Cohen vs. Absa Bank Limited - (09 Feb 2024)

Section 31 of the Insolvency Act serves as a sword for the liquidator in winding up the insolvent estate, rather than a shield for third parties in subsequent litigation

Insolvency

The Appellant, Mr. Chaim Cohen (Mr Cohen), seeks to avoid liability under a deed of suretyship executed in favour of the Respondent, Absa Bank Limited (Absa), on the basis of Section 31(2) of the Insolvency Act, 1936 (the Insolvency Act). As a result of the primary debtor, A Million Up Investments 105 (Pty) Limited (AMU), being unable to meet its obligations under a loan agreement to Absa in full, it was liquidated. Thereafter, Absa sought to hold Mr. Cohen liable as surety.

In his defence Mr. Cohen invoked Section 31(2) and alleged that, before its liquidation, AMU colluded with Absa to dispose of property belonging to AMU in a manner which had the effect of prejudicing AMU’s creditors or of preferring one of them above the others. The question is whether Section 31(2) permits a surety, in these circumstances, to raise this defence. The commercial court of the Gauteng Division of the High Court, Johannesburg (the high court) said no. Consequently, it ordered Mr. Cohen to pay to Absa 40 million rand plus interest and costs. It is that finding and order which the surety wishes to assail in this appeal.

Section 31 of Act establishes a unified process in which: (a) a collusive disposition is set aside provided the requirements of Section 31(1) have been established; (b) the loss occasioned to the insolvent estate due to the transgressor’s actions is made good; (c) a penalty is imposed upon the transgressor; and (d) the ex lege forfeiture of the creditor’s claim against the insolvent estate if the transgressor is also a creditor of the insolvent estate. Thus, Section 31(2) of the Insolvency Act does not afford a shield to the surety who seeks to escape liability on the basis that the insolvent primary debtor colluded with the creditor prior to its liquidation to dispose of the insolvent’s property in a manner which had the effect of prejudicing the insolvent’s creditors or of preferring one of them above another.

Only the liquidator (or a creditor in the liquidator’s name), and not a third party, such as a surety, has locus standi to rely on the remedies outlined in Section 31. Section 31 serves as a sword for the liquidator in winding up the insolvent estate, rather than a shield for third parties in subsequent litigation. If the liquidator (or a creditor in the liquidator’s name) did not take proceedings to set aside a collusive disposition, the disposition remains valid, and neither the liquidator nor anyone else has recourse to the remedies outlined in Section 31(2). The high court correctly rejected the Section 31(2) defence Mr. Cohen raised and relied upon and dismissed his counterclaim due to his lack of standing. Appeal dismissed.

Tags : SURETY LIABILITY PAYMENT