Liquidators Win Major Battle

By Dirk Kotze [06/04]

The liquidators of Consolidated News Agencies (Pty) Ltd (in liquidation) (“Consolidated”) won a major battle in the Transvaal Provincial Division of the High Court when they succeeded in having ABSA’s claim of R133 336 454,72 which they proved against Central News Agencies (Pty) Ltd (in liquidation) (“Central”), expunged in the recent case of Consolidated News Agencies (Pty) Ltd (in liquidation) and Others v ABSA Bank Ltd and Others.

The background and main facts to the dispute can be summarised as follows:

Central owed Consolidated a total of R177million (“the claim”) in respect of the purchase price of the top 61 stores. Consolidated was indebted to its holding company, Consolidated News Agencies Holdings (Pty) Ltd (“Holdings”) on loan account for some R850 million. As security for the repayment of the aforementioned loan account, Consolidated ceded the claim to Holdings in securitatem debiti. As a result of cash flow difficulties Holdings, Central and Consolidated  approached ABSA for an increased overdraft facility, which ABSA agreed to provide. ABSA alleged that Holdings subsequently ceded all its claims (including the claim) to ABSA as security for the repayment of the overdraft.

Shortly after the conclusion of the agreement, Consolidated and Central were liquidated. ABSA, assuming that the dominium over the claim vested in them, subsequently proved the claim against Central. The liquidators of Consolidated on the other hand were of the opinion that ownership of the claim, vested in Consolidated and that only Consolidated was entitled to prove the claim against Central. On this understanding, Consolidated’s liquidators also proved a claim against Central, which was expunged by the Master of the High Court upon submissions made by Central’s liquidators.

In the light thereof, Consolidated’s liquidators subsequently approached the TPD for a declarator on the issue of ownership of the claim.

The decisive legal issue to be decided was whether  the cedent of a claim in securitatem debiti, retained a reversionary interest (or the bare dominium) in it, after cession thereof to the cessionary, and if so, whether upon the liquidation of the cedent, its liquidators became entitled to recover and administer the claim.

In defence to the application, ABSA raised some interesting points in limine, one of which was that Consolidated lacked the necessary authority to bring the application for the expungement of ABSA’s claim against Central.

The following factual background needs to be provided in order to put the aforementioned point in limine in perspective: ABSA is a major creditor of Consolidated and Central. As a result of the large amount of their claims proved in the respective estates, ABSA had major voting powers at the duly convened meetings of creditors. On the 10th of April 2003 and at a statutory second meeting of creditors of Consolidated, it was resolved that “all ......claims....which the liquidators may wish to  proceed with shall be subject to directions to be given to them at a further statutory meeting of creditors. Until such directions have been given, no litigation shall be proceeded with”. At that point in time the liquidators of Consolidated had enough prima facie evidence to proceed with legal action against ABSA, the latter having been party to certain impeachable transactions. The only factor prohibiting the liquidators of Consolidated to proceed with such litigation, was obtaining directions from the creditors. At a duly convened meeting of Consolidated’s creditors on the 10th of June 2003, the liquidators were again unsuccessful in obtaining the necessary authority from creditors to proceed against ABSA.

Thereafter, on the 2nd of July 2003, the liquidators of Consolidated applied to the Master for the extension of their powers which would have enabled them to proceed with litigation against ABSA. ABSA objected to such extension of powers and the Master refused to grant such extension of powers.

It should be remembered that ABSA had already proven the claim against Central and time was running out to object to the confirmation of Central’s liquidation and distribution account. As a result of this and the fact that the liquidators of Consolidated were advised that ABSA could not raise the liquidator’s lack of authority in proceedings against them, they approached the Transvaal Provincial Division of the High Court for an order in the following terms:

1. THAT ownership of the claim of R133 336 454.72 in respect of the purchase price for the top 61 stores due by  Central to Consolidated in terms of the written agreement concluded between the parties on 8th Nov 2001, vests in Consolidated;
    

2. THAT ABSA is not entitled to be paid any dividend by Central, alternatively its liquidators, in respect of the aforementioned claim
    

3. THAT the liquidators of Central are to reflect Consolidated as a creditor of Central in the Liquidation and Distribution Account of Central for the amount of the aforesaid claim and to expunge ABSA as being the creditor entitled thereto;

In his judgment on the point in limine, the learned judge took cognisance of the fact that the application, if successful, would be to the advantage of the other creditors of Consolidated and to the disadvantage of ABSA. The judge then observed that ABSA, as a major creditor of Consolidated, Central and Holdings was in a position to manipulate the liquidation process in its favour.  After analyzing the primary functions of a liquidator, the judge then made an important remark by stating that: “.... liquidators ought not to be manipulated by some creditors to the prejudice of others”. He continued by confirming that should a liquidator litigate without the authorisation of the creditors it may be, if it transpires that he was wrong in his approach, that he will be held personally liable for the costs. That is the risk which a liquidator takes if he litigates without the necessary authority. “On the other hand if the litigation is necessary for the liquidator to give effect to what he is appointed to do, i.e. to liquidate and distribute the assets correctly, third parties will not be able to non-suit the liquidator because of lack of authorisation. Similarly in the case of a creditor who tries to prevent a liquidator to obtain a court ruling that will be to his disadvantage but to the advantage of other creditors, the court ought not to non-suit the liquidator unless it becomes apparent that the conduct of the liquidator is unreasonable.” (see p 6 par 11 of the judgment). This was also the main reason why the learned judge eventually held that the point in limine cannot succeed.

In his judgment on the main issue, Hartzenberg J confirmed that the Court was bound by the decisions of the highest Court of Appeal in applying the pledge construction when interpreting a cession in securitatem debiti, especially when the cedent falls foul to a liquidation or sequestration order.

For some years, the legal consequences of a cession in securitatem debiti has been the cause of much academic debate. There seem to be two possible constructions, namely the fiduciary security cession construction and the pledge construction. The legal effect of a cession in securitatem debiti in the context of a fiduciary security cession is that the cession is treated as an ordinary cession with a superimposed undertaking (pactum fiduciae) by the parties that the cessionary will restore the ceded right to the cedent on satisfaction of the secured debt. It follows that from the moment such cession becomes operative, the cedent can no longer institute action in his/her own name and the claim is completely transferred to the estate of the cessionary. Only when the obligation so secured falls away, the cessionary is obliged to cede the claim back to the cedent. On such construction, ABSA would have been entitled to prove the claim against Central.

In contrast thereto, the pledge construction equates a cession in securitatem debiti to the pledge of a moveable asset. The cedent thus, notwithstanding the cession, retains a reversionary right (or the bare dominium) in the claim which was ceded and the claim thus never completely leaves the estate of the cedent. The cessionary (pledgee) acquires a limited real security right, which can only be exercised after maturity of the pledge, in other words when the cedent (pledgor) is in default. Such construction would have the effect that the liquidators of Consolidated would be correct in arguing that the dominium over the claim vested in Consolidated as a further result of which the right to recover the claim from Central, also vested in Consolidated.

Despite criticism by prominent academics such as Susan Scott on the approach of our Courts in interpreting cessions in securitatem debiti, the Supreme Court of Appeal seems to favour the pledge construction, especially in a scenario where the cedent is liquidated or sequestrated. As a result of applying the pledge construction, judgment was thus granted in favour of the liquidators of Consolidated and the Order sought was granted.

Dirk Kotze - BA, LLB, Admitted Attorney and Conveyancer, Dip Criminal Justice and Forensic Auditing (Rand Afrikaans University), Dip Insolvency Law (University of Pretoria), Cert Johannesburg Stock Exchange's Registered Securities Trade Exam, Cert JSE Compliance Officer Exam, International Capital Markets Qualification, conducted by the Securities Institute, London, UK.

Dirk can be contacted on Tel. 021 880 5400 or by e-mail.