THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
CASE NO : 499/04
In the matter between :
THOMAS REGINALD CHOWLES HOSKING N.O.
RUDOLPH ERIC THOMAS HOSKING N.O.
PAUL MICHAEL HOSKING N.O. First Appellants
(In their capacities as trustees for the time being of Paragon Asset Management Trust)
THOMAS REGINALD CHOWLES HOSKING N.O.
RUDOLPH ERIC THOMAS HOSKING N.O.
PAUL MICHAEL HOSKING N.O. Second Appellants
(In their capacities as trustees for the time being of Paragon Asset Management Trust (Western Cape))
WILLIAM HENRY VOYSEY N.O.
COLLEEN VOYSEY N.O.
FREDERICK STEMMET N.O. Third Appellants
(In their capacities as trustees of the Commercial Investment Trust)
- and -
SAREL ALBERTUS COETZEE N.O.
JACOBUS MARTHINUS ABRAHAM LOUW N.O.
DOUGLAS JOHAN KLERCK N.O.
DAVID JOHN RENNIE N.O.
LESLIE NEIL SACKSTEIN N.O. First Respondents
(In their capacities as trustees in the insolvent estate of the Halgryn Family Trust)
THE MINISTER OF JUSTICE & CONSTITUTIONAL
DEVELOPMENT N.O. Second Respondent
THE SOUTH AFRICAN LAW COMMISSION Third Respondent
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Before: HOWIE P, ZULMAN, CAMERON, NUGENT & PONNAN JJA
Heard: 10 NOVEMBER 2005
Delivered: 25 NOVEMBER 2005
Summary: Section 29(1) of the Inso lvency Act 24 of 1936 – voidable
preferences – whether unconstitutional.
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J U D G M E N T
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NUGENT JA
2
NUGENT JA:
[1] A central feature of Anglo-Ameri can bankruptcy law for almost three
centuries has been the principle of e quitable distribution amongst concurrent
creditors of the assets of the insolven t debtor. And following in the footsteps
of that principle has been a perennial debate concerning the validity of
dispositions that are made by an insolven t debtor before the axe of bankruptcy
falls. For once an insolvent debtor disposes of property to one creditor the risk
of loss to the others increases propor tionately unless the debtor regains his
solvency. The history of that deba te and the ethical and commercial
imperatives that have surrounded it are extensively explored in an erudite
article by Professor Robert Weisberg entitled ‘Commercial Morality, the
Merchant Character, and the Hist ory of the Voidable Preference’, 1 which
places the debate in the following context:
‘Preference law … reflects a kind of in security about the formal process of
bankruptcy. Bankruptcy law enforces its principl e of ratable distribu tion at the technical
point when the petition is filed. But preference law then sets a still earlier moment at which
the debtor’s estate faces a risk of dismemberm ent. At that earlier moment, preference law
imposes a duty or sanction on the debtor or individual creditor to preserve the estate so that,
when the petition is filed, the trustee will still find the assets there to distribute. Bankruptcy
law empowers the trustee and the court to enfo rce ratable distribution as a matter of public
power; preference law implies that the debtor an d creditor have a private duty to save the
1 39 Stanford LR Vol 3 (1986) 3.
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bankruptcy process from becomi ng moot before it has a chance to start. It places on the
debtor and individual creditor a social or moral responsibilit y to respect the interests of the
general class of creditors, presumably in the name of the larger social goal of enhancing the
efficient sale of credit.’
Professor Weisberg goes on to observe that ‘despite apparent consensus on the
purpose of preference law the conditi ons under which debtor and creditor owe
this duty have been heavily conteste d for several centuries’ and that the
approach to be taken to preferences remains ‘one of the most unstable
categories of bankruptcy jurisprudence.’2
[2] Measures that aim at the impeachment of preferences are often founded
upon what is considered to be the moral turpitude of an insolvent debtor who
confers a preference on a creditor. But the impeachment of preferent
dispositions can also be justified on grou nds other than the moral turpitude of
the debtor: on an obligation owed by creditors amongst themselves not to
disturb the equitable distribution that they all are entitled to anticipate once a
debtor is unable to pay all his debts.3
[3] The legislation in this country d ealing with the problem of preferences
reflects elements of both. It is reflect ed mainly in sections 29(1), 30(1) and
31(1) of the Insolvency Act 24 of 1936. Section 31(1) is aimed at collusive
transactions that have the effect of prejudicing creditors or preferring one
2 Weisberg, op cit 4.
3 Weisberg, op cit 82-90.
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creditor above another. 4 Section 30(1) is directed at dispositions that may not
result from collusion but are nonetheless intended by the debtor to prefer one
creditor above the others. 5 And no doubt because an insolvent debtor who
disposes of property to a creditor shor tly before sequestration can generally be
presumed to intend to conf er a preference s 29(1) a llows for the impeachment
of dispositions that are made less than six months before se questration if they
merely have the effect of conferring a preference unless the creditor can prove
that that was not the debtor’s intenti on and that it was made in the ordinary
course of business. The section reads as follows:
‘ S. 29 Voidable Preferences
(1) Every disposition of his property made by a debtor not more than six months before the
sequestration of his estate or, if he is deceased and his estate is insolvent, before his death,
which has had the effect of preferring one of his creditors above another, may be set aside
by the Court if immediately after the making of such disposition the liabilities of the debtor
exceeded the value of his assets, unless the person in whose favour the disposition was
made proves that the disposition was made in the ordinary course of business and that it
was not intended thereby to prefer one creditor above another.’
4 S. 31 Collusive dealings before sequestration
(1) After the sequestration of a debtor's estate the court may set aside any transaction entered into by
the debtor before the sequestration, whereby he, in collusion with another person, disposed of property
belonging to him in a manner which had the effect of prejudicing his creditors or of preferring one of his
creditors above another.
5 S. 30 Undue preference to creditors
(1) If a debtor made a dispositi on of his property at a time when his liabilities exceeded his assets,
with the intention of preferring one of his creditors above another, and his estate is thereafter sequestrated,
the court may set aside the disposition.
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[4] The question in the present appeal is whether s 29(1) is constitutionally
objectionable. The appellant s contend that it is a nd they seek an order
declaring it to be invalid. The circumst ances in which the matter arose can be
stated briefly. The appellants are the trustees of three trusts: Paragon Asset
Management Trust (‘Paragon’), Paragon Asset Manage ment Trust (Western
Cape) (‘Paragon Western Cape’), and Co mmercial Investment Trust. Acting
on behalf of hundreds of individual investors the trusts invested heavily in a
business venture that was conducted by the Halgryn Family Trust. The
investments were in the form of revolvi ng loans that attracted a high rate of
interest. Loans made by investors, with interest, were repaid for a while but
the continuation of repayments was sustainable only with ever larger
investments. Naturally the venture ha d a limited lifespan. Ultimately the
Halgryn Family Trust was sequestrated leaving vast amounts incapable of
being repaid.
[5] During the six months immediately preceding sequestration the trusts
were periodically repaid with interest moneys that they had lent to the Halgryn
Family Trust. According to the trustees of the inso lvent estate (the first
respondent) repayments to either Pa ragon or Paragon Western Cape or both
amounted to R24 977 272 and repayments to Commercial Investment Trust
amounted to R1 382 818. Relying upon the provisions of s 29(1) the trustees
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of the insolvent estate sued the trusts in the South Eastern Cape High Court for
recovery of the dispositions.
[6] The trusts excepted to the par ticulars of claim on the grounds that
s 29(1) was constitutionally invalid. Presumably because that procedure is
inappropriate for resolving an issue of that nature the action was stayed while
the trusts brought an application for an order declaring that
‘…section 29(1) of the Insolvency Act 24 of 1936 insofar as it places an onus on a
defendant to prove that a dispos ition was made in the ordinary course of business and that
it was not intended thereby by the debt or to prefer one creditor above another [is]
inconsistent with the Constitution of the Republ ic of South Africa Act 108 of 1996 and [is]
invalid.’
[7] The application was dismissed by th e court below (Pillay AJ) in a lucid
and well reasoned judgment and this appeal is brought with the leave of this
court.
[8] As appears from the passage that I have highlighted the appellants’
concern (at least initially) was that the onus that is cast upon a defendant who
wishes to escape impeachment of a disposition is excessively onerous. 6 When
asked to clarify what part of the secti on was said to be in valid the appellants’
counsel at first asked for the deletion of the words ‘not more than six months’
and the words ‘unless the person in whose favour the disposition was made
6 What will be required to discharge that onus was considered by this court in Cooper v Merchant Trade
Finance Ltd 2000 (3) SA 1009 (SCA) in which the more important earlier cases are collected.
7
proves that the disposition was made in the ordinary course of business and
that it was not intended thereby to prefer one creditor above another’. But that
only exposes the flaw in the case the a ppellant presented. The result of an
order with that limited scope w ould expose to impeachment without
qualification all dispositions made by an insolvent debtor at any time before
sequestration with the effect of preferri ng one creditor above another. And if
the impeachment of all such dispositi ons is constitutionally unassailable it can
hardly be said that the qualifications ar e themselves objectionable. While it is
true that an order in those terms would re lieve a creditor of what is said to be
an oppressive onus it would do so only by denying him any defence at all.
[9] Confronted with that difficulty the appellants’ counsel grasped the
nettle and plumped instead for an order declaring the whole of s 29(1) to be
invalid. Although that was not the basis upon which the case was brought the
appellants’ change of tack does bring more clearly into focus the true nature of
their complaint. What the appellants say, in effect, is that it is constitutionally
impermissible to impeach a disposition unless it is shown to have been made
by an insolvent debtor with the inten tion of conferring a preference. (Such a
disposition is impeachable in terms of s 30(1)). Or viewed from the opposite
perspective the appellants’ argument is that it is constitutionally impermissible
to impeach a disposition merely because it has the effect of conferring a
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preference, which is what s 29(1) allows for in the absence of proof by the
creditor that brings the qualification into effect.
[10] Why it should be objectionable to impeach a disposition that has the
effect of conferring a preference was never fully articulated in argument.
General appeals were made to the rights of dignity
7 and equality 8 that are
protected by the Bill of Rights but those appeals were not developed. Nor am I
able to see how any rights that ar e constitutionally protected might be
compromised by s 29(1). Even an appeal to no more than considerations of
commercial equity or fairness – if that were to be relevant – would not seem to
me to assist the appellants. I have al ready pointed out that there is a sound
commercial rationale for im peaching dispositions that confer a preference
even where no moral turpitude attaches to the insolvent debtor. Indeed, as
pointed out by Zulman JA in Cooper,9 there are other jurisdictions that allow
for the impeachment of dispositions by reason only of their effect and without
any regard to the motive of the debtor. 10 Earlier I drew attention to the fact
that what is equitable in this field of commercial activity seems destined to
remain forever contested with the result that there will always be a variety of
legitimate legislative choices. No reason has been shown why the legislative
choice that is embodied in s 29(1) is constitutionally impermissible.
7 Section 10.
8 Section 9.
9 Footnote 5.
10 Cooper, at para 6.
9
[11] There is no merit in this appeal . The appeal is dismissed with costs
including the costs of two counsel.
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R.W. NUGENT
JUDGE OF APPEAL
HOWIE P)
ZULMAN JA)
CAMERON JA) CONCUR
PONNAN JA)