It is axiomatic – at least as a prima facie proposition – that insolvency is only concerned about assets which belong to the insolvent when the insolvency commences (or, as it is often said when a concursus creditorum is established on the commencement of insolvency). South African insolvency law respects property rights which have accrued under our law prior to the commencement of insolvency proceedings, including security interests such as mortgages, liens and cessions. This prima facie rule has exceptions: for instance, a trustee or liquidator may in certain circumstances assert a claim to property owned by others on the ground that it was improperly transferred or divested by the insolvent to diminish the insolvent’s estate available for distribution to creditors. In this way the trustee or liquidator swells the assets of the insolvent estate for the benefit of its creditors. One of the claims which a trustee or liquidator has at his or her disposal is the ability to “claw back” an asset from a third-party who has improperly received it from the insolvent prior to insolvency – the claim relevant for purposes of this article is commonly referred to as the impeachment of a disposition not made for value.
Section 26 of the Insolvency Act, 1936 empowers a court to set aside every disposition (for instance, a payment) of property by an insolvent not made for value. There are different rules which apply: if the disposition sought to be impeached took place within two years prior to the commencement of the insolvency, the disposition will be set aside unless the disponee can prove that, immediately after the disposition, the insolvent remained solvent with his or her assets exceeding his or her liabilities; if it occurred more than two years prior to the commencement of insolvency, the onus is reversed and it is for the trustee or liquidator to prove that the liabilities exceeded the assets after the disposition was made. Other jurisdictions refer to this claim as reversing the effect of a “transaction at an undervalue” made by an insolvent within a stated period of time before insolvency. The general thrust of these provisions is to permit an investigation and if the requirements are satisfied, impeachment of a pre-insolvency transaction where “fair market value” or value was not received. Value must be viewed from the insolvent’s point of view and not that of the disponee or counter-party.
The Supreme Court of Appeal recently handed down judgment in Van Wyk Van Heerden Attorneys v Gore N.O. and Another (828/2021) [2022] ZASCA 128 (30 September 2022) where the liquidators of company A sought to set aside separate deposits made from the bank account of A into the trust banking account of a firm of attorneys for the benefit of:
- company B; and
- the attorneys for legal services rendered for the benefit of company B and the sole director of company A.
Brief Facts
Three deposits were made into the trust account of a firm of attorneys from the banking account of Brandstock Exchange Proprietary Limited (Brandstock). The deposits were made by the sole director of Brandstock, Bruce Robert Philp (Philp). Of the three deposits, R1,250,000 and R75,000 were made separately on 23 February 2018 and R200,000 was made on 30 April 2018.
The deposits were made towards a transaction involving the acquisition by a third-party purchaser of claims of Utexx Trust (Trust) against BRP Livestock CC (BRP Livestock) and Philp. BRP Livestock was provisionally liquidated on 3 November 2017 and finally on 8 March 2018. Philp was confronting a sequestration application at the time of the three deposits. These insolvency proceedings against Philp and BRP were driven by the Trust.
The first deposit of R1,250,000 was used by the attorneys to discharge the purchase consideration payable to the Trust and the other two deposits were used by the attorneys to settle legal fees, counsel’s fees and other disbursements. None of the deposits were used for the benefit of Brandstock – and neither did Brandstock derive any benefit or value from the deposits made by it. The key question is whether the attorneys derived any benefit?
Brandstock was then itself provisionally liquidated on 3 July 2018 and finally on 20 August 2018.
The liquidators of Brandstock sought to set aside all three deposits on the basis that they constituted impeachable dispositions made by Brandstock to the attorneys for no value or benefit to Brandstock.
Courts’ Finding
Before we get to the findings of the court on the impeachability of the three deposits, we reiterate the well-established principles in our law of the banker-customer relationship and whether it is any different in respect of funds held by attorneys in a trust account.
The court held that a bank owns funds deposited into banking accounts held with it. A debtor-creditor relationship is established whereby the bank is indebted to the customer. The bank owns the funds but is obliged to comply with instructions of the bank account holder concerning a positive balance in the banking account. Bank account holders thus have the power of disposal over the credit balance of funds held by the bank on their behalf.
In respect of funds deposited into attorneys’ trust accounts, the same kind of relationship with the bank as with any bank account is established between the bank and the attorneys - the bank owns the funds, but is obliged to give effect to instructions by the attorneys holding the trust account. The bank is indebted to the attorneys and no other party, as only the attorneys can instruct a bank to dispose of amounts to the credit in such trust account as clients have no legal relationship with the bank concerning attorneys’ trust accounts.
Attorneys typically function at two levels when operating trust accounts. On the one hand, as principals because only they have the right to dispose of funds to the credit in that account pursuant to a banker-customer relationship. On the other hand, as agents if they give effect to a mandate from a client in whose name the funds are held in trust. The court held that this framework within which attorneys operate a trust account does not determine whether a deposit into a trust account amounts to a disposition to the attorneys.
The court went on to refer to the provisions of the Legal Practice Act, 2014. This legislation provides that an amount standing to the credit of any trust account of any trust account practice does not form part of the assets of the trust account practice or of any attorney, partner or member thereof and may not be attached by a creditor of such trust account practice, attorney, partner or member.
To succeed in impeaching a disposition not made for value (i) a disposition must have been made by an insolvent (in this case the disposition was made by Brandstock) (ii) to a person who either claims under or benefited by the disposition (in this case the attorneys) and (iii) such person is unable to prove that the insolvent’s (Brandstock’s) assets exceeded its liabilities immediately after the disposition.
Given the debtor-creditor relationship established when funds are deposited into an attorney’s trust account (the bank owes the money deposited to the attorney – as principal - who, in turn, is obliged to give effect to the instruction – as agent – of the client) and the provisions of the Legal Practice Act, 2014, the court concluded that the payment by the attorneys to the Trust cannot be impeached as the attorneys did not benefit from the disposition made by Brandstock into its trust account – the payment to the attorneys did not amount to a disposition. The funds deposited with the attorneys in their trust account, and paid out on the instructions of the client, cannot therefore be recovered from the attorneys. The court went on to say: “… to hold a party liable who simply acted as an intermediary and gave effect to instructions by the client but did not benefit from the disposition gives rise to an absurd and unbusinesslike outcome.” The impeachment claim for a disposition made for no value is aimed at a party that benefits from the disposition – the attorneys did not benefit and they simply served as conduits in the process. It would be different if the attorneys used funds in a trust account to pay gambling debts (as it happened in De Villiers NO v Kaplan 1960 (4) SA 476 (C)), which benefitted the personal estate of the attorney.
By making the payment to the Trust, in accordance with an instruction from a client, the attorneys complied with a lawful mandate. The attorneys received no benefit from the purchase consideration paid to the Trust. It was the Trust that benefitted. The Trust was therefore hit by the impeachable provision in section 26(1)(b) of the Insolvency Act, 1936. The Trust ultimately received monies of Brandstock without Brandstock receiving any value since it was not a party to the sale transaction. In the final analysis, the Trust benefitted as the purchase consideration was discharged with monies belonging to Brandstock. The deposit of the sum of R1,250,000 into the attorneys trust account fell outside the application of a disposition that could be impeached as the attorneys did not benefit from it.
In respect of the two other deposits used to settle legal fees, counsel’s fees and other disbursements, the court held that the attorneys made the funds part of their assets when they appropriated them to settle their fees and pay disbursements incurred on behalf of clients other than Brandstock. As such, the attorneys benefited from the two deposits, Brandstock did not receive value for the deposits and the attorneys attracted the onus to prove the solvency of Brandstock immediately after the deposits. The attorneys conceded that they were unable to discharge the onus that the assets of Brandstock exceeded its liabilities. The two deposits were accordingly impeached.
In conclusion, attorneys are not immune from the impeachment provisions in section 26 of the Insolvency Act, 1936.
