The purpose of the Act is to ensure that creditors are treated fairly and that one creditor is not preferred over another. As part of the protection provided to creditors, the Act regulates "impeachable dispositions”. This term refers to the setting aside of certain transactions, referred to as dispositions, which the insolvent person entered into within a period of six months prior to sequestration and which prejudiced or preferred one creditor over others, while the debtor was already insolvent or which caused the insolvency.
A disposition is defined in Section 2 of the Act as:
“…any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefore, but does not include a disposition in compliance with an order of the court.”
Section 29 of the Act, titled “Voidable Preferences” states in ss (1) as follows:
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.
From the above, it is clear that, in order to set the disposition aside, the trustee of the insolvent person’s estate must prove the following:
- the disposition was made by the insolvent person within six months before sequestration;
- the effect of the disposition was to prefer one creditor over others; and
- immediately after making such disposition, the liabilities of the debtor exceeded the value of his assets.
A creditor who has received such a disposition, and who wishes to avoid the setting aside thereof, needs to prove that:
- the disposition was made in the ordinary course of business; and
- it was not intended to prefer one creditor over another.
This burden of proof placed on the creditor appears more difficult than that which rests on the trustee. What exactly is the meaning of "a disposition made in the ordinary court of business”? And how can a creditor actually prove what an insolvent person’s intention was at the time of making the disposition? An analysis of these two requirements in the light of relevant case law follows:
- The disposition was made in the ordinary course of business
The case of Griffiths v Janse van Rensburg NO and Another  1 All SA 643 (SCA) provides one of the most recent insights into the approach that the courts take to the interpretation of this aspect of s 29(1) dispositions.
In this case, a trust was established to receive “investments” into a pyramid scheme through fraudulent representations that the “investments” would be used by the Trust to purchase estate agent’s rights to commissions, which had been earned but not yet paid.
The appellant (Mr Griffiths) made two investments in the Trust of R100 000 each. The appellant received a repayment of his investments with R12 000 interest on each investment. So, the total repayment received was R224 000.
The trust was later sequestrated and the trustees instituted legal proceedings to set aside all four payments as dispositions in terms of s 29(1) of the Act.
The decision importantly stated that the onus to prove the requirements to set aside the disposition rests on the party attempting to do so, here the trustees. Prior to the appeal, it had been agreed that the trustees had proved these requirements. As this onus had been proved, the onus then shifted to the appellant.
The appellant needed to prove both that the dispositions were made in the ordinary course of business, and that when the payments were made, there was no intention to prefer the appellant over the other creditors. This decision considered the proof required to show that the payments were made in the ordinary course of business.
The court emphasised that an objective test is required to prove that the dispositions were made in the ordinary course of business. Such dispositions should be evaluated in the light of all relevant facts and on a case by case basis. The question to be answered is whether the transaction is one ‘with conventional terms which ordinary business people would normally have concluded under the given circumstances’. Here, the court held that the repayments of the capital amounts did not take place in the ordinary course of business, and the dispositions were set aside.
The judgment in Griffiths held that a court will be inclined to set aside dispositions which cause ‘wrinkled noses or raised eyebrows’ amongst solvent business people who know the circumstance in which the payment was made.
- The disposition was not intended to prefer one creditor above the others
The leading decision regarding the defence that the disposition was not intended to prefer one creditor above another is found in Cooper & Another NNO v Merchant Trade Finance Ltd 2000 (3) SA 1009 (SCA). It was held here that, to determine whether there was an intention to prefer one creditor above others, the relevant facts must be examined and weighed up at the time that the disposition was made in order to determine, on a balance of probabilities, what ‘the dominant, operative or effectual intention in substance and in trust’ of the debtor was in making the decision.
In contrast to the objective test used for the first aspect of a creditor’s defence, a subjective test is used to prove that there was no intention to prefer one creditor over another. The state of mind of the insolvent person must be determined using evidence and inference. As Zulman JA held for the majority “The question which the court has to decide is not whether the debtor should have known that the effect of the disposition made would have been to disturb the proper distribution of his assets but rather as a fact that he intended it to have that effect. As previously stated if the debtor never applied his mind to the matter it again can hardly be said that he had the requisite intention” [para 13].
It must be noted that the consequence of setting aside a disposition made to the creditor is not that the creditor will no longer be able to recover the amount due to him. Rather, it means that he will become a concurrent creditor in the estate of the insolvent person. Of course, this is not an ideal scenario, as there is always the possibility that the creditor will be unable to recover the full amount due to him and may receive only the same portion as the remainder of the creditors.
It is therefore important for a creditor to know what defences are available to him should a trustee institute legal proceedings to set aside a transaction in terms of s 29(1). It is evident from the above analysis that if a payment was made honestly, during the ordinary course of business and that there is no indication that the payment was made with any intention to prefer one creditor over another, then the transaction should not be set aside.