What amounts to “dispositions without value” in the context of section 26 of the Insolvency Act 24 of 1936?

3 1 Overview

It is submitted that it is generally not ideal to place unnecessary legislative restrictions on those who conduct business with each other at arm’s length and in good faith. However, there is a need to recognise that not everyone transacts in good faith and may conclude certain transactions knowing very well that there are other potential people who might be prejudiced by such transactions.23 This is true for people who owe other people but proceed to dispose of their properties to some of their creditors without receiving any appreciable benefit and are eventually declared insolvent by the court. Section 26(1) of the Insolvency Act is aimed at responding to such situations by empowering trustees once sequestration orders have been granted to investigate transactions concluded by insolvent persons before such orders were granted to impeach such transactions.24 In Estate Jager v Whittaker,25 the Appellate Division viewed section 26 of the Insolvency Act as an important tool that trustees can use to protect the interests of the insolvent persons’ creditors through the institution of court proceedings to set aside transactions which were made without value.26 This section provides that:

[e]very disposition of property not made for value may be set aside by the court if such disposition was made by an insolvent --

1.  more than two years before the sequestration of his estate, and it is proved that, immediately after the disposition was made, the liabilities of the insolvent exceeded his assets;
2.  within two years of the sequestration of his estate, and the person claiming under or benefited by the disposition is unable to prove that, immediately after the disposition was made, the assets of the insolvent exceeded his liabilities. Provided that if it is proved that the liabilities of the insolvent at any time after the making of the disposition exceeded his assets by less than the value of the property disposed of, it may be set aside only to the extent of such excess.

This provision is aimed at protecting the interests of creditors through powers provided to trustees to approach courts to set aside pre-sequestration transactions that were made without insolvent persons deriving value in return.27 To determine which transactions can be set aside, the legislature described the word “disposition” widely to cover not only the alienation of property but also agreements that create rights and obligations.28 In terms of section 1 of the Insolvency Act, a disposition is described as

any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation or any contract therefor, but does not include a disposition in compliance with an order of the court.

This is a process that leads to the insolvent person partying ways with a particular asset.29 This description assists in the determination of whether, as a matter of fact, insolvent persons have relinquished their real rights to identified assets, either by way of alienation or contract. A contract generally creates an underlying obligation to perform or receive performance. Thus, transactions regarding payments made by insolvent persons to creditors who did not provide any performance in return in circumstances where there was no underlying obligation to make such payments will amount to dispositions made not for value.30 In Silver v Standard Bank of SA Ltd,31 the court was of the view that the expression “for value” in the context of transactions concluded by persons before being declared insolvent means pecuniary value in the form of something sounding in money.32 This was a somewhat restrictive description that was merely focused solely on financial benefits. This case was discussed in the context of its specific circumstances, where the court was not required to evaluate circumstances where the insolvent may have benefitted by means other than payment of money.

Nonetheless, subsequent cases clarified that monetary payments are not the only indicators of value. In Goode, Durrante and Murray Ltd v Hewitt and Cornell33 the court held that the word “value” is not restricted to a monetary or tangible material consideration.34 The insolvent would have derived value if the creditor that benefited from the transaction demonstrated benefits derived by the insolvent person that came directly from the transaction.35 It is submitted that where the insolvent person entered into a transaction that enabled it to be financially stable due to the opportunities created by such transaction, that would be a clear indication of value. The court in Goode accepted that a transaction that led to the continued financial stability of the insolvent company and the group of companies that the insolvent company belonged to was for value.36 However, the court in Langeberg koöperasie BPK v Inverdoorn Farming And Trading Company Ltd,37 as it will be shown below, was of the view that the potential for financial stability does not per se demonstrate value, particularly when liquidation is imminent.38 The facts of each case are unique and must be assessed in totality to determine whether in such circumstances there insolvent derived value.39

It is clear that once the issue of relinquishment of rights on a certain asset has been determined, the inquiry becomes whether “value” was promised or received from the transaction. To understand how value should be understood, there was a need for courts to provide some guidance, which they sought to do through the crafting of several tests that they used to determine whether in a specific transaction the insolvent person derived value.

3 2 Quid pro quo

In 1944, the Appellate Division attempted to provide guidance on how the phrase “disposition not made for value” should be approached. In Estate Jager, the court held that this phrase in its ordinary signification means “a disposition for which no benefit or value is or has been received or promised as a quid pro quo”. 40 The court in this case did not engage what quid pro quo entails in the context of section 26(1) of the Insolvency Act having regard to the complexities surrounding certain transactions, where value may not necessarily be monetary. The concept of quid pro quo generally entails a reciprocal exchange of something for a particular benefit in return. 41 This concept requires one of the parties to do something such as selling their asset to another person who commits to reciprocate by also doing something, such as making payment for that asset.42 It becomes challenging when the reciprocal performance is not monetary or the payment provided is less than what the asset is worth. Under these circumstances, it will become challenging to assess whether there is value. At a very basic level, it appears that in Estate Jager the court’s characterisation of quid pro quo in the context of section 26(1) of the Insolvency Act was more in line with the insolvent’s relinquishment of rights on a certain property without receiving anything in return.

This approach suggests that there must be something that the insolvent person should have received or benefited from the transaction, failing which the disposition will be not for value. In Estate Jager, the court opined that the most obvious example of a “disposition not made for value” is a donation.43 It is generally accepted that a donation is

an agreement which has been induced by pure (or disinterested) benevolence or sheer liberality, whereby a person under no legal obligation undertakes to give something ... to another person ... in return for which the donor receives no consideration nor expects any future advantage.44

Unfortunately in practice, transactions that insolvent persons conclude do not resemble classical cases of donations, and the courts are required to examine these transactions carefully to determine whether they can be declared dispositions made not for value. It is also worth noting that even donations when properly assessed, may have been made with a view to gain some form of advantage which may be clear some time in the future.

3 3 Fair and adequate return

With the passage of time, courts continued to grapple with the word value when trustees claim that insolvent persons did not derive any benefit from pre-sequestration transactions.45 For example where insolvent persons did not receive any payment in some of the transactions they concluded before sequestration orders were granted. The complexity of some of the transactions led courts to introduce concepts such as nominal value, insufficient value, as well as fair and adequate return when determining whether there was value in a particular transaction.46 For instance, in Inverdoorn, the court had to determine whether a subsidiary insolvent company derived value from binding itself as a surety and co-principal debtor of its parent company, where its liabilities exceeded its assets after the mortgage bond was registered.47 This suretyship prevented the creditor from pressing the parent company (and by extension all the subsidiary companies in the group) into liquidation. 48 The creditor argued that the insolvent subsidiary company derived value from the principal debt it was called upon to settle. 49 Further that the settlement amount was to be recovered from the parent company. 50 In dismissing this argument, the court was of the view that value “means adequate value and not some mere trifling consideration”. 51

This approach appears to be in line with the approach adopted in Bloom’s Trustee v Fourie, 52 where the court interpreted the word “value” under section 24(1)(b) of the 1916 Act, which was replaced by section 26(1) of the Insolvency Act to mean “adequate value” or “‘just’ and ‘valuable consideration’”. The court did not provide any analysis of what these phrases mean in the context of dispositions not made for value. It nonetheless, endorsed the view that “value when applied without qualification to property of any description necessarily means the price which it will command in the market”. 53 However, in Bloom’s, the court cautioned that emphasis on what the market commands may lead to dispositions of assets of large value being sold for entirely inadequate consideration or for merely trifling consideration and the trustee being prevented from setting them aside as dispositions, not for value. 54 In other words, what the market demands may not necessarily be the true value of the asset in question and its disposal may lead to the prejudice of other creditors upon insolvency. What would amount to inadequate consideration to the extent that there will be no value derived was unclear and required judicial clarity. The Appellate Division in Swanee’s Boerdery (EDMS) BPK (in liquidation) v Trust Bank of Africa LTD, 55 held that the valuable consideration in Bloom’s was no longer applicable in light of how it defined value in the cases of Estate Wege and Estate Jager 56

As such, subsequent courts did not engage the concept of valuable consideration57 but adopted the phrase “adequate value” in determining whether the disposition is not for value. Some of the decisions did not refer to the phrase quid pro quo, thereby causing some confusion about whether a different standard was to be adopted to determine whether there is value in any transaction that is sought to be set aside as disposition, not for value. In this approach, it appears that the thinking was that even if the insolvent derived some benefit, courts were duty-bound to assess whether the benefit derived was adequate under the circumstances. In Inverdoorn, the court did not provide the criteria that could be used to determine the adequacy of the benefit received by the insolvent with a view to ascertaining whether a particular transaction had value. However, the court appeared to suggest an assessment of a “fair and adequate return to the company” which would benefit creditors should the company be insolvent as a test that could be utilised to determine “adequate value”.58 It appears that the court, in this case, was of the view that a return to the company that is remote and illusory will not amount to a fair and adequate return.59 Unhappy with this decision, the creditor appealed to the Appellate Division.60 In dismissing the appeal, the Appellate Division held that for the insolvent company to have received value, “some benefit must actually have accrued or, at least have been reasonably likely to accrue in the future” to the insolvent company.61 Unfortunately, the court in Langeberg did not engage with the concept of “adequate value” and how it should be determined, despite the concept of adequacy gaining judicial momentum.

Most disappointingly, the court Cronje v De Paiva 62 approved a statement that describes the phrase disposition not for value as “disposition for no or inadequate benefit or value is or has been received or promised as a quid pro quo”. 63This court did not clarify what justified the adoption of the combination of different tests (as adopted in Inverdoon and Estate Jager respectively) in the present case. The court did not explain in what way these two tests on their own were insufficient to describe dispositions without value. Furthermore, the court did not explain the benefits of the expanded test. This added to the confusion of how, when, and if each of these tests applies, since they were stated in the alternative.64

3 4 Disposition made for less than the true value 

In Terblanche v Baxtrans,65 the court’s failure to adequately explain what is actually meant by “fair and adequate value” led to practical challenges when insolvent persons disposed of assets for less than their true value. Before the court granted the sequestration order in Terblanche, the insolvent sold his tractors and trailers worth R1,276,000 to one of his creditors for R450,000.66 Upon his appointment, the trustee brought an application to set aside this transaction as a disposition not made for value. The trustee argued that dispositions that are made for less than the true value of the disposed assets are prima facie without value.67 The creditor argued that the concept of true value was vague and imprecise because it is not clear whether it refers to book value, market value, replacement value of the disposed asset, or something else.68 The creditor further argued that the adequacy of the value was an immaterial aspect of the transaction.69 In reply, the trustee was of the view that where the circumstances do not demonstrate that some other benefit was received by the insolvent in return for the disposition, then the creditor’s contention would mean that the value provided is far less than the true value of the asset would render the disposition immune from attack under section 26 of the Insolvency Act.70 In determining this issue, the court started by criticising the parties for their failure to distinguish between the concepts of “no value” and “inadequate value” and their lack of recognition of the relationship between these concepts in the context of section 26 of the Insolvency Act.71 The court rejected the submissions that section 26 can only apply where there is a total absence of value and that inadequate value is always prima facie evidence of “no value at all”.72

The court reasoned that “[t]he question of adequacy should ... not be equated with the concept of illusory or nominal value. Illusory or nominal value is what those words suggest - no value at all”.73 The court attempted to differentiate between the concept of adequacy and those of illusion or nominal value in the context of dispositions not made for value. The court held that:

“Illusory value” is merely an illusion and “nominal value” is value in name only. Adequacy, on the other hand, in relation to value connotes a far more extensive idea. ‘Illusory value’ and “nominal value” will always be inadequate. However, a price or a benefit may be inadequate in relation to the value of the item but may nevertheless not amount to illusory or nominal value.74

This approach suggests that when determining whether there is value, each case should be dealt with on its own merits. Even though the court sought to distinguish between these concepts, it did not provide clarity on how applications to set aside dispositions where inadequate value has been given should be approached. In particular, whether section 26(1) of the Insolvency Act should find application in such pre-liquidation transactions. When some value is given, there is no clarity as to when value will be regarded as a mere illusion or being of value in name only. Nonetheless, the court emphasised that when trustees are of the view that the benefit associated with the disposition is illusory or nominal in that it amounts to no value at all, then this must be pleaded and proved.75 This further suggests that it will then be at the discretion of the court whether any value was derived in a particular case, which may also lead to similar cases being decided differently.

3 5 No value at all

In Strydom, the Supreme Court of Appeal was presented with a golden opportunity to reflect on section 26(1) of the Insolvency Act to clarify not only what exactly the phrase “disposition not made for value” means but also how value should be determined for this provision to find application. In this case, before being declared insolvent, the company sold its shares to different purchasers for less than the reasonable market value of those shares. 76 Upon being appointed, liquidators of the company found transactions that led to the sale of these shares impeachable and applied to the court to set them aside as dispositions not made for value in terms of section 26(1) of the Insolvency Act.77 In determining whether to set aside these transactions, Van der Merwe JA correctly observed that previous cases did not definitively decide whether this provision “contemplates a claim based on a disposition for inadequate or insufficient value as opposed to no value at all”.78 In fact, none of the cases decided before Strydom adequately explained how value should be established to determine whether section 26 is applicable. All these cases adopted vague tests such as valuable consideration, inadequate value, nominal value, and illusory value without providing the proper context within which these tests should be applied.

In Strydom, the court embarked on a survey of selected previous cases and summarised the way the courts in these cases tried to define the word “value” in the context of section 26 of the Insolvency Act without commenting on the soundness or otherwise of their approaches. The court distinguished these previous cases on the basis that they were more focused on the nature of the transactions before them as opposed to the meaning of the phrase “disposition not made for value” in section 26(1) of the Insolvency Act, which was the main issue before the court in Strydom.79 On the one hand, the creditors that benefited from the dispositions argued that this phrase meant no value at all.80 On the other hand, the liquidators argued that this phrase meant less than the reasonable market value thereby yielding counter-performance that does not amount to a fair return or equivalent. 81 After assessing these arguments, and in line with the view that insolvent persons must not be allowed to impoverish their estates by giving their assets away without receiving any present or contingent advantage in return, 82 Van der Merwe JA opined that section 26(1) “was intended to apply only to gratuitous dispositions”. 83

At first sight, Van der Merwe JA’s approach appears to be correct, but on careful consideration, his approach appears to be very simplistic. Gratuitous dispositions are “[b]estowed or granted without consideration or exchange for something of value”. 84 This approach does not assist in explaining what value is and how it should be determined in the context of section 26 of the Insolvency Act. With respect, the court’s attempt to distinguish previous cases from Strydom on the basis that those cases were more concerned with the nature of the transactions before them is not convincing. In fact, this was a misdirection that prevented Van der Merwe JA from adequately interpreting what the phrase “disposition not for value” means. This phrase is intrinsically linked to the nature of the transactions that insolvent persons concluded before their sequestration or liquidation. It is the nature of those transactions that provide a sense of whether any value was derived or was to be derived. Failure to accord the necessary importance to the nature of the transactions, in the same way, previous cases did, led Van der Merwe JA to take a blanket approach to the concept of value. Van der Merwe JA concluded that the ordinary meaning of the phrase “disposition not for value” means “for no value at all”. 85

In coming to this simplistic and unwarranted conclusion that is likely to lead to serious practical consequences, Van der Merwe JA did not adequately consider the position where there might be some form of value, but that value is insignificant and prejudicial to other creditors - particularly where the disposition had the effect of reducing the estate of the insolvent person. In justifying his approach, Van der Merwe JA was of the view that an approach that would subject dispositions that are less than the reasonable market value or where a fair or equivalent return was not provided, to the provisions of section 26(1) of the Insolvency Act would amount to an absurdity.86

The court reasoned that this approach will prejudice bona fide purchasers who, unaware of their sellers’ financial circumstances and in the ordinary course of business, purchase assets for less than their reasonable market value or do not provide fair or equivalent returns for what such properties are worth.87 The court opined that, by making this provision applicable under these circumstances, these purchasers would be forced to return assets without the right to reclaim purchase prices.88 Surely, creditors that transacted in good faith and at arm’s length should be able to plead and prove their defences. However, this does not justify, not subjecting these transactions to the “section 26(1) judicial scrutiny” where trustees and liquidators can satisfy the court that insolvent persons did not derive value from transactions sought to be impeached, particularly those transactions where insignificant or inadequate value was given to the prejudice of other creditors.

It is submitted that the Supreme Court of Appeal missed a golden opportunity of crafting a business-like workable test that can be used to determine whether a particular transaction should be set aside as a disposition not made for value in terms of section 26(1) of the Insolvency Act. With respect, it is submitted that the Supreme Court of Appeal did not settle the interpretation of the phrase “dispositions not made for value” in section 26(1) of the Insolvency Act. The court, while mentioning them in passing, did not adequately deal with the concepts of inadequate value, quid pro quo, nominal or illusory value with a view of clarifying why they are not suited to provide a contextual and purposive interpretation of the phrase “dispositions not made for value”.

The court in Strydom, did not clarify why the blanket approach of “no value at all” was a more appropriate test to apply in the interpretation of this phrase. This approach will have the unintended effect of closing the door on trustees and liquidators and prevent them from approaching courts to test whether there was a genuine commercial transaction with the expectation of some advantage at the time the transaction was entered into, which was equal to or more than the risk incurred by the creditor that benefited from the disposition.89 It is submitted that section 26(1) of the Insolvency Act should apply to transactions that led to one of the parties being sequestrated or liquidated where such a party did not receive adequate compensation or benefit in return.90 In my view, the concept of adequacy, irrespective of the nature of the benefit provided to the insolvent person, is central to the determination of whether the insolvent derived value from the transaction sought to be impeached.