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[2021] ZASCA 33
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FirstRand Bank Limited v Master of the High Court (Pretoria) and Others (1120/19) [2021] ZASCA 33; 2021 (4) SA 115 (SCA) (7 April 2021)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 1120/2019
In the matter
between:
FIRSTRAND
BANK LIMITED
APPELLANT
and
MASTER OF
THE HIGH COURT
(PRETORIA)
FIRST RESPONDENT
THE BODY
CORPORATE OF
VICTORY
PARK
SECOND RESPONDENT
CORNELIA
CAROLINA MIENIE NO THIRD
RESPONDENT
IGNATIUS
CLEMENT MIKATEKO
SHIRILELE N
O
FOURTH
RESPONDENT
NEDBANK
LIMITED
FIFTH RESPONDENT
MINISTER OF
JUSTICE AND
CONSTITUTIONAL
DEVELOPMENT
SIXTH RESPONDENT
MINISTER OF
RURAL DEVELOPMENT
AND LAND
REFORM
SEVENTH RESPONDENT
Neutral citation:
FirstRand
Bank Limited v Master of the High Court (Pretoria) and Others
(Case
no 1120/19)
[2021] ZASCA 33
(7 April 2021)
Coram:
WALLIS, SALDULKER and DLODLO JJA and
GOOSEN and MABINDLA-BOQWANA AJJA
Heard
:
23 February 2021
Delivered
:
This judgment was handed down electronically by circulation to the
parties’ legal representatives by email,
publication on the
Supreme Court of Appeal website and release to SAFLII. The date and
time for hand-down is deemed to be 10h00
on 7 April 2021.
Summary:
Insolvency Act 24
of 1936
– interpretation of
ss 106
,
89
(2) and
14
(3) –
liability for costs of sequestration when there is no free residue or
free residue is insufficient – whether
secured creditors
relying solely on their security are liable to contribute –
whether petitioning creditor is solely liable.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Vilakazi AJ, sitting as a court
of first instance):
1
The appeal is upheld.
2
Paragraph 3 of the
order of the Gauteng Division of the High Court, Pretoria is set
aside and replaced with the following order:
‘
3.
That the Third and Fourth Respondents are directed to amend the
first and
final liquidation, distribution and contribution account to
reflect
that the Second Respondent is solely liable to pay the
contribution of R46 663.16.’
3
There is no order as to costs.
JUDGMENT
Mabindla-Boqwana
AJA (Wallis, Saldulker and Dlodlo JJA and Goosen AJA concurring):
Introduction
[1]
This appeal concerns
the interpretation of
s 106
, read with ss 89(2) and 14(3), of the
Insolvency Act 24 of 1936 (the Act) dealing with the liability of
creditors to pay a contribution
where there is insufficient or no
free residue in an insolvent estate to meet expenses, costs and
charges connected with the sequestration.
Such costs are a charge
against the free residue in terms of s 97(2)
(c)
of the Act.
[2]
This issue has been a
subject of controversy for a while within the insolvency law academic
circles.
[1]
The debate centres on the question of which creditors are liable to
pay a contribution for costs where there is a shortfall in
the free
residue. Does the burden to contribute lie with all creditors who
have proved claims against the estate? Does that include
secured
creditors who have proved their claims but relied solely on their
security? And what about the petitioning
[2]
creditor who applied for the sequestration of the estate in the first
place? These questions engaged Vilakazi AJ in the Gauteng
Division of
the High Court, Pretoria (the high court). But first, the background
that led to the application before Vilakazi AJ.
Background
[3]
The insolvent, Mr
J Z Msimango, prior to his sequestration, owned two sectional title
units, which were separately bonded, one to
Nedbank Limited in the
amount of R577 800 (property 1) and the other to First National Bank
(FNB), a division of the
appellant (FirstRand), in the amount of
R645 840 (property 2) respectively. The unit mortgaged in favour
of Nedbank (property
1) fell within the sectional title scheme
administered and managed by the second respondent (the Body
Corporate).
[4]
On 7 October 2009, the
Body Corporate launched an application in the high court for the
sequestration of the insolvent’s estate
on the basis that the
insolvent owed it R22 000 in arrear levies. A year earlier it
had obtained a default judgment against
the insolvent in the Pretoria
Magistrates’ Court for payment of the sum of R8 895.64.
[5]
The Body Corporate
approached the high court on the strength of a
nulla
bona
return issued
by the sheriff which rendered the insolvent’s conduct an act of
insolvency within the ambit of s 8
(b)
of the Act. In its
sequestration application, the Body Corporate contended that, ‘[b]oth
properties will be sold when the
Respondent [the insolvent] is
sequestrated and that as such the probability of a substantial
dividend becoming available to concurrent
creditors is very likely’.
A security certificate was issued by the Master of the High Court,
Pretoria (the Master) stating
that sufficient security had been given
by the Body Corporate for the payment of all fees and charges
necessary for the prosecution
of all sequestration proceedings, and
of all costs of administering the estate until a trustee had been
appointed and, if no trustee
was appointed, all fees and charges
necessary for the discharge of the estate from sequestration.
[6]
A final order of
sequestration was granted by the high court on 14 June 2010
and the third and fourth respondents were
appointed as trustees and
confirmed on 12 August 2011. Nedbank proved its claim of R679 512.82
at the second meeting of creditors
held on 22 November 2012. Property
1 was sold for an amount of R350 000 and transferred to the buyer. To
effect registration of
transfer, the municipality was paid an amount
of R14 643.44 and the Body Corporate R178 647 from the sale of
proceeds in accordance
with s 15B(3)
(a)
(i)(
aa)
of the Sectional
Titles Act 95 of 1986 (the
Sectional Titles Act).
[3
]
The property was further sold by its buyer to another purchaser for
R580 000. The Body Corporate did not prove a claim.
[7]
The appellant alleges
that it had no knowledge that the insolvent had been sequestrated. It
had started a foreclosure process prior
to sequestration and property
2 was sold at a sale in execution on 15 September 2010 for the sum of
R330 000.
[4]
It was then registered on December 2010 in the name of the purchaser.
The proceeds from the sale in execution were paid to FNB.
FNB proved
a claim of R617 686.86 together with interest thereon at 9.25% at a
special meeting of creditors on 17 May 2015. It
had indicated in its
affidavit lodged in terms of s 44(4) of the Act that it relied solely
on its security in satisfaction of its
claim. Subsequent to that, FNB
was called upon by the trustees to refund the insolvent estate an
amount of R30 697.91 made up of
costs relating to the realisation of
the security in terms of s 89(1)
[5]
of the Act (R13 587.89), a contribution to the costs of sequestration
in the amount of R17 028.82 and costs of a special meeting
at
R81.20.
[8]
The Trustees’
First and Final Liquidation, Distribution and Contribution Accounts
(the L&D Account), prepared by the third
and fourth respondents,
reflected a contribution in the amount of R46 663.16 payable by the
proven creditors (FNB & Nedbank)
on a pro rata sharing basis.
Nedbank’s share was reflected as R29 634.33 whilst FNB’s
was R17 028.82. The Body Corporate
was not reflected as being liable
to pay any contribution at all.
[9]
The appellant did not
take issue with the s 89(1) costs or the costs for the special
meeting, but felt aggrieved with being required
to pay a contribution
towards the costs of sequestration. It accordingly delivered a
written objection to the L&D Account to
the Master on the basis
that, as the petitioning creditor, the Body Corporate was the
creditor liable to pay the contribution as
envisaged by s 14(3) of
the Act.
[10]
The Master’s
response to this objection was inter alia that, whilst a petitioning
creditor would be liable to contribute to
the costs of sequestration
in terms s 14(3) of the Act, there was an exception to this rule.
Relying on selected parts of a publication
authored by Dr David
Burdette,
[6]
the Master reasoned:
‘
4.
The exceptions to this rule are namely arrear taxes owing on fixed
property (in terms of
section 89(1)
and (5) of the
Insolvency Act
>)
and arrear levies owing in respect of sectional
title units (in terms of the provisions of the
Sectional Titles Act,
95 of 1986
, as interpreted by the Courts in
Nel
v Body Corporate of Seaways Building
[1995] ZASCA 83
;
1996 (1) SA 131
(A) and
Barnard v
Regspersoon van Aminie
2001 (3) SA 973
(SCA)).
5. Arrear
taxes on fixed property and arrear levies in respect of sectional
title units are considered to form part of the administration
expenses, despite the fact that the obligation to pay these amounts
arose prior to sequestration.
6. The arrear
levies are part of the costs to be paid prior to the Registrar of
Deeds giving effect to the transfer of the property.
Therefore,
there can never be a claim for arrear levies in law currently
.
7. The
Supreme Court of Appeal has determined that the claims by Body
Corporate for arrear levies are not affected by the provisions
of the
Insolvency Act.
. . .
11. If one
considers the effect of the
Barnard
decision where it was
stated that legal expenses incurred in trying to recover the levies
or costs involved in bringing the application
for the sequestration
of the debtor’s estate, form part of the levies and may be
claimed from the proceeds of the Sectional
Title Unit. If this aspect
of the
Barnard
decision is to be applied consistently, it
would mean that any contribution payable by a Body Corporate in terms
of
Section 14(3)
will also form part of the levy, and the amount will
ultimately be paid from the proceeds of the [Sectional] Title Unit.
This in
turn means that there will be less funds available with which
to pay the secured creditor and indirectly has the effect that
secured
creditor is paying the contribution.
12. For the reasons stated above, the Body Corporate is not liable
for contribution.’
[11]
The appellant took this
decision on review to the high court on the basis that the Master
incorrectly interpreted
s 14(3)
read with s 106 of the Act and
misapplied the
Nel
[7]
and
Barnard
[8]
decisions. It sought an order directing the trustees to amend the L&D
account to reflect that the Body Corporate was solely
liable to pay
the contribution of R46 663.16, alternatively that the Body
Corporate, FNB and Nedbank were liable
pro
rata
to pay the
contribution. It was clear from the founding affidavit that FNB’s
primary case was that the Body Corporate should
pay the entire
contribution, although in the prayer this was expressed as the
alternative relief. As in this Court, the application
in the high
court was unopposed. The Body Corporate withdrew its opposition
whilst the Master filed a notice to abide.
[12]
In its judgment, the
high court found that reliance by the Master on
s15B(3)
(a)
(i)
(aa)
of the
Sectional Titles Act as
the basis to absolve the Body
Corporate from being liable pro rata to pay a contribution was
misplaced. In the high court’s
view, the Body Corporate ‘set
the machinery in motion by instituting sequestration proceedings
against the insolvent. Section
89(1) read with section 106 of the
Act, makes it clear that the legal costs incurred in sequestrating
the insolvent are not associated
with payment of the levies. Those
costs fall outside the protection of section 15B(3)(
a
)(i)(
aa
)
of the
Sectional Titles Act. I
hold therefore that the [Body
Corporate] is not immune from contribution’.
[13]
The high court further
held the
Barnard
case to be distinguishable, in that sequestration costs have no
connection to the recovery of unpaid levies and that having regard
to
the intention behind
ss 14(3)
,
89
and
106
, the Master’s
interpretation went against the spirit of ss 9 and 25 of the
Constitution. As a result, the court reviewed
and set aside the
Master’s decision and directed the trustees to amend the L&D
Account to reflect that, FNB, Nedbank
and the Body Corporate were all
liable pro rata to pay the contribution of R46 663.16. The court did
not deal with why it found
FNB and Nedbank liable. Its judgment
focused merely on the Body Corporate’s liability. It is that
decision of the high court
that is the subject of this appeal with
the leave of that court.
[14]
The appeal was
not opposed by any of the respondents. Given the importance of the
matter in the administration of insolvent estates,
this Court
requested the appointment of an
amicus
curiae
to assist
the Court by advancing any argument that might be available to bodies
corporate in situations similar to the one in this
case. We are
grateful to Ms Olsen, who appeared with Ms Mbonane, for undertaking
this task and for their assistance.
Discussion
[15]
It is convenient to
dispose of s 15B(3)
(a)
(i)
(aa
)
of the
Sectional Titles Act at
this stage. It was submitted by both
counsel that the Master incorrectly relied on
Barnard
and
Nel
as authorities for the conclusion that the Body Corporate was
absolved from paying the costs of sequestration. I agree. Neither
dealt with the obligation of a body corporate that was the
petitioning creditor to make a contribution, where it did not prove
a
claim and relied on its statutory right to recover arrear levies.
[16]
The
relevant provisions of the Act are ss 14(3), 89(2) and 106. FirstRand
argued
that
these provisions properly constructed make the Body Corporate solely
responsible for any deficiency where it is the petitioning
creditor,
even though it had not proved a claim, as both Nedbank and the
appellant relied solely on their securities. The
amicus
curiae
took a
different view submitting that on the interpretation of these
provisions, all three creditors were liable to make pro rata
contributions to the costs of sequestration.
[17]
The approach to be
followed in interpreting a document, including a statute, is now
established and has been deliberated upon in
many decisions of this
Court. It is still useful to refer to this Court’s decision in
Natal Joint
Municipal Pension Fund v Endumeni Municipality
[9]
where Wallis JA summarised the correct approach at para 18:
‘.
. . 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.
Where more than one meaning
is possible each possibility must be weighed in the light of all
these factors. The process is objective,
not subjective. A sensible
meaning is to be preferred to one that leads to insensible or
unbusinesslike results or undermines the
apparent purpose of the
document. Judges must be alert to, and guard against, the temptation
to substitute what they regard as
reasonable, sensible or
businesslike 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, in a contractual context it is to
make a contract for the parties other
than the one they in fact made.
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.’
(Footnotes
omitted.)
[18]
The
need for a contribution to be made towards the costs of sequestration
arises in the following way.
Section
44(1) of
the Act provides that any person or representative of a person who
has a liquidated claim against an insolvent estate,
the cause of
which arose before the sequestration of that estate, may at any time
before the financial distribution of the estate,
prove that claim in
the manner provided. A claim is proved by way of an affidavit as
envisaged in s 44(4) detailing among other
things, the nature and
particulars of the claim and, if a creditor holds a security, the
nature of that security.
[19]
Section 89(2)
(i
)
stipulates that where a creditor relies for the satisfaction of his
claim solely on the proceeds of the property which constitutes
his
security, he shall not be liable for any costs of sequestration other
than the costs specified in s 89(1) and other than costs
for which he
may be liable under
paragraphs
(a)
and
(b)
of the proviso
to s 106.
[20]
Non-preferent claims
(concurrent or unsecured creditors) are paid from the free
residue.
[10]
Free residue is ‘that portion of an insolvent estate which is
not subject to any right of preference by reason of any mortgage,
legal hypothec, pledge or right of retention’.
[11]
[21]
Section 97 deals with
the costs of sequestration. It provides that, after the free residue
has been applied to defray funeral and
death bed expenses, the
balance thereof shall be used in paying the costs of sequestration of
the estate with the exception of
those mentioned in s 99(1).
[12]
Taxed costs of sequestration are ranked third among other costs of
sequestration as per
s 97(2)
in
order of
priority. In terms of s 97(3) the expression ‘taxed costs of
sequestration’, refers to ‘the costs (as
taxed by the
registrar of the court) incurred in connection with the petition of
the debtor for acceptance of the surrender of
his estate or of a
creditor for the sequestration of the debtor’s estate, but it
does not include the costs of opposition
to such a petition, unless
the court directs that they shall be included’.
[22]
Section 106 provides
the mechanism for determining which creditors must make a
contribution towards the costs of sequestration,
when there is no
free residue or it is insufficient. It reads as follows:
‘Where there is no
free residue in an insolvent estate or when the free residue is
insufficient to meet all the expenses,
costs and charges mentioned in
section
ninety-seven
, all creditors who have proved
claims against the estate shall be liable to make good any
deficiency, the non-preferent creditors
each in proportion to the
amount of his claim and the secured creditors each in proportion to
the amount for which he would have
ranked upon the surplus of the
free residue, if there had been any: Provided that-
(a)
if
all the creditors who have proved claims against the estate are
secured creditors who would not have ranked upon the surplus of the
free residue, if there had been any, such creditors shall be liable
to make good the whole of the deficiency
, each in proportion to
the amount of his claim;
(b)
if
a creditor has withdrawn his claim, he shall be liable to contribute
in respect of any deficiency only so far
as is provided in
section
fifty-one
, and if a creditor has withdrawn his
claim within five days after the date of any resolution of creditors
he shall be deemed to
have withdrawn the claim before anything was
done in pursuance of that resolution
.’ (My
emphasis.)
[23]
This section must be
read together with ss 14(3) and 89(2) which provide:
Section 14(3)
‘
In
the event of a contribution by creditors under section
one
hundred and six
,
the petitioning creditor, whether or not he has proved a claim
against the estate in terms of section
forty-four
,
shall be liable to contribute not less than he would have had to
contribute if he had proved the claim stated in his petition
.’
Section 89(2):
‘
If
a secured creditor (other than a secured creditor upon whose petition
the estate in question was sequestrated) states in his
affidavit
submitted in support of his claim against the estate that he relies
for the satisfaction of his claim solely on the proceeds
of the
property which constitutes his security, he shall not be liable for
any costs of sequestration other than the costs specified
in
subsection (1), and other than costs for which he may be liable under
paragraph
(a)
or
(b)
of
the proviso to section
one
hundred and six
.’
[24]
FirstRand
contended that in terms of s 89(2) of the Act it had no
obligation to make a contribution to the costs of sequestration
except in the circumstances set out in either sub-sec
(a)
or
(b)
of s 106. While no concurrent creditor had proved a claim
against the insolvent estate under s 14(3), the Body Corporate,
as the petitioning creditor, was obliged to make the same
contribution as it would have done had it proved a claim against the
estate. In the absence of any other concurrent creditor, it was
therefore liable for the entire contribution. The
amicus
curiae
for her part
submitted that the case fell squarely within the language of s 106(
a
)
and, because the Body Corporate was obliged to make a contribution
under s 14(3), the contributions fell to be determined
in
proportion to the contributories’ claims.
[25]
The academic
controversy about the interpretation of these sections referred to in
para 2 of this judgment is well expressed in
the following passage
from
Meskin’s
Insolvency Law
:
[13]
‘
The
controversy relates to the correct interpretation of
section
106
read
with sections 14(3) and 89(2), and more particularly, whether by the
reference in
section
106
to
“all creditors who have proved claims” the intention is
that for the purposes of determining the sequestrating
creditor’s
liability to contribute, he is to be regarded as a creditor who has
proved a claim as envisaged by
section
106
,
or whether his liability to contribute arises independently,
under
section
14(3)
,
and that accordingly he is liable,
together
with
those
creditors who have
actually
proved
claims and who are liable to contribute under
section
106
.
In relation to the liability of a secured creditor or secured
creditors envisaged by proviso (a) to
section
106
,
the controversy is whether, where there is a sequestrating creditor
who is as such liable to contribute, the entire contribution
is
payable by the sequestrating creditor alone, or whether the secured
creditor, or creditors, envisaged by proviso (a) and the
sequestrating creditor are liable for the entire deficiency
proportionately to the amounts of their respective claims (the
sequestrating
creditor being treated as if he had proved the claim
upon which the sequestration order was obtained)
.’
[26]
FirstRand’s
submissions were made against the practical background that the
primary cause of the shortfall in the free residue
was the costs of
sequestration incurred by the Body Corporate and paid to its
attorneys. The Body Corporate thus made a full recovery
of the arrear
levies and FirstRand, which gained no benefit from the sequestration,
was mulcted in a contribution towards the costs
of sequestration
incurred by the Body Corporate. Furthermore, it had no practical
connection with this body corporate as its mortgage
was over a unit
in a different scheme.
[27]
A case which dealt with
a question similar to the one before us is
Synman
v The Master and Others
[14]
which was cited by the
amicus
curiae
in advancing
her submissions. In that case the sequestration was a friendly one.
The bank (ABSA) in whose favour the insolvent
had mortgaged property,
was the only proven creditor in the estate. ABSA ‘conditionally’
relied on its security in
its affidavit in case of a contribution.
The Master ignored the condition and took the view that ABSA had in
fact relied on its
security. The court did not decide this issue but
assumed on behalf of ABSA that the requirements of s 89(2) were met.
As often
occurs in friendly sequestrations, there happened to be no
free residue. The court found that ABSA was liable to make good the
deficiency ‘in proportion to the amount for which he (it) would
have ranked upon surplus of the free residue, if there be
any’.
As we shall see, this statement is problematic, given that the court
had accepted that ABSA had relied solely on its
security, in which
event it becomes difficult to understand how ABSA would have ranked
upon the surplus of the free residue.
[28]
The court further held
that ‘[t]he proviso [s 106
(a)
]
relates to the situation where creditors (in the plural) who have
proved claims are secured creditors who would not have ranked
upon
the surplus of the free residue; in that event such secured creditors
shall be liable to make good the deficiency in proportion
to the
amount of their respective claims’. It concluded that
s 106
(a)
applied
if there
were a number of secured creditors, but also applied out of necessity
if there is only one. This decision has been criticised.
[15]
[29]
The
Snyman
decision was at
odds with a judgment of this Court in
Bank
of Lisbon and South Africa Ltd v The Master and Others,
[16]
to which the court in
Snyman
had been referred by ABSA’s counsel. In
Bank
of Lisbon
this
Court said:
‘
Sections
44(4) and 89(2) must be read together. The intention is clear. A
creditor who claims that he is a secured creditor and
who does not
wish to share in the free residue and who looks only to the proceeds
of the security is not liable for any costs of
sequestration, nor can
he receive more than his security or its proceeds, whether or not
there is a free residue. “His security”,
i.e. the
security designated as such by the creditor, may prove to be
valueless or may have ceased to exist. There is nothing in
the
wording of section 89(2) which suggests that that fact will render
such a proved creditor liable for any costs of sequestration.
As
indicated above, the whole purpose of the section is to enable a
creditor, who believes when lodging his claim that his security
has a
value, to limit his claim to the value of his security and to free
him from liability for costs. If it should transpire that
his
security has become valueless the basis on which he proved his claim
would fall away. He would not have a claim against the
estate. The
position cannot be different in the case of a creditor who
bona
fide
believes that he holds security
and specifically limits his claim and his potential liability. He for
all practical purposes ceases
to be a creditor of the estate. The
bank was in fact in that position. Paragraph 7 of the affidavit of
proof of claim, quoted above,
is clear and unequivocal.’
[30]
The court in
Synman
found the
Bank of
Lisbon
case to be
inapplicable on the basis that the passage quoted above, did not deal
with the final words of s 89(2) referring to paragraph
(a)
of the proviso to s 106, yet, it did not deal with the purpose of s
89(2). Nor did it explore the relationship between the proviso
and
the main enacting provision of s 106, read in the light of
s 14(3).
[31]
Now to the relevant
sections. Section 106 consists of the main section and three
provisos. The first part of the main section requires
all creditors
with proved claims against the estate to make good the deficiency. On
the face of it that would include secured creditors
(including those
who rely solely on their security). It however goes on to provide how
contributions would be made by making non-preferent
creditors liable
each in proportion to the amount claimed and secured creditors each
in proportion to the amount for which it would
have ranked upon the
surplus of the residue, if there be any
.
[32]
This
second part of the section must be read in conjunction with s 83(12)
in
terms of
which a secured creditor is entitled to rank against the estate if
the claim is more than the amount payable to it in respect
of its
security. In this event, the secured creditor will be ranked to be
paid the concurrent portion (additional portion) of the
claim not
satisfied from the proceeds of the security from the free residue.
That secured creditor would be liable to contribute
in proportion to
the amount that would have ranked upon the surplus of the free
residue (ie the concurrent balance of its claim),
if any had been
there.
[33]
According to Burdette,
the proviso in s 106
(a)
‘was introduced in order to make secured creditors liable for
contribution where they (or it, if there is only one creditor)
had
all relied [solely] on their security and there were no other
creditors that could pay the contribution in terms of the main
provision of section 106 (in other words where there are no
concurrent creditors, including secured creditors with concurrent
portions on their claims, and no applicant [petitioning]
creditor)’.
[17]
Two circumstances come to mind where that could occur. The one would
be where there is a voluntary surrender of the insolvent estate
and
no sequestrating creditor. The other would be where the sequestrating
creditor was financially unable to pay a contribution,
in which event
under s 118(2) the required contribution would have to be
recovered from the secured creditors under s 106
(a)
.
[34]
Burdette illustrates
the point quite clearly by using the example of a secured creditor
proving a claim of, for example, R120 000
but not relying solely on
its security, the security realises R100 000 and the creditor is
awarded R80 000 after deducting the
costs mentioned in s 89(1)
from the proceeds of the security. That creditor will be ranked
against the estate’s free
residue in respect of the balance of
its claim (ie for the R40 000, which is R120 000 less R80 000). The
R40 000 represents the
concurrent portion, which is the portion in
relation to which the contribution to costs of sequestration will be
levied.
[35]
This
interpretation makes sense if one has regard to the wording in
s 89(2). A secured
creditor
who relies solely on the proceeds of its security is absolved from
liability to contribute to the costs in terms of this
section, except
costs in s 89(1) and those in the provisos under
paragraphs
(a)
and
(b)
of s 106.
In
this instance there is no concurrent claim payable to those secured
creditors. The court in
ABSA
Bank v The Master of the Supreme Court Provincial Division &
Others
[18]
clarified this point appositely when explaining the purpose of s
89(2). It said:
‘
.
. .
the section was intended to ensure
no more than that the burden of a contribution fell on those
creditors in whose interest costs
are being incurred in
administration of the estate. That generally means the
concurrent creditors as the secured creditors
are entitled to recover
what is owing to them from the proceeds of their security. There is
no need for the estate to incur expense
to ensure that secured
creditors are paid, except for that part of their claims which
exceeds the value of their security. Ordinarily
the estate will only
incur expense in realising a security if the liquidators are of the
view that the security is worth more
than the claim it secures.
In such a case the liquidators would be justified in realising the
particular security, to pay the
secured creditor in full, and to
apply the excess to concurrent claims. The expense so incurred is
thus for the benefit of concurrent
creditors
.’
[36]
The only apparent
motive for a secured creditor to rely solely on their security is to
avoid the risk of having to pay a contribution
towards costs as was
observed in
Bank of
Lisbon
[19]
.
In terms of s 89(2), liability in this instance only arises in terms
of paragraphs
(a)
or
(b)
of the proviso to s 106. That would be if all creditors are
secured creditors who have relied solely on their security. They
will
be liable for the whole of the deficiency, each in proportion to the
amount of their claim. There is no concurrent part of
the claim.
Therefore, if the secured creditor’s claim was R200 000, it
would be liable in proportion to the whole claim of
R200 000. This is
unlike what is provided in the main part of s 106 where those secured
creditors with concurrent claims, would
be liable in proportion to
the amount they would have ranked upon the surplus of the free
residue.
[37]
The next question is
what happens if the only other creditor (in addition to the secured
creditors who rely solely on their security)
is a petitioning
creditor who has not proved its claim such as in this case? Then s
14(3) comes into play. When there is no free
residue or it is
insufficient and a contribution is required in terms s 106, a
creditor who instituted the sequestration proceedings
is required to
contribute, whether or not it has proved a claim, not less than they
would have had to contribute if they had proved
the claim stated in
his petition.
[38]
Section 14(3) must be
read with s 106. That much is clear from the wording of the actual
provision. Even though the petitioning
creditor has not proved a
claim, it is compelled to contribute ‘in the event of a
contribution by creditors under section
one hundred and six whether
or not he has proved a claim against the estate’. In terms of s
14(3), the petitioning creditor
will always have to contribute. The
section contains no exceptions. The petitioning creditor is placed in
the same position as
it would have been in had it proved its claim.
This means its liability would be calculated in proportion to the
amount of its
claim as stipulated in the main part of s 106.
[39]
This issue was debated
at length with both counsel at the hearing of this matter. The
interpretation advanced by the
amicus
curiae
was that s
106
(a)
should be read independently from s 14(3) and that the words ‘the
whole of the deficiency’ were only applicable in
respect of the
secured creditors mentioned in that proviso. In practical terms, when
applying the sections, the trustees would
then have to look further
by also making the petitioning creditor liable to contribute which
would result in pro rata liability
among the two secured creditors
and the petitioning creditor. As observed in
Meskin’s
Insolvency Law
this
is in line with the view supportive of the
Snyman
conclusion. This view holds that s 14(3) ‘does not suggest that
the sequestrating creditor is to be deemed to have proved
a claim and
thus to be regarded as a proved creditor as envisaged by section 106,
nor that the liability of those proved creditors
who are liable to
contribute by virtue of section 106 is excluded by the liability
attaching to the sequestrating creditor under
section 14(3), and
accordingly that the sequestrating creditor is liable, together with
those creditors who have actually proved
claims and who are liable to
contribute under section 106, whether under the main provision of
section or any of the provisos thereto’.
[20]
[40]
That interpretation
strains the proviso in s 106
(a)
and does violence to s 89(2) and its purpose. It also overlooks the
provisions of s 14(3). Construed properly, while not ‘deemed’
to have proved a claim
stricto
sensu
, the
provisions of s 106 apply to the petitioning creditor ‘whether
or not he [it] has proved a claim’. Because of
that it should
be treated in the same manner as a creditor who has proved its claim.
Consequently, when there is no free residue,
or it is insufficient,
the first port of call would be look to the petitioning creditor to
contribute along with concurrent creditors
who have proved their
claims and secured creditors who would have ranked upon the surplus
of the free residue. That is the consequence
of reading the enacting
part of s 106, together with ss 14(3) and 89(2).
[41]
Only if there are no
other proved and concurrent creditors (including the petitioning
creditor) able to contribute, would the secured
creditors who have
relied solely upon their security be called upon to pay (s 106
(a)
read with s 89(2). This interpretation is sensible as it does not do
violence to the words ‘to make good the whole of the
deficiency, each in proportion to the amount of his claim [not the
concurrent portion]’ in s 106
(a)
.
These words in fact strengthen that construction. The fact that the
proviso operates to oblige secured creditors who rely solely
on their
security to meet the entire deficiency illustrates that there is no
other creditor to meet the shortfall. This is consistent
with the
basic principle that a proviso is not to be construed as if it were
an independent enacting provision, but as qualifying
the enactment in
relation to which it stands as a proviso.
[21]
Accordingly, in the case where there are two such secured creditors
and a petitioning creditor, the petitioning creditor would
be solely
liable to pay the costs of sequestration based on their claim.
[42]
This construction
overcomes the potential unfairness, to secured creditors, that may
creep in with friendly sequestrations and in
instances where
petitioning creditors do not prove their claims, such as in this
case. When applying for sequestration a claim
would be made that the
sequestration of the insolvent would be to the advantage of the
creditors whereas the facts may not be supportive
of that allegation.
The insolvent may only have one or two bonded properties and a
shortfall would arise with no benefit realised
to creditors.
[43]
The appellant gave
examples of where it suffered losses running into millions of rands,
in instances where it was called upon by
trustees or liquidators in
various matters to make contributions for costs of sequestration
notwithstanding that it had relied
solely on its security. Section
14(3) seeks to avoid a situation where a creditor would petition for
the sequestration of the estate
and not prove a claim, only for other
creditors ‘to pick up the costs’. In a case like the
present one, the unfairness
is heightened because bodies corporate
petition for sequestration, recover outstanding monies in terms of
s 15B(3)
(a)
(i)
(aa)
once
a unit is
sold and, where there is a shortfall in the free residue other
creditors, who have proved their claims (including secured
creditors
who rely solely on their security), bear the costs, including the
costs paid by the petitioning creditor to their attorneys.
[44]
This analysis
illustrates that
Snyman
was wrongly
decided. It further confirms that the Master was wrong in absolving
the Body Corporate from paying the contribution
on the basis of his
reasoning which I have quoted in para 10 above. Lastly, the high
court erred by holding FNB and Nedbank liable
as co-contributors to
the costs of sequestration together with the Body Corporate. For that
reason, its decision must be set aside.
[45]
In conclusion, having
determined the meaning of ss 106, 89(2) and 14(3), it is clear that
the Body Corporate as the petitioning
creditor is solely liable to
pay the costs of sequestration as the other two creditors (FNB and
Nedbank) are secured creditors
who relied solely on their security.
Had there been other creditors found to have been liable to
contribute, it would have had
to contribute in proportion to the
amount of its claim in the petition (R22 000). It is however not
necessary to have regard to
that amount, as the Body Corporate has
been found to be solely liable for payment of the entire R43 680.35
in respect of the taxed
bill of costs. Lastly, since this matter is
not opposed, there will be no order as to costs.
[46]
In the result the
following order is made:
1
The appeal is upheld.
2
Paragraph 3 of the order of the Gauteng Division of the High Court,
Pretoria is set
aside and replaced with the following order:
‘
3.
That the Third and Fourth Respondents are directed to amend the
first and
final liquidation, distribution and contribution account to
reflect
that the Second Respondent is solely liable to pay the
contribution of R46 663.16.’
3
There is no order as to costs.
N P MABINDLA-BOQWANA
ACTING JUDGE OF APPEAL
Appearances
For
the appellant: D M Leathern SC
Instructed
by: Rorich Wolmarans
& Luderitz Inc., Pretoria
Symington & De Kok Attorneys,
Bloemfontein
Amicus
Curiae: L K Olsen (with her M Mbonane)
[1]
P M Meskin, edited by:
Professor André Boraine
et
al
Meskin’s
Insolvency Law
(1990) LexisNexis Online (updated 2020) para
11.8.1.
[2]
This is the sequestrating creditor, the procedure
by way of petition having been abolished.
[3]
Section 15B(3)(
a
)(
i
)(
aa
)
of the
Sectional Titles Act 95 of 1986
reads:
‘
(3)
The
registrar shall not register a transfer of a unit or of an undivided
share therein, unless there is produced to him-
(a)
a
conveyancer's certificate confirming that as at date of
registration-
(i)
(aa)
if
a body corporate is deemed to be established in terms of
section 2
(1) of the
Sectional Titles Schemes Management
Act, that
body corporate has certified that all moneys due to the
body corporate by the transferor in respect of the said unit have
been
paid, or that provision has been made to the satisfaction of
the body corporate for the payment thereof.’
[4]
In addition to the price the purchaser paid the
clearance amounts due to the municipality and the body corporate.
[5]
‘
89
Costs to which securities are subject
(1)
The
cost of maintaining, conserving and realizing any property shall be
paid out of the proceeds of that property, if sufficient
and if
insufficient and that property is subject to a special mortgage,
landlord's legal hypothec, pledge, or right of retention
the
deficiency shall be paid by those creditors,
pro
rata
, who have proved their claims and who
would have been entitled, in priority to other persons, to payment
of their claims out
of those proceeds if they had been sufficient to
cover the said cost and those claims. The trustee's remuneration in
respect
of any such property and a proportionate share of the costs
incurred by the trustee in giving security for his proper
administration
of the estate, calculated on the proceeds of the sale
of the property, a proportionate share of the Master's fees, and if
the
property is immovable, any tax as defined in subsection (5)
which is or will become due thereon in respect of any period not
exceeding two years immediately preceding the date of the
sequestration of the estate in question and in respect of the period
from that date to the date of the transfer of that property by the
trustee of that estate, with any interest or penalty which
may be
due on the said tax in respect of any such period, shall form part
of the costs of realization
.’
[6]
Then of
the University
of South Africa.
[7]
Nel N O v Body Corporate of the Seaways
Building and Another
1996 (1) SA 131
(SCA).
[8]
Barnard N O V Regspersoon van Aminie en ‘n
Ander
2001 (3) SA 973 (SCA).
[9]
Natal Joint Municipal Pension Fund v Endumeni
Municipality
[2012] ZASCA 13
;
[2012] 2
All SA 262
(SCA);
2012 (4) SA 593
(SCA) para 18.
[10]
Section 103 of the Insolvency Act 24 of 1936 (the
Act).
[11]
Section 2 of the Act – Definitions.
[12]
Section 99(1) of the Act deals with
p
reference in regard
to certain statutory obligations.
[13]
Op cit fn 1.
[14]
Synman v The Master and Others
2003 (1) SA 239
(T).
[15]
David Burdette, University of Pretoria:
‘Contributions by creditors in insolvent estates - has
section
89(2)
of the
Insolvency Act become
obsolete?
Snyman
v The Master
2003 (1) SA 239 (T)’
(2003) 66
THRHR
521.
[16]
Bank of Lisbon and South Africa Ltd v The
Master and Others
1987 (1) SA 276
(A)
at 287I -288A.
[17]
Op cit, fn 15 at 525.
[18]
ABSA Bank v The Master & Others NNO
1998
(4) SA 15
(N) at 24H-25A.
[19]
Op cit fn 16.
[20]
Op cit fn 1.
[21]
Mphosi v Central Board for Co-operative
Insurance Ltd
1974 (4) SA 633
(A) at
645C-H.