Commercial law attorney PJ Veldhuizen from Cape Town-based law firm Gillan and Veldhuizen Inc. has warned that the recent case of a liquidation involving a Close Corporation and a creditor is a clear example of collusive conduct and the consequences of impeachable transactions.
In the case, liquidators for Muga CC brought an application against an individual in terms of the Insolvency Act 24 of 1936. The liquidators alleged that the individual had engaged in collusive dealings with the company before it went into liquidation and that the company had made dispositions that constituted undue preferences for one creditor over others. As a result of the evidence presented, the court ordered that the dispositions made be set aside and that the individual be held liable for the loss suffered due to collusive conduct.
According to Veldhuizen, this case serves as a stark reminder of the importance of fair dealing and equitable distribution of assets in the context of insolvency proceedings. He also emphasised that this case highlights the severe consequences of engaging in collusive dealings with a company in financial distress, especially when transactions are made in preference of one creditor over another.
The court in this case found that the company intended to defraud its other creditors by engaging in these transactions with the intent to prefer one creditor over others and to harm the other creditors by reducing the assets available for distribution among them. The court also found that the individual, who was a member of Muga CC and in his personal capacity, discussed the repayment of a loan shortly after becoming aware of the pending winding-up.
Furthermore, the court discovered that Muga CC negotiated with other creditors to postpone payments due to them, while the individual was paid what was due to him. This had the effect of preferring the individual over other creditors. Proceedings revealed that these payments were made while the company was experiencing financial distress and while its liabilities exceeded its assets.
The Insolvency Act sets out rules that govern dispositions a debtor makes before their estate is sequestrated. These rules are in place to ensure that there is fair dealing and equitable distribution of assets in the context of insolvency proceedings. The sections that apply to dispositions made by debtors are:
Section 26: allows the court to set aside dispositions made without value if the debtor’s liabilities exceeded their assets at the time of the disposition or within two years of sequestration.
Section 29: allows the court to set aside dispositions made within six months of sequestration if they caused one creditor to be preferred over another and the debtor’s liabilities exceeded their assets at the time of the disposition.
Section 30: allows the court to set aside dispositions made with the intention of preferring one creditor over another at a time when the debtor’s liabilities exceeded their assets.
Section 31: allows the court to set aside collusive dispositions made before sequestration that prejudice creditors or prefer one creditor over another. Parties who participated in collusive dispositions may be liable.
On appeal, the court concluded that the liquidators had met all the requirements in terms of the Insolvency Act and upheld the judgment. The court dismissed the appeal with costs.