realisation
of immovable property
in the estate. To afford the bondholder a
preference to that free residue would afford it something to which it
was never entitled
before insolvency, would breach the
concursus
creditorum
principle, and would give
rise to an absurdity. One does not adopt interpretations that are
inconsistent with basic principles
of law and are not commercially
sensible, particularly in a field that is entirely concerned with
commercial dealings.
[35]
The
apparent purpose of s 102 was to deal with a contention that had
been raised under the 1916 Act – which did not refer
to any
preference being afforded to the holders of notarial bonds over
movables, whether special or general – that all these
common
law preferences had been removed. While the argument had been
rejected
[30]
no doubt those
who drafted the Act thought it appropriate to put the matter beyond
question by expressly providing for such a preference
in s 102.
It may be that they chose language that was inapt to include special
notarial bonds, as was held by this Court in
Cooper
,
but that is the obvious purpose underpinning this provision. There is
nothing to support the notion that the legislature was concerned
to
afford holders of notarial bonds a special preference.
[36]
Firstrand
sought support for its contentions in the proposition that the bond
covered all movable property including cash. Relying
on the judgment
in
Sarwill
Agencies (Pty) Ltd v Jordaan, N O
[31]
it argued that once the assets in the estate, including the immovable
assets, were realised, the proceeds of the realisation became
movable
property subject to their bond. It is unnecessary for present
purposes to decide whether
Sarwill
was correctly decided because it dealt with an entirely different
situation. The liquidator of a company had, during the course
of the
liquidation, acquired certain movable assets to enable him to sell a
business as a going concern. When he did so the question
was whether
those assets had, after their acquisition, become subject to the
creditor’s notarial bond over movables on the
basis that the
bond was a continuing security. But that is not the same as this case
where the immovable properties have been realised
by the liquidator
as required by the provisions of s 82 of the 1936 Act. To say
that the proceeds of that realisation then
fall within the terms of a
notarial bond is to create, by the ordinary and obligatory processes
of liquidation, a security and
a right to a statutory preference in
direct conflict with the existence of a
concursus
creditorum.
[37]
Firstrand also submitted that the matter
was resolved in its favour by virtue of the provisions of s 1(3)
of the Security Act,
which reads as follows:
‘
Subject
to the provisions of subsection (4) a notarial bond contemplated in
subsection (1) other than a notarial bond contemplated
in section 1
of the Notarial Bonds (Natal) Act, 1932 (Act No. 18 of 1932), which
was registered before the commencement of this
Act shall, upon the
insolvency of the mortgagor before or after such commencement, confer
on the mortgagee the same preference
in respect of the entire free
residue of the insolvent estate as that conferred on a mortgagee by a
general bond in terms of section
102 of the Insolvency Act, 1936 (Act
No. 24 of 1936).’
[38]
The submission was not developed but
emphasis was placed on the words ‘the entire free residue of
the insolvent estate’.
However, for two reasons I do not think
that assists Firstrand. First the section was enacted to remedy the
situation of existing
holders of special notarial mortgage bonds
after the decision in
Cooper
.
It does not apply to bonds executed subsequently to the commencement
of the Security Act. They are dealt with in s 1(1) of
that Act
and bondholders are given the status in insolvency of the holder of a
pledge. In other words they are secured creditors
and look to the
movable property specified in the bond to satisfy their claim even
though it is not in their possession. Such assets
do not on
realisation fall into the free residue unless there is a surplus
after paying the secured claim. This reversed the common
law position
as it had existed since 1830 and the decision in
In re
Russouw
.
By contrast existing holders of
special bonds were given what, prior to
Cooper
,
it had been thought they enjoyed, namely a preferent claim.
This is said to be a preference in the entire free residue,
but that
language simply makes it clear that their preferent claim is not
confined to the particular assets subject to their bond.
That
distinguishes it from the rights that such a bondholder will have
under s 1(1). It does not, however, mean that their
right to a
preference from the free residue is unrestricted.
[39]
Second, and decisively, the extent of the
preference conferred by this section is the same as that conferred on
a mortgagee by a
general bond in terms of s 102. One
cannot then determine the effect of s 1(3) unless one has first
determined
the extent of the preference enjoyed by the holder of a
general bond. If the preference of the mortgagee under a general bond
is
limited to the value of the property hypothecated under that bond,
in other words to the value of the movables, then the preference
conferred by s 1(3) will be similarly limited. The fact that in
principle a preference may be available in respect of the
entire free
residue does not alter this. The reference in s 1(3) to the
entire free residue does not mean that the preference
of a general
bondholder under s 102 is a preference against the entire free
residue. To hold otherwise is to engage in circular
reasoning.
Conclusion
[40]
In the result I would answer the question
posed by the parties and set out in para 2 in the affirmative. As
already mentioned the
order granted by Tuchten J did not properly
reflect his conclusions because it excluded Firstrand from any
preference in the free
residue remaining when s 102 was reached
and also excluded it from any claim as a concurrent creditor against
the free residue.
That was erroneous because on the facts a portion
of that free residue represented the proceeds of the realisation of
movables.
The problem can be remedied by deleting from the order
paras 2 and 4 thereof.
The
following order is made:
1. The order of the
court below is amended by the deletion of paragraphs 2 and 4 and the
renumbering of paragraphs 3, 5 and 6 as
paragraphs 2, 3 and 4
respectively.
2. The appeal is
otherwise dismissed with costs, such costs to include those
consequent upon the employment of two counsel.
M
J D WALLIS
JUDGE
OF APPEAL
APPEARANCES:
For the appellant: L
Meintjies (the heads of argument having been
prepared by D M
Leathern SC and L Meintjies)
Instructed
by: Rorich Wolmarans & Luderitz Inc, Pretoria
Symington
& De Kok, Bloemfontein
For
the respondent: DM Fine SC (with him JM Hoffman)
Instructed
by: Mkhabela Huntley Adeyeke Inc, Pretoria
McIntyre
& Van der Post, Bloemfontein
[1]
Contract
Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd
2003
(2) SA 253
(SCA) paras 3 and 4;
See
also
Barclays
National Bank Ltd and Another v Natal Fire Extinguishers
Manufacturing Co (Pty) Ltd and Others
1982
(4) SA 650
(D) at 655H-656D.
[2]
See the definition of ‘security’ in s 2 of the Act.
[3]
Such rights fall within the definition of immovable property in s 2
of the 1936 Act.
[4]
The approximate ratio between R222 000 and R2 780 000.
[5]
Insolvent
Estate A. R. Cunningham
(1908) 29 NLR 469
at 471-472.
[6]
See
In
re Carter
2
Menz 353
at 358;
Ex
parte Grand Hotel and Theatre Co Ltd Liquidation
1908
ORC 19
and
Adolph
Mosenthal & Co v The Master and Feinberg’s Trustees
1931
CPD 155
at 156 in the argument by R P B Davis KC subsequently Davis
AJA. The wording of the general clause appears to have been along
the following lines: ‘and generally his person and all his
movable property and assets of every description, both such as
he is
at present and/or may in future be or become possessed of, of
whatever nature and kind soever and wheresoever situate,
nothing
excepted’. See
Mosenthal
157-8.
[7]
In
re Russouw
1
Menz 479
,
Hare
v Trustee of Heath
(1884-1885)
3 SC 32
at 33.
[8]
W H Mars KC
The
Law of Insolvency in South Africa
1
st
ed (1917) 206.
[9]
Adolph
Mosenthal & Co v The Master and Feinberg’s Trustee
1931
CPD 155.
[10]
From the record of parliamentary debates it appears to have been
introduced as an amendment inserted at the committee stage of
the
proceedings, but there is nothing in the record of the debates to
indicate what prompted this. It was not a product of the
Insolvency
Conference that preceded the 1936 Act and involved a wide range of
people.
[11]
George Wille and Philip Millin
Mercantile
Law of South Africa
8
th
ed (1934) 263.
[12]
George Wille
Principles
of the South African Law
2
nd
ed (1945) at 231.
[13]
W H Mars
The
Law of Insolvency in South Africa
3
rd
ed (1936) by H E Hockley at 343.
[14]
Elmarie de la Rey
Mars
The Law of Insolvency in South Africa
8
th
ed (1988) at 383.
[15]
George
Wille
Wille’s
Principles of South African Law
5
th
ed (1966) at 233 and 6
th
ed (1970) by J T R Gibson at 237;
Wille
and Millin’s Mercantile Law of South Africa
18
th
ed (1984) Ed J F Coaker and D T Zeffertt at 389; Catherine Smith
The
Law of Insolvency
3
rd
ed (1988) at 234; Elmarie de la Rey and Robert Sharrock
Hockley’s
Insolvency Law
5
th
ed (1990) at121; PJ Badenhorst, Juanita Pienaar and Hanri Mostert
Silberberg
and Schoeman’s The Law of Property
5
th
ed (2006) para 16.6.1.1, at 385 and GF Lubbe (revised by TJ Scott)
‘Mortgage and Pledge’ in Joubert
LAWSA
Vol 17(2) 2
nd
ed (2008) para 517.
[16]
Meskin’s
Insolvency Law and its operation in winding-up
Eds
Justice P A M Magid, Professor André Boraine, Jennifer A
Kunst and Professor David Burdette (loose-leaf) para 12.4.10
Issue
26 the volume being up to date to May 2013 and Issue 40.
[17]
Eberhard Bertelsmann and others
Mars
the Law of Insolvency in South Africa
9
th
ed (2008) para 22.11.
[18]
Cooper
NO en Andere v Die Meester en 'n Ander
1992
(3) SA 60 (A).
[19]
Vrede
Koöp Landboumaatskappy Bpk v Uys
1964
(2) SA 283
(O) following the approach in relation to the 1916 Act in
B.
Ebrahim Ismail & Co. v Khan’s Trustee
1930
NPD 136.
See also Basil Wunsh ‘What Rights of Preference are
enjoyed by a Special Notarial Bond’
(1960) 23
THRHR
112
, where it was argued, on the strength of s 88 of the 1936
Act, that the reference to a general mortgage bond included a bond
specially hypothecating movables, and
Insolvent
Estate A. R. Cunningham
(1908) 29 NLR 469
at 471-472.
[20]
Geyser
NO v Fuhri
1980
(1) SA 598
(N) at 602A-B. See also
International
Shipping Co (Pty) Ltd v Affinity (Pty) Ltd
1983
(1) SA 79
(C) at 84C-E and
Ninian
& Lester (Pty) Ltd v Perry NO
1991
(1) SA 66
(N) at 72H-J.
[21]
Contract
Forwarding (Pty) Ltd v Chesterfin (Pty) Ltd supra
para
3.
[22]
Philip Sacks ‘Notarial Bonds in South African Law’
(1982) 99
SALJ
605
at 613.
[23]
See the definition of ‘security’ in s 2 of the 1936
Act.
[24]
See the definition of ‘special mortgage’ in s 2 of
the 1936 Act.
[25]
See the definition of ‘free residue’ in s 2 of the
1936 Act.
[26]
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012
(4) SA 593
(SCA) para 18;
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk
2014 (2) SA 494
(SCA) paras 10-12.
[27]
South
African Airways (Pty) Ltd v Aviation Union of South Africa and
Others
2011 (3) SA 148
(SCA) paras 25–30
[28]
Walker
v Syfret NO
1911 AD 141
at 166 most recently cited by this Court in
Gainsford
and Others NNO v Tanzer Transport (Pty) Ltd
2014
(3) SA 468
(SCA) para 1.
[29]
Ward
v Barrett NO and Another NO
1963
(2) SA 546
(A) at 552E–553A.
[30]
B.
Ebrahim Ismail & Co. v Khan’s Trustee
1930
NLR 136.
[31]
Sarwill
Agencies (Pty) Ltd v Jordaan, N O
1975
(1) SA 938
(T).