It is axiomatic – at least as At first glance proposition – that insolvency only affects assets that belong to the insolvent when insolvency begins (or, as is often said when a competition creditorum is established at the start of the insolvency). South African insolvency law respects property rights that have accrued under our law before the start of insolvency proceedings, including security interests such as mortgages, liens and assignments. This At first glance There are exceptions to the rule: for example, a trustee or liquidator may, in certain circumstances, assert a claim against property belonging to others on the ground that it has been improperly transferred or disposed of by the insolvent in order to reduce the insolvent’s estate available for distribution to creditors. In this way, the trustee or the liquidator inflates the assets of the insolvent estate for the benefit of its creditors. One of the claims that a trustee or liquidator has at his disposal is the ability to “retrieve ” property of a third party who received it wrongfully from the insolvent prior to insolvency – the relevant claim for the purposes of this note is commonly referred to as an indictment of worthless disposition.
Section 26 of the Insolvency Act 1936 empowers a court to set aside any disposition (eg payment) of property by an insolvent which is not made for value. Different rules apply: if the disposition sought to be set aside took place within two years before the onset of insolvency, the disposition will be set aside unless the assignee can prove that, immediately after the disposition, the insolvent remained solvent with its assets exceeding its liabilities; if it occurred more than two years before the start of the insolvency, the charge is reversed and the onus is on the trustee or liquidator to prove that the liabilities exceeded the assets after the disposition. Other jurisdictions refer to this claim as reversing the effect of a “undervalued transactionmade by an insolvent within a specified period before insolvency. The general idea of these provisions is to allow investigation and, if the conditions are met, indictment of a pre-insolvency transaction where “fair market value” or the value was not received. Value should be considered from the perspective of the insolvent and not that of the assignee or counterparty.
The Supreme Court of Appeal recently ruled in Lawyers Van Wyk Van Heerden v Gore NO and another (828/2021)  ZASCA 128 (September 30, 2022) where Company A’s liquidators sought to reverse separate deposits made from A’s bank account to a law firm’s trust bank account for the benefit of:
- company B; and
- lawyers for legal services rendered for the benefit of company B and the sole director of company A.
Three deposits were made to a law firm’s trust account from the bank account of Brandstock Exchange Proprietary Limited (Brand stock). The deposits were made by Brandstock’s sole director, Bruce Robert Philp (Philip). Of the three deposits, R1,250,000 and R75,000 were made separately on February 23, 2018 and R200,000 were made on April 30, 2018.
The deposits were made in connection with a transaction involving the acquisition by a third party acquirer of receivables from Utexx Trust (Trust) against BRP Cattle CC (BRP Breeding) and Philip. BRP Livestock was provisionally liquidated on November 3, 2017 and definitively liquidated on March 8, 2018. Philp was facing a sequestration claim at the time of the three filings. These insolvency proceedings against Philp and BRP were conducted by the Trust.
The first deposit of R1,250,000 was used by the lawyers to satisfy the purchase consideration payable to the Trust and the other two deposits were used by the lawyers to pay legal fees, attorneys’ fees and other disbursements. None of the deposits were used for the benefit of Brandstock – nor did Brandstock derive any profit or value from the deposits made by it. The key question is whether lawyers have benefited from this?
Brandstock was then itself provisionally liquidated on July 3, 2018 and definitively on August 20, 2018.
Brandstock’s liquidators sought to void the three filings on the grounds that they were objectionable dispositions made by Brandstock to attorneys of no value or benefit to Brandstock.
Conclusion of the courts
Before coming to the conclusions of the court on the opposability of the three deposits, we recall the principles well established in our law of the banker-client relationship and if it is otherwise with regard to the funds held by lawyers in a trust account.
The court ruled that a bank had funds deposited in bank accounts held with it. A debtor-creditor relationship is established in which the bank is indebted to the customer. The bank owns the funds but is required to comply with the bank account holder’s instructions regarding a positive balance in the bank account. Bank account holders thus have the power to dispose of the credit balance of the funds held by the bank on their behalf.
With respect to funds deposited in lawyers’ trust accounts, the same type of relationship with the bank as with any bank account is established between the bank and the lawyers – the bank owns the funds, but is required to give effect at the instructions of the lawyers holding the trust account. The bank is liable to the lawyers and to no other party, as only the lawyers can order a bank to dispose of amounts to the credit of such a trust account, as customers have no legal relationship with the bank regarding the accounts in attorneys’ trust.
Lawyers generally operate at two levels when handling trust accounts. On the one hand, as principals because they alone have the right to dispose of the funds credited to this account by virtue of a banker-client 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 in which lawyers operate a trust account does not determine whether a deposit in a trust account amounts to a disposition in favor of lawyers.
The court then referred to the provisions of the Legal Practice Act, 2014. This Act provides that an amount credited to any trust account of a trust account firm does not form part of the assets of the trust account firm. trust or any lawyer, partner or member thereof and cannot be seized by a creditor of such firm, lawyer, partner or member.
To successfully challenge a disposition not effected for value (i) a disposition must have been made by an insolvent (in this case the disposition was made by Brandstock) (ii) in favor of a person who claims or has benefited from the disposal (in this case, the lawyers) and (iii) that person is unable to prove that the assets of the insolvent (Brandstock) exceeded its debts immediately after the disposal.
Given the debtor-creditor relationship that is established when funds are deposited in a lawyer’s trust account (the bank owes the deposited money to the lawyer – as principal – who, in turn, is bound to give effect to the instruction – as agent – of the client) and the provisions of the Legal Practice Act 2014, the court found that the payment by solicitors to the trust cannot be challenged as the lawyers did not benefit from the disposition made by Brandstock of its trust account – the payment the lawyers did did not amount to a disposition. The funds deposited with the lawyers in their trust account, and paid on the instructions of the client, cannot therefore be recovered from the lawyers. The court went on to say, “…To hold liable a party who merely acted as an intermediary and gave effect to the client’s instructions but did not benefit from the provision gives rise to an absurd and non-commercial result. The impeachment request for a worthless disposition is aimed at a party who benefits from the disposition – the lawyers did not take advantage of it and they simply served as conduits in the process. It would be different if lawyers used funds from a trust account to pay gambling debts (as happened in De Villiers NO vs. Kaplan 1960 (4) SA 476 (C)), which benefited the solicitor’s personal estate.
In making payment to the Trust, pursuant to an instruction from a client, the lawyers complied with a legal mandate. The lawyers received no benefit from the purchase consideration paid to the Trust. It was the Trust that benefited. The Trust was therefore affected by the challengeable provision of Section 26(1)(b) of the Insolvency Act 1936. The Trust ultimately received monies from Brandstock without Brandstock receiving any value since it was not a party to the sale transaction. In the final analysis, the Trust benefited because the purchase consideration was paid with funds belonging to Brandstock. The deposit of the sum of R1,250,000 into the lawyers’ trust account did not fall within the scope of the application of a provision subject to dismissal because the lawyers did not benefit from it.
With respect to the other two deposits used to settle attorneys’ fees, attorneys’ fees and other disbursements, the court found that the attorneys had capitalized the funds when they applied them to settle their fees and pay disbursements incurred on behalf of clients other than Branded Stock. Thus, the lawyers benefited from both filings, Brandstock received no value for the deposits, and the lawyers had the burden of proving Brandstock’s solvency immediately after the filings. The attorneys admitted they were unable to satisfy the charge that Brandstock’s assets exceeded its debts. The two depositions were therefore indicted.
In conclusion, lawyers are not immune from the impeachment provisions of Section 26 of the Insolvency Act 1936.