Summary of Judgment

1. Introduction

The matter concerned an application for leave to appeal brought in the Gauteng Local Division, Johannesburg. The application was directed against a judgment previously delivered by De Villiers AJ on 16 January 2020.

The applicants were Trevor Mahlasale Ramodike NO and Solomon Stanley Issoker Botkanyo NO (cited in their representative capacities). The respondent was MGG Productions (Pty) Ltd.

Procedurally, the court recorded that there had been a delay in finalising the leave-to-appeal application, which was attributed to an administrative error: the judge indicated that he only became aware “recently” that leave to appeal had been sought.

In substance, the dispute related to the operation of section 46 of the Insolvency Act 24 of 1936 and, in particular, whether a set-off (in circumstances where implementation was delayed and occurred when the parties moved to cash trading terms) was impeachable or whether it fell within the statutory baseline of having been effected “in the ordinary course of business”.

2. Material Facts

The court treated as material the following factual features relevant to the statutory enquiry under section 46.

It was common cause in the judge’s account that the case involved set-off between the parties’ respective claims. The set-off was described as unusual in one respect: although set-off in law is typically regarded as occurring automatically, in this matter the implementation of set-off was delayed and only took effect when the parties changed their trading terms to a cash basis.

The judge summarised the commercial arrangement, for purposes of explaining the factual matrix, as one business effectively communicating to the other that their current arrangement was not working, proposing that the parties should set off mutual claims so as to effect payment in that manner, and thereafter that they should trade on a cash basis rather than on credit. The court regarded this as a simple commercial adjustment to trading terms.

Beyond this, the judgment on leave to appeal did not set out further detailed factual disputes. The court’s focus remained on whether, on these facts, the set-off was effected in the ordinary course of business, and whether there were any indications of a contrived manipulation to procure the benefits of set-off.

3. Legal Issues

The court identified two primary questions raised in argument on leave to appeal.

The first issue was whether the judge had erred in interpreting section 46 of the Insolvency Act by considering the other impeachable transaction provisions in the Act and by attempting to locate a “mischief” addressed by section 46, rather than (as the applicants contended) applying what was said to be the clear meaning of section 46 without broader contextual analysis. This was primarily a dispute about legal interpretation and methodology.

The second issue was whether the judge had erred in applying the law to the facts, specifically whether the set-off should have been found not to have been effected in the ordinary course of business (and thus to be impeachable), and whether the judge had been correct in relation to setting aside the Master’s unreasoned decision (as characterised in the judgment).

Overall, the leave-to-appeal enquiry required the court to assess whether there were reasonable prospects that another court would adopt a different approach on interpretation or reach a different conclusion on the application of section 46 to the facts.

4. Court’s Reasoning

The court addressed the interpretive complaint by explaining that, although section 46 could be read as having a clear meaning and was not regarded as ambiguous, the judge had found one aspect “perplexing”: section 46 requires a finding on whether set-off was effected in the ordinary course of business, notwithstanding that set-off is, as a general proposition, automatically effected in law. The judge’s reasoning on leave to appeal was that the unusual feature in this case was the delayed implementation of set-off, connected to the shift to cash trading, and that the statutory enquiry therefore had practical content on the facts.

In explaining why he considered it appropriate to examine the “mischief” and the statutory context, the judge contrasted section 46 with other impeachable transaction provisions in the Insolvency Act, namely section 26 (dispositions without value), section 29 (voidable preferences), section 30 (undue preference to creditors), and section 31 (collusive dealings before sequestration). Those provisions were described as involving court involvement to set aside transactions, and as addressing mischiefs that are easier to identify. By contrast, section 46 was described as seeking to “undo” a transaction without involving a court and “without a hearing”, and as being invoked primarily by a party with a financial interest, upon a finding that a transaction was “unusual”. The judge considered it legitimate, in that context, to attempt to understand section 46 by reference to the purpose and structure of the Act as a whole.

The court further considered that the contextual fact that concursus creditorum arises upon the declaration of insolvency, and not six months earlier, was properly taken into account as part of the interpretive environment in which section 46 operates.

As to the substantive standard “in the ordinary course of business”, the judge reiterated that South African courts accept that the concept permits a range of actions by businesspeople, and that the judicial approach to section 46 has been conservative, in the sense that the section “should not find easy application”. The court stated that it had followed the approach in three reported cases dealing with section 46. Two of those matters were said to involve facts clearly demonstrating a contrived manipulation to procure set-off, in which event set-off was set aside. In the third, no such manipulation was present and set-off was not set aside.

On the leave-to-appeal papers, the judge was not persuaded that the applicants’ argument meaningfully engaged with the questions the court had posed about the rationale and ambit of section 46. The application was characterised as largely restating the section, which the judge did not regard as demonstrating that another court would develop a different interpretive approach.

Turning to the application of law to fact, the judge stated that there were no reasonable prospects that another court would find error in (a) setting aside the Master’s unreasoned decision, or (b) finding that the set-off was effected in the ordinary course of business. The commercial change described—mutual set-off coupled with a move to cash trading—was considered plainly within ordinary business practice. The judge stated that the outcome met the tests set out in the earlier judgment, as applied in the cited authorities.

Finally, although both parties asked that any appeal be directed to the Supreme Court of Appeal, the judge held that this only became relevant if leave to appeal were granted. Since he was not satisfied that leave should be granted, no such referral followed.

5. Outcome and Relief

The court dismissed the application for leave to appeal.

The court ordered that the application for leave to appeal was dismissed with costs.

No leave to appeal to the Supreme Court of Appeal was granted, because the threshold requirement—satisfaction that leave should be granted—was not met on the judge’s assessment.

Cases Cited

Estate Engelbrecht v Engelbrecht 1957 (3) SA 83 (N).

Al-Kharafi & Sons v Pema and Others NNO 2010 (2) SA 360 (W).

In Re Trans-African Insurance Co Ltd (In Liquidation) 1958 (4) SA 324 (W).

Gazit Properties v Botha N.O. [2011] ZASCA 199.

Griffiths v Janse van Rensburg NO [2015] ZASCA 158.

Fourie's Trustee v Van Rhijn 1922 OPD 1.

Legislation Cited

Insolvency Act 24 of 1936, section 46.

Insolvency Act 24 of 1936, section 26.

Insolvency Act 24 of 1936, section 29.

Insolvency Act 24 of 1936, section 30.

Insolvency Act 24 of 1936, section 31.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that there were no reasonable prospects that another court would find that the judge had erred either in the interpretive method adopted in relation to section 46 of the Insolvency Act 24 of 1936 or in the application of section 46 to the facts.

The court held that it was permissible and appropriate to read section 46 contextually, including by considering the apparent mischief addressed by the provision and by comparing it with other impeachable transaction provisions in the Insolvency Act, as well as by recognising that concursus creditorum arises upon the declaration of insolvency.

On the facts summarised in the judgment, the court held that the set-off—implemented in the context of a move from credit trading to cash terms, and not shown to be the product of contrived manipulation—was effected in the ordinary course of business and was therefore not impeachable under the baseline contemplated by section 46.

Accordingly, leave to appeal was refused and the applicants were ordered to pay costs.

LEGAL PRINCIPLES

Section 46 of the Insolvency Act 24 of 1936 may be approached contextually, including by reference to the structure of the Insolvency Act and by comparing section 46 with other impeachable transaction provisions, particularly given section 46’s distinctive operation as described by the court (including its capacity to undo a transaction without court involvement).

The statutory phrase “in the ordinary course of business” is applied in a manner recognising that ordinary business activity permits a range of commercial actions. In the context of section 46, the court endorsed a conservative approach, indicating that the provision should not find easy application.

In assessing whether set-off is impeachable under section 46, the presence or absence of contrived manipulation designed to bring about set-off may be significant in distinguishing cases where set-off is set aside from those where it is not.

The court affirmed, as part of the relevant context, that concursus creditorum arises upon the declaration of insolvency, not at an earlier point such as six months prior, and treated this as a proper contextual factor when understanding the operation of section 46.