Petitioning creditor found liable to pay the costs of sequestration

May 1st, 2021

FirstRand Bank Ltd v Master of the High Court (Pretoria) and Others (SCA) (unreported case no 1120/19, 7-4-2021) (Mabindla-Boqwana AJA (Wallis, Saldulker and Dlodlo JJA and Goosen AJA concurring))

In this case the Supreme Court of Appeal (SCA) had to determine the meaning of s 106, read together with ss 89(2) and 14(3) of the Insolvency Act 24 of 1936 (the Act), which deals with the liability for –

  • costs of sequestration when there is no free residue or free residue is sufficient;
  • whether secured creditors relying solely on their security are liable to contribute; and
  • whether a petitioning creditor is solely liable.

The SCA said the issue has been a subject of controversy for a while within the insolvency law academic circles and added that the debate centred on the question of which creditors are liable to pay a contribution for costs where there is a shortfall in the free residue. Whether the burden to contribute lies with all creditors who have proved their claims against the estate. The SCA pointed out that these questions engaged Vilakazi AJ in the Gauteng Division of the High Court in Pretoria (the High Court).

The SCA first looked at the background of the case. On 7 October 2009, the Body Corporate (second respondent) launched an application in the High Court for sequestration of the insolvent’s estate on the basis that the insolvent owed it R 22 000 arrear levies. A year earlier it had obtained a default judgment against the insolvent in the Pretoria Magistrates’ Court for payment of the sum of R 8 895,64. The insolvent Mr Msimango prior to his sequestration, owned two sectional title units, which were separately bonded, one to Nedbank Limited in the amount of R 577 800 (property A) and the other to First National Bank (FNB), a division of the appellant FirstRand Bank Ltd (FirstRand) in the amount of R 645 840 (property B) respectively. The unit mortgaged in favour of Nedbank (property A) fell within the sectional title scheme administered and managed by the second respondent.

The Body Corporate approached the High Court on the strength of a nulla bona return issued by the Sheriff, which rendered the insolvent’s conduct an act of insolvency within ambit of s 8(b) of the Act. In its sequestration application the Body Corporate contended that ‘[b]oth properties will be sold when the respondent [the insolvent] is sequestrated and that as such the probability of a substantial dividend becoming available to concurrent creditors is very likely’. A security was issued by the Master of the High Court in Pretoria (the Master) stating that sufficient security had been given by the Body Corporate for the payment of all fees and charges necessary for the prosecution of all sequestration proceedings, and of all costs of administering the estate until a trustee had been appointed and if no trustee was appointed, all fees and charges necessary for the discharge of the estate from sequestration.

The SCA added that a final order of sequestration was granted by the High Court on 14 June 2010 and the third and fourth respondents were appointed as trustees and confirmed on 12 August 2011. Nedbank proved its claim of R 679 512,82 at the second meeting of creditors held on 22 November 2012. Property A was sold for an amount of R 350 000 and transferred to the buyer. To effect registration of transfer, the municipality was paid an amount of R 14 643,44 and the Body Corporate
R 178 647 from the sale of proceeds in accordance with s 15B(3)(a)(i)(aa) of the Sectional Titles Act 95 of 1986. The property was further sold by its buyer to another purchaser for R 580 000. The Body Corporate did not prove a claim.

The SCA said that the appellant alleged to the High Court that it had no knowledge that the insolvent had been sequestrated. That it had started a foreclosure process prior to sequestration and property B was sold at a sale in execution on 15 September 2010 for the sum of R 330 000. It was then registered in December 2010 in the name of the purchaser. The proceeds from the sale in execution were paid to FNB. FNB proved a claim of R 617 686,86 together with interest thereon at 9,25% at a special meeting of creditors on 17 May 2015. It had indicated in its affidavit lodged in terms of s 44(4) of the Act that it relied solely on its security in satisfaction of its claim. Subsequent to that, FNB was called on by the trustees to refund the insolvent estate an amount of R 30 697,91 made up of costs relating to realisation of the security in terms of s 89(1) of the Act (R 13 587,89), a contribution to the costs of sequestration in the amount of R 17 028,82 and costs of a special meeting at R 81,20.

The appellant did not take issue with the s 89(1) costs for the special meeting but felt aggrieved with being required to pay a contribution towards the costs of sequestration. It accordingly delivered a written objection to the Contribution Accounts (the L&D account) to the Master on the basis that, as the petitioning creditor, the Body Corporate was the creditor liable to pay the contribution as envisaged by s 14(3) of the Act. The Master’s response to this objection was, inter alia, that while a petitioning creditor would be liable to contribute to the costs of sequestration in terms s 14(3) of the Act, there was an exception to this rule. Relying on some parts of a publication authored by Dr David Burdette. The appellant took the decision on review to the High Court on the basis that the Master incorrectly interpreted s 14(3) with s 106 of the Act and misapplied the Nel NO v Body Corporate of the Seaways Building and Another 1996 (1) SA 131 (A) and Barnard NO v Regspersoon van Aminie en ’n Ander 2001 (3) SA 973 (SCA) decisions.

The appellant sought an order directing the trustees to amend the L&D account to reflect that the Body Corporate was solely liable to pay the contribution of R 46 663,16 alternatively that the Body Corporate, FNB and Nedbank were liable pro rata to pay the contribution. The SCA said that s 44(1) of the Act provides that any person or representative of a person who has a liquidated claim against an insolvent estate the cause of which arose before the sequestration of that estate may at any time before the financial distribution of the estate, prove that claim in the manner provided.

A claim is proved by way of an affidavit as envisaged in s 44(4) detailing among other things, the nature, and particulars of the claim and, if a creditor holds a security, the nature of that security. The SCA added that s 89(2) stipulates that where a creditor relies for the satisfaction of his claim solely on the proceeds of the property which constitutes his security, he shall not be liable for any costs of sequestration other than the costs specified in s 89(1) and other costs for which he may be liable under paras (a) and (b) of the proviso to s 106.

The SCA added that s 16 provides, which mechanism for determining which creditors must contribute towards the costs of sequestration, when there is no free residue, or it is insufficient. The SCA said that the s 106 must be read together with ss 14(3) and 89(2). FirstRand contended that in terms of s 89(2) of the Act it had no obligation to contribute to the cost of sequestration except in the circumstances set out in either subs (a) or (b) of s 106. FirstRand’s submission was made against the practical background that the primary cause of the shortfall in the free residue was the costs of sequestration incurred by the Body Corporate and paid to its attorneys.

The SCA said the Body Corporate thus made a full recovery of the arrear levies and FirstRand, which gained no benefit from the sequestration, was mulcted in a contribution towards the costs of sequestration incurred by the Body Corporate. Furthermore, it had no practical connection with this Body Corporate as its mortgage was over a unit in a different scheme. The SCA pointed out that a case that dealt with a question similar to the one before it was Snyman v the Master and Others 2003 (1) SA 239 (T), which was cited by the amicus curiae in advancing her submission. In that case the sequestration was a friendly one.

The SCA said that the analysis illustrated that Snyman was wrongly decided. It further confirms that the Master was wrong in absolving the Body Corporate from paying the contribution on the basis of his reasoning relying on the selected parts of a publication by author Dr David Burdette. The SCA added that the High Court erred by holding FNB and Nedbank liable as co-contributors to the costs of sequestration together with the Body Corporate and for that its decision must be set aside. In conclusion the SCA said that having determined the meaning of ss 106, 89(2) and 14(3), it is clear that the Body Corporate as the petitioning creditor is solely liable to pay the costs of sequestration as the other two creditors FNB and Nedbank are secured creditors who relied solely on security.

The SCA said there had been other creditors found to have been liable to contribute. It would have had to contribute in proportion to the amount of its claim in the petition (R 22 000). The SCA added that it is, however, not necessary to have regard to that amount, as the Body Corporate had been found to be solely liable for payment of the entire
R 43 680,35 in respect of the taxed bill of costs. The SCA pointed out that since the matter was not opposed there would be no order as to costs.

The SCA made the following order:

‘1. The appeal is upheld.

  1. Paragraph 3 of the order of the Gauteng Division of the High Court, Pretoria is set aside and replaced with the following order:

“3. That the third and fourth respondents are directed to amend the first and final liquidation, distribution, and contribution account to reflect that the second respondent is solely liable to pay the contribution of R 46 664.16.”

There is no order to costs’.

Kgomotso Ramotsho Cert Journ (Boston) Cert Photography (Vega) is the news reporter at De Rebus.

This article was first published in De Rebus in 2021 (May) DR 34.

De Rebus