One would have thought that the Supreme Court of Appeal (“SCA”) would have had an opportunity to interpret the important sections of the 1937 Insolvency Act by now. This appeared not to be the case when section 26 of the 85-year-old act came before the Supreme Court of Appeal recently in Strydom & Another NNO v Snowball Wealth (Pty) Ltd & Others [Unreported, Case Number 356/21, Supreme Court of Appeal, 15 June 2022] (“Snowball-case”).
Section 26 provides for the setting aside of a disposition of property by an insolvent “made not for value”. The section is also applicable to companies and corporations.
The facts of the Snowball-case were as follows: Prior to its liquidation the DexGroup sold shares that it held in Trustco to Snowball, Chou and Rabinowitz. The shares were sold to the respondents at a discount of between 40 and 72% of the value of the shares. The liquidators of DexGroup instituted a claim against the Snowball, Chou and Rabinowitz for the return of the shares as it alleged that the transactions contravened the provisions of section 26 and that the value paid for the shares were “illusory and merely nominal”.
The respondents filed exceptions against the liquidators’ claim on the basis that it did not disclose a course of action. Snowball’s exception was based thereon that the term “illusory and merely nominal” means no value. Snowball alleged that it did pay for the shares and that it was not “illusory and merely nominal”, as such a claim cannot be based on a disposition in terms of section 26.
The exception by Chou and Rabinowitz contended that the reference in section 26 to “not made for value” means no benefit at all and that inadequate value does not mean “not made for value” in terms of section 26.
The liquidators argued that the phrase “not made for value” means inadequate value (less than market value or not fair return).
The Western Cape High Court upheld the exceptions. Although the SCA agreed with the findings of the Western Cape High Court, it was of the view that the court a quo did not deal with an interpretation of the term “not made for value”.
The SCA considered a number of previous judgements of the SCA, which dealt with section 26 (and its predecessor in section 24 of the 1916 Insolvency Act) and came to the conclusion that in none of the previous cases were the question decided whether a claim can be based on section 26 for a disposition made for inadequate or insufficient value as opposed to no value at all.
In the current case, the transaction was at arm’s length, and there were no suggestions that it lacked validity, was unenforceable or susceptible to impeachment.
The SCA interpreted section 26 by using the ordinary principles of interpretation. The SCA was of the view that the liquidators’ interpretation of the phrase “made not for value” requires “a significant reading into s 26(1).” The SCA referred to the judgment of Estate Jager v Whittaker & Another 1944 AD 246 (“Estate Jager”) where the court considered the ordinary meaning of the words and stated that the “The words “disposition not made for value” mean, in their ordinary signification, a disposition for which no benefit or is or has been received or promised as a quid pro quo.” On the other hand, the SCA was of the view that the respondents’ interpretation of the phrase was more in accordance with the ordinary meaning of the words.
Next the SCA considered whether the context and purpose of the phrase indicate that the words should carry a different meaning to its ordinary meaning. According to the SCA section 26 forms part of a set of remedies (“Disgorgement Claims”) under the Insolvency Act together with section 29 (voidable preference), section 30 (undue preference) and section 31 (collusive dealings).
The SCA found that the Disgorgement Claims points to “… a comprehensive set of remedies to reverse objectionable transactions that occurred prior to sequestration or winding-up. A comparison of these remedies remonstrates that the more objectionable the transaction, the more extensive the remedy afforded.” Although sections 26, 30 and 31 provides for remedies that are unlimited in time, the latter two sections require proof of conduct that is prejudicial to the general body of creditors either by way of an intention to prefer or collusion. The court held that there is “nothing inherently, commercially or morally objectionable to a sale at a discounted price. The same cannot be said of a factually insolvent person squandering or giving away his assets for no return.”
Relying on the judgment of Estate Wege v Strauss 1932 AD 76 the SCA confirmed that the object of section 26 should rather be on preventing a person from giving his assets away without any return and not on preventing a person from “… engaging in the ordinary transactions of life…”
The SCA furthermore considered section 26(2) which provide that a recipient of property in contravention of section 26(1) does not have a claim against the estate in competition with the other creditors. Section 32(3) of the Insolvency Act also provides that if the property has been alienated or consumed and the disposition is set aside, the recipient will be liable for the value of the property at the date of the disposition or at the date of setting it aside, whichever is the higher.
Based on the aforementioned the SCA took to the view that the liquidators’ interpretation that the phrase “ not made for value” means something less than “market value” or “fair return” would lead to absurd results where property is obtained by a purchaser “with no knowledge of the seller’s financial position, and in the ordinary course of business… from a person who is sequestrated years later, the purchaser would have to return the property without the right to reclaim the purchase price. Moreover, should the purchaser bona fide have alienated or consumed the property, he or she would be liable for payment of the higher of the value of the property at the time of the sale or at the time of setting aside of the disposition and forfeit the purchase price.”
Lastly, the SCA considered the provisions of section 25(4) of the Insolvency Act which provides for a claim where immoveable property was disposed of “without giving sufficient value”. This section was included in the Act in 1993. The SCA was of the view that if it is presumed that the legislator acquainted with the existing law it would not have included the new expression “without giving sufficient value”.
The SCA therefore found that the phrase “not made for value” should be interpreted in its ordinary meaning and that it means no value at all. The SCA also found that the judgement of De Jongh Ontwikkelaars (Pty) Ltd & Another v Kilotech Investments (Pty) Ltd 2021 (4) 492 (GP) which found that section 26 can be raised if inadequate value was received, should not be followed.
It will be interesting to see if the courts will follow the SCA’s interpretation of section 26 where the transaction to dispose of the property prior to sequestration or liquidation was not bona fide, at arms-length and susceptible to impeachment. Plaintiff who wishes to rely on section 26 might have to consider whether claims should rather be instituted in terms of any of the other sections of the Insolvency Act.
Hugo van Heerden
Director