Impeachable dispositions_week 10 (be dealt with in week 9)

1. Introduction to the topic

 There are several sections in the Insolvency Act which are there to protect the
interest of creditors of the insolvent estate, with one example those sections
which allow that certain dispositions can be set aside.
 Such dispositions include dispositions without value, voidable preferences,
undue preferences and collusive dealings before sequestration.
 There is also a remedy under common law which can be used to set aside a
specific type of disposition, which we discuss below.
 Common object between these sections is to protect the creditors who would
be affected where assets does not form part of the insolvent estate for equal
distribution amongst creditors.

2. What is ‘disposition’?
 Generally, it is any transfer or abandonment of rights to the debtor’s property.
 Included in this definition would be sale, lease, mortgage, pledge, delivery,
payment, release, compromise, donation, or any contract therefor.
 Excluded from this list is disposition in compliance with an order of court.
 Thus, this definition does not only relate to alienation, but it would include any
contract which gives rise to rights and duties. So, it includes both the actual
transfer of property but also that contract which created the right that the
property must be transferred.
 Take note: repudiation by the debtor of an inheritance is not a disposition.
o Why? As there is only the power (‘bevoegheid’) and the right only
comes into existence once the inheritance is accepted.

3. Disposition without value (section 26)_quid pro quo (nothing in return)

General
 There was no obligation on the debtor, but he either made it fully aware or
oblivious of the impending sequestration.
 There is no quid pro quo.
Object of the section
 Prevent the person from impoverishing the estate by giving away assets
without an advantage returning to the insolvent estate.
Meaning of value
 Value in the normal sense, and need not only be in direct monetary terms.
 Another example: benefit of financial stability that a subsidiary would receive by
forming part of a group of companies.
 To determine whether there is ‘value’ a court would look at the facts of each
case.
Consequence
 Consequence: the person who received this benefit could be compelled to
restore the benefit received back to the debtor’s estate.
o This person (the beneficiary) has no right to claim as a creditor against
the insolvent estate, unless:
 Uncompleted disposition by way of surety, guarantee or
indemnity, but limited to the value with which insolvent’s assets
exceeded his liabilities immediately before the disposition was
made.
 If the liabilities exceed the assets with less than the value of the disposition,
then it is not the entire disposition which is set aside, but only that part where
the disposition makes the liabilities exceed the assets.
Requirements
 First prove that the disposition was made.
 The person who received it, benefitted.
 The debtor received no value back for it.
Then, there are additional requirements depending on when the disposition took
place.
More than 2 years before sequestration of the estate
 Proved that immediately after the disposition was made, the liabilities
exceeded his assets. Onus on the trustee
Within two years of the sequestration
 The court would set aside the disposition unless the person who received the
benefit can prove that immediately after the disposition was made, that the
assets of the insolvent exceeded his liabilities.
Important distinction: there is no need to prove that the insolvent intended to
prejudice the creditors. The crux is impoverishing the estate without receiving a
benefit in return.
Examples
 Donations.
Exception to s 26: Dispositions in terms of antenuptial contract
A settlement of property in an antenuptial contract by a husband on his wife or on
any child born or to be born of the marriage, will not be set aside if the following is
requirements are met:
 Must be an immediate benefit. This benefit must be given by transfer, delivery,
payment, cession, pledge or special mortgage of property within 3 months
from the date of marriage.
 The settlement must be given in terms of an antenuptial contract which was
properly registered.
 The settlement must have been given in good faith.
  Good faith in this context means: the absence of any intention to
prejudice creditors in obtaining payment of their claims or to prefer one
creditor above another.
 The husband’s (or wife’s) estate must not have been sequestrated within 2
years of when the antenuptial contract was registered.
Case law
Strydom and another NNO v Snowball Wealth (Pty) Ltd and others 2022 (5) SA 438 (SCA)

4. Disposition which prefers one creditor above another: voidable

preference (section 29)
Object of provisions
 A person on the verge of insolvency, who cannot satisfy his creditors’ claims
and whose estate is subsequently sequestrated, should not be allowed to
select which creditor he wants to pay (preference), as he does not have this
right.
 This section ensures that there is fair distribution to the creditors.
Requirements
 Disposition by a debtor to a creditor, so that the creditor would benefit from this
disposition.
 When? Not more than six months before the sequestration of his estate or in
case of a deceased insolvent estate, not more than six months before his
death.
 The effect of the disposition was that one creditor was preferred above
another.
Objective test: has the proper distribution in the insolvent estate which should have
taken place been defeated?
 So, did the creditor benefit earlier or get paid earlier than what he
should have.
 Immediately after making this disposition, the debtor’s liabilities exceeded the
value of his assets.
Consequences
If the requirements were proven, the disposition may be set aside by the court,
unless:
Exception to s 29
Purpose for the exception: protect a disposition which would otherwise be voidable, if
it was made under circumstances which would not appear to the average business
man to be unbusinesslike or surprising.
 The disposition was in the ordinary course of business; and
 There was no intention to prefer one creditor above another (this in good faith)
The person who wants to hold on to his disposition must prove both aspects.
Ordinary course of business
 Meaning of business: objective test applied.
 The mode and not the purpose is important.
 Opinion of the ordinary business person (not the insolvent or debtor).
 Question asked: if solvent persons would in the normal course of business act
in the same way as the parties concerned in the transaction.
 Thus, the transaction should not appear anomalous, or unbusinesslike, or
surprising.
 The court must consider the actions of both parties to the transaction.
Examples of dispositions made in the ordinary course of business:
 To achieve a turnover which would make it possible for a company to compete
with other traders, it was necessary to sell goods at a low price (S v Gani 1965
1 All SA 498 (T)).
No intention to prefer
 Here it is the motive (or state of mind) of the debtor which is important.
 Subjective test: did the debtor intend to prefer, or put differently ‘disturb the
natural order of how assets must be divided upon insolvency’.
o In the absence of direct evidence, the court relies on the surrounding
facts.
o A good indication is where the debtor was not contemplating
sequestration but made this disposition for another reason. For
example, to get a benefit from a creditor which would turn around his
dire situation or making the disposition to avoid criminal prosecution.
Case law
 Pretorius’ Trustee v Van Blommenstein 1949 (1) SA 267 (O)
 Cooper and another NNO v Merchant Trade Finance LTD 2000 (3) SA 1009
(SCA)

5. Undue preference to creditors: disposition intended to prefer one

creditor (section 30)
General
Different to section 29, there is no time limit which applies with undue preference.
Requirements
It is the trustee who must prove the following:
 There was a disposition within the meaning of the Insolvency Act.
  At the time the disposition was made, the debtor’s liabilities exceeded his
assets (he was insolvent). How do you determine the value? The market
value of the property, so the value it would fetch if sold under usual terms and
conditions (does this test sound familiar?).
 The disposition was made either to a creditor or to a third party, so that the
creditor would benefit from the disposition.
 The debtor intended to prefer one of his creditors above another. If the
disposition was made when the debtor was solvent, there is no question if
creditors will be paid or not, so this would not count. However, if the
disposition is made when the debtor is technically insolvent, the debtor is
preferring that creditor who received the disposition above the others, as he is
paid ‘out of sequence’, so not in the order he would be paid if we had the
concursus creditorum.
o The test to determine the intention is whether the debtor intended to
disturb the normal course of distribution. This must have been his main
objective in making this disposition. If he did not apply his mind to
reach a conclusion that this disposition was conferring such a
preference, then there would not be undue preference.
o What factors can determine whether it was the debtor’s dominant
intention to confer the preference?
 Did the insolvent contemplate the possibility of insolvency when
he made this decision?
 Was it possible for the debtor to exercise his free will? So, there
was no undue pressure or coercion to make this disposition.
 Was there any relationship between the debtor and creditor
apart from the debtor-creditor relationship?

 Thereafter, the estate was sequestrated.

Difference of trustee’s powers to those in section 29.
Relevance of when disposition took place.
 Undue preference set aside irrespective of when, but voidable preference
requires that the disposition should not have been more than 6 months
before the sequestration.
Debtor must actually be insolvent when he made the disposition
 Undue preference, the debtor must actually be insolvent. With voidable
preference, the disposition could be made when debtor was solvent, but as
long as the disposition rendered him insolvent.
Defence against voidable disposition
 No defence under s30 to the beneficiary of the disposition, but beneficiary of
voidable preference does have a defence.
Case law
Pretorius NO v Stock Owners’ Co-operative Co Ltd 1959 (4) SA 462 (A)
6. Collusive dealings before sequestration (section 31)
 The distinguishing feature here is the element of collusion of the debtor with
another person.
 What is the meaning of collusion in this context?
o Intention of the debtor and the other person to obtain a benefit which
would give that person an undue preference to him or prejudice other
creditors. (so ‘cheat’ the other creditors out of their rights). In short: an
intention to defraud.
o There must be a concerted effort on the side of the debtor and the
other person to defraud the insolvent’s creditors. The key element here
being fraud.
 The collusion must have been entered before the sequestration.
 What is the consequence for the other party who took part in the collusion?
o He is liable to make good any loss caused by the disposition to the
insolvent estate.
o Pay for the benefit of the estate, by way of penalty, a sum awarded by
the court.
o If the party who took part in the collusion is also a creditor he forfeits
his claim against the estate.
Requirements
 The insolvent made a disposition of his property.
 This disposition was made in collusion with another party.
 The effect of this disposition was that creditors were either prejudiced or
preferred above another.

7. Disposition in fraud of creditors (actio Pauliana)_alienations under

common law
 The creditors also have rights under common law to set aside a disposition as
being in fraudem creditorum.
 This is done using the actio Pauliana.
 With this action a creditor can recover assets which should have been in the
insolvent estate.
 The important element is to prove the presence of fraud.
Requirements
 The transaction diminished the debtor’s assets.
 The person who received from the debtor, did not receive his own assets.
 There is an intention to defraud.
 Fraud took place.
It must be determined what ‘fraud’ in this context means.
 Not fraud within criminal law context.
  There is fraud if the object of the transaction was to give one creditor an unfair
advantage over other creditors in insolvency.
 There is a difference of what must be determined for alienations made ex
titulo lucrative (disposition made for value) and alienations made ex titulo
oneroso (gratuitous disposition, like a donation).
o Ex titulo lucrative: (1) the debtor intended to commit fraud; and (2) the
recipient of the disposition knew of the debtor’s intention and was privy
to it.
o Ex titulo oneroso: Enough to prove fraud on the side of debtor. Good
faith or otherwise on the side of the recipient is irrelevant.
Tutorial activity for the work dealt with during this week (date to be
announced)
Bring along copies of the cases in this week’s work so that the content of the
cases may be discussed.