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Last Updated: 3 December 2005
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
________________________________________________________________________
Before: HOWIE P, ZULMAN, CAMERON, NUGENT & PONNAN JJA
Heard: 10 NOVEMBER 2005
Delivered: 25 NOVEMBER 2005
Summary: Section 29(1) of the Insolvency Act 24 of 1936 – voidable preferences – whether unconstitutional.
________________________________________________________________________
J U D G M E N T
________________________________________________________________________
NUGENT JA
NUGENT JA:
[1] A central feature of
Anglo-American bankruptcy law for almost three centuries has been the principle
of equitable distribution
amongst concurrent creditors of the assets of the
insolvent debtor. And following in the footsteps of that principle has been a
perennial
debate concerning the validity of dispositions that are made by an
insolvent 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 proportionately unless the debtor
regains his solvency. The history of
that debate 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
History of
the Voidable Preference’,[1]
which places the debate in the following context:
‘Preference law ...
reflects a kind of insecurity about the formal process of bankruptcy. Bankruptcy
law enforces its principle
of ratable distribution 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 dismemberment. 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 enforce ratable distribution as a matter of public
power; preference law implies that the debtor and creditor have a private duty
to save the bankruptcy process from becoming moot
before it has a chance to
start. It places on the debtor and individual creditor a social or moral
responsibility 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 conditions under
which
debtor and creditor owe this duty have been heavily contested 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 grounds
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 dealing with the problem of preferences reflects elements of both.
It is reflected 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 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 shortly before
sequestration can generally be presumed
to intend to confer a preference s 29(1)
allows for the impeachment of dispositions that are made less than six months
before sequestration
if they merely have the effect of conferring a preference
unless the creditor can prove that that was not the debtor’s intention
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] The
question in the present appeal is whether s 29(1) is constitutionally
objectionable. The appellants contend that it is and
they seek an order
declaring it to be invalid. The circumstances in which the matter arose can be
stated briefly. The appellants
are the trustees of three trusts: Paragon Asset
Management Trust (‘Paragon’), Paragon Asset Management Trust
(Western
Cape) (‘Paragon Western Cape’), and Commercial 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 revolving 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 had 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 insolvent estate (the
first respondent) repayments to either Paragon
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 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 particulars 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 disposition was
made in the ordinary course of business and that it was
not intended thereby by
the debtor to prefer one creditor above another [is] inconsistent with the
Constitution of the Republic of South Africa Act 108 of 1996 and [is]
invalid.’
[7] The application was dismissed by the 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 section was said to be invalid 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
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 appellant
presented. The result of an order with that limited
scope would expose to
impeachment without qualification all dispositions made by an insolvent debtor
at any time before sequestration
with the effect of preferring one creditor
above another. And if the impeachment of all such dispositions is
constitutionally unassailable
it can hardly be said that the qualifications are
themselves objectionable. While it is true that an order in those terms would
relieve
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
intention 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 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 are 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 already pointed out that there is a sound
commercial
rationale for impeaching 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.
[11] There is no merit in this appeal. The appeal is dismissed
with costs including the costs of two counsel.
____________________
R.W. NUGENT
JUDGE OF APPEAL
HOWIE P)
ZULMAN JA)
CAMERON
JA) CONCUR
PONNAN JA)
[1] 39 Stanford LR Vol 3 (1986) 3.
[2] Weisberg, op cit
4.
[3] Weisberg, op cit
82-90.
[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 disposition 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.
[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] Section
10.
[8] Section
9.
[9] Footnote 5.
[10] Cooper, at para
6.
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