A recent judgment handed down by the Supreme Court of Appeal on 30 September 2011 has laid bare the effects of non-compliance with the requirements of Section 34 of the Insolvency Act and should arguably sent shivers down every buyer, banker’s and conveyancing attorney’s spine.
Not only was the sale and transfer of the assets of a business, which was subsequently liquidated, declared void ab initio, but so too the mortgage bonds registered in favour of the bank financing the transaction.
A proper due diligence investigation into all relevant issues is thus of utmost importance when assisting a buyer or a bank evaluating it’s security. It proves that “possession cannot be regarded as “10 points of the law” and possession and even ownership and the security of a mortgage bond can be set aside by a ruling of a court. A bona fide buyer or bank are most likely to be un-aware of a pending liquidation or insolvency of a seller, which liquidation or sequestration can take up to six months to come to conclusion after the sale and full payment of a purchase price has taken place.
The facts of the case can be summarised as follows:
• Tiffindell Ski Limited (the company) concluded an agreement of sale with Tiffski Property Investment (Pty) Ltd (Tiffski) on 12 July 2007 in which it sold to Tiffski the immovable property on which it conducted a hotel and resort enterprise along with the said business enterprise (the subject matter).
• The written agreement of sale contained terms quite common in many such agreements and to the effect that possession, occupation and control would be given to Tiffski on the date of transfer, that the agreement would not be published in term of Section 34 of the Insolvency Act, that the company would continue to conduct its business pending transfer and that the agreement represented the entire agreement between the parties.
• Registration of transfer subsequently took place on 16 September 2008 simultaneous with the registration of two mortgage bonds in favour of the State Bank of India Limited (the Bank).
• The company went into liquidation on 23 October 2008 and its liquidators challenged the validity of the transfer of the subject matter and the registration of the mortgage bonds against themselves, arguing that it was void as against them on the grounds that (1) the company went into liquidation within 6[six] months from the transaction (2) the transfer was not in the ordinary course of business (3) the transfer of the business was not for the purpose of securing the payment by the company of its debts and (4) the required notice was not published as set out in Section 34 of the Act.
Upon accepting the liquidator’s arguments, the court rejected Tiffski’s contentions that it was not a “trader” as defined in the Act, that the transaction was in the ordinary course of business, that the transfer fell outside of the 6 month window contemplated in the Act and that due to the transaction being common knowledge it was not necessary to advertise.
It placed specific emphasis on the Bank’s role when considering the validity of the mortgage bonds and rejected the claim by the Bank that it was unaware of the company’s financial difficulties at the time it approved the disputed mortgage bonds. The Bank further contended that the bonds passed by Tiffski over the immovable property transferred from the company constituted real rights in the said property that served as its only “real security” for the monies lent. Thus any order voiding the mortgage bonds would cause it irreparable financial harm.
The Bank sought to rely on a number of court decisions for the proposition that the validity of a mortgage bond duly registered in the Deeds Office is not dependent on the validity of the antecedent contract, a contention that the court also rejected. According to the court in this instance, it is trite that no legal consequence flow from a void jural act. The court stated that “As Tiffski did not acquire ownership of the company’s immovable property – on account of the voidness of the transfer – it must logically flow that Tiffski could not in turn grant any rights, let alone real rights, in the immovable property to the Bank”.
The court then further slammed the Bank saying that it should have insisted on publication of a notice in terms of Section 34 and this being expressly excluded in the agreement of sale must have been done with the Bank’s approval or acquiescence. It was the opinion of the court that to uphold any argument advanced by the Bank in its defense would “defeat the very purpose which the Legislature wished to achieve in enacting Section 34 (1) and benefit the Bank at the expense of the company’s creditors. The Bank must accordingly be taken to have consciously assumed the risk of the transfer of the company’s business to Tiffski falling foul of the legislative requirements and nevertheless agreed to advance moneys to Tiffski fully aware of the risk in doing so.
In future, any bank or money lending institution should do well to take head of the court’s hardline approach applied in this case and as the usual remedies relied on in cases of this nature fell on deaf ears in favour of the rights of the company’s numerous creditors. It could in fact signal the start of a growing trend to protect creditors and restrict lending even further, warning any bank to tighten its mechanisms for due diligence, information control and mortgage bond approval criteria even further.
Conveyancing attorneys who attend to the registration of mortgage bonds must also be aware of the risks associated with the registration of a mortgage bond when a court rules the security void, due to non compliance of legal requirements.
With special thanks to Daan Steenkamp.
For the full judgment visit http://www.saflii.org/za/cases/ZASCA/2011/187