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[2012] ZAGPPHC 148
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Stander NO and Another v Wouter Raymond Bouwer t/a Bouwer & Heyns Legal Cost Consultants (34450/2011) [2012] ZAGPPHC 148 (3 August 2012)
NOT
REPORTABLE
IN
THE NORTH GAUTENG HIGH COURT, PRETORIA /ES
(REPUBLIC
OF SOUTH AFRICA)
CASE
NO: 34450/2011
DATE:03/08/2012
IN
THE MATTER BETWEEN:
COENRAAD
LOUWRENS STANDER
N.O.
..........................................................
1ST
APPLICANT
IGNATIUS
CLEMENT MIKATEKO SHIRILELE
N.O.
.............................................
2nd
APPLICANT
[In
their capacity as liquidators of
KIRSTEN
LOTTERING SCHEEPERS INC (in liquidation)]
AND
WOUTER
RAYMOND BOUWER t/a
BOUWER
& HEYNS LEGAL COST
CONSULTANTS
...........................................
RESPONDENT
JUDGMENT
PRINSLOO,
J
Introduction
[1]
The applicants are the joint liquidators of a company in liquidation,
Kirsten Loitering Scheepers Inc ("KLS").
[2]
The respondent is a creditor of KLS.
[3]
The applicants, essentially, claim relief based on the provisions of
section 341(2) of the previous Companies Act, Act 61 of
1973 ("the
Act").
In
the alternative, the applicants claim relief based on the provisions
of sections 26, alternatively 29 alternatively 30 of the
Insolvency
Act, Act 24 of 1936 ("the Insolvency Act").
[4]
Section 341(2) of the Act ("section 341(2)"), under the
heading "Dispositions and shared transfers after winding-up
void" reads as follows:
"(2)
Every disposition of its property (including rights of action) by any
company being wound-up and unable to pay its debts
made after the
commencement of the winding-up, shall be void unless the court
otherwise orders."
[5]
It is convenient to quote the contents of the amended notice of
motion presented by the applicants, after relief initially sought
involving the locus standi of the applicants as purported provisional
liquidators was abandoned and an argument in limine advanced
by the
respondent in this regard was not proceeded with:
"1.
That condonation be granted for the late filing of the replying
affidavit (my note: this issue was not disputed before
me and,
inasmuch as it may be necessary, I grant such condonation).
2.
That it be declared that the payment of R750 000,00 to the respondent
on 28 April 2009 constitutes a void disposition of the
property of
Kirsten Lottering Scheepers Inc (in liquidation), after commencement
of the winding-up in terms of the provisions of
section 341(2) of
the Companies Act, no 61 of 1973;
In
the alternative to prayer 2
3.
That the payment of R750 000,00 to the respondent be set aside as an
impeachable disposition of the property of the insolvent
estate of
Kirsten Lottering Scheepers Inc (in liquidation) in terms of the
provisions of section 26, alternatively section 29,
alternatively
section 30 of the
Insolvency Act, no 24 of 1936
;
4.That
judgment be granted against the respondent for the amount of R750
000,00;
5.
That the respondent be ordered to pay interest at the rate of 15.5%
per annum on the amount of R750 000,00 from 30 April 2009
to date of
payment;
6.
That the respondent be ordered to pay the costs of the application."
[6]
Returning to the wording of
section 341(2)
, I am satisfied, on the
evidence before me, that KLS was unable to pay its debts when it was
wound up. I am also
satisfied
that the payment made by KLS to the respondent on 28 April 2009 was a
"disposition of its property" by KLS as
intended by the
wording of the subsection. Lastly, it is clear, and common cause,
that the disposition was made after the commencement
of the
winding-up: the winding-up is deemed to have commenced, in terms of
the provisions of section 348 of the Act, when the liquidation
proceedings were instituted on 25 November 2008, which is well before
the payment was made on 28 April 2009. I add that the provisional
liquidation order was granted about a month after the payment was
made, namely on 27 May 2009, and the final liquidation order
was
granted on 25 August 2009.
[7]
The defendant opposes the application and asks for the disposition to
be validated, in the sense that I must "otherwise
order" in
the spirit of section 341(2). Put differently, the respondent asks
for my discretion in this regard to be exercised
in his favour by
validating the payment.
There
is authority for the proposition that the onus to achieve this result
is on the respondent. The author M S Blackman, in an
article in The
Law of South Africa 1st re-issue vol 4 part 3 para 174 says the
following:
"The
onus is on the person seeking to uphold the transaction to establish
circumstances justifying the making of a validating
order."
The
learned author, in footnote 11 on p270, quotes a series of judgments
from foreign jurisdictions to support his contention in
this regard.
I do not propose repeating those references. The author Meskin,
Henochsberg on The Companies Act vol 1, 5th ed says
the following on
p681 when dealing with the subject of section 341(2):
"It
is submitted that it is incumbent on a party seeking the validation
of the disposition to establish the facts upon which
he relies for
such purpose."
Brief
remarks about the background of the case
[8]
Before its liquidation, KLS carried on the business of a company of
practising attorneys. One of the directors of KLS, Cornelus
Kirsten
("Kirsten") was also a shareholder of a company Malokiba
Trading 19 (Pty) Ltd ("Malokiba").
[9]
Malokiba conducted the business of providing bridging finance, and
for this purpose borrowed money from the general public and
other
businesses as investors, in terms of written loan agreements, and
lent this money to debtors who were in need of bridging
finance.
All
payments made to Malokiba in terms of the loan agreements, were paid
into the trust account of KLS.
A
clause in the loan agreement entered into between Malokiba and the
investor stipulated clearly that the amount invested will be
paid
into the trust account of KLS "for the exclusive purpose of
financing transfer duties and/or estate agents commission
and/or
bridging finance in property transactions …"
[10]
It is clear from the undisputed and detailed evidence elaborated upon
in a lengthy founding affidavit, that some investors
deposited huge
amounts into the trust account of KLS. One Maartens paid an amount of
R6 million, one Segal an amount of some R3,4
million and Popular
Diamond Jewellery Manufacturers (Pty) Ltd an amount of some R3
million.
Between
March and July 2005 Malokiba entered into loan agreements with some
hundred and fifty four members of the public and businesses
and
collected investments to the tune of some R188 million.
[11]
Later, some satellite companies, also rejoicing in the name of
Malokiba, were registered with the view to attracting more
investments for the Malokiba stable. All monies paid for shares of
these satellites, for such investment purposes, were also paid
into
the trust account of KLS. Effectively, the trust account of KLS
served as the bank account of Malokiba. Later a second trust
account
was opened by KLS to receive, exclusively, payments involving the
activities of Malokiba.
[12]
It is clear that the Malokiba operations amounted to nothing less
than a pyramid scheme. Eventually, the scheme led to major
financial
losses of the investors. Kirsten was also a director of another
notorious company, Hau Wei Manufacturing. Kirsten channeled
monies
from the trust account of KLS to other companies of which he was a
director. Ultimately, KLS was exposed to the amount of
some R80
million and clearly unable to pay its debts. KLS allowed, as will
appear from the aforegoing, its trust funds to be utilised
for other
purposes than those described in the clause in the loan agreements,
to which I have referred. To this extent, KLS attracted
liability
towards the unsuspecting investors. KLS was also managed recklessly
by its directors in that it took part in the illegal
scheme of
Malokiba. As a result of these unlawful activities, the trust account
of KLS also showed substantial debit balances.
[13]
In the end, Malokiba and its satellites were also liquidated during
or about 2008, and Hau Wei Manufacturing was liquidated
in October
2007.
[14]
Against this background, it can be said that KLS was disgraced,
insolvent and unable to pay its debts.
[15]
I turn briefly to the position of the respondent, and his involvement
in the case.
During
2005 KLS, together with a number of other firms of attorneys,
performed legal work for the Emfuleni local municipality.
The
respondent, from time to time, was instructed by KLS to prepare bills
of costs relating to services rendered by KLS to this
municipality
("Emfuleni").
During
the second half of 2005, one H C W Scheepers ("Scheepers")
who was a director of KLS and whose name also features
in the KLS
name, approached the respondent with the news that Emfuleni had
requested the attorneys representing them to "freeze"
their
files for a period and to temporarily "suspend" all
proceedings on cases they were working on. They had to submit
a list
of cases, dealing with the extent of the work done.
The
agreement with Emfuleni was that if this instruction to suspend the
work were to have the effect that the attorneys could not
recover
their fees from the debtor, Emfuleni would be liable for the fees of
the attorneys including those of KLS on an attorney
and own client
scale.
Pursuant
to this arrangement, Scheepers instructed the respondent to draft the
necessary bills of cost and it was agreed that the
respondent would
be entitled to fees calculated on the basis of 10% of the bill as
drafting fees and a further 10% of the bill
as taxation fees, namely
20% of the total of fees taxed and allowed. The respondent would
share the risk of payment with KLS and
would only be paid on the
aforesaid basis once KLS received the money from Emfuleni.
On
the strength of this arrangement, the respondent went ahead and
drafted numerous bills of costs and also attended to the taxation
thereof. This happened between the second half of 2005 and the
beginning of 2006.
The
total amount of fees taxed and allowed and which became due and
payable by Emfuleni to KLS, came to some R7,5 million with interest
and the respondent's agreed percentage of those fees came to Rl 378
179,00. Already on 24 August 2006 the respondent sent an account
for
this amount to KLS. KLS failed and/or refused to pay.
[16]
During April 2009, and only about one month before the provisional
liquidation order was granted, Scheepers contacted the respondent
and
offered to pay him an amount of R750 000,00 in full and final
settlement of his claim. Scheepers pointed out that this offer
was
made due to the fact that Emfuleni had not paid KLS but only offered
an amount of R4 million to KLS in settlement of its claim
of some
R7,5 million. It is obvious that already at this stage Scheepers
would have been well aware of the fact that liquidation
of KLS was
imminent, the application already having been instituted in November
2008.
[17]
The respondent accepted the offer and on 28 April 2009 he received
the payment ofR750 000,00 from KLS.
[18]
The respondent alleges in his opposing affidavit that neither he nor
any person in his employ was aware, at any relevant time,
of the
winding-up of KLS. Where this statement is not contested in the
replying affidavit, I must accept it to be correct.
[19]
In the opposing affidavit, the respondent also alleges that the
demands for payment against KLS and the recovery of the amount
due to
the respondent, including the settlement amount, was done in the
normal course of business "of the respondent and the
recovery of
fees due to it".
The
real question, as I understand it, is whether the disposition was
made in the normal course of the business of the company which
is
being wound up. I am not persuaded that this is what happened when
Scheepers paid the money to the respondent. As will be pointed
out
later, KLS, when receiving the R4 million, immediately set about
paying certain creditors, including the respondent. This happened
when the granting of the provisional liquidation order was around the
corner, and when the winding-up had already been commenced
with some
five months earlier, in November 2008. By the time the payment was
made to the respondent in April 2009, the collapse
of the Malokiba
pyramid scheme would already have been common knowledge. Malokiba and
its satellites were already liquidated in
the middle of 2008 and Hau
Wei Manufacturing was liquidated in October 2007. A judgment was
already granted against Kirsten in
June 2008 in the sum of some R2,3
million in favour of the liquidators of Hau Wei of which Kirsten was
a director.
Under
these circumstances, it can hardly be said that the dissipation of
the R4 million by making payments to a number of selected
creditors,
including the respondent and, for example, the wife of Scheepers,
shortly before the liquidation order was granted,
represented
payments made by KLS in the normal course of its business.
[20]
So much for the background of the case. I turn to briefly consider
what happened to the R4 million ("the R4 million")
once it
was received on 28 April 2009 by KLS from Emfuleni.
The
destiny of the R4 million
[21]
After the provisional liquidation of KLS, the liquidators appointed
one Steven Robinson ("Robinson") to take charge
of the
assets of KLS and to report back. His preliminary auditory report is
annexure "DMB14" to the founding affidavit
("DMB14").
[22]
It appears from "DMB14" and annexures thereto that the R4
million was initially deposited into the trust account
of KLS. An
amount of Rl,38 million was then disbursed over the next few days to
a few selected creditors including the respondent,
AdvLeeuwner
(counsel representing KLS in the dispute with Emfuleni and who knew
about the winding-up proceedings that were pending),
De Bruin &
Vennote (a firm of attorneys also involved in the litigation which
was aware of the pending winding-up proceedings)
and two of the
companies involved in the pyramid scheme in which Kirsten, amongst
others, had an interest. I add that the present
applicants also
instituted proceedings in terms of section 341(2) against Leeuwner
and De Bruin & Vennote and two of my colleagues
in this division
upheld both those applications. Adv Leeuwner applied to the Supreme
Court of Appeal for leave to appeal and, in
an order dated 1 March
2012, the application for leave to appeal was dismissed with the two
learned Judges of Appeal making the
following order:
"The
application for leave to appeal is dismissed with costs.
Reasons
for dismissal of application:
Dismissal
of an application for leave to appeal signifies that this court is of
the view that the intended appeal has no reasonable
prospects of
success and that there is no other compelling reason why it should be
heard. This court therefore, in general terms,
concurs with the
reasoning set out in the judgment of the court below."
I
realise that this is not a judgment which is binding on me but,
nevertheless, it is an order which I cannot ignore. As far as
I can
make out, De Bruin & Vennote did not prosecute an appeal.
[23]
The balance of some R2,64 million was transferred from the KLS trust
account to the KLS business account and, according to
Robinson, "paid
out mainly to connected parties (other than the Absa overdraft of
R500 000,00 and an amount to Standard BankofR261
000,00) ..."
Included
amongst the "connected parties" were one of the Malokiba
companies in which Kirsten, Lottering and Scheepers
were
shareholders, another Malokiba company, Scheepers himself, Lottering
himself and Ms Scheepers. Most of these recipients were
clearly not
secured or preferent creditors.
[24]
It is clear that all these payments were made with a view to
preferring a list of selected creditors (including the respondent)
to
the detriment of the rest of the body of creditors of KLS.
[25]
There was an argument advanced on behalf of the respondent that the
disbursements made from the trust account (including the
one to the
respondent) were not paid from the own funds of KLS but disbursed
from the trust account to a number of creditors, including
the
respondent. The argument, if I understood it correctly, was that this
was not a disposition "of its own property"
by KLS as
intended by the provisions of section 341(2). I cannot agree with
this submission. It is clear that the R4 million, when
it was paid,
became the property of KLS. It was not deposited in the trust account
in the normal sense namely on the basis that
it belonged to clients
of KLS and was only kept in trust for that purpose.
Brief
remarks about the legal position
[26]
For the sake of brevity, I will deal with extracts from what is
stated on this subject of section 341(2) by Meskin, Henochsberg
on
The Companies Act vol 1, 5th ed, supra, ("Henochsberg") as
well as the discussion on the same subject in Commentary
on the
Companies Act by M S Blackmail and five other authors, vol 3
("Blackman et al").
The
remarks made by these learned authors are generally supported by them
referring in footnotes to the relevant authorities, including
a
number of cases reported in foreign jurisdictions. I do not propose
repeating those references.
There
will also be brief references to three South African judgments often
referred to in these applications involving section 341(2)
and also
relied upon by the authors aforementioned. The cases are the
following:
Herrigel
NO v Bon Roads Construction Co (Pty) Ltd & Another
1980 4 SA 669
(SWA) CHerrigel")
Rousseau
en Andere v Malan en fn Ander
1989 2 SA 451
(CPD) ^Rousseau")
and Lane NO v Olivier Transport
1997 1 SA 383
(CPD) ("Lane").
[27]
As far as Henochsberg is concerned, the discussion is to be found at
pp676-681 of the work by the learned authors. They point
out that the
court's discretion to validate such a disposition, or to decline to
do so,
"is
controlled only by the general principles which apply to every kind
of judicial discretion: the court must decide what
would be just and
fair in the circumstances of the case, bearing in mind the purpose of
the subsection." The purpose of section
341(2) is said "to
ensure that the property of a company threatened with winding-up is
not improperly dissipated prior to
the
commencement
of the winding-up ... and is available for satisfaction of the claims
of its creditors on a footing of equality of
treatment subject only
to any security or preference which any of them may enjoy under the
Insolvency Act"
;. {Herrigel at 678 and Lane at 385.)
The
learned authors in Henochsberg suggest that a disposition valid when
effected and only retrospectively invalidated by virtue
of the
operation of the provisions of
section 348
ordinarily will be
validated by the court "... if it amounts to no more than the
result of the bona fide carrying on of the
company's operations in
the ordinary course". I have already concluded that this was not
the case in the present matter and
that the payment to the respondent
was not made "in the ordinary course" of the business of
KLS. The learned authors
suggest that the court will ordinarily
refuse to validate a disposition where it was made eg with the object
of securing an advantage
to a particular creditor in the winding-up
which otherwise he would not have enjoyed or with the intention of
giving a particular
creditor a preference. In Herrigel the court
refused to validate the disposition notwithstanding that the
recipient thereof was
bona fide but the result was that such
recipient had in fact been preferred above other creditors - see
Herrigel at 679-680. In
the present case, I have come to the
conclusion, as illustrated when dealing with the destiny of the R4
million, that those selected
creditors (including the respondent)
were paid with the object of securing an advantage for them which
they otherwise would not
have enjoyed and in the process the general
body of creditors was prejudiced.
The
learned authors also point out that the discretion which a court has
to validate or not to validate is to be exercised in the
light of
certain guidelines crystalised in authorities quoted by these
authors: firstly, the basic premise is that in a winding-up
all
unsecured creditors should be paid pari passu (which, for the reasons
mentioned, did not happen in the present case). Secondly,
it is not
normally right to validate a payment, the effect of which is to pay
in full a single unsecured creditor, unless the payment
formed a
necessary part of a transaction which as a whole was beneficial to
the general body of unsecured creditors. For the reasons
mentioned,
this did not happen in the present case. Thirdly, payments made in
good faith and at the time when the parties were
unaware that
(proceedings for winding-up had been instituted) will generally be
validated where they relate to the company's need
to continue
business and earn income (or save loss) during the pendency of such
proceedings, but not payments, even though they
are made honestly,
which were mere reductions of pre-existing debts without any
conceivable countervailing benefits to the company.
In the present
case, the payments were clearly not made honestly by Scheepers. He
knew exactly what the position was and there
was no longer any
question of KLS continuing business in the normal fashion by the time
the disposition was made to the respondent.
Fourthly relatively
little weight should be attached to the hardship which will be
suffered by the recipient of the payment if
the payment is not
validated, the purpose of the subsection being to minimise hardship
to the body of creditors generally. In this
case, the respondent,
regrettably, will suffer a great deal of hardship if he is ordered to
repay the monies honestly earned a
number of years ago through hard
work but, unfortunately, and for the reasons mentioned, the
disposition made to the respondent
could not have served "to
minimise hardship to the body of creditors generally". There are
two other guidelines offered
by the learned authors which do not
appear to me to be relevant for present purposes.
[28]
The discussion by the authors Blackman et al9 supra, is to be found
at pp 14-46 to 14-61 of the work. Generally, the approach
of these
learned authors is in harmony with what is to be found in
Henochsberg. I do not propose embarking upon unnecessary repetition.
At
14-59, the authors state:
"Knowledge
at the time of the transaction by anyone of the parties that an
application for the winding-up has been presented
and that a
winding-up order may be made (my note: of course, in this case at
least Scheepers clearly knew what was going on) is
not fatal to the
success of an application for validation of a transaction otherwise
rendered void by the section. However, where,
in the case of a
creditor's application, there were doubts as to the company's
solvency, the court in the exercise of its discretion
will not
sanction a disposition unless it is satisfied on affirmative evidence
that the transaction is or was beneficial to the
company. In this
situation, the court would regard a fairly heavy onus in relation to
evidence as falling on persons seeking to
justify a disposition not
in the ordinary course of business."
For
the reasons mentioned, the respondent, in this case, did not offer
any evidence to this effect and did not discharge the onus
referred
to: the disposition was not made in the ordinary course of business,
and it also did not redound to the general benefit
of the body of
creditors. Indeed, it amounted to the respondent being preferred to
other concurrent creditors.
In
this regard, Mr Davis offered submissions to the effect, if I
understood him correctly, that if the debts flowing from the Malokiba
pyramid scheme were to be ignored, the disposition did not amount to
an unfair advantage over "normal" creditors as Mr
Davis put
it. I fail to see how the Malokiba creditors looking to KLS for
compensation because of the losses they suffered, for
the reasons
already explained, can be ignored for purposes of assessing the
merits of this particular dispute. Moreover, evidence
in support of
the submission made by Mr Davis is not to be found in the opposing
affidavit so that the onus, in that regard, has
also not been
discharged.
Although
each case must be treated on its own facts, it ought to be observed
that in Herrigel, Rousseau and Lane the recipient of
the disposition
was ordered to repay the amount. I make this observation because
section 341
(2) does not provide for recovery of the property or
money. It merely renders the disposition void, and gives the court a
discretionary
power to order otherwise, ie to validate the
disposition, as pointed out by Blackman et al at 14-51. The learned
authors go on
to state:
"Thus,
the appropriate remedy in respect of the invalidated disposition is a
matter not regulated by the section and has to
be determined by the
general law."
Recognising
this, the learned judge in Herrigel, at 685B-D, nevertheless came to
the
conclusion that:
"An
order to repay the amount of a void disposition is a necessary and
practical adjunct to a factual finding that such disposition
is
void."
These
remarks may well be debatable, but, for present purposes, I am not
prepared
to find that the order for repayment is clearly wrong.
Conclusion
[30]
In view of the aforegoing, and while recognising the hardship an
adverse finding for the respondent will visit upon him, I
have come
to the conclusion that the application must succeed. Under these
circumstances I also consider it unnecessary to deal
with the
arguments offered in respect of the provisions of
sections 26
,
29
and
30
of the
Insolvency Act.
Costs
[31]
I was not urged on behalf of the applicant to award the costs of two
counsel, although such an order may well be justified.
However, it
seems to me that the costs flowing from the employment of senior
counsel ought to be allowed.
The
order
[32]
I make the following order:
1.
It is declared that the payment of R750 000,00 to the respondent on
28 April 2009 constitutes a void disposition of the property
of
Kirsten Lottering Scheepers Inc (in liquidation), after commencement
of the winding-up as intended by the provisions of section
341(2) of
the Companies Act, Act 61 of 1973.
2.
Judgment is granted against the respondent for payment of the amount
of R750 000,00.
3.The
respondent is ordered to pay interest on the aforesaid amount at the
rate of 15,5% per annum calculated from 30 April 2009
to date of
payment.
4.
The respondent is ordered to pay the costs of this application
including the costs flowing from the employment of senior counsel.
W
R C PRINSLOO
JUDGE
OF THE NORTH GAUTENG HIGH COURT
34450-2011
HEARD
ON: 29 MARCH 2012
FOR
THE APPLICANTS: F H TERBLANCHE SC ASSISTED BY H M VERMAAK
INSTRUCTED
BY: STRYDOM & BREDENKAMP INC
FOR
THE RESPONDENT: N DAVIS SC
INSTRUCTED
BY: RIETTE OOSTHUIZEN ATTORNEYS