The extraordinary in the ordinary: the devil is in the (sometimes unexpected) details of section 34 of the Insolvency Act 24 of 1936 and the actio Pauliana

6 1 The characterisation of the application

The court characterised the nature of the application. It was

not a proceeding instituted against Main Road to recover payment of any debt, nor is it for a declaratory order in respect of a creditor’s rights in respect of any such a proceeding. Consequently, it is irrelevant that this application was launched by the applicants within the six-month period specified in [section] 34(1) and would (according to the applicants) have been heard prior to the expiry of that period were it not for the Covid-19 pandemic. 51

This passage of the judgment narrows the scope of the main provision in section 34(1) of the Insolvency Act. Within the six months set by section 34(1), the creditors must litigate to recover payment of their debts or at least obtain a declaratory order about their rights in respect of a proceeding for recovering their debts. Instead, what the present applicants had sought was an order declaring the transfer void and setting it aside, and ordering the business to be “transferred back” to Main Road.

Is there an answer to this characterisation? An argument might run as follows. The applicants were concerned that they would not receive payment of their debts from Main Road. They did not wish to buy the business: this conclusion is inferred from their failure to exercise their first option to do so. Instead, they wished to receive payment. They probably wished to ensure that they would continue to receive payment of their debts. Their method of achieving that aim was to have the business and its assets restored to the estate of the close corporation and then have the corporation placed in business rescue. That restoration would be achieved by voiding the “voidable sale of the business” (in the words of the heading of section 34). They applied to court within the required six month-period laid down by section 34(1) to have the voidable sale set aside. The court order they sought would have ensured that the business and its assets would have formed part of the estate of Main Road once more, and from that property the applicants would have been able to obtain payment of their debts, instead of being met by the buyer of the business, Nel, saying that it was not liable for the debts of the seller. Next, on the assumption that the Main Road close corporation was “financially distressed”,52 a successful business rescue would, among other things, enable the development and implementation of a business rescue plan to maximise the likelihood of the corporation’s continuing to exist on a solvent basis or, if that were impossible, that would result in a better return for the corporation’s creditors (such as the applicants) or shareholders than would result from the immediate liquidation of the corporation.53 So the declaration in the present case did concern the applicants’ rights in respect of a proceeding brought within the required six months for recovering their debts as a result of the reversal of the business transfer followed by business rescue.

The response to this answer might be that the declaration in the present case did not directly concern the applicant creditors’ rights in respect of a proceeding for recovering their debts. The takeaway from the Main Road judgment is that the declaration must directly concern the applicant creditors’ rights in respect of a proceeding for recovering their debts. A declaration for the setting aside of a business and asset transfer as a prelude to an application for business rescue with a view to recovering payment is not a proceeding for recovering debts.

6 2 Section 34 and the actio Pauliana straddle sequestration and winding-up

Main Road neatly illustrates a feature that section 34 of the Insolvency Act shares with the common-law remedy of the actio Pauliana. Both may be relied on by the debtor’s creditors before a sequestration or liquidation order is granted against the debtor.54 This shared feature distinguishes section 34 and the actio Pauliana from the other four statutory impeachable dispositions:55 all those statutory impeachable dispositions only apply if there is an insolvency or liquidation order in place. Section 34 and the actio Pauliana thus straddle the dividing line of the sequestration or winding-up of the debtor’s estate. As a corollary, both may be instituted by creditors against a trader company shortly before it is placed in liquidation. Both may thus complicate an attempt at restructuring the company in pre-insolvency proceedings such as business rescue or a compromise with creditors under Chapter 6 of the Companies Act 71 of 2008.

6 3 The position further back in time, before winding-up

What about the position further back in time: in other words, a point where the trader company is not on a downward path into liquidation? If the prescribed notices are published under section 34(1), the consequences of doing so as stated in section 34(2) still follow. What happens if the company then manages to pay the liquidated liabilities that would otherwise become due at a future date? The company will not enter and need not enter winding up as an insolvent company on the ground of failure to pay those debts at least.56 In Simpson’s Motors v Flamingo Motors ,57 section 34(1) was interpreted as requiring that the trader’s estate must be sequestrated within six months after the disposition to be void against his creditors. This ruling was held to be incorrect because it conflicted with the express wording of section 34(1). 58

The trader’s celebration about satisfying section 34(2) may still be spoilt. A party-crasher glowers in the corner - the actio Pauliana instituted by creditors complaining not necessarily of fraud in the criminal sense of the word but of the debtor’s intention to give one creditor an unfair advantage over others in case of insolvency.59 I focus on the latter aspect. The residual power of this line of authority on the actio Pauliana is that, ex hypothesi, the debtor (every debtor in South Africa, not just debtors who are traders) is not yet the subject of a sequestration or liquidation order, nor may the debtor necessarily even be the subject of pre-insolvency proceedings or agreements. These proceedings or agreements might include business rescue or a compromise with creditors, under Chapter 6 of the 2008 Act, if the debtor is a company, a common-law compromise with creditors, or an informal workout in the shadows of the law. Main Road featured negotiations between Main Road and two of the applicants that went as far as Main Road’s granting two of the applicants the “first option” to buy the business. But no binding sale and transfer of the business followed.

In defence, the trader may argue here as follows. He has fulfilled his payment obligations under section 34(2) that are triggered by publishing the section 34(1) notices. He had no choice whether to do so as the creditors demanded payment: he had to satisfy section 34(2). He, therefore, raises the defence of necessity. In satisfying sections 34(1) and 34(2), he was compelled to infringe the requirements of the actio Pauliana . This defence removes the unlawfulness of his intention to advantage these creditors in case of insolvency. This cutting of the Gordian knot shields him from an outcome that would yield him the worst of both worlds: he published the section 34(1) notices, paid the liabilities as section 34(2) required, and as his reward for obeying these laws he now faces an actio Pauliana.

6 5 The court’s reasoning and interpretation of section 34

I turn to consider the court’s reasoning and interpretation of section 34 in Main Road . The hinge was the Supreme Court of Appeal’s ruling on absolute versus relative voidness, the latter connoting direction and purpose.60 For other South African mentions of this insight, see Mgoqi v City of Cape Town; City of Cape Town v Mgoqi, 61 and Van Der Merwe v The National Director of Public Prosecutions .62 It is interesting to see Van Zyl J and Sven Olivier AJ, respectively, also quoting the further words from Wade and Forsyth that appear in Oudekraal but not Main Road :

‘Void’ is therefore meaningless in any absolute sense. Its meaning is relative, depending upon the Court’s willingness to grant relief in any particular situation.63

Wade and Forsyth’s opinion as quoted in Main Road also features in EOH Abantu (Pty) Ltd v Commission for Conciliation, Mediation & Arbitration ;64 Top Trailers (Pty) Ltd v Kotze ;65 and now The Black Eagle Project Roodekrans v The MEC: Department of Agriculture, Conservation and Environment, Gauteng Provincial Government .66

Further afield, as Lord Nicholls confirmed,

The consequence of invalidity may not be the same in all contexts and in respect of all persons. An order may be void for one purpose and valid for another: see the helpful discussions in Wade and Forsyth, Administrative Law , 7th ed. (1994), pp. 339-344, and Craig, Administrative Law , 3rd ed. (1994), pp. 451-466. Thus, when considering the consequences of different grounds of invalidity the purpose in hand is always important, as well as the particular statutory context.67

Wade and Forsyth’s opinion was also quoted approvingly in New Zealand and India, in Rawlinson v Oliver ;68 State of Punjab v Gurdev Singh, Ashok Kumar,69 and Tayabbhai M Bagasarwalla v Hind Rubber Industries Pvt Ltd . 70

Next, the Oudekraal insight was connected to section 34(1) of the Insolvency Act by Botha JA’s ruling that voidness under the subsection was not voidness “in any absolute sense” but only as against persons there specified.71 The significance of this connection does not emerge from Main Road (no doubt because there was no sequestration or liquidation and thus no trustee or liquidator in this case), but Botha JA’s ruling should still be remembered:

The alienation is not declared void in any absolute sense, but only as against the trustee. That means that it is within the discretion of the trustee whether to treat such an alienation as void or not. He may, as INNES, C.J., pointed out in Harrismith Board of Executors v. Odendaal , 1923 AD 530 at p. 539, waive or determine not to exercise his powers under the section. If he waives his rights, the alienation remains standing. If he exercises his powers under the section and treats the alienation as void, he in effect avoids or annuls it, and, therefore, sets it aside in that sense.72

It is submitted that, in principle, each creditor of the trader may similarly exercise discretion whether to treat the transfer as void: they “may treat the transfer as void”,73 they “may treat a relevant transfer by the trader as being void”;74 section 34(1) “enables creditors ... to treat the transfer as void”;75 and they “could have treated the transfer as being void” if they had acted within the specified six months.76 The appellants’ argument in Main Road for the absolute meaning of “void” in section 34(1) implicitly ignored this aspect of the case. Instead, the argument can be revealed as requiring and producing a binary result that would, in effect, exclude the trustee’s - and each creditor’s - choice of whether to treat the transfer as void. The transfer would simply have been void. The trustee’s choice is explored in the next paragraph of the Galaxie judgment.77 It is too long to quote here but is mentioned for readers’ edification. The references to authority in that exposition should also be noted, including three decisions of the Appellate Division. It is also submitted that using the word “void” is unhelpful in the circumstances of section 34(1). The word that should be used is “voidable”, as the heading of section 34 itself states.78 This word “voidable” immediately presumes that someone must be doing the voiding and that until the relevant transaction is voided, it remains valid.

The relevant passage from Galaxie on the operation of section 34(1) was also quoted approvingly in Roos v Kevin & Lasia Property Investments BK79 and Motala v Moller .80 In Motala, GS Myburgh AJ quoted the relevant part of section 34(1) and added: “This does not however connote invalidity in the ordinary sense”,81 before quoting the relevant passage from Galaxie . The Galaxie passage was also relied on in argument by the successful appellants in Gainsford v Tiffski Property Investments (Pty) Ltd .82 This piling up of authority drives home the conclusion that the appellants arguing for an absolute meaning of the word “void” in Main Road were arguing in the teeth of established authority for its relative meaning in section 34(1).

The better view is that the transfer was void. So what? Are the creditors just supposed to sit there, inert? No; they have the discretion to exercise (as seen above), and the purpose of section 34(1) is for them to enforce their claims against the debtor, as the buttressing authority of Rustenburg83 and the Vermaak cases84 bears out. Wellman clarifies that the amount the creditors may claim under section 34(1) is unlimited. The added feature worth stating here is that nearly all the creditors may enforce their claims against the trader during the six months: “against his creditors”, so the wording of section 34(1) runs. The only exceptions are if the transfer takes place in the ordinary course of that business or is for securing the payment of a debt.85 Nor is the group of creditors limited to those in relation to the business. The group comprises the creditors of the trader in general, for as Joubert JA pointed out:

Onder skuldeisers in die algemeen moet ook verstaan word skuldeisers wie se skuldvorderings teen die handelaar nie beperk is tot skuld wat in verband met die besigheid staan nie.86

This group would include the trader’s personal creditors too.

A final comment on section 34(1) concerns the interplay between the voidness against the creditors and the voidness against the trustee during the six months that follow the transfer. What happens if the creditors institute proceedings against the trader and take execution on the assets before the sequestration order is granted and a trustee is appointed? As this activity by the creditors follows the transfer, it is not hit by section 34(3), which applies to proceedings instituted before the transfer. Does section 34(1) thus provide creditors with protection to change their relationships with the debtor in the run-up to sequestration or winding-up so that, under cover of this subsection, they are immune from challenge under any of the other impeachable dispositions (sections 26, 29, 30, and 31 of the Insolvency Act and the actio Pauliana at common law)? Is this, then, also a window of opportunity for creditors to create or improve upon various types of real security over the debtor’s assets to strengthen their positions in the order of preference should sequestration or winding-up ensue? If no such protection and opportunity arise, what purpose does declaring the transfer void against the creditors serve?

The decision in Main Road clarifies that the litigation by the creditors under section 34(1) must be for payment of the debts or for a declaration in relation to the payment of those debts: see paragraph 6 1 above. The creditors’ attempts to improve their real security meet this requirement because these efforts concern the payment of their debts by the debtor concerned.

What the law giveth in section 34(1), the law taketh away under sections 26, 29, 30, and 31 and the actio Pauliana . This season is not for the creditors of all debtors in South Africa. It is only for the creditors of a trader defined in section 2 of the Insolvency Act. Nor does it last forever. It is limited to six months at most. In principle, it may not even last that long: sequestration or winding-up may supervene. Then, in the classic words of Innes J, the hand of the law is laid upon the estate.87 At that point, there is no longer any opportunity for individual debt collection or strengthening of the position of a creditor. If the protection and opportunity in terms of section 34(1) can be undermined by sections 26, 29, 30, and 31 of the Insolvency Act and the actio Pauliana as described above, the outcome would seem to be that when sequestration or winding-up supervenes, the preceding portion of the six months is rendered meaningless for the creditors who have acted according to its terms. Indeed, they have worsened their position before they acted in terms of section 34(1): they have since put their necks into the nooses of sections 26, 29, 30, and 31 and the actio Pauliana by their behaviour. With help like this in section 34(1), who needs hindrances? And as has recently been held in another case in a different context,88 when it comes to interpretation, a sensible meaning should be preferred to one leading to results that are not sensible or businesslike or that undermine the document’s apparent purpose.89 Courts should be slow to conclude that words are tautologous or superfluous.90 In Wellworths Bazaars Ltd v Chandler’s Ltd,91 Davis AJA quoted Knight Bruce LJ in Ditcher v Denison : 92

It is also a good general rule in jurisprudence that one who reads a legal document, whether public or private, should not be prompt to ascribe, should not, without necessity or some sound reason, impute to its language tautology or superfluity, and should be rather at the outset inclined to suppose each word intended to have some effect, or be of some use.

On the other hand, though, if section 34(1) does provide the protection and opportunities that the bare wording of the section seems to allow and enable, then it amounts to an open season for the creditors of the trader to act quickly to put themselves in the best position they can be in before sequestration or winding-up supervenes, safe in the knowledge that their actions in this brief time cannot be impeached under sections 26, 29, 30, and 31 and the actio Pauliana. In effect, then, the law of impeachable dispositions breaks down completely in respect of these activities in these six months: the law of impeachable dispositions simply does not apply to them. Again, was this really what the legislature intended either when it passed the Insolvency Act in 1936?

A court faced with this scenario would thus be sitting on the horns of a dilemma, with the parties requiring an answer more decisive than, “it’s all uncertain, I don’t know, and I can’t decide: it’s too hard.” Perhaps a solution may be ventured along these lines. The outcome in which the entire law of impeachable dispositions (sections 26, 29, 30, and 31 and the actio Pauliana) is suspended or excluded in relation to the creditors’ activities under section 34(1) is extreme. This outcome is, therefore, less desirable for the observance of the law and the maintenance of public order than the outcome in which creditors are deprived of their protection and entitlement under section 34(1). On this basis, it is preferable that section 34(1) should be rendered meaningless for creditors than that it should render the entire law of impeachable dispositions meaningless in the circumstances of section 34(1).

6 6 The actio Pauliana applied in Main Road

Now I move away from section 34 and on to more about the actio Pauliana. Fraud on the creditors, it was held, is perpetrated overtly or covertly - overtly by the bold or naive, but more usually covertly to hide the real purpose.93 As Main Road had proceeded overtly, so the reasoning in Main Road ran, it had committed no fraud.94 Nor had Nel committed fraud by buying the financially troubled pharmacy. CJPE had similarly known of the financial troubles; that knowledge would not have been laid at its door had it gone ahead and bought the pharmacy business, so it should not be laid at Nel’s door either.

This last finding ignores what was done with that knowledge. It is also an incomplete analysis of the facts. What is missing from this reasoning is considering the other, less usual possibility. Put another way: if there are two possibilities, and only one is considered and applied, how does one know when the other possibility may, and perhaps should, be the one that is chosen? If the answer is that the one is considered and applied because it is the more usual, how does one know when to identify the unusual one? And does the danger not arise that if only one possibility is considered because it is the more usual, this may be a foregone conclusion that removes the fact that there were ever two possibilities at the outset?

The other possibility was that the fraud was perpetrated by the bold or naive.95 Main Road played open cards with the first and second applicants but still went ahead with the sale to Nel. Similarly, despite knowing about Main Road’s financial troubles, Nel still purchased it when CJPE refrained. Tarring CJPE with the same brush as Nel was misplaced: one bought the pharmacy, and the other did not. The facts fit the possibility that the Main Road owners and the Nel owners did not know and understand the details and requirements of the actio Pauliana. Realistically, which pharmacist can reasonably be expected to be familiar with these intricacies of insolvency law?96

In other words, the pharmacists may have possibly been naive here about intending to confer an advantage on the prospective buyers in case of insolvency. Alternatively, if it were shown that the pharmacists did know their way around insolvency law - as polymathic masters of mixing medicines, then, also familiar with the actio Pauliana - the inference would seem to point to their being bold in intending to confer an advantage on the purchasing creditor in the event of insolvency. To bring this aspect of the discussion to a close: it would have strengthened the reasoning if the court had explained why it chose the second possibility rather than the second other than for the sole reason that the second is more usual than the first.

If the pharmacists had been shown to have acted boldly or naively here, then on the authority of Beddy, some people might argue that the requirements of the actio Pauliana were satisfied. The idea that a person who naively infringes insolvency law should still be held liable for the consequences of doing so may be troubling to other people. Yet it does not negate the fact of the infringement if the maxim that ignorance of the law is no excuse is applied.97 This result would have enabled the applicants to recover the assets disposed of by Main Road to Nel and any benefits accruing from the debtor’s fraud. Those benefits would have included the proceeds of trading with the proceeds of the alienated assets and any property acquired with it (or its value or its proceeds).98 Depending on the amounts involved, this recovery might have opened the way for the business rescue by a court order that the applicants desired.

The paragraphs above have presented a different view of applying the law to the facts. If their reasoning is incorrect and is therefore rejected, it is submitted that the court’s view on the non-availability of the liquidation order under the 2008 Act was correct. It should still be mentioned, though, that this presupposes that liquidation was really what the applicants wanted. Maybe they did not include the prayer for liquidation because they never wanted it. What, then, does one make of the switch of attitude at the end of the case? Perhaps by then, the applicants, their dreams of business rescue by court order shattered, were simply scrambling to take something positive away from this litigation, if only the second-best choice of liquidation. Of course, the answer that one would love to know is why they sought business rescue in the first place. That would shed some light on why they were prepared to ask for liquidation. As a way of resolving the two, it may have been that the plan the applicants sought from the outset was not the primary goal of maximising the likelihood of the company continuing in existence on a solvent basis. Instead, it was the consolation prize, “if it is not possible for the company to so continue in existence”, that would result “in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company”.99

Again, the lesson is to foresee, discuss with the client, receive clear instructions, and plan accordingly for the possibility that the application’s primary goal may fail and to provide for a secondary or alternative goal (here, liquidation) properly set out in the court papers from the outset and with notice given to all the relevant creditors such as SARS. The unsuccessful applicants learned a similar lesson in a different context in Cooperativa Muratori & Cementisti v Companies and Intellectual Property Commission .100 Among other things, they wanted to lead further evidence before the Supreme Court of Appeal even though they had not cited or served the local South African creditors and allowed them the opportunity of submitting evidence and arguments against recognising the final Italian judgment and order in South Africa.101 Wallis JA held that this step would breach those local creditors’ rights of access to courts under section 34 of the Constitution of the Republic of South Africa, 1996 and that it could not be countenanced.102 Arguably, if the applicants in Main Road did not involve the debtor’s other creditors properly in this way, they might face liability for common-law remedies such as damages.103 The Constitution is the supreme law of the Republic, and its obligations must be fulfilled.104 So it governs the law on seeking liquidation of the trader company under section 131(4)(b) of the 2008 Act.105