Brief Summary

Company — Winding up — Disposition without value — Liquidators sought repayment of R 1 044 500.00 from defendant, alleging payments made by insolvent company constituted dispositions without value — Plaintiffs failed to establish that no payments were received from defendant during the relevant period — Court held that plaintiffs could not selectively limit the time frame for their claim under section 26(1) of the Insolvency Act — Judgment granted in favour of plaintiffs for R 240 000.00 under section 29 instead, as claim under section 26(1) was not substantiated.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an application for default judgment on the unopposed motion roll, instituted by the plaintiffs in their representative capacities as joint liquidators of Free Agape Enterprises (Pty) Ltd (in liquidation) (“Free Agape”). The liquidators sought repayment of amounts paid by Free Agape to the defendant, contending that such payments were impeachable dispositions under the Insolvency Act 24 of 1936.

The parties were Pieter Hendrik Strydom N.O, Haroon Abdool Satat Moosa N.O, and Deon Marius Botha N.O (as joint liquidators) as plaintiffs, and Cecilia Jacoba Le Roux as the defendant.

The procedural history, as recorded in the reasons, was that summons was issued, and the matter was postponed in October 2022 to allow the defendant an opportunity to obtain legal representation. By the hearing date of 9 June 2023, the defendant had not delivered a notice of intention to defend or a plea, but she appeared in person and indicated that she had invested money with Free Agape, did not know it was illegal, and had already repaid some money.

The general subject-matter of the dispute concerned the liquidators’ attempt to recover monies paid out by Free Agape to an investor/participant in what was pleaded to be an illegal investment scheme, relying primarily on section 26(1) (dispositions without value) and alternatively on section 29(1) (voidable preferences) of the Insolvency Act.

2. Material Facts

Free Agape was placed in final liquidation on 12 June 2018. In terms of section 348 of the Companies Act 61 of 1973, the deemed date of commencement of liquidation was pleaded as 22 March 2018, being the alleged date on which the winding-up application was presented to court.

It was pleaded that on 13 August 2019, under case number 11938/2019, an order was granted declaring that the investment scheme conducted under the name and style of Free Agape (and various trading names) was illegal, unlawful and void, and that all investment and related agreements between Free Agape and third-party investors were null and void.

The liquidators pleaded, as part of the scheme’s operation, that Free Agape did no business other than taking deposits from investors and using these deposits to repay deposits received from other investors and/or to pay out amounts described as dividends to other investors. It was further pleaded that Free Agape’s liabilities exceeded its assets and that it was unable to pay its debts as contemplated in sections 339 and 340 of the Companies Act 61 of 1973.

In support of the claim under section 26(1), the liquidators pleaded that during the period 21 April 2017 to 14 November 2017, Free Agape made payments to the defendant totalling R 1 044 500.00. They pleaded that these payments were made less than two years before the effective date of liquidation and therefore constituted dispositions for purposes of the Insolvency Act.

A critical pleaded factual assertion for the section 26(1) claim was that, during that pleaded period, the defendant made no payments to Free Agape, and therefore the liquidators contended that the full amount paid to her exceeded what she paid to Free Agape, rendering those payments dispositions “not made for value”.

The court treated as significant that, on the liquidators’ own pleaded description of how the scheme functioned, payments out (described as dividends or repayments) occurred after deposits were received from investors. The liquidators’ pleadings did not set out, with sufficient particularity for the section 26(1) enquiry as applied in the reasons, when deposits were made by the defendant relative to the payments she received.

3. Legal Issues

The central legal questions the court was required to determine were whether the liquidators had made out a case for relief under section 26(1) of the Insolvency Act 24 of 1936 (disposition without value), and, if not, whether relief could properly be granted under the alternative claim under section 29(1).

The dispute primarily concerned the application of law to pleaded facts and, in relation to section 26(1), the court’s evaluation of whether the pleaded facts satisfied the statutory requirements concerning “value”, the relevant time period, and the requirement concerning the insolvent’s assets and liabilities immediately after the disposition. It also involved the court’s exercise of a discretion (recognised in the reasons) as to whether to set aside a disposition once the statutory framework was considered against the pleaded case.

A further issue addressed in the reasons was whether, and in what manner, the pleaded illegality of the underlying investment scheme affected the assessment of whether payments were “for value” within the meaning of section 26(1).

4. Court’s Reasoning

The court began by setting out the text and purpose of section 26(1), explaining that it serves to protect creditors by empowering trustees/liquidators to set aside pre-insolvency transactions not made for value, subject to the statutory onus structure and time frames. The reasons emphasised that the determination of “value” is not confined to monetary consideration, need not necessarily come from the recipient of the disposition, and must be determined with reference to all the circumstances. The court also recognised the established approach that the enquiry into “value” focuses on whether the insolvent obtained a benefit from making the disposition.

A central feature of the court’s reasoning was that section 26(1) involves what the court described as a two-part enquiry. First, it must be shown that the disposition was not made for value. Second, the statutory onus requirements linked to the time frames in section 26(1)(a) and (b) must be satisfied. In the court’s view, the liquidators’ pleaded approach improperly selected only a limited period (approximately six months) in which the defendant allegedly paid nothing in, while receiving payments out, and sought to use that limited window to establish “no value”.

The court regarded the liquidators’ use of the phrase “during this period” as instructive, holding that it reflected a selective computation that did not adequately engage with the broader two-year period relevant to section 26(1). The court reasoned that, at minimum, the entire two-year period should be considered for purposes of properly evaluating whether the dispositions were for value in the context of the scheme described in the pleadings. On the pleaded version, payments out occurred only after deposits were taken from investors; this description was seen as undermining a simplistic inference that payments to the defendant were necessarily “for no value” merely because no deposits were alleged within a narrow, selected period.

The court further reasoned that, because the liquidators bore the onus (in the circumstances they pleaded) to prove the requirements applicable to section 26(1), it was insufficient to make a bare allegation that immediately after the disposition the insolvent’s liabilities exceeded its assets. The reasons stressed that liquidators, as administrators of the insolvent estate, would ordinarily have access to the insolvent’s financial records, and the court considered it inappropriate that the pleadings left the court effectively to speculate as to whether the “assets versus liabilities immediately after disposition” requirement had been met.

On the question of illegality, the court addressed the pleaded fact that the scheme and related agreements had been declared illegal and void. The reasoning drew on the established meaning that “disposition not for value” means “for no value at all”, and linked this to the nature of the underlying transactions. The court referred to authority distinguishing between contracts that are lawful but give rise only to moral obligations unenforceable in a court of law, and illegal contracts that give rise to no obligations at all, indicating that this distinction informs the evaluation of “value” in section 26-type enquiries.

The court also relied on the approach that the assessment must have regard to the time of the transaction/promise, not merely the time of payment, warning that if the payment date were determinative, many payments by an insolvent whose liabilities exceeded assets could mistakenly be treated as dispositions without value. This principle was used to reinforce the court’s conclusion that the liquidators’ selective period-based pleading did not properly establish the relevant statutory elements.

Taking these considerations together, the court concluded that the liquidators had not made out a case for setting aside the payments under section 26(1) on their pleaded version, and the court accordingly exercised its discretion against granting relief under section 26. The court therefore granted judgment on the alternative claim under section 29(1).

5. Outcome and Relief

The court granted judgment in favour of the plaintiffs on the alternative claim in the amount of R 240 000.00 in terms of section 29(1) of the Insolvency Act 24 of 1936.

The court did not grant the primary relief sought under section 26(1) for R 1 044 500.00, holding that the plaintiffs had not made out a case for that relief on the pleaded facts and the applicable statutory requirements.

No specific order as to costs is recorded in the provided reasons.

Cases Cited

Estate Jager v Whittaker 1944 (AD) 246.

Goode, Durante & Murray Ltd. v Hewitt & Cornell 1961 (4) SA 286 (N).

Estate Wege v Strauss 1932 AD 76.

Strydom N.O and Another v Snowball Wealth (Pty) Ltd and Others (356/2021) [2022] ZASCA 91 (15 June 2022).

Eckhoff N.O and Another v Hartshorne and Another (13640/2020) [2022] ZAWCHC 68 (29 April 2022).

Legislation Cited

Insolvency Act 24 of 1936, section 2.

Insolvency Act 24 of 1936, section 26(1).

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

Insolvency Act 24 of 1936, sections 30 and 31.

Companies Act 61 of 1973, section 348.

Companies Act 61 of 1973, sections 339 and 340.

Rules of Court Cited

No rules of court are recorded as cited in the provided reasons.

Held

The court held that the plaintiffs, on their pleaded case, did not establish entitlement to relief under section 26(1) because their pleading was impermissibly selective as to the relevant period, did not adequately address the necessary statutory enquiries (including the position of assets and liabilities immediately after the dispositions), and was internally undermined by their own pleaded description of how the investment scheme operated (namely, that repayments/dividends were made after deposits were received).

The court held further that, in these circumstances, relief under section 26(1) was not made out, and the court therefore granted judgment under the alternative basis of section 29(1) for R 240 000.00.

LEGAL PRINCIPLES

Section 26(1) of the Insolvency Act 24 of 1936 is directed at protecting creditors by permitting the setting aside of dispositions not made for value, subject to the statutory onus regime and the relevant time frames. Whether a disposition is for value depends on whether the insolvent obtained a benefit, assessed in light of all the circumstances, and “value” is not confined to monetary consideration nor required to proceed from the direct recipient.

The section 26(1) enquiry requires, first, proof that the disposition was not made for value, and second, satisfaction of the statutory requirements relating to the insolvent’s assets and liabilities immediately after the disposition, together with the applicable onus depending on whether the disposition occurred within or outside the two-year period specified in the section.

In evaluating “value” for purposes of section 26(1), the assessment is directed to the time of the transaction or promise giving rise to the payment rather than merely the time of payment, because focusing only on the payment date could incorrectly categorise payments by an insolvent as dispositions without value.

Where liquidators or trustees seek relief under section 26(1), a bare allegation regarding the insolvent’s financial position immediately after a disposition may be insufficient on the approach adopted in the reasons, particularly given the liquidators’ role and their ordinary access to the insolvent estate’s records. The onus structure and the statutory criteria require a properly pleaded and supported basis for the conclusion that the statutory threshold has been met.

The illegality or voidness of underlying transactions may be relevant to the evaluation of “value”, including through the distinction (recognised in the cited authorities) between arrangements giving rise only to unenforceable moral obligations and illegal agreements giving rise to no obligations at all; however, the assessment remains tied to whether value, benefit, or a quid pro quo is received or promised in the relevant sense contemplated by section 26(1).

Strydom N.O and Others v Le Roux - Reasons (2613/2022) [2023] ZAWCHC 244 (15 September 2023)