Brief Summary

Insolvency — Dispositions in ordinary course of business — Appeal against judgment setting aside payments made by an insolvent company to the appellant — Payments made under valid loan agreements — Liquidators contending payments were not in the ordinary course of business due to contraventions of the Banks Act — Court held that payments made in accordance with contractual obligations constituted dispositions in the ordinary course of business, despite the underlying business being tainted by illegality — Appeal upheld, and the order of the court below set aside.

Comprehensive Summary

Summary of Judgment

Introduction

The matter concerned an appeal to the Supreme Court of Appeal against a decision of the North Gauteng High Court, Pretoria, in which certain payments (dispositions) made by a company later placed in liquidation were set aside under section 29(1) of the Insolvency Act 24 of 1936 as alleged voidable preferences.

The appellant was Gazit Properties (Pty) Ltd, an investor-creditor that had advanced funds to the insolvent company and later received repayment. The respondents were Deon Marius Botha N.O., Izak Johannes Boshoff N.O., and Wergele Stafford Mackenzie N.O., cited in their capacities as the joint liquidators of Malokiba Trading 19 (Pty) Ltd (in liquidation).

In the court of first instance, the liquidators succeeded in having the impugned payments set aside under s 29(1), with an order that Gazit repay the monies to the estate. The appeal was pursued with the leave of the court a quo. The general subject-matter of the dispute was the interpretation and application of the statutory defence in s 29(1), specifically whether the payments were made “in the ordinary course of business” despite allegations that Malokiba’s broader business model was unlawful or “tainted”.

Material Facts

Malokiba purported to conduct business as a provider of bridging finance linked to fixed property transactions. It solicited money from members of the public as “investors” and represented that such funds would be lent out for purposes associated with property transfers, such as transfer costs or estate agents’ commissions, pending registration of transfers. The court recorded that the reality differed from this representation: Malokiba often accepted investments and advanced funds without underlying property transfers, resulting in a collapse when new investor money became insufficient, with new funds being used to satisfy earlier obligations.

Gazit was one such investor. It advanced a total of R5 million to Malokiba under written loan agreements. The agreements provided for interest at 2.5% per month, continued for an indefinite period, and were cancellable by either party after three months on 45 days’ notice. Gazit exercised its contractual right of cancellation, whereafter Malokiba repaid capital and interest.

The dispute in the litigation concerned R3 050 355, being payments made by Malokiba to Gazit within the six months preceding Malokiba’s liquidation. The parties concluded a pre-trial agreement recording admissions and narrowing the issues. It was admitted by Gazit that immediately after each payment Malokiba’s liabilities exceeded its assets, that each payment had the effect of preferring Gazit above other creditors, and that each payment constituted an alienation of assets. It was also agreed that Malokiba did not intend to prefer Gazit above other creditors, so that the only remaining issue under s 29(1) was whether the payments were made in the ordinary course of business.

In their particulars for trial, the liquidators advanced contentions that Malokiba’s business was unlawful on several bases, including contravention of the Banks Act 94 of 1990 (accepting deposits from the public and on-lending without being registered), alleged unlawfulness under a Government Notice relating to interest rates and harmful business practices under the Consumer Affairs (Unfair Business Practices) Act 71 of 1988, and an allegation of a prohibited pyramid scheme. At trial the liquidators abandoned the pyramid scheme contention and did not pursue the interest-rate/harmful business practice allegation; the appeal proceeded principally on the asserted contravention of the Banks Act and related contentions of deception and the use of new investor funds to pay earlier investors.

Legal Issues

The central legal question was whether the liquidators were entitled to have the payments set aside under section 29(1) of the Insolvency Act 24 of 1936, given the agreed requirements of preference and insolvency, and the absence of intent to prefer, leaving only the statutory defence issue of whether the payments were made “in the ordinary course of business”.

The dispute primarily concerned the application of law to largely common-cause facts. The factual position that payment occurred according to the loan agreements and within the six-month period, coupled with the pre-trial admissions about insolvency and preference, was not materially disputed for purposes of s 29(1). The principal contest was normative and interpretive: the meaning of “ordinary course of business” and whether that inquiry is defeated or materially affected by the alleged illegality or misrepresentation associated with the debtor’s broader business model, including a contravention of the Banks Act and the asserted sourcing of repayment funds from later investors.

Court’s Reasoning

The Supreme Court of Appeal approached s 29(1) on the basis that the inquiry into “ordinary course of business” is objective and requires a close examination of the disposition itself, assessed against the background of its causa (the underlying obligation that gave rise to the payment). The court held that an approach focusing predominantly on the general unlawfulness or “contamination” of the debtor’s overall business model risks a misapplication of s 29(1), because the statute requires scrutiny of the relevant dispositions and the obligations they discharged.

The court relied on established authority that where a debtor pays a debt in accordance with the stipulations of the contract, such payment is prima facie in the ordinary course of business. It emphasised the formulation in Estate Wege v Strauss 1932 AD 76 and the objective test articulated in Hendriks NO v Swanepoel 1962 (4) SA 338 (A), namely whether, having regard to the terms of the agreement and the circumstances under which it was concluded, it is the kind of agreement that solvent business people would normally conclude. This approach was confirmed with reference to Amalgamated Banks of South Africa Bpk v De Goede & ‘n ander 1997 (4) SA 66 (SCA).

Applying these principles, the court held that the common-cause position was that Malokiba repaid Gazit by the due date and on the terms stipulated in the loan agreements, after Gazit exercised its contractual cancellation right. The repayment was thus performance of a contractual obligation that had become due according to the agreement. On that footing, the transaction was characterised as an ordinary commercial arrangement: one party lends money and the other repays with agreed interest, and the obligation to repay becomes enforceable upon cancellation in terms of the contract.

The liquidators’ principal attempt to avoid this conclusion was to argue that Malokiba’s contravention of section 11(1) of the Banks Act 94 of 1990 “tainted” the loan agreements and thus removed the repayments from the ordinary course of business. The court rejected that argument. It reasoned that the fact of contravention did not mean that the loan agreements ceased to be “normal” agreements for purposes of the s 29(1) test, and it identified nothing in the Banks Act compelling such a result. The court considered the reference to Oilwell v Protec 2011 (4) SA 394 (SCA) as support for the proposition that statutory contravention does not, without more, lead to the conclusion advanced by the liquidators. It further noted that section 83(1) of the Banks Act empowers the Registrar of Banks to direct repayment of unlawfully obtained money, which the court regarded as pointing away from the idea that repayment would be treated as abnormal or inherently disqualifying for “ordinary course” purposes.

The court added that even on an assumption that the loans might be void on this ground, Malokiba would still have been obliged to repay on demand, and the par delictum rule did not arise on the evidence before it. The court stressed that there was no evidence that investors such as Gazit knew of illegality, and it drew an analogy to the reasoning in Fourie N O v Edeling N O [2005] 4 All SA 393 (SCA), where the court had recognised that absent proof that investors acted from a turpitudinous cause, repayment liability could arise (there, expressed with reference to a claim under the condictio ob iniustam causam).

The “contamination” argument also relied on alleged misrepresentations to Gazit about how its funds would be used. The court regarded this as irrelevant to the s 29(1) defence in the circumstances: Gazit might have been entitled to cancel for misrepresentation upon discovering it, but unless and until cancellation occurred, the contracts remained valid and enforceable, and payment by the debtor in accordance with those terms could not, on that basis alone, be treated as outside the ordinary course of business.

Finally, the liquidators contended that Malokiba’s repayments were made using money obtained from new investors and that Malokiba lacked genuine funds to meet its obligations. The court held that the fact of insolvency at the time of payment was irrelevant to whether the disposition was made in the ordinary course of business, citing Hendriks NO v Swanepoel 1962 (4) SA 338 (A) and Pretorius’ Trustee v Van Blommenstein 1949 (1) SA 267 (O). It further held that the source of the funds used for payment is not a material consideration in the ordinary-course inquiry, and it rejected the proposition that repayment becomes tainted merely because the funds were sourced from elsewhere. In this regard, it stated that the case was not one where the dispositions themselves involved an offence or constituted fraud on the rights of third parties, referring to Du Plooy NO v National Industrial Credit Corporation Ltd 1961 (3) SA 741 (W).

The court also dealt with reliance placed on Janse van Rensburg NO v Botha [2011] ZASCA 72, holding that it was not dispositive in the present appeal because, as understood by the court, the issues in that case differed and did not include whether the disposition was made in the ordinary course of business.

On the totality of the above, the court concluded that Malokiba’s repayments were made pursuant to a due contractual obligation and therefore occurred in the ordinary course of business for purposes of s 29(1). The high court’s focus on the unlawfulness or “tainted” nature of Malokiba’s wider business was held to have led it into error.

Outcome and Relief

The Supreme Court of Appeal upheld the appeal with costs.

It set aside the order of the court a quo and substituted it with an order dismissing the liquidators’ claim. The substituted order was that the plaintiff’s claim is dismissed with costs.

Cases Cited

Estate Wege v Strauss 1932 AD 76.

Hendriks NO v Swanepoel 1962 (4) SA 338 (A).

Amalgamated Banks of South Africa Bpk v De Goede & ‘n ander 1997 (4) SA 66 (SCA).

Oilwell v Protec 2011 (4) SA 394 (SCA).

Fourie N O v Edeling N O [2005] 4 All SA 393 (SCA).

Pretorius’ Trustee v Van Blommenstein 1949 (1) SA 267 (O).

Du Plooy NO v National Industrial Credit Corporation Ltd 1961 (3) SA 741 (W).

Janse van Rensburg NO v Botha [2011] ZASCA 72.

Legislation Cited

Insolvency Act 24 of 1936, section 29(1).

Insolvency Act 24 of 1936, section 30(1).

Banks Act 94 of 1990, section 11(1).

Banks Act 94 of 1990, section 83(1).

Consumer Affairs (Unfair Business Practices) Act 71 of 1988, section 26(6).

Government Notice 1135 of 1999 (Government Gazette 20169 of 1999).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, for purposes of section 29(1) of the Insolvency Act 24 of 1936, the enquiry into whether a disposition was made in the ordinary course of business requires objective scrutiny of the disposition and its underlying causa. Where a debtor makes payment in accordance with a valid contractual obligation and in terms of the agreement’s repayment provisions, the payment is prima facie made in the ordinary course of business.

It further held that the alleged illegality or “taint” in the insolvent’s broader business model, including a contravention of the Banks Act, did not, on the facts and issues before it, disqualify repayment made in terms of the loan agreements from being regarded as in the ordinary course of business. The appeal succeeded and the liquidators’ claim to set aside the payments under s 29(1) failed.

LEGAL PRINCIPLES

The phrase “in the ordinary course of business” in section 29(1) of the Insolvency Act 24 of 1936 is approached objectively, asking whether, considering the agreement’s terms and the circumstances of its conclusion, the transaction is one normally entered into by solvent business people.

A payment made in accordance with the stipulations of a contract is prima facie made in the ordinary course of business. The focus of the enquiry is on the disposition itself and its causa, rather than on a broad characterisation of the debtor’s general business practices.

The fact that the debtor was insolvent at the time of payment, or that the payment had the effect of preferring a creditor, does not by itself determine the “ordinary course” question; those elements are separately dealt with in the structure of s 29(1).

The source of the funds used to make repayment is not, without more, treated as material to whether the disposition was in the ordinary course of business, and repayment in accordance with a due contractual obligation is not rendered non-ordinary merely because the debtor’s broader business involved misrepresentations or statutory contraventions, absent a showing that the disposition itself falls outside normal commercial performance of due obligations.

Gazit Properties (Pty) Ltd v Botha NO and Others (873/2010) [2011] ZASCA 199; 2012 (2) SA 306 (SCA) (23 November 2011)