FirstRand Bank Limited v Master of the High Court (Pretoria) and Others (1120/19) [2021] ZASCA 33; 2021 (4) SA 115 (SCA) (7 April 2021)

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Reportable

Case no: 1120/2019

In the matter between:

FIRSTRAND BANK LIMITED

APPELLANT

and

MASTER OF THE HIGH COURT

(PRETORIA)

FIRST RESPONDENT

THE BODY CORPORATE OF

VICTORY PARK

SECOND RESPONDENT

CORNELIA CAROLINA MIENIE NO THIRD RESPONDENT

IGNATIUS CLEMENT MIKATEKO

SHIRILELE N O FOURTH

RESPONDENT

NEDBANK LIMITED

FIFTH RESPONDENT

MINISTER OF JUSTICE AND

CONSTITUTIONAL DEVELOPMENT SIXTH RESPONDENT

MINISTER OF RURAL DEVELOPMENT

AND LAND REFORM

SEVENTH RESPONDENT

Neutral citation: FirstRand Bank Limited v Master of the High Court (Pretoria) and Others (Case no 1120/19) [2021] ZASCA 33 (7 April 2021)

Coram: WALLIS, SALDULKER and DLODLO JJA and GOOSEN and MABINDLA-BOQWANA AJJA

Heard: 23 February 2021

Delivered: This judgment was handed down electronically by circulation to the parties’ legal representatives by email, publication on the Supreme Court of Appeal website and release to SAFLII. The date and time for hand-down is deemed to be 10h00 on 7 April 2021.

Summary: Insolvency Act 24 of 1936 – interpretation of ss 106, 89 (2) and 14 (3) – liability for costs of sequestration when there is no free residue or free residue is insufficient – whether secured creditors relying solely on their security are liable to contribute – whether petitioning creditor is solely liable.

ORDER

On appeal from: Gauteng Division of the High Court, Pretoria (Vilakazi AJ, sitting as a court of first instance):

1 The appeal is upheld.

2 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 R46 663.16.’

3 There is no order as to costs.

Mabindla-Boqwana AJA (Wallis, Saldulker and Dlodlo JJA and Goosen AJA concurring):

Introduction

[1] This appeal concerns the interpretation of s 106, read with ss 89(2) and 14(3), of the Insolvency Act 24 of 1936 (the Act) dealing with the liability of creditors to pay a contribution where there is insufficient or no free residue in an insolvent estate to meet expenses, costs and charges connected with the sequestration. Such costs are a charge against the free residue in terms of s 97(2)(c) of the Act.

[2] This issue has been a subject of controversy for a while within the insolvency law academic circles.[1] The debate centres on the question of which creditors are liable to pay a contribution for costs where there is a shortfall in the free residue. Does the burden to contribute lie with all creditors who have proved claims against the estate? Does that include secured creditors who have proved their claims but relied solely on their security? And what about the petitioning[2] creditor who applied for the sequestration of the estate in the first place? These questions engaged Vilakazi AJ in the Gauteng Division of the High Court, Pretoria (the high court). But first, the background that led to the application before Vilakazi AJ.

Background

[3] The insolvent, Mr J Z Msimango, prior to his sequestration, owned two sectional title units, which were separately bonded, one to Nedbank Limited in the amount of R577 800 (property 1) and the other to First National Bank (FNB), a division of the appellant (FirstRand), in the amount of R645 840 (property 2) respectively. The unit mortgaged in favour of Nedbank (property 1) fell within the sectional title scheme administered and managed by the second respondent (the Body Corporate).

[4] On 7 October 2009, the Body Corporate launched an application in the high court for the sequestration of the insolvent’s estate on the basis that the insolvent owed it R22 000 in 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 R8 895.64.

[5] 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 the 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 certificate was issued by the Master of the High Court, 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.

[6] 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 R679 512.82 at the second meeting of creditors held on 22 November 2012. Property 1 was sold for an amount of R350 000 and transferred to the buyer. To effect registration of transfer, the municipality was paid an amount of R14 643.44 and the Body Corporate R178 647 from the sale of proceeds in accordance with s 15B(3)(a)(i)(aa) of the Sectional Titles Act 95 of 1986 (the Sectional Titles Act).[3] The property was further sold by its buyer to another purchaser for R580 000. The Body Corporate did not prove a claim.

[7] The appellant alleges that it had no knowledge that the insolvent had been sequestrated. It had started a foreclosure process prior to sequestration and property 2 was sold at a sale in execution on 15 September 2010 for the sum of R330 000.[4] It was then registered on December 2010 in the name of the purchaser. The proceeds from the sale in execution were paid to FNB. FNB proved a claim of R617 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 upon by the trustees to refund the insolvent estate an amount of R30 697.91 made up of costs relating to the realisation of the security in terms of s 89(1)[5] of the Act (R13 587.89), a contribution to the costs of sequestration in the amount of R17 028.82 and costs of a special meeting at R81.20.

[8] The Trustees’ First and Final Liquidation, Distribution and Contribution Accounts (the L&D Account), prepared by the third and fourth respondents, reflected a contribution in the amount of R46 663.16 payable by the proven creditors (FNB & Nedbank) on a pro rata sharing basis. Nedbank’s share was reflected as R29 634.33 whilst FNB’s was R17 028.82. The Body Corporate was not reflected as being liable to pay any contribution at all.

[9] The appellant did not take issue with the s 89(1) costs or the 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 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.

[10] The Master’s response to this objection was inter alia that, whilst 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 selected parts of a publication authored by Dr David Burdette,[6] the Master reasoned:

‘4. The exceptions to this rule are namely arrear taxes owing on fixed property (in terms of section 89(1) and (5) of the Insolvency Act>) and arrear levies owing in respect of sectional title units (in terms of the provisions of the Sectional Titles Act, 95 of 1986, as interpreted by the Courts in Nel v Body Corporate of Seaways Building [1995] ZASCA 83; 1996 (1) SA 131 (A) and Barnard v Regspersoon van Aminie 2001 (3) SA 973 (SCA)).

5. Arrear taxes on fixed property and arrear levies in respect of sectional title units are considered to form part of the administration

expenses, despite the fact that the obligation to pay these amounts arose prior to sequestration.

6. The arrear levies are part of the costs to be paid prior to the Registrar of Deeds giving effect to the transfer of the property. Therefore, there can never be a claim for arrear levies in law currently.

7. The Supreme Court of Appeal has determined that the claims by Body Corporate for arrear levies are not affected by the provisions of the Insolvency Act.

[1] P M Meskin, edited by: Professor André Boraine et al Meskin’s Insolvency Law (1990) LexisNexis Online (updated 2020) para 11.8.1.

[2] This is the sequestrating creditor, the procedure by way of petition having been abolished.

[3] Section 15B(3)(a)(i)(aa) of the Sectional Titles Act 95 of 1986 reads:

‘(3) The registrar shall not register a transfer of a unit or of an undivided share therein, unless there is produced to him-

(a) a conveyancer's certificate confirming that as at date of registration-

(i) (aa) if a body corporate is deemed to be established in terms of section 2 (1) of the Sectional Titles Schemes Management Act, that body corporate has certified that all moneys due to the body corporate by the transferor in respect of the said unit have been paid, or that provision has been made to the satisfaction of the body corporate for the payment thereof.’

[4] In addition to the price the purchaser paid the clearance amounts due to the municipality and the body corporate.

[5] ‘89 Costs to which securities are subject

(1) The cost of maintaining, conserving and realizing any property shall be paid out of the proceeds of that property, if sufficient and if insufficient and that property is subject to a special mortgage, landlord's legal hypothec, pledge, or right of retention the deficiency shall be paid by those creditors, pro rata, who have proved their claims and who would have been entitled, in priority to other persons, to payment of their claims out of those proceeds if they had been sufficient to cover the said cost and those claims. The trustee's remuneration in respect of any such property and a proportionate share of the costs incurred by the trustee in giving security for his proper administration of the estate, calculated on the proceeds of the sale of the property, a proportionate share of the Master's fees, and if the property is immovable, any tax as defined in subsection (5) which is or will become due thereon in respect of any period not

exceeding two years immediately preceding the date of the sequestration of the estate in question and in respect of the period

from that date to the date of the transfer of that property by the trustee of that estate, with any interest or penalty which may be due on the said tax in respect of any such period, shall form part of the costs of realization.’

[6] Then of the University of South Africa.

[7] Nel N O v Body Corporate of the Seaways Building and Another 1996 (1) SA 131 (SCA).

[8] Barnard N O V Regspersoon van Aminie en ‘n Ander 2001 (3) SA 973 (SCA).

[9] Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; [2012] 2 All SA 262 (SCA); 2012 (4) SA 593 (SCA) para 18.

[10] Section 103 of the Insolvency Act 24 of 1936 (the Act).

[11] Section 2 of the Act – Definitions.

[12] Section 99(1) of the Act deals with preference in regard to certain statutory obligations.

[13] Op cit fn 1.

[14] Synman v The Master and Others 2003 (1) SA 239 (T).

[15] David Burdette, University of Pretoria: ‘Contributions by creditors in insolvent estates - has section 89(2) of the Insolvency Act become obsolete? Snyman v The Master 2003 (1) SA 239 (T)’ (2003) 66 THRHR 521.

[16] Bank of Lisbon and South Africa Ltd v The Master and Others 1987 (1) SA 276 (A) at 287I -288A.

[17] Op cit, fn 15 at 525.

[18] ABSA Bank v The Master & Others NNO 1998 (4) SA 15 (N) at 24H-25A.

[19] Op cit fn 16.

[20] Op cit fn 1.

[21] Mphosi v Central Board for Co-operative Insurance Ltd 1974 (4) SA 633 (A) at 645C-H.