EIASOV (PVT) LIMITED v ARENEL (PVT) LIMITED

Case Name: ELIASOV, N.O., v ARENEL (PRIVATE LIMITED)

Geral Division, Bulawayo

Civil Action

Beadle, A.J

28^th February and 1^st and 2^nd March, 1979

CITATION: Eliasov v Arenel 1979 R.L.R 123 (G.D)

The plaintiff in this case approached the Court suing in his capacity as the liquidator of a company, FORTWELL TRADING COMPANY (PRIVATE) LIMITED and will be referred to as “the company” for the purposes of this summary. Its directors and shareholders were Mr. and Mrs. Eisenstein and a Mr. and Mrs. Steinberg (who had management and control of the company). The defendant was another private company, ARENEL (PRIVATE) LIMITED and was represented by Rodney Lepar, the managing director. A third but uncited party in this matter is ELENEM SYNDICATE, a mining partnership headed by Rodney Lepar’s father, Ruby Lepar and John Maclaran.

Fortwell Trading Company was a wholesale dealer of typical household items and foodstuffs before a resolution was passed to confirm its liquidation in terms of section 242(2)(a) of the Companies Act on the 4^th of May 1977[1]. It’s relationship with the defendant was one of mutual benefit since the defendant among many other activities made biscuits, sweets and other confectionary. Over a long period of time, the defendant company would sell to the company on credit with the understanding that payment would made 60 days after delivery with the company honoring its obligations and making regular payments. However, at the year-end of 1976, the company began falling into arrears with payments because its trading regions were heavily affected by the effervescence of the Rhodesian Bush War and all efforts to push trade into more urban and hospitable areas were fruitless. In and around early 1977, a certain Herbert MacLachlan who was in the employ of the defendant company as a salesman began to approach the company for payment of the money owed to Arenel up until he was relieved of this task by Rodney Lepar in sometime in the middle of April. This was due to the fact that every time Herbert MacLachlan approached the company, he was told lies of cheques being mailed in the not-so-distant future, “in actual fact, somewhere about the 21^st of February a sum of $2500-odd was paid in the discharge of arrear debts, but “the company” still remained considerably in debt”[2]. Rodney Lepar made his first visit to the company sometime in April where he was met with Mrs. Eisenstein, who made a promise to pay that was left unfulfilled. He then made second visit in which he threatened legal action against the company for failure to satisfy its debts. On the third visit on the 2^nd of May 1977 a heated discussion ensued between Rodney Lepar and Mrs. Steinberg because a cheque for $934 dated in February was handed to Rodney in May. It was during this discussion that it was revealed by Mrs. Steinberg that the company, due to very low sales had in excess a number of heavy lorries that were deemed surplus to requirements and were looking to be sold. Rodney Lepar acting in the interest of his father’s mining syndicate whom he was aware had just failed to purchase a lorry of their own (and having signing rights), “suggested to Mrs. Steinberg that if he could find a purchaser for one of these lorries, could he receive the proceeds of that sale in settlement of the debt owed to his own company, Arenel.”[3] An agreement of $5000 was reached between the two them such that “the effect of the transaction was this: that a payment made by Elenem Syndicate for the purchase of a lorry from ‘the company’ was handed over by ‘the company’ to the defendant company in discharge of a debt which ‘the company’ owed to the defendant company.” [4]. A further cheque payment of $400 was made which was able to square away Fortwell’s debts as of the 28^th of February 1978.

This was the background at the heart of the matter before the Court wherein the liquidator in terms of section 44 of the Insolvency Act Chapter 303, challenged the transaction of the sale of the lorry as an undue preference of creditor because of two problems operating in tandem:

• The transaction happened two days before Fortwell Trading Limited was liquidated;
• The endorsement of the cheque, even without considering whether the transaction was in the ordinary course of business or not, the circumstances around it were unusual and improper.

Therefore the question that needed to be addressed by the Court was: Whether Fortwell Trading Company (Private) Limited seemed to offer preference to one of its creditors, Arenel (Private) Limited.

The law governing such scenarios is stated as follows:

 “Voidable preferences

(1) Subject to the provisions of this section, every disposition of his property made by a debtor within the period of six months immediately preceding –

(a) the sequestration of his estate; or

(b) if he is dead and his estate is insolvent, his death;

Which has the effect of preferring one of his creditors above another may be set aside by a court if, immediately after the making of the disposition, the liabilities of the debtor exceeded the value of his assets.

(2) A disposition shall not be set aside in terms of subsection (1) if the person in whose favour the disposition was made proves that the disposition was made in the ordinary course of business and that it was not intended thereby to prefer one creditor above another.

(3) For the purposes of this section –

(a) “creditor” includes a surety for the debtor and a person in a position by law analogous to that of a surety;

(b) every disposition of property made under a power of attorney, whether revocable or irrevocable, shall be deemed to be made at the time at which the transfer or delivery or mortgage of such property takes place.” [5]

Additionally, in setting the facts at hand against the provisions of section 44 of the Insolvency Act, BEADLE A.J highlighted some important principles[6] that will apply as well:

1. The test that would need to be applied by the Court would need to be as subjective one. In which there would need to be an assessment of the debtor’s intention when he made the payment. Thus the question before the Court would be “did the debtor, when he made the disposition, intend to prefer the creditor he paid?” [7]
2. The construction of section 44 (in particular subsection 2) places an onus on the creditor receiving the payment or disposition who must show that when it was made, either, the creditor did not have the intention to prefer it over other creditors or to show that the transaction occurred during the normal course of business.
3. Where a debtor may have more than reason or motive for giving undue preference to one creditor over other creditors, it will be his dominant motive that will be at the heart of the Court’s assessment in that the “debtor’s dominant motive must be to give such an undue” [8].
4. If the debtor is of the knowledge that his estate is insolvent and is about to go through sequestration proceedings, and on the basis of this knowledge, he pays the debts owed to one creditor and thereby gives that creditor undue preference over other creditors, “the ordinary principles of the law of evidence apply, which are that he is assumed to intend the natural and probable consequences of his acts, and if these consequences are to prefer, an in intention to prefer can be assumed.”[9]
5. However, the presumption directly above (4) can be rebutted by a number of differing factors[10]. It was said in established case authority that:-“…when the debtor expects or contemplates sequestration, the assumption can be made that a payment to one creditor is a disposition with the intention to grant a preference to” [11] However,“such an assumption loses its strength if there is evidence that a disposition, made in the circumstances set out above was in fact not accompanied by the intention to grant a preference to the creditor”[12]It was against this backdrop that BEADLE A.J highlight some factors that could rebut the presumption.

“An example of some of the, is when the debtor states he had no intention to prefer and he is regarded as a good and truthful witness and his evidence is believed, or when there is evidence of extreme pressure put on the debtor to cause him to pay one creditor before another.”[13]

But a caveat must be placed in this analysis in that in deciding whether or not the creditor’s intention to prefer exists, it is a factual question that must be asked and rigid rules in assessment of such cannot be placed but must be dealt with the facts on hand. He went further to say,“How strong that assumption will be is, of course, itself a pure question of fact. For example, where the debtor is a shrewd man of business who fully appreciates the consequences and purposes of liquidation, and at a time when he has already resolved to liquidate a hopelessly insolvent business he pays one creditor in full by disposing of one of the realizable assets of his insolvent company, the assumption that he intended to prefer that the creditor over others will be very strong one indeed and it will need cogent evidence to rebut such an assumption.”[14]

Assessing the facts, the applicable law and the evidence presented to him, the learned judge ruled in favour of the liquidator of the plaintiff company. He based his reasoning on the fact that the defendant company, Arenel, did not discharge the onus placed on by subsection 2 of section 44 of the Insolvency Act Chapter 303. The defendant company failed to show that that when the cheque was drawn by plaintiff company and endorsed over to the defendant company, this was done without the intention of preferring one creditor over another thereby giving them undue preference. The reason this was so, according to BEADLE A.J, was that Mrs Steinberg’s actions attributed to a deliberate action of giving preference; the reasons for her actions on the 2^nd of May was to pacify another director, Mrs Eisenstein whose mother had a business relationship with Rodney Lepar’s father and a recognised agent of the company. For these reasons the Judge, ruled for the setting aside of the disposition and for a judgment cost of $5000 in favour of the plaintiff.

Reference(S):

[1] A company may be wound up voluntarily –When the period, if any, fixed for the duration of the company by the articles expires or the event, if any, occurs on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily.

[2] Eliasov v Arenel [1979] R.L.R 123 (G.D) [D] –[E]

[3] Ibid.[126]  [F]

[4] Ibid. [127] [A] – [C]

[5] Insolvency Act (Chapter 303), s44

[6] MARS, The Law of Insolvency in South Africa (6^th edition) 217-221

[7] Supra note 2 [127] [G]

[8] Ibid. [127] – [128] [H]-[A]

[9] Ibid [128] [B] – [D]

[10] R v Ismail [1920]  (A.D) 316 [319]

[11] Gert de Jager (Edms.) Bpk. v Jones N.O, en McHardy N.O [1964] S.A 325 (A.D) [331]

[12] Pretorius’ Trustee v Van Blommenstein [1949] (1) S.A 267 [278]

[13] Supra note 2 [128]-[129] [H]-[A]

[14] Supra note 2 [128] [B] – [D]