Brief Summary

Sequestration — Provisional order of sequestration — Locus standi — Respondent contending that claims had been paid in full and that applicants lacked standing to seek final order — Court considering whether payment discharged the debts and established insolvency. Respondent argued that a payment made by a third party constituted a donation and did not create liability, thus disputing the existence of any outstanding debts. Court held that the applicants had established the respondent's insolvency and maintained locus standi to pursue the final order, as the purported payment did not extinguish the claims against the respondent.

Comprehensive Summary

Summary of Judgment

Introduction

The matter concerned the extended return day of a provisional sequestration order granted against the first respondent, Mr Evgueni Victorovitch Zakharov, in the Western Cape Division of the High Court. The application for final sequestration was brought jointly by the first and second applicants, Corruseal Corrugated KZN (Pty) Ltd and Corruseal Corrugated Gauteng (Pty) Ltd (referred to collectively in the judgment as “Corruseal”). The second respondent, Ms Irina Petrovna Karavaeva, was cited in accordance with the division’s practice directions, but no substantive relief was sought against her.

The procedural history was material to the issues on the return day. Corruseal’s claims arose from suretyships signed by Mr Zakharov for the indebtedness of Exotic Fruit (Pty) Ltd (“Exotic”), a company he controlled, which was later liquidated. Following Exotic’s liquidation, Corruseal instituted action proceedings against Mr Zakharov under the suretyships. In those actions, the court granted summary judgment in limited amounts (R500 000 in each matter), after which writs were issued and the sheriff obtained nulla bona returns when Mr Zakharov failed to pay or to point out disposable property.

Corruseal then launched sequestration proceedings, resulting in a provisional sequestration order granted on 3 August 2022. The rule was extended by agreement to 22 February 2023, when the matter came before Gamble J for determination of whether the provisional order should be confirmed. On the return day, Mr Zakharov advanced two principal defences: that Corruseal lacked standing because the judgment debts had allegedly been settled after the provisional order, and that Corruseal had not established his insolvency.

The general subject-matter of the dispute was therefore whether Corruseal had met the statutory requirements for a final sequestration order, including standing as a creditor, proof of an act of insolvency or actual insolvency, and advantage to creditors, as well as whether the court’s discretion should nevertheless be exercised against sequestration.

Material Facts

Corruseal supplied packaging materials to Exotic over time. On 21 April 2016, Mr Zakharov applied for credit facilities with Corruseal on Exotic’s behalf and furnished personal suretyships for Exotic’s future indebtedness to each applicant. By October 2019, Exotic owed Corruseal KZN more than R16 million and Corruseal Gauteng more than R1.2 million for goods sold and delivered under the credit facilities.

On 25 October 2019, Exotic was liquidated on the application of another creditor. After Mr Zakharov failed to satisfy payment demands, Corruseal issued summons against him under the suretyships (separate actions for Corruseal KZN and Corruseal Gauteng). In opposing summary judgment, Mr Zakharov advanced (among other defences) an assertion that the suretyship exposure was limited to R500 000 per applicant. On 25 May 2021, summary judgment was granted in each matter only in the amount of R500 000, with leave to defend the balance. Subsequent applications for leave to appeal were refused, ultimately by the Supreme Court of Appeal on 3 November 2021.

On 24 November 2021, two warrants of execution were issued for approximately R601 232.95 each (capital plus interest). On 1 December 2021, the sheriff attended at Mr Zakharov’s home and demanded payment. Mr Zakharov was present and informed the sheriff that he was unable to pay and also stated that movables at the home belonged to Chestnut Hill (Pty) Ltd. The sheriff returned nulla bona returns in respect of both writs.

Corruseal instituted sequestration proceedings and obtained a provisional sequestration order on 3 August 2022. After that provisional order, Mr Zakharov filed a supplementary answering affidavit alleging that an associate (through a Dubai entity, Evergreen) had provided funds enabling payment of Corruseal’s judgment debts and interest, and that this payment should deprive Corruseal of standing to pursue sequestration. The payment relied upon was effected on 25 August 2022, when R1 283 286.88 was paid from Mr Zakharov’s attorneys’ trust account into Corruseal’s attorneys’ trust account. Mr Zakharov characterised the funds as a donation to him, used to avoid the “indignity” of sequestration, and he tendered costs.

A further factual feature accepted by the court as relevant on the record was that the R1 283 286.88 remained in the trust account of Corruseal’s attorneys and had not been paid out to any party, and that Corruseal maintained it received the money without prejudice to its rights. The court also noted additional indications of Mr Zakharov’s financial distress, including a further summary judgment obtained against him on 4 July 2022 for substantial amounts pursuant to another suretyship, as well as admissions in his answering affidavit regarding the liquidation’s severe impact on his finances and difficulties in accessing foreign income.

Where the court distinguished between disputed and undisputed facts, it treated the existence and effect of the nulla bona returns as effectively undisputed, because Mr Zakharov did not meaningfully engage with or challenge Corruseal’s reliance on them, nor did he rebut the inference sought to be drawn from them.

Legal Issues

The central questions the court was required to determine were whether Corruseal had established the requirements for final sequestration on the return day on a balance of probabilities. Within that overall enquiry, the judgment addressed several connected legal issues.

The first was whether Corruseal retained locus standi as a creditor to pursue final sequestration where, after provisional sequestration, a third party had paid money that was intended (according to Mr Zakharov) to settle Corruseal’s judgment debts. This was primarily a question of the legal effect of a post-sequestration payment structured as a donation to the insolvent, implicating statutory rules governing what property vests in the Master or trustee upon sequestration.

The second was whether Corruseal had shown that Mr Zakharov had committed an act of insolvency as contemplated by section 8(b) of the Insolvency Act 24 of 1936, through the sheriff’s returns after execution steps on judgments, and whether Corruseal could continue relying on such returns given the post-provisional payment dispute. This involved application of statutory requirements to largely common-cause procedural facts and the consequences of Mr Zakharov’s failure to meet allegations in his affidavits.

The third was whether Corruseal had established actual (factual) insolvency by inference, and whether Mr Zakharov had rebutted any prima facie case arising from his failure to pay and surrounding circumstances. This was an exercise in applying legal standards to the evidentiary picture placed before the court in motion proceedings.

The fourth was whether there was reason to believe that sequestration would be to the advantage of creditors, including whether an investigation under insolvency machinery could yield recoveries, and whether the presence of funds said to vest in the insolvent estate supported that requirement.

Finally, even if the statutory requirements were met, the court had to consider whether it should exercise its discretion to refuse a final sequestration order notwithstanding compliance with the formal criteria. This was a discretionary, evaluative judgment guided by established principle.

Court’s Reasoning

On locus standi, the court treated the decisive point as the legal consequence of Mr Zakharov’s own characterisation of Evergreen’s contribution as a donation to him, accepted by him, and then paid onward to Corruseal’s attorneys. The court accepted Corruseal’s submission that a donation is a contract requiring acceptance by the donee, and that on the respondent’s version the payment was an unconditional benefit made available to him with no obligation of repayment. The court then applied section 20 of the Insolvency Act, which provides that sequestration divests the insolvent of his estate and vests it in the Master (and thereafter a trustee), and that the estate includes not only property held at sequestration but also property acquired or accruing during sequestration, subject to section 23 (which was not relied upon as saving the donation).

Relying on Ex parte Vrey 1947 (4) SA 648 (C), the court held that a donation made to an insolvent during sequestration does not vest in the insolvent personally, but in the trustee (or, at the provisional stage, the Master/provisional trustee). On this approach, the court reasoned that Evergreen had not paid Corruseal directly in settlement of the debt; instead it had donated money to Mr Zakharov, and any such post-sequestration accrual formed part of the insolvent estate. The court thus rejected the respondent’s attempt to recharacterise the transaction as if Evergreen had simply paid Corruseal to spare him sequestration, holding that however the scenario was framed, the structure adopted on the papers was a donation to the insolvent, with the consequence that the funds vested in the insolvent estate and could not extinguish Corruseal’s claim in the manner contended for. On that basis, Corruseal’s debt had not been settled and Corruseal retained standing to seek final sequestration.

On proof of insolvency, the court reiterated that on the return day the applicant must establish the requirements for final sequestration on a balance of probabilities, including a qualifying claim, an act of insolvency or actual insolvency, and advantage to creditors. It treated the existence of Corruseal’s qualifying claim as having been established once locus standi was upheld.

For the act of insolvency requirement, Corruseal relied on section 8(b), supported by the sheriff’s nulla bona returns after execution on the summary judgment debts. The court emphasised that Mr Zakharov did not meaningfully contest the allegation that he had committed an act of insolvency, did not attack the validity of the returns, and did not answer Corruseal’s allegation that he had committed an act of insolvency under section 8(b). The court treated this failure to engage as decisive in permitting the allegation to be taken as admitted in motion proceedings, referencing the applicable approach to disputes of fact. The respondent’s argument, drawing on Duchen v Flax 1938 WLD 119, that a creditor could not still rely on a nulla bona return once the debt had been settled, was held not to assist him because the court had found that settlement had not occurred in law.

Although proof of an act of insolvency sufficed, the court also addressed actual insolvency. It accepted that Corruseal could not provide a complete inventory of Mr Zakharov’s assets and liabilities, but held that actual insolvency may be established inferentially, applying the passage quoted from ABSA Bank Ltd v Rhebokskloof (Pty) Ltd and others 1993 (4) SA 436 (C). The court reasoned that the respondent had not attempted to demonstrate solvency by showing that his assets exceeded his liabilities, despite the prima facie case arising from the nulla bona returns. It attached weight to additional indicators, including another substantial summary judgment against him on a different suretyship, and the respondent’s own admissions of financial distress, including selling vehicles, reliance on his wife’s funds, and difficulties in repatriating foreign earnings. The court further considered the respondent’s explanation that Evergreen’s donation was made to avoid the indignity of sequestration as supporting an inference of inability to pay. Drawing on the well-known approach that a debtor’s failure to pay debts is weighty evidence on solvency, with reference to De Waard v Andrews & Thienhans Ltd 1907 TS 727, the court concluded that factual insolvency was established on the probabilities in addition to the statutory act of insolvency.

On the “benefit to creditors” requirement, the court applied a wide interpretation consistent with Meskin & Co v Friedman 1948 (2) SA 555 (W), as approved in Stratford and others v Investec Bank Limited and others 2015 (3) SA 1 (CC). It reasoned that sequestration offers investigative advantages, and that it was enough to show a reasonable prospect of some pecuniary benefit, including through enquiries that may reveal or recover assets. The court considered the respondent’s description of a web of entities and trusts and the assertion that household movables belonged to a company controlled by his daughter as indicating that insolvency inquiries could potentially yield recoveries. The court also treated as material that there was already an amount of R1 283 286.88 regarded as being in the hands of the respondent’s trustee and available for distribution, which provided an immediate, concrete benefit to creditors.

Finally, in considering discretion, the court accepted that it had an overriding discretion to refuse sequestration but applied the approach articulated in Orestisolve (Pty) Ltd t/a Essa Investments v NDFT Investments Holdings (Pty) Ltd and another 2015 (4) SA 449 (WCC), namely that where the requirements are met a court should not refuse relief on a whim and some particular reason must exist to withhold the order. The court found no such reason on the facts, and considered that an investigation into the respondent’s financial affairs was imperative, particularly given the indications of multiple creditors and complex financial arrangements.

Outcome and Relief

The rule nisi granted on 3 August 2022 was confirmed, and the first respondent’s estate was placed under final sequestration.

The costs of the application were ordered to be costs in the administration of the insolvent estate.

Cases Cited

Union Free State Mining and Finance Corporation Ltd v Union and Free State Gold and Diamond Corporation Ltd 1960 (4) SA 547 (W); Avis v Verseput 1943 AD 331; Ex parte Vrey 1947 (4) SA 648 (C); Duchen v Flax 1938 WLD 119; Ex parte Bruce 1956 (1) SA 480 (SR); Paarwater v South Sahara Investments (Pty) Ltd [2005] 4 All SA 185 (SCA); Plascon-Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd [1984] ZASCA 51; 1984 (3) SA 623 (A); Orestisolve (Pty) Ltd t/a Essa Investments v NDFT Investments Holdings (Pty) Ltd and another 2015 (4) SA 449 (WCC); Sithole N.O. v Mahlangu 2017 ZAGPJHC 134; Lundy v Beck 2019 (5) SA 503 (GJ); ABSA Bank Ltd v Rhebokskloof (Pty) Ltd and others 1993 (4) SA 436 (C); De Waard v Andrews & Thienhans Ltd 1907 TS 727; Meskin & Co v Friedman 1948 (2) SA 555 (W); Stratford and others v Investec Bank Limited and others 2015 (3) SA 1 (CC).

Legislation Cited

Insolvency Act 24 of 1936, sections 8(b), 20, and 23.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that Corruseal retained locus standi because the post-provisional payment relied upon by the respondent was, on the respondent’s own version, a donation made to him during sequestration and thus vested in the Master/trustee in terms of section 20 of the Insolvency Act 24 of 1936, rather than extinguishing Corruseal’s claims.

The court further held that Corruseal had established, on a balance of probabilities, that the respondent had committed an act of insolvency under section 8(b) through unchallenged nulla bona returns, and that Corruseal had also established actual insolvency by inference from the respondent’s failure to pay, other proved liabilities, and the respondent’s own admissions of financial distress.

The court held that sequestration would be to the advantage of creditors, both because insolvency procedures could facilitate investigation into the respondent’s complex financial arrangements and because funds were already available for distribution within the insolvent estate.

Having found that the statutory requirements were satisfied and no special reason existed to refuse relief, the court confirmed the provisional order and granted a final sequestration order, with costs to be costs in the administration of the insolvent estate.

LEGAL PRINCIPLES

A final sequestration order on the return day requires the applicant creditor to establish, on a balance of probabilities, a qualifying claim, an act of insolvency or actual insolvency, and reason to believe sequestration will be to the advantage of creditors.

Under section 20(2)(b) of the Insolvency Act 24 of 1936, an insolvent’s estate includes property acquired or accruing during sequestration (subject to statutory exceptions). A donation made to an insolvent during sequestration vests in the Master/trustee rather than in the insolvent personally, with the consequence that such a donation cannot be treated as the insolvent’s personal property for purposes of privately extinguishing debts outside the insolvency framework.

A creditor may establish insolvency through proof of an act of insolvency under section 8(b) by relying on a sheriff’s return showing failure to satisfy a judgment debt or to indicate sufficient disposable property. Where such reliance is not meaningfully met in motion proceedings, the allegation may be treated as effectively admitted on the papers in accordance with the applicable approach to motion proceedings.

Actual insolvency may be proved inferentially; it is not necessary for an applicant creditor to present a complete balance sheet of the debtor’s assets and liabilities. A debtor’s unexplained failure to pay debts and surrounding evidence of financial distress may justify an inference of insolvency, and the debtor bears the practical burden of rebutting a prima facie case by demonstrating solvency.

The “advantage to creditors” requirement is interpreted broadly. It is sufficient to show a reasonable prospect, not too remote, of some pecuniary benefit, including benefit flowing from statutory investigative mechanisms that may reveal or recover assets, even where immediate assets are not fully identified.

Even where statutory requirements are met, the court retains a discretion whether to grant a final sequestration order; however, that discretion must be exercised on rational grounds and not capriciously. Where requirements are satisfied, an order will generally follow absent a particular reason to refuse it.

Corruseal Corrugated KZN (Pty) Ltd and Another v Zakharov and Another (2108/2021) [2023] ZAWCHC 48 (6 March 2023)