Brief Summary

Insolvency — Liquidation — Preference of creditors — Plaintiffs, as liquidators of MP Finance Group CC, sought to set aside a payment made to the Defendant within six months prior to liquidation, alleging it preferred the Defendant over other creditors — Defendant denied receipt of any payment and claimed the entities involved had no assets or liabilities — Court held that the payments made were indeed preferences under Section 29 of the Insolvency Act, and the Plaintiffs were entitled to recover the amount paid to the Defendant.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were a trial action in the North Gauteng High Court, Pretoria, in which six plaintiffs, acting as liquidators and insolvency practitioners, sued the defendant for repayment of an amount alleged to constitute an impeachable disposition under section 29 of the Insolvency Act 24 of 1936.

The plaintiffs were cited in their capacities as the duly appointed liquidators of a group of entities associated with what was commonly referred to in the papers as the “Krion Scheme”, and which, for administrative purposes, had been treated as a consolidated estate referred to as MP Finance Group CC (in liquidation). The defendant was Christiaan Johannes Botha, a recipient of payments from the scheme.

The procedural history included earlier litigation concerning the illegality of the scheme and the status of investor contracts. In particular, an order by Hartzenberg J (under sections 26 and 30 of the Insolvency Act) declared the scheme insolvent and contracts with investors illegal and void; that declaratory relief was confirmed on appeal by the Supreme Court of Appeal in a reported judgment dated 1 April 2004. Separately, a consolidation order had been granted in the Witwatersrand Local Division under a case number referred to as 21098/2003, though the court noted it appeared the correct number was 21098/02.

The dispute in the present matter concerned whether a payment of R192 710.00 to the defendant (allegedly made within six months before liquidation) was a voidable preference recoverable by the liquidators under section 29, and whether the plaintiffs had proved the statutory prerequisites for that remedy given the unusual structure and operation of the scheme.

Material Facts

It was common cause, and supported by the earlier appellate description of the scheme, that the Krion Scheme operated from around 1998, attracting participants with promised returns typically described as 10% per month, with investors often reinvesting capital and profit such that returns were compounded. The scheme ultimately collapsed when inflows could no longer sustain the outflows required to pay the promised returns.

It was also common cause that the scheme was unlawful and that the arrangements with investors were regarded as illegal and void in the earlier litigation. The Supreme Court of Appeal judgment referred to by the court described the scheme as one in which the operator used incoming money to pay earlier participants, and observed that upon receipt of money the scheme was, in law, obliged promptly to repay it under the condictio ob iniustam causam, rather than retain it to a contractual repayment date.

As to the structure of the entities, the plaintiffs pleaded that they acted for multiple estates (including MP Finance Consultants CC (in liquidation), Krion Financial Services Ltd (in liquidation), Marburt Financial Services Ltd (in liquidation), Madikor 20 (Pty) Ltd (in liquidation), and M&B Co-operative Limited Partnership) whose estates had been consolidated by court order into a single estate referred to as MP Finance Group CC (in liquidation). The defendant disputed that certain of the pleaded entities existed as legal persons and contended that false names were used to conceal the illegality of the scheme.

The defendant’s factual case, accepted as consistent with the evidence as a whole, was that the scheme was driven and managed by Marietjie Prinsloo, who received and paid monies in cash, stored cash in containers under her control, and used agents to distribute cash payments to participants after deductions (including her share and commissions). The court treated as undisputed (or at least not materially disputed for purposes of the dispositive findings) that payments were made in cash and that the cash was handled and controlled by Prinsloo in this manner.

In replication, the plaintiffs admitted that Krion Financial Services Ltd had a bank account for the period 7 March 2002 to 1 June 2002, but that the other entities forming part of the scheme did not have bank accounts; they further admitted that no formally registered entity under the name M&B Corporation Ltd existed, and that none of the entities forming part of the scheme had financial statements. The plaintiffs nevertheless maintained that Prinsloo conducted the scheme under various names, including the names of the entities cited, and that those entities’ estates were being wound up as consolidated.

A key factual gap, central to the outcome, was that the plaintiffs did not prove (to the court’s satisfaction) that the cash used to pay the defendant was property of any identified insolvent estate (whether one of the cited entities or the purported consolidated estate), or that any of those entities made a disposition to the defendant as contemplated by section 29. The court also accepted the thrust of the defendant’s evidence-based contention that the only consistent records of payments were in the name of MP Financial Services, associated with Prinsloo, and that there was no acceptable evidentiary foundation establishing that the relevant companies conducted business as that entity or that the cash belonged to them.

Legal Issues

The central legal questions were whether the plaintiffs had proved the jurisdictional facts required to set aside a disposition under section 29(1) of the Insolvency Act 24 of 1936, and, in particular, whether there was evidence of a disposition of property by a debtor (the insolvent) that had the effect of preferring the defendant as a creditor above others within the relevant time period, with the debtor’s liabilities exceeding its assets immediately after the disposition.

A closely connected issue was the identification of the relevant “debtor” for purposes of section 29. The plaintiffs relied on the consolidated estate referred to as MP Finance Group CC (in liquidation), while the defendant contended that no such legal entity existed, and that a court could not create a company or close corporation outside the statutory registration framework. This raised a question that was predominantly one of law, namely the legal competence and effect of the purported consolidation order, particularly as against a person (the defendant) who was not a party to that order.

The dispute also concerned the application of law to fact, focusing on whether the plaintiffs had proved, on the evidence, that the cash paid to the defendant was an asset of a particular insolvent estate and that the disposition was made by that estate. In addition, the defendant raised the factual-and-legal contention that the plaintiffs had not proved that the defendant was a creditor of any of the liquidated entities on whose behalf the plaintiffs sued.

Court’s Reasoning

The court approached the matter on the basis that the plaintiffs’ claim was expressly and solely founded on a statutory remedy, namely section 29 of the Insolvency Act, and that the plaintiffs therefore bore the burden to bring themselves within the jurisdictional requirements of that section. While accepting in principle the general proposition that a payment within six months of liquidation which prefers one creditor may be set aside, the court held that the statutory mechanism could not be invoked unless the foundational elements were properly established on the evidence.

A central step in the reasoning was the court’s treatment of the identity of the insolvent debtor. The plaintiffs relied on MP Finance Group CC as the insolvent estate, but the court accepted the defendant’s legal contention that a court is not competent to “create” a company, close corporation, or other statutory entity except in accordance with the governing legislation. The judgment emphasised that a close corporation is a creature of statute and must be registered under the relevant statutory framework; accordingly, the notion that MP Finance Group CC existed as a legal persona (as opposed to an administrative label used by liquidators for winding-up purposes) could not be assumed merely from the consolidation process.

Relatedly, the court accepted that the consolidation order did not bind the defendant. The defendant was not shown to have been a party to that order (or otherwise bound by it), and the court accepted that it could not be used to impose obligations on non-parties in a way that substituted for proof of the statutory requirements in an action under section 29. The court aligned itself with reasoning expressed in an unreported decision (referred to in argument and cited in the judgment) that was similarly critical of the notion that consolidation could operate as an extra-statutory mechanism to create entities or obligations.

On the factual application of section 29, the court accepted that a disposition of property is a factual matter and that, on the evidence, the cash used for payments emanated from containers kept and controlled by Prinsloo. The court held that there was no evidentiary basis, beyond speculation, to conclude that Prinsloo acted on behalf of any of the legal entities for which the plaintiffs acted in such a manner that the monies became those entities’ assets and that a disposition was made by such an entity to the defendant. The plaintiffs’ admissions in replication regarding the lack of bank accounts for most entities and the absence of financial statements reinforced, in the court’s view, the failure to connect the cash flow to an identified insolvent estate as owner of the property.

Because the plaintiffs did not prove key jurisdictional elements of section 29—most notably that the disposition was of the property of the debtor and made by the debtor, and that the debtor was properly identified as an insolvent estate capable of making dispositions within the meaning of the Act—the claim could not succeed. The court expressly stated that whether the plaintiffs might have had some other claim in law was irrelevant, because the pleaded cause of action was confined to section 29.

Outcome and Relief

The court dismissed the plaintiffs’ claim.

The dismissal was accompanied by an order that the plaintiffs pay the defendant’s costs.

Cases Cited

Fourie NO and Others v Edeling NO and Others 2005 (4) All SA 393 (SCA).

JH Janse Van Rensburg NO and Others v SJL Steyn (Case No 18137/2005) (North Gauteng High Court, Pretoria, 30 October 2009) (unreported).

Legislation Cited

Insolvency Act 24 of 1936 (section 29; also referred to in context: sections 26 and 30).

Companies Act 61 of 1973 (section 311; section 386(4)(a)).

Consumer Affairs (Unfair Business Practices) Act 71 of 1988 (section 12), read with Government Notice 1135 of 9 June 1999 and Government Gazette No 20169 of 9 June 1999.

Banks Act 94 of 1990 (section 11(2)).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that the plaintiffs, suing as liquidators and relying solely on section 29(1) of the Insolvency Act 24 of 1936, failed to prove the jurisdictional requirements for setting aside the alleged voidable preference.

In particular, the court held that it was not established on the evidence that any relevant insolvent estate (whether one of the pleaded entities or the purported consolidated estate) was the owner of the cash paid to the defendant or that such estate made a disposition to the defendant as contemplated by section 29. The court further held that a court is not competent to create a statutory entity such as a company or close corporation outside the relevant statutory framework, and that the consolidation order relied upon did not bind the defendant.

LEGAL PRINCIPLES

Section 29(1) of the Insolvency Act 24 of 1936 provides a statutory basis to set aside a disposition made within the stipulated period that has the effect of preferring one creditor above another, but the claimant must prove the jurisdictional facts required by the section in order to succeed.

A litigant relying on section 29 must establish, on the facts, that there was a disposition of the debtor’s property by the debtor, and that the statutory conditions relating to preference and the debtor’s financial position are satisfied; failure to prove the foundational elements is fatal to the claim.

A court is not competent to create a company, close corporation, or other statutory legal persona except in accordance with the applicable statutory scheme governing its existence and registration, and an administrative consolidation mechanism cannot be treated as a substitute for statutory requirements or as binding upon persons who were not shown to be bound by the relevant order.

Van Rensburg NO and Others v Botha (18146/2005) [2010] ZAGPPHC 88 (30 July 2010)