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[2021] ZAGPJHC 386
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ABSA Bank Limited v Cohen (32870/2012) [2021] ZAGPJHC 386 (9 June 2021)
REPUBLIC OF SOUTH
AFRICA
IN THE HIGH COURT OF
SOUTH AFRICA
GAUTENG LOCAL
DIVISION, JOHANNESBURG
CASE NO: 32870/2012
REPORTABLE:
NO
OF
INTEREST TO OTHER JUDGES: NO
REVISED.
DATE: 9/6/2021
In the matter between:
ABSA
BANK
LIMITED
Plaintiff
and
CHAIM
COHEN
Defendant
JUDGMENT
This judgment was handed
down remotely by circulation to the parties’ representatives by
email and release to SAFLII. The
date and time for hand-down is
deemed to be 10.30am on 09 June 2021
MAHALELO,
J
:
[1]
The plaintiff, Absa
instituted action against the defendant, Mr Chaim Cohen for payment
of the amount of R20 million plus interest
on the aforesaid amount at
prime plus 8%, alternatively, at the prescribed rate
a
temporae
mora
and costs on attorney and client scale based on a suretyship
agreement signed by the defendant in favour of the plaintiff in terms
of which the defendant agreed to stand as surety and co-principal
debtor for the obligations owed to the plaintiff by a company,
A
Million Up Investments 105 (Pty) Ltd (“AMU”).
[2]
The defendant was the
director of AMU and its holding company Quantum Property Group
Limited (“QPG”) for a number of
years. AMU entered into a
series of loan agreements over a period from 2006 through to 2011
with Absa in terms of which AMU applied
and was granted loans to
build a hotel. The hotel is named 15 On Orange in Cape Town.
[3]
AMU was liquidated in
August 2012 because it failed to repay its debts to the plaintiff. It
is undisputed that at the time AMU owed
the plaintiff the amount of
approximately R576 million and after the second and final liquidation
and distribution accounts issued
by the liquidators of AMU, a
shortfall of R380 million was still owed to Absa.
[4]
After the liquidation of
AMU, Absa sued the sureties including the defendant as they had
agreed that they would put up security
for Absa lending the money.
Preliminary issues
[5]
At the commencement of the trial, the defendant abandoned reliance on
the allegations
pleaded in relation to the sale of the hotel property
in 2013 which is contained in the so called Blacher document which
allegations
are set out in paragraphs 45A to 45I and 49A of its plea.
[6]
The defendant does not dispute the underlying agreement on which
Absa’s claim
is based or the existence of the underlying debt
by AMU to Absa. He has however raised several defences. Firstly, he
relies on
section 31(2)
of the
Insolvency Act 24 of 1936
to assert
that Absa should forfeit its claim against AMU because Absa was a
party to a collusive disposition with AMU and Protea
Hotel Group
(“Protea”) whereby AMU paid R25 million of its assets to
Protea, preferring Protea over other creditors.
On this basis, he
argues that he should be released as a surety. Secondly, he alleges
that he signed his suretyship on the understanding
between himself
and Absa, represented by Bertus Erasmus, Pieter Steyn, Peter Swart
and Wessel de Jager, that his suretyship would
lapse if he was no
longer the controlling mind in AMU. He therefore alleges a tacit term
in the suretyship agreement. Thirdly,
he alleges “prejudice”
which he contends permits a finding that the suretyship has been
discharged. He alleges that
he was prejudiced by the conduct of Absa
towards AMU which burdened his suretyship.
The plaintiff’s
case
[7]
AMU concluded a loan agreement with Absa in April 2008 in terms of
which Absa advanced
funds to AMU with a total facility limit of R370
million (“the 2008 Loan Agreement”) for the development
of its property
in Cape Town on which a hotel, 15 On Orange together
with parking, retail space and penthouses were to be developed.
[8]
A subsidiary of AMU, Darwo was to manage and operate the hotel for
which purpose it
entered into a management agreement with African
Pride, a subsidiary of Protea. Protea and AMU each held 50% of the
share capital
in Darwo.
[9]
In terms of the 2008 Loan Agreement:
(a)
The loan was repayable 34
months after the date of the first drawdown being May 2009.
(b)
Construction of the entire
development was expected to be completed by June 2009 and the hotel
was planned to open on 1 September
2009.
(c)
It
was a suspensive condition to the distribution of funds that all
penthouse units were sold in terms of unconditional sale agreements
to arm’s length purchasers (pre-sales). Further, AMU was
expected to receive the full purchase price for each of the penthouse
units by 31 August 2009.
[1]
(d)
In
addition, the retail areas within the development were expected to
have been fully leased so as to generate income from time
of
opening.
[2]
[10]
On or about 9 January 2008 the defendant concluded a deed of
suretyship in terms of which he
bound himself as surety and
co-principal debtor, jointly and severally with AMU for the debts of
AMU in favour Absa. The suretyship
was subject to a maximum of R20
million together with such further amounts in respect of interests
and costs as accrued up to the
date of payment.
[11]
The relevant clauses of the suretyship agreement read:
“‘
I …
the undersigned, CHAIM COHEN … bind myself … as surety
… and co-principal debtor … jointly
and severally
together with A MILLION UP INVESTMENTS 105 (PROPRIETARY) LIMITED
(‘the Debtor’) in favour of ABSA BANK
LIMITED …
(‘the Bank’) for the repayment on demand of any sum or
sums of money, which the Debtor owes or may
hereafter owe to the Bank
from whatever cause arising …
6.
ADMISSIONS BY THE DEBTOR
I … agree that
all admissions by or on behalf of the Debtor, including but not
limited to the acceptance of the Bank’s
claim by a trustee or
liquidator in the event of the insolvency or liquidation of the
Debtor, as well as any judgment granted by
a competent court against
the Debtor in favour of the Bank, shall be binding on me …
7.
DISCRETION OF THE BANK
I … acknowledge
and agree that the Bank may, in its discretion, without reference to
me … and without prejudice to
its rights in terms hereof:
7.1
Determine the extent, nature and duration of any facility or other
advance to the Debtor;
…
7.3
Enter into any arrangement, compromise or settlement or grant an
extension to the Debtor
or any surety; …
9.
INSOLVENCY, LIQUIDATION, ETC
9.1
If the estate of the Debtor or any other person who has bound himself
as surety for that
Debtor is sequestrated, liquidated, surrendered or
placed under judicial management, administration, compromise or
arrangement,
either by way of statute or otherwise:
…
9.1.1
the Bank shall be entitled to apply all proceeds or payments which
are received from the Debtor, curator, liquidator
or from any other
source in diminishing the amount owed, without affecting or
diminishing my liability in terms hereof for payment
of the amount
which is owing to the Bank by the Debtor after receipt of such
proceeds or payments.
’
In terms of clause 11 of
the suretyship agreement the suretyship would be a continuing
covering security. Clause 15 confirms that
the defendant is ‘
liable
for all costs which may be incurred in the enforcement of this
suretyship, including collection costs and legal costs on
the scale
between attorney and his own client
’.
Clause 16 confirms that
the written suretyship document comprised the entire agreement
between the Bank and the defendant regarding
the suretyship. It
emphasised that ‘
the Bank shall not be bound by any
undertakings, representations or warranties not expressly recorded
’
in the suretyship.
Clause
21 confirms that the Bank’s entitlement to recover from the
defendant is ‘
limited
to a maximum of R20 000 000,00 together with such further amounts in
respect of interest and costs as have already accrued
or which will
accrue until date of payment of the amount
’.
[12]
The construction of the hotel was not completed on time which
negatively affected the cash flow
of the hotel. The defendant set out
various reasons for it being delayed by six months; i.e. fatal
accident on site, a change of
plan to keep and incorporate in the
hotel the façade of historical building, heavy rains and
issues regarding interior designing
of the hotel.
[13]
When the hotel was ultimately opened in December 2009 not all the
hotel rooms were completed
and the penthouses remained incomplete.
Construction, particularly in relation to the penthouses continued
during 2010.
[14]
As a result of being over time and over budget, AMU needed more
funding. It then approached Absa
for an extension of the loan
facility. This extension, which provided additional capital and an
extension to the capitalised interest
facility, was agreed to in
November 2009. It was signed by the defendant on behalf of AMU (“the
2009 Addendum”).
[15]
In terms of the 2009 Addendum:
(a)
An extra R45 million was
allocated to AMU.
(b)
The
repayment date was extended to 31 March 2010.
[3]
(c)
AMU
was again required to confirm that pre-sales were in place.
[4]
[16]
AMU battled with the repayment of the loan and by 31 March 2010 it
was in breach of the agreement.
Absa says that it would have been
entitled to call up the loan and to liquidate AMU following
non-payment of the loan after the
default in March 2010 but, despite
the default, there appeared to have been a
bona fide
belief by
AMU’s management, including the defendant, the sureties and
Absa that AMU could trade itself into a better position.
[17]
On 23 November 2010, AMU and QPG signed a new “
Commitment
Letter
” and “
Term Sheet
” for the
restructuring of the loan to AMU (“the November 2010 Term
Sheet”). The Term Sheet recorded the principles
that would
apply and the amendments to be made to restructure the facility and
implement the turnaround strategy. At the time that
the November 2010
Term Sheet was signed, the defendant was the executive chairman of
QPG and he presided over the board meeting
of 16 November 2010, where
the November 2010 Term Sheet was discussed and approved.
[18]
The November 2010 Term Sheet contemplated additional revenue being
generated by AMU to pay the
loan debt from receipt of 100% of the
profits from operations. Absa stated that in order to achieve this,
AMU needed to acquire
50% shareholding of Protea in the operating
company Darwo because the November Term Sheet specifically recorded
the intention of
AMU to acquire Protea’s shares in Darwo. It
was recorded as a suspensive condition that:
“
The
successful finalisation of all agreements and documentation relating
to the restructuring arrangement, including but not limited
to,
purchase of shares of 15 On Orange from Protea Hotel Group (Pty) Ltd
and each document is in a form and substance acceptable
to the
Bank
.”
[5]
[19]
The November 2010 Term Sheet also reflected the need for an equity
contribution of approximately
R50 million (plus interest) towards
paying off the loan on or before 30 November 2011. Clause 7 of the
November 2010 Term Sheet
confirmed that the equity (and the interest
on equity) was required to be paid by the equity providers in full by
no later than
30 November 2011.
[6]
[20]
In their financial statements, AMU and QPG relied upon the November
2010 Term Sheet to notify shareholders
in QPG that they had secured
an extension to repay the loan amounts.
[21]
The defendant signed off on the QPG Annual Report in which these
representations were made. From
December 2010 Absa and AMU, through
their attorneys engaged in negotiations about the wording for the
long-term agreement to capture
the restructuring arrangements agreed
upon in the November 2010 Term Sheet. The defendant was involved in
the discussions and negotiations
around the conclusion of those loan
agreements. Eventually, the long-form agreements were concluded on 31
August 2011 in the form
of the Amended and Restated Loan Agreement
(“ARLA”).
[7]
[22]
The loan facilities provided in the ARLA followed the same form as
the facilities reflected in
the November 2010 Term Sheet, namely, a
facility, senior bridging facility and the equity facility. The
repayment date for the
equity outstanding in the amount of R61
million was extended to 31 March 2012. As contemplated in the
November 2010 Term Sheet,
the bridging facility in respect of equity
outstanding was not to be paid from cash flows generated within AMU.
AMU was required
to source equity injections from sureties, QPG
and/or Quantum Properties by shareholder loans, share issues etc.
[8]
[23]
By 31 March 2012 AMU had not paid the R61 million due for payment on
that date. Following the
breach, Absa made demands on AMU and also on
the defendant as surety. The board of directors of AMU resolved to
commence business
rescue proceedings on or about 4 June 2012. On 18
June the Western Cape High Court issued an order setting aside the
business rescue
resolution following an application by Absa. On 29
June 2012 AMU was placed under provisional winding-up. That order was
confirmed
and made final on 14 August 2012.
[24]
There is no dispute that AMU was indebted to Absa when AMU was placed
in liquidation. Further,
that Absa’s claim was accepted by the
liquidators of AMU and after all distributions, an amount of R380
million was still
owing to Absa. It is not disputed that during the
liquidation two amounts were paid out to Absa as distributions in
respect of
its secured claims being R184 561 473,57 and R3 580
590,61.
[9]
[25]
During the trial Absa presented the factual
statement of Mr Prinsloo, one of its employees which was admitted
by
the defendant in the pre-trial conference held on 20 July 2020. Mr
Prinsloo is the Manager of Interest Calculating Solutions
at Absa. He
was asked to review Absa’s records of the accounts of AMU and
to confirm the interest calculations in relation
thereto and the
balances outstanding at various dates. He confirmed
inter
alia
:
1.
The loans granted to AMU
by Absa,
2.
The running balance on the
AMU loan accounts with Absa,
3.
The interest accrued each
month (running at approximately R3 million per month in 2009 and
2010.
4.
The amounts drawn down and
the amounts paid in.
5.
That as at June 2010, the
amount owed by AMU to Absa was R412 230 088,29.
6.
As at 20 August 2012, the
amount owed by AMU to Absa was R576 991 787,69.
[26]
He was also asked to calculate the amount owed on the defendant’s
suretyship. His evidence
is that he carried out two calculations
using different interest rates. In both calculations, the capital
amount owed of R20 million
is deemed owed on the date on which
summons was issued against the defendant which is 1 September 2012.
In annexure “WP5”,
he calculated the interest accrued
over the period since 1 September 2012 and the aggregate as at 27
September 2019 using the prime
rate. As reflected on annexure “WP5”,
the amount owing as at 27 September 2019 is R39 178 139.32. Annexure
“WP5”
also reflects the date on which the
in duplum
limit will be reached using the prime rate calculation. Mr Prinsloo’s
evidence is that the interest accrued equalled the
capital on 1
December 2019. In annexure “WP6”, he calculated the
interest owed on the R20 million debt using the default
interest rate
of prime plus 8%. In this calculation, the accumulated interest was
equal to the capital on 1 October 2016. According
to him the total
amount owing by the defendant under the suretyship agreement
therefore is R40 million.
The defendant’s
case
[27]
At the commencement of the trial the defendant had abandoned the
defence raised regarding the
tacit term in the suretyship agreement.
Only two defences remained. The defendant contends that he is
entitled to rely on
section 31(2)
of the
Insolvency Act to
argue that
Absa’s claim against AMU should be forfeited and, as a
consequence of the principal debt falling away, he should
be released
from his suretyship. Secondly, he alleges “prejudice”
which he contends permits a finding that the suretyship
has been
discharged.
[28]
The defendant contends that he is entitled to rely on the provisions
of
section 31(2)
of the
Insolvency Act because
AMU colluded with Absa
and Protea in disposing R25 million of its assets to Protea on 6
September 2011 by way of Sale of Shares
Agreement. According to the
defendant, the Sale of Shares Agreement between AMU, Darwo and Protea
was to be approved by Absa as
part of the Amended and Restatement
Agreement of 31 August 2011. The amount of R25 million was paid to
Protea from the assets of
AMU by payment of R14 million to Protea and
a transfer to it of a penthouse the value of which was agreed at R11
million. At the
time of the disposition to Protea, the liabilities of
AMU exceeded its assets. The defendant says that the disposition of
R25 million
to Protea was intended and had the effect of preferring
Protea above other creditors of AMU. In the result, so the defendant
pleaded,
Absa’s claim against AMU is forfeited and as a
consequence the principal debt fell away and he is released from his
suretyship.
The defendant counterclaimed for an order and a
declarator that the principal debt no longer exist and the surety has
been released.
[29]
In addition, the defendant contended that Absa and AMU entered into
the ARLA whereby AMU in collusion
with Absa, disposed of substantial
administration, management fees to itself at a time when AMU was
commercially insolvent, in
a manner which had the effect of
preferring Absa over other creditors. According to the defendant, in
terms of
section 31(2)
of the
Insolvency Act, Absa
, being a creditor
of AMU, shall be liable to make good the loss which it had caused to
the insolvent estate of AMU, by way of penalty,
and Absa shall
forfeit its claim against the insolvent estate of AMU. In the
premises, so the defence goes, the principal debt
no longer exists
and the sureties have been discharged.
[30]
As far as the defence of prejudice is concerned, the defendant
alleged that his prejudice arises
from the fact that Absa allowed
Protea to interfere in contractual relationship between Absa and AMU.
He says that he became unable
to use his position as director to
recuperate AMU financially, to prevent the replacement of the
management contract and to prevent
dissolution of the shareholders’
agreement, which loss of control he alleged burdened his suretyship.
[31]
According to the defendant when AMU battled with the repayments of
the loan Absa threatened with
foreclosures and claims against the
sureties in early 2010. An impasse had developed between the
defendant, in his capacities as
developer and director of AMU and
Arthur Gillis of Protea who was responsible for the operations of the
hotel. According to the
defendant, Arthur Gillis was critical of his
managerial style whilst he was of the view that Protea had failed on
the operational
side. The defendant says that he wanted to get rid of
Protea as the operator and Protea wanted to get rid of him as
director of
AMU.
[32]
The defendant referred to a meeting of 13 April 2010 at the offices
of Protea, where he said
Mr Gillis threatened him and other directors
of AMU with foreclosure by Absa should they fail to agree to a
transaction which he
proposed which entailed the purchase of Protea’
s
50%
shares in Darwo at R1,00 per share, the replacement of the Darwo
management contract, which would be less onerous than the then
existing one and AMU’s undertaking to pay Protea an amount
which it had allegedly invested whilst managing the hotel.
[33]
The defendant says in evidence that it was at that meeting where he
stated to Absa’s representatives
that he had an offer to raise
finance of R300 million for AMU’s development from a Chinese
Construction Bank. He also stated
that he wanted to replace Protea
with another hotel group as the manager of the hotel. The defendant
testified that Absa didn’t
allow him to introduce an investment
offer of R100m made to AMU by Mvelaphanda and Radisson Hotel Group on
the excuse that they
will only support introduction of investments
that include Protea (Gillis) involvement in the management of AMU
hotel. It is the
evidence of the defendant that when he mentioned
these proposals to recuperate the business of AMU, Absa’s
representatives
insisted that he be removed as a director and
insisted on Protea’s involvement in the management of the
hotel, albeit on
more onerous terms than before.
[34]
According to the defendant, shortly before 28 February 2011 Peter
Shaff, who was one of the directors
in AMU purchased all the shares
which Gary Itzikowitz’s company, Compass Projects (Pty) Ltd had
in QPG as well as its loan
account in AMU for R21 million in order to
entrench his position in AMU with 76% of the votes and ensure that
the defendant does
not return to the board of QPG and AMU. Peter
Shaff made the first payment of R1,2 million. According to the
defendant, Pieter
Swart of Absa, despite being aware of Shaff’s
mala fide
deal, neither him nor Erasmus had divulged this to
Absa and they allowed AMU and Absa to enter into the Amendment and
Restatement
Agreement on 31 August 2011 with Gary Shaff representing
AMU, as well as the disposition of R25 million by AMU to Protea
despite
the fact that nothing was owed by AMU to Protea.
[35]
According to the defendant, Absa ignored the memorandum containing
the suggested terms of the
Term Sheet of November 2019 which he
submitted despite its knowledge of Shaff’s
mala fide
deal in acquiring control of AMU and continued with the preparation
of the contract documentation for the ARLA.
[36]
The defendant also says that on 19 June 2012 Absa had four of its own
officials appointed as
directors in AMU but were later removed
through attorneys. According to the defendant Absa did its utmost to
get rid of him and
to gain control of AMU and this was done in unison
with Protea.
[37]
It is common cause that R25 million had been paid to Protea from the
assets of AMU in terms of
the Amended and Restatement Agreement
incorporating the Sale of Shares Agreement. As at 31 August 2011 the
outstanding indebtedness
of AMU to Absa stood at R426 million. The
defendant says that the ARLA had the effect of increasing the debt to
R581 420 062,42
on 26 June 2012 when Absa launched application to
liquidate AMU.
[38]
The defendant referred to Absa’s valuation of the hotel being
Amu’s asset contained
in the affidavit deposed to by Martin
Charles Leigh, Absa’s head of Restructuring Advisory Group of
between R300-R350 million
at that stage despite earlier valuations of
R750 million and R560 million by external valuations. According to
the defendant, there
is nothing to suggest that the value of the
hotel property was higher at 31 August 2011 than the value at which
Absa itself had
valued the property as stated in Leigh’s
affidavit. The defendant testified that because the property was sold
by the liquidators
of AMU for R205 million it means that even Leigh’s
valuation of between R300-R350 million was optimistic, which then
follows
that before and after, as well as at the time of the
disposition of R25 million of AMU to Protea, the liability of AMU
exceeded
the value of its assets and in terms of the second
liquidation and distribution account of AMU there was a huge
shortfall which
then clearly shows that Protea was preferred to other
concurrent creditors in that it is the only creditor of AMU which
received
its total claim.
[39]
According to the defendant, Absa did not claim the R25 million from
Protea as it was entitled
to do in terms of
section 31(1)
of the
Insolvency Act because
it would be met with a defence that it was a
party to the collusion, same applies to the liquidators of AMU. The
defendant testified
that the collusion to prefer Protea over other
creditors was made possible by Peter Shaff’s fraudulent
purchase of Itzikowitz’s
shares and Absa closed its eye and
played along to get the agreement signed on 31 August 2011. The
defendant says that Absa was
aware that payment of R25 million by AMU
to Protea would have the effect of prejudicing AMU’s other
creditors and it also
knew at the time of the disposition that AMU’s
financial position was hopeless.
[40]
During cross examination the defendant acknowledged the trite
principle that the corporation
(AMU) and the individual director
(himself) were separate legal entities and that the bank dealt with
them separately, each in
its own capacity. As such, where the
defendant (in his personal capacity) gave a written suretyship to the
bank as security for
the debts owed by AMU, there is no basis to
import a necessary connection between the defendant and AMU in order
to sustain the
enforceability of the suretyship.
[41]
The defendant tendered the evidence of Gary Itzikowitz (
Mr
Itzikowitz
) in support of his case. In relevant parts his
evidence is that he was a director of AMU and QPG from 2004 until
2010. When the
Development Loan Agreement of 2008 and the Addendum
thereto were concluded in 2009 he was director of AMU. He resigned in
2010
as a result of tension between the directors of AMU and QPG and
pressure from Absa and Protea. He is aware of the loan that was
granted to AMU prior to him being appointed a director of AMU. He
confirmed that Absa charged capitalised interest on the loan.
He
accepted that AMU was in breach of the loan agreement and that the
addendum was concluded because AMU needed more funds and
had to apply
to restructure the loan. He accepted that during the restructuring of
the loan, the repayment period of 34 months
in the original loan was
replaced with the repayment date of 31 March 2010 and the total
facility limit to be repaid was R370 million.
Mr Itzikowitz testified
that he was aware of the two undertakings which the defendant gave to
Absa, one in his personal capacity
and the other in his capacity as
director of AMU for payment of R57 million to Absa by close of
business day on 31 March 2010.
He is aware that the undertakings were
never honoured and is in agreement that Absa was entitled to call up
the loan and demand
payment from the sureties. With regards to “POC1”
Mr Itzikowitz testified that Absa was aware that the defendant had
not approved of the transaction embodied in ARLA. According to Mr
Itzikowitz, Absa insisted on Mr Gillis being part of the contractual
relationship between itself and AMU and insisted on the defendant’s
removal as director. It is his evidence that shortly
before 28
February he concluded an agreement with Peter Shaff in terms of which
Peter Shaff purchased 17.2% shareholding which
Itzikowits’s
company (Compass Projects) held in QPG for R21 665 004,00 as
well as his loan account in AMU. Peter Shaff
paid R1,2 million. This
transaction would enable Peter Shaff and his co-directors to control
AMU with 76% of the votes and to be
able to get rid of the defendant
as the director of AMU.
[42]
Mr Itzikowitz says that Peter Shaff and his brother Garry were
mala
fide
in the purported purchase of his shareholding and the loan
account, and that the initial payment by Peter Shaff was made with
the
purpose of getting him and the defendant out of their way in
order to fulfil Absa’s wishes of getting rid of the defendant.
According to Mr Itzikowitz, Peter Swart of Absa co-signed the ARLA on
31 August 2011 with the full knowledge that the board of
AMU, who
resolved in favour of the transaction had fraudulently been
established by Peter Shaff and his brother through the
mala fide
transaction in terms of which they purported to buy his shares in
QPG, which was the holding company in AMU. According to Mr
Itzikowitz,
at all times and particularly on 31 August 2011 Absa
through its representatives was aware that AMU had no contractual
relationship
with Protea and that AMU had not been indebted to
Protea. Mr Itzikowitz says that having regard to the affidavit of
Martin Leigh
in the liquidation application of AMU by Absa, AMU’s
indebtedness to Absa exceeded the value of its assets immediately
after
the conclusion of the ARLA. With regard to the R25 million paid
to Protea, Mr Itzikowitz testified that Absa colluded with AMU for
the benefit of Protea and the disposition had the effect of
preferring Protea over other creditors. He complained that part of
the money used to make the payment was the R7 million cash deposit
which was held as security by Absa in terms of the 2008 Loan
Agreement. Under cross examination when he was asked to provide a
date or refer to documents in support of his accusations of
collusion, Mr Itzikowitz indicated that the particular event occurred
after his time as director of AMU. When questioned about the
failings
of AMU/QPG to meet the deadlines he took no responsibility. He
confirmed that the defendant failed to disclose the resale
agreements
with the sale of the penthouses and he conceded to the financial
losses it caused.
[43]
Peter Shaff also testified for the defendant. In relevant parts his
evidence is that he served
as an Executive Director of AMU from 6
December 2010 until its liquidation in 2012. He was also a Director
of QPG from 24 June
2010 until 2016. QPG was the sole shareholder in
AMU. AMU was used for the hotel project. AMU and Protea each held 50%
of the shares
in 15 On Orange, which functioned as the operator of
the hotel. Protea was obliged to invest some R11 million in the
furniture,
fittings and equipment for the hotel and to fund the first
year’s working capital and any losses of the hotel. Thereafter
the hotel losses, if any, were to be funded on a 50/50 basis by AMU
and Protea. In the course of the operation of the hotel the
relationship between the defendant and Mr Gillis of Protea became
fraught, to the knowledge of at least Lyndon Kan of Absa.
[44]
As at 31 March 2010, AMU was in default in respect of its obligations
to Absa under the loan
agreement. The amount of the loan had risen
from the original advance of R370 million to some R425 million on
account of an additional
advance of R45 million which the defendant
secured in November 2009 in order to try to complete the hotel. Absa
was therefore entitled
to call up the loan, liquidate AMU and sell or
take over the hotel. According to him, had Absa done so when the debt
stood at R425
million, the loss to it would have been considerably
less than that which it sustained when AMU was ultimately liquidated,
by which
time its liability to Absa had risen to some R580 million.
[45]
On 13 April 2010 he attended a meeting with his brother, Gary Shaff,
together with Mr Gillis,
the defendant, Mr Itzikowitz and Shur. At
that meeting the defendant stated that he could raise finances of
R300 million for AMU’s
development from the Chinese
Construction Bank. He also stated that he wanted to replace Protea
with another hotel group as the
manager of the hotel. Absa
represented by Lyndon Kan, was not prepared to entertain outside
finance, and ensured no other hotel
operator would take over the
management. Mr Gillis told Absa, represented by Lyndon Kan, not to
accept the defendant’s deals.
[46]
On 6 September 2011 a Sale of Shares Agreement was entered into by
Protea, AMU and Darwo in terms
of which Protea sold to AMU 50% of the
issued share capital of Darwo (60 shares) for R1,00 each. AMU
undertook to pay to Protea
its claim of R25 825 569,14 (which
included interest) against Darwo by way of a payment of R11 million,
a payment of R3 million
and transfer to Protea of a penthouse which
the parties valued at R11 million. The Sale of Shares Agreement was
subject to the
fulfilment of conditions precedent, amongst others,
that Absa approve of the conclusion thereof. The conditions precedent
were
fulfilled and AMU effected payment of R25 million to Protea, on
the basis as agreed (including transfer of the penthouse). The said
Sale of Shares Agreement constituted an integral part of the
Amendment and Reinstatement Agreement. On 19 June 2012 Absa caused
four of its employees to be appointed as directors of AMU. Mr Shaff
and the others objected through their attorneys, as a result
Absa
abandoned the appointments.
[47]
Prior to, and at the time of the conclusion of the said Sale of
Shares Agreement, Absa, represented
by Anneri Harley, Pieter Swart,
Lyndon Kan, Wessel de Jager, Pieter Steyn and Bertus Erasmus, were
aware that AMU had not been
indebted to Protea. AMU’s
undertaking in the said Sale of Shares Agreement to pay the
indebtedness of Darwo to Protea, created
Protea as creditor of AMU
and given the fact that AMU had been insolvent at the time, the
payment to Protea was intended to, and
had the effect of preferring
Protea above AMU’s other creditors.
[48]
Under cross examination, Mr Shaff testified that Absa had developed
the base case model which
was a variable five-year financial model
wherein AMU tried to make repayments within five years. He indicated
that the base case
model also had debentures with it. He also stated
that it included the sale of penthouses and that the model took into
account
the assumption that Protea would buy shares from Darwo.
According to him, the model encouraged the Protea-Darwo deal and for
Protea
to sell its 50% shares to AMU. Mr Shaff testified under cross
examination that Absa did not allow them a period of five years but
instead called up the loans on 31 March 2012 despite an undertaking
that the date will be deferred to September 2012. Mr Shaff
confirmed
that while he was director of AMU in 2010 the source of funding to
pay AMU’s creditors was Absa and that Absa wanted
to pay other
creditors of AMU to prevent liquidation and it was consistent
throughout and only changed in December 2012. He accepted
without
resistance that the intention of Absa and AMU at the time that the
ARLA and Darwo deal were concluded was to ensure that
AMU’s
other creditors were paid. He added that when the August 2010
agreement was signed between Absa and AMU, Absa’s
intention was
to support AMU to trade itself into a better position. He
acknowledged that Absa had been incredibly supportive of
the hotel.
He maintained his stance that the auditors of QPG were provided with
an oral assurance by Mr Steyn on behalf of Absa
that the repayment of
R61 million would be deferred to September 2012 and that the loan
would not be called up but, when he was
taken through the evidence
and documents including his recordings he admitted and conceded that
the claims he made in his witness
statement against Absa were
baseless. Mr Shaff further testified that Absa and Protea colluded
against AMU but could provide no
evidence in support.
[49]
In rebuttal Absa presented the evidence of Mr Pieter Willem Steyn (
Mr
Steyn
). In his witness statement and oral testimony Mr Steyn
indicated in relevant parts that he joined Absa in 2007 as a member
of the
Corporate Development Division, being Absa’s internal
corporate finance house. At the beginning of 2010, he took up the
position
of Head of Business Support and Recoveries in the Business
Bank. In that position, he was involved in and was responsible for
medium,
large and certain corporate accounts which were distressed.
These accounts included AMU ‘s account which was part of the
Corporate Property Finance Division’s distressed client
portfolio.
[50]
His involvement with AMU and QPG was primarily during 2010 and 2011
in his role as head of Business
Support and Recoveries and to a much
lesser extent, during 2012. Wessel de Jager reported to him. Other
members of the Absa management
team that were directly involved
during 2010 included the then Head of Commercial Property Finance,
Lyndon Kan and Absa legal advisor
designated to the AMU matter,
Annari Harley. The Business Support and Recovery Division was a
support function within the bank
and was required to work with “
the
front line
” departments who engaged directly with the
customers on a regular basis. The frontline sales personnel from the
Absa Commercial
Property Finance Division with whom they engaged on
the AMU matters were, primarily, Bertus Erasmus and Diane Vaskys. At
all the
times that he dealt with AMU, the AMU and QPG boards knew
that changes to the loan facility amount and/or changes to the loan
terms
and conditions could only be approved by the AGCC (Absa’s
credit committee), individual managers dealing with the customer
were
not authorised to make decisions on behalf of Absa in this regard.
[52]
When he became involved with the AMU account in early 2010, AMU had
already been in default and
an amendment to the 2008 Development Loan
Agreement (“
the
2008 Agreement
”) had been
concluded in November 2009 (“
the November 2009 Addendum
”),
in order to provide AMU with additional funding and additional time
to repay the loan. The hotel was supposed to have
been open in
mid-2009 and the penthouse units that formed part of the development
were to have been sold. The 2008 Agreement anticipated
that income
from the sale of the penthouse units would have reduced the aggregate
loan amount by approximately R110 million and
the hotel revenue from
mid-2009 was expected to service the remaining debt. Absa was intent
on assisting AMU to trade its way into
a better position but there
were a number of factors which could negatively affect the
achievement of that. At the same time Absa
was concerned that there
was infighting between the management of AMU and Protea and the
directors and shareholders of AMU were
not prioritising the company’s
obligation to repay the loan. As a result, Absa decided to deliver
notices to the sureties
which were designed to focus the minds of the
sureties that they would be personally liable if the debt was not
paid.
[53]
According to Mr Steyn it was in the interest of all concerned not to
liquidate AMU at that stage
but to allow the hotel an opportunity to
grow its business, to grow its reputation and to attract guests. At
the meeting held between
Absa and AMU’s management on 15 April
2010 to discuss scenarios which would work for Absa in order to
reduce Absa’s
exposure to AMU, various options were presented
and discussed. The defendant advised that he had received a letter
from the China
Construction Bank expressing interest. He did not
share the letter or the details of the interest with Absa and he has
never seen
any letter from the China Construction Bank to that
effect. The defendant also mentioned that there was an investor
looking to
invest more than R30 million. At that meeting the
defendant also suggested that a restructuring might take place in
terms of which
a new operating company might be formed which would
take over the management agreement with Protea.
[54]
Mr Steyn says that the representations made by the defendant in
relation to the alleged investors
were deemed very loose by Absa and
could not be taken seriously as no written undertakings had been
received and no terms had been
presented as to what those investors
would require in return. Given Absa’s experience with the
defendant reneging on written
undertakings to make payments, Absa was
not persuaded that there were any real prospects of such investments
materialising.
[55]
AMU was still looking to Absa to provide additional funding in order
to complete the construction
and to assist in funding certain
operating expenses. Absa indicated to the defendant that it was
difficult for it to release funds
for construction outside of any
agreement. Following a meeting on 21 May 2010 Absa presented a new
term sheet to AMU. The new term
sheet proposed additional security
being given to Absa, the restructuring of the loan repayments and
restructuring of the operating
company. Wessel de Jager of Absa gave
the AMU board until 30 June 2010 to comply with the requirements of
the draft term sheet
that had been sent. According to Mr Steyn, Absa
never intended who the directors of AMU should be or how those
directors should
carry out their business, but that Absa could not be
compelled to commit additional funding or incur additional risk
unless it
was happy with the strategy proposed by the directors and
managers.
[56]
In November 2011, he (Steyn) was told by Peter and Gary Shaff that
the auditors of AMU, Grant
Thornton, were concerned over AMU’s
ability to repay the Equity Outstanding (defined in clause 2 and
Part
1
of Schedule 2 of the Amended and Restated Loan Agreement) as at 31
March 2012. They requested that he attend a meeting with Grant
Thornton. He attended the meeting with David Ruben of Grant Thornton
on 22 November 2011. At that meeting, he was asked about the
loan
commitment and what was anticipated by Absa. He confirmed to them
that the written agreements recorded Absa’s requirements
and
that Absa expected shareholders and sureties to make payment of the
R61 million due on 31 March 2012. He pointed out to them
that the
agreements precluded AMU from paying the R61 million from its own
revenue streams. He stated to the auditors that Absa
wished to
support AMU but he gave no assurances that Absa would not call up the
loan facility on 31 March 2012 or any other undertakings
of such a
nature in the event of a default. He pointed out that he was not
authorised to give such undertakings on behalf of Absa
and that it
would be irregular for auditors to rely on any oral statements in
making their determinations. He categorically rejected
the suggestion
by Mr Shaff that he gave assurances on behalf of Absa to the auditors
that the loan would not be called up. Mr Steyn
referred to his
internal email of 23 November 2011 in which he reports on the content
of a telephone conversation with Peter Shaff
on 23 November 2011 the
day after he had visited the auditors. He testified that Mr Shaff
reported to him that the auditors had
told him that they would not
qualify the audit. He noted in that email that he was not sure that
he understood how this “
swing
” had been achieved.
He stated in this regard that Mr Shaff had told him that the
liability in respect of the R61 million
was to be shown as a
short-term liability. This was confirmed in the financial statements
when they were published. According to
Mr Steyn, there was no
suggestion that the debt repayable on 31 March was to be deferred
.
Mr Steyn testified that the terms of the original Shareholders
Agreement and particularly clauses 15 and 20 thereof dealt with the
termination of the management agreement and the sale of shares.
According to him the disposal of the shares necessarily required
that
the loan accounts with Protea be settled at the same time. Mr Steyn’s
evidence was that, the turnaround strategy which
had been agreed
between AMU and Absa required them to ensure that the furniture and
fittings of the hotel remained in place and
that the booking system
remained operational to continue generating revenue. According to Mr
Steyn, because Protea held a notarial
bond over the furniture and
fittings in the hotel and controlled the booking system, if its loan
accounts were not repaid or Protea
walked out, Protea could lawfully
exercise its rights under those notarial bonds and remove the
furniture and fittings as well
as the booking system, rendering the
hotel inoperable. This, according to him, was a significant risk
which both AMU and Absa sought
to avoid. Mr Steyn pointed out that
the replacement of the hotel operator as proposed by the defendant
would have taken time to
implement and the defendant had not shown
how this was to be achieved or what revenues would be generated to
pay the cost incurred
in the meantime (including the interest payable
on the Absa loan which was running at over R3million per month at the
time). Further,
the turnaround strategy supported by the base case
financial model required AMU to receive a “full cash sweep”
of all
of the profits generated by Darwo in the operation of the
hotel, not just 50%. If the Darwo deal was not done, Protea would
have
retained 50% of the shares and therefore an entitlement to 50%
of the dividends/profits. According to Mr Steyn given the above,
it
is absurd and certainly not business-like for the defendant to
contend that Protea could have been required to sell its shares
to
AMU without having its loan account settled. It is Further Mr Steyn’s
evidence that when the November 2010 term sheet
was signed, AMU, QPG
and the defendant personally recognised and expected that the
purchase of Protea’s shares would necessarily
include and
required the settlement of the loan account. As such, it is spurious
to suggest that the settlement of the loan accounts
as part of the
2011 Sale of Shares agreement was somehow a collusive arrangement
intended to prefer Protea and prejudice other
creditors.
[57]
At the commencement of closing argument, the defence raised by the
defendant in relation to prejudice
was abandoned and the only issue
argued before me was the defence raised under
section 31(2)
of the
Insolvency Act. Mr
Turner on behalf of Absa filed comprehensive heads
and addressed all the defences raised by the defendant. However, as I
have indicated
above the only question under consideration is whether
the defendant, being a surety is entitled to raise a defence under
section 31(2)
of the
Insolvency Act without
having successfully
brought an application/action to set aside the alleged collusive
disposition.
[58]
The defendant relies on
section 31(2)
of the
Insolvency Act for
his
defence that the disposition of R25 million to Protea was made
through collusion between AMU and Absa to benefit Protea to
the
prejudice of other creditors. He contends that because of the
collusive disposition Absa’s claim should be forfeited
and he
be released from his obligation as surety.
[59]
Absa contends that the defendant lacks
locus standi
to raise
the defence based on
section 31(2)
of the
Insolvency Act, because
he
had not prosecuted an application in terms of
section 31(1)
and that
in the absence of such an application having been successfully made,
the defendant has no defence. That in any event,
the defendant would
have been precluded from making such an application as he, being
neither the liquidator nor the creditor of
the insolvent estate as
envisaged in
section 32(1)
, lacks
locus standi
to do so. It
asked for the dismissal of the defendant’s defence and
counterclaim.
[60]
In argument Mr Arnoldi on behalf of the defendant argued that the
locus standi
requirements for
section 31(1)
were not relevant
because the defendant does not seek to set aside any transaction (as
contemplated in
section 31(1)
and
section 31(2)
but seeks only to
rely on the forfeiture element available under
section 31(2).
He
argued that the
locus standi
restrictions which apply to
section 31(1)
and
section 32
are not applicable if reliance is only
placed on the forfeiture element in
section 31(2).
Mr Arnoldi
contended that a finding of collusion in this court would precipitate
automatic forfeiture of Absa’s claim against
AMU. This he
contends would mean the extinction of the principal obligation of AMU
to Absa, automatically extinguishing his debt
as a surety.
[61]
Mr Arnoldi argued that on a proper interpretation of
section 31(2)
the words “
such
collusive disposition
”
refer to a collusive disposition as described in
section 31(1)
, and
not to a disposition which has been set aside, as contended for by
Absa; and the words “
he
shall also forfeit his claim
”
in
section 31(2)
refer to any creditor who was a party to a collusive
disposition, irrespective of whether proceedings have been instituted
to set
aside the disposition. According to him, forfeiture flows from
a collusive disposition and not from the setting aside thereof. The
setting aside of a collusive disposition is not a prerequisite for
forfeiture and the fact that a collusive transaction remains
unchallenged by a trustee or creditor cannot detract from the fact
that it is a collusive transaction. He added that if collusion
is
found, forfeiture of the creditor’s claim results in terms of
section 31(2)
as a matter of law. Mr Arnoldi
contended
further that if the intention of the legislature had been that a
creditor who is guilty of collusive dealing should forfeit
its claim
against the insolvent estate only if the trustee (or liquidator(s))
or a creditor successfully instituted proceedings
to obtain an order
of court declaring the colluding creditor’s claim to be
forfeited, then it would have been an easy matter
for the lawmaker to
have said so in
section 31(2).
But the lawmaker has not said so.
Instead,
section 31(2)
states that the colluding creditor “
shall…
forfeit his claim
”.
According to him the word “
shall
”
is peremptory and if the lawmaker had intended the forfeiture of the
colluding creditor’s claim to be contingent upon
the successful
institution of legal proceedings to set aside the collusive
disposition and/or to recover compensation and/or a
penalty, then one
would have expected the lawmaker to have used the words “
may
. . . forfeit his claim
”
instead. Mr Arnoldi argued that
section 32
does not make provision
for proceedings for forfeiture, which according to him, supports the
argument that collusion triggers forfeiture
as a matter of law. He
submitted that
section 32
provides for the setting aside of a
disposition of property under
sections 26
,
29
,
30
,
31
, or the
recovery of compensation or a penalty under
section 31.
He contended
further that because the defendant seeks neither the setting aside of
the disposition, nor payment of loss or compensation
by way of
penalty, it follows that
section 32
does not apply to the question of
locus standi.
[62]
With regard to the interpretation of
section 31
Mr Arnoldi submitted
that legislation must be interpreted so as to give effect to the
purpose for which it was enacted. He urged
the court to prefer a
sensible meaning to the one that leads to insensible or
unbusinesslike results or that undermines the apparent
purpose of the
legislation. To this end, he referred to what was held in the case of
Natal
Joint Municipal Pension Fund v Endumeni Municipality
[10]
that:
“
Interpretation
is the process of attributing meaning to the words used in a
document, be it legislation, some other statutory instrument,
or
contract, having regard to the context provided by reading the
particular provision or provisions in the light of the document
as a
whole and the circumstances attendant upon its coming into existence.
Whatever the nature of the document, consideration must
be given to
the language used in the light of the ordinary rules of grammar and
syntax; the context in which the provision appears;
the apparent
purpose to which it is directed and the material known to those
responsible for its production.
”
[11]
[63]
According to Mr Arnoldi, it is clear from
section 31(2)
, in
particular the provisions for the recovery of a penalty from a party
to a collusive disposition and for the forfeiture by a
colluding
creditor of its claim against an insolvent estate (or company in
liquidation) that one of the purposes of the
Insolvency Act is
to
stamp out collusive pre-sequestration dispositions, which are a
species of fraud or cognate to fraud. He argued that to interpret
section 31
in the manner contended for by Absa (i.e. to deprive a
person in the position of the defendant of the benefit of the
provision
that Absa, as colluding creditor, “
shall
also forfeit
[its]
claim
”)
would be to undermine the clear purpose of stamping out collusive
dispositions and to fly in the face of the purpose to
which
sections
31
and
32
are directed.
Legal Principles and
Analysis
[64]
Section 31
and
32
of the
Insolvency Act provide
as follows
:
“
Section
31
Collusive
dealings before sequestration
(1)
After the
sequestration of a debtor's estate the court may set aside any
transaction entered into by the debtor before the sequestration,
whereby he, in collusion with another person, disposed of property
belonging to him in a manner which had the effect of prejudicing
his
creditors or of preferring one of his creditors above another.
(2)
Any person who was
a party to such collusive disposition shall be liable to make good
any loss thereby caused to the insolvent estate
in question and shall
pay for the benefit of the estate, by way of penalty, such sum as the
court may adjudge, not exceeding the
amount by which he would have
benefited by such dealing if it had not been set aside; and if he is
a creditor he shall also forfeit
his claim against the estate.
(3)
Such compensation
and penalty may be recovered in any action to set aside the
transaction in question.
”
Section 32
Proceedings
to set aside improper disposition
“
(1)
(a)
Proceedings to …
set aside any disposition of property under
section 26
,
29
,
30
, or
for the recovery of compensation or a penalty under
section 31
, may
be taken by the trustee.
(b)
If the trustee
fails to take any such proceedings, they may be taken by any creditor
in the name of the trustee upon his indemnifying
the trustee against
all costs thereof.
(2) In any such
proceedings the insolvent may be compelled to give evidence on a
subpoena issued on the application of any party
to the proceedings or
he may be called by the court to give evidence. When giving such
evidence he may not refuse to answer any
question on the ground that
the answer may tend to incriminate him or on the ground that he is to
be tried on a criminal charge
and may be prejudiced at such a trial
by his answer.
(3) When the court
sets aside any disposition of property under any of the said
sections, it shall declare the trustee entitled
to recover any
property alienated under the said disposition or in default of such
property the value thereof at the date of the
disposition or at the
date on which the disposition is set aside, whichever is the higher.”
[65]
What distinguishes a disposition in terms of
section 31(1)
from
voidable and undue preferences is the element of collusion, and that
the trustee in the insolvent estate may in addition to
setting aside
the disposition, recover from any person who was a party to such
collusive disposition any loss which the disposition
caused to the
insolvent estate, and a penalty in an amount determined by the court.
The compensation and penalty may be recovered
in the action to set
aside the disposition.
[12]
To
succeed with an action under
section 31(1)
the trustee must allege
and prove the following:
(a)
The insolvent made a
disposition of his property;
(b)
The disposition was made
in a collusion with another person; and
(c)
The disposition had the
effect of prejudicing creditors or preferring one above another.
[66]
In order to answer the question raised in this action, the
interpretation of
section 31
becomes necessary. I bear in mind what
the Constitutional Court, confirming
Endumeni
,
held in
Chisuse
[13]
that:
“
[47]
In interpreting statutory provisions, recourse is first had to the
plain, ordinary grammatical meaning of the words in question.
Poetry
and philosophical discourses may point to the malleability of words
and the nebulousness of meaning, but, in legal interpretation,
the
ordinary understanding of the words should serve as a vital
constraint on the interpretative exercise, unless this interpretation
would result in an absurdity. As this court has previously noted in
Cool Ideas, this principle has three broad riders, namely —
'(a) that statutory
provisions should always be interpreted purposively;
(b) the relevant
statutory provision must be properly contextualised; and
(c) all statutes must
be construed consistently with the Constitution, that is, where
reasonably possible, legislative provisions
ought to be interpreted
to preserve their constitutional validity. This proviso to the
general principle is closely related to
the purposive approach
referred to in (a).'
[48]
Judges must hesitate 'to substitute what they regard as reasonable,
sensible or business-like for the words actually used.
To do so in
regard to a statute or statutory instrument is to cross the divide
between interpretation and legislation.
”
[67]
Section 31
of the
Insolvency Act is
located within a series of
provisions dealing with the trustee’s powers while the estate
is vested in the trustee.
Section 25
of the
Insolvency Act provides
for the “
estate to remain vested in trustee until
composition or rehabilitation
” and
sections 26
–
34
deal with various scenarios in which the trustee might seek to
recover assets that were disposed of prior to sequestration, which
should fall within the estate. The trustee’s powers also
include the power to recognise or reject creditors’ claims.
The
overriding purpose of these sections is to ensure that the property
which has left the estate of the debtor in improper circumstances
(as
described in the Act), will be returned to the estate for a
structured and equitable distribution amongst all the creditors
whose
claims have been accepted by the duly appointed trustee/liquidator.
[68]
Section 31
deals with circumstances under which the court may set
aside a transaction which was entered into before sequestration
whereby,
in collusion with another person, the debtor disposed of
property belonging to him in a manner which had the effect of
prejudicing
his creditors or of preferring one of his creditors above
another.
Section 31
does not stand on its own and does not provide
any relief in and of itself. It operates together with
section 32
of
the
Insolvency Act which
expressly regulates the proceedings to set
aside any disposition of property under
sections 26
,
29
and
30
.
Section 32
provides the procedure to be followed by an aggrieved
person intending to challenge the disposition in terms of the
substantive
requirements of each of
sections 26
,
29
,
30
and
31
.
[69]
The central purpose of all of these provisions is to empower the
trustee/liquidator to collect
the rightful assets in the estate for
purposes of distributing them to the rightful creditors. The purpose
for which the defendant
seeks to invoke
section 31
is unrelated to
this purpose as the relief he seeks will have no effect on the
insolvent estate.
[70]
The defendant seeks to rely on the last lines of
section 31(2)
which
says “
and if he is a creditor he shall also forfeit his
claim against the estate”
and argues that he can do so
without reference to and without meeting the requirements of
section
31(1)
or any other requirements in
section 31(2).
On a proper
interpretation of this section, it is my view that the defendant’s
argument has no merit. The words “
and
” and “
als
o”
in my view emphasise that this clause must be read conjunctively with
other parts of the clause and cannot be read alone.
It is
respectfully correct as counsel for Absa submitted, that the
forfeiture relief is not available unless the creditor is also
found
liable to pay compensation and/or a penalty. In terms of the first
part of
section 31(2)
, the first remedy against a person who was
party to “
such collusive disposition
” is that he
must be found liable to make good any loss and to pay a penalty. It
is perfectly correct that it is only if the
person who has been found
liable to make good a loss and pay a penalty is also a creditor of
the estate, that the last line (regarding
forfeiture) applies.
Without the finding of a court that the person is liable to make good
a loss and pay a penalty, the question
of forfeiture does not in my
view, arise.
[71]
In order to make sense of the identity of the person/creditor to
which
section 31(2)
relates, the reader must refer back to
proceedings in terms of
section 31(1).
The reference to “
such
collusive disposition
” in the first line of
section 31(2)
can only be a reference to a disposition in terms of a transaction
which a court has set aside in terms of
section 31(1).
The reference
cannot be to any other “
collusive disposition
” or
to persons who were involved in any transaction other than the one
set aside in terms of
section 31(1).
It therefore follows that
section 31(3)
confirms that an action/application for payment of
compensation and/or a penalty is linked to the action/application to
set aside
the transaction provided for in
section 31(1).
In other
words, this relief (which is required before a creditor also forfeits
a claim) is only available if proceedings are successfully
brought to
set aside the transaction.
[72]
In terms of
section 32(1)
only the liquidator/trustee has
locus
standi
to bring such proceedings.
[14]
If a trustee/liquidator fails to bring the proceedings, a creditor
may sue in the liquidator’s name, provided he indemnifies
the
liquidator against all costs.
[15]
If the creditor who sues in the name of the trustee (giving
indemnity) secures a recovery of an impeachable disposition, that
recovery will be credited to the estate of the insolvent company and
the proceeds will be distributed amongst the creditors. If
the
liquidator did not take steps to set aside the impugned disposition,
the disposition stands and remains valid.
[16]
Section 31(2)
does not provide a surety in the position of the
defendant with a defence where no positive (and successful) steps
were taken to
set aside the impugned transactions. The only relief
that is available to a person relying on that clause is an order
setting aside
the transaction.
[73]
The defendant did not at the time and cannot now challenge the
liquidation and distribution accounts
presented by AMU’s
liquidators in 2014. The defendant in the suretyship agreement agreed
to be bound by the admissions by
the liquidators. I am in agreement
with the plaintiff’s counsel that the defendant’s
interpretation of the section
ignores all of these necessary elements
as well as the underlying purpose of the section and the Act as a
whole. The defence raised
by the defendant under
section 31(2)
of the
Insolvency Act therefore
stands to fail.
[74]
While, generally, the surety may usually invoke defences available to
the principal debtor against
the creditor, this principle does not
extend to give sureties the right to invoke statutory remedies that
are only available to
a liquidator.
Section 31
provides a remedy to
the liquidator only and where the liquidator did not set aside the
transaction, there is no defence available
to a surety. The alleged
“
disposition”
to Protea occurred in August 2011, the liquidators were appointed in
or about August 2012 and the summons in this matter relying
on the
ARLA was delivered in August 2012. The first liquidation and
distribution account of AMU lay open for inspection at the
office of
the Master during June 2014 and the second liquidation and
distribution account of AMU lay open for inspection at the
office of
the Master during May 2015. The defendant did not object to the
liquidation and distribution account in the manner now
pleaded or at
all. The debt owed by AMU to Absa was admitted and accepted by the
liquidators of AMU in the amount of R569,715,669.72.
Absa’s
claim against AMU was proved in the insolvent state of AMU and has
the effect of a binding judgment. The
section 31
defence was
introduced by amendment in February 2020, more than 7 years later.
Any claim by the liquidators (or by the defendant
in the name of the
liquidators) would have prescribed, at the latest, during 2015.
[17]
[75]
The defendant has counterclaimed conditionally in the event of the
court finding in his favour
on the defence raised under
section
31(2).
In the counterclaim he had prayed for a declarator that Absa’s
claim against him had been forfeited and he is released from
his
suretyship. For the reasons advanced above, the defendant’s
defence raised under
section 31(2)
and the counterclaim stands to
fail. I find that the defendant does not have
locus standi
to
raise such defence.
Conclusion
[76]
In the premises it is held that the defendant is liable to pay the
amount due and owing in terms
of his suretyship agreement. The
suretyship agreement is limited to the maximum of R20 million
together with such further amounts
in respect of interest and costs
as accrued up to the date of payment. The underlying debt owed by AMU
to Absa was proved by Mr
Prinsloo and was not disputed by the
defendant. The evidence of Mr Prinsloo as to the interest which has
accrued on the R20 million
suretyship debt is also not disputed.
There is no dispute that the debt has reached
in diplum.
[77]
The suretyship agreement contains a clause that the defendant would
pay attorney and client costs
in the event of a breach of the
agreement.
[78]
In the result I make the following order:
1.
The defendant is liable to
pay the plaintiff an amount of R40 million;
2.
The defendant is liable to
pay interest on the above amount from date of judgment to date of
payment at the prescribed applicable
rate;
3.
The defendant is liable to
pay cost of suit on the scale as between attorney and client.
4.
The defendant’s
counterclaim is dismissed with costs.
M B MAHALELO
JUDGE OF THE HIGH
COURT
GAUTENG LOCAL
DIVISION, JOHANNESBURG
Appearances
Counsel for the
plaintiff: D A Turner
O
Motlhasedi
Instructed by:
Webber Wentzel Attorneys
Counsel for the
defendant: Arnoldi SC
Instructed
by:
Ian Levitt Attorneys
Date of hearing:
20
November
2020
[1]
Addendum to the Loan Agreement, pleadings “POC 3”.
[2]
Listing Particulars
[3]
Addendum Agreement clause 3.1.1 and clause 3.1.18.
[4]
Addendum Agreement clause 3.1.10.
[5]
Paragraph 13.4 Bundle 027-942.
[6]
Clause 7 of the November 2010 Term Sheet.
[7]
Pleadings “POC 1”.
[8]
Clause 7.1.2 of the ARLA.
[9]
Amended second liquidation and distribution account.
[10]
2012 (4) SA 593 (SCA).
[11]
At para 18.
[12]
Section 31(3).
[13]
Chisuse
and Others v Director-General, Department of Home Affairs and
Another
2020 (6) SA 14
(CC).
[14]
Section
32(1).
[15]
Myburgh
v Walters
NO
2001
(2) SA 127
(C) at 130;
Reynolds
NNO v Standard Bank of SA
2011 (3) SA 660
(W) at para 13.
[16]
Galaxie
Melodies (Pty) Ltd v Dally NO
1975 (4) SA 736
(A) at 743.
[17]
Duet
and Magnum Financial Services CC (in liquidation) v Koster
2010
(4) SA 499
(SCA) at paras 27 and 28