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OF INTEREST

IN THE HIGH COURT OF SOUTH AFRICA

(SOUTH EASTERN CAPE DIVISION)

Case No: 9229/05

Order Delivered: 15/05/08

Reason Available: 26/05/08

In the matter between

JAN ABRAHAM VENTER Plaintiff

and

LESLIE NEIL SACKSTEIN N.O. First Defendant

JACOBUS HENDRIKUS JANSE

VAN RENSBURG N.O. Second Defendant

ROMANA BERNADETTE KNUTH N.O. Third Defendant

JUDGMENT

REVELAS J

[1] The plaintiff instituted action against the defendants for the payment of an amount of R300 000.00 pursuant to a settlement agreement concluded between the parties almost six years ago on 7 December 2001. The defendants are trustees of an insolvent known as the Usapho Trust. The defendant disputed the claim and when the pleadings were closed and the matter was set down for trial, the parties, by agreement, placed before court a special stated case to be adjudicated in terms of Rule 33(4) of the Rules of Court. The stated claim incorporates the settlement agreement.

[2] Clause 1.3 of the agreement makes mention of the fact that the plaintiff invested and reinvested monies with Usapho (or “the insolvent Trust”) from time to time and that Uspaho conducted an illegal pyramid scheme. The plaintiff stated that he was unaware of the unlawfulness of the scheme.

[3] In terms of clause 2 of the aforesaid agreement, the plaintiff undertook to pay to the trustees an amount of R648 000.00 in instalments failing which the outstanding balance and annual interest thereon (at 15,5%) will immediately become due and payable and the plaintiff would be liable to pay all legal costs. The clause in question also entitled the plaintiff to lodge an unsecured claim against Usapho in an amount of R1 000 000.00 for proof in terms of section 44 of the Insolvency Act 24 of 1936 (“the Act”).

[4] Clause 3 of the agreement is a warranty clause wherein the plaintiff guarantees that he has made full disclosure of all transactions with any monies received by him from Usapho and its related entities. In the event of a breach of the aforesaid, the trustees would be entitled to cancel the agreement and recover monies owed.

[5] The plaintiff avers in the agreement that he had invested a capital amount of R300 000.00 on 2 December 1991 with Usapho and reinvested the same amount together with the interest it had earned, as well as lesser amounts from “time to time”.

[6] The trustees did not dispute or admit the aforesaid statement, but noted it in the agreement and contended the following in paragraph 4.2 of the agreement:

“The trustees contend that each payment to a creditor of Usapho Trust, whether categorized as a payment of interest or repayment of capital or both, constitutes a disposition by Usapho on actual receipt of such repayment by the creditor irrespective of whether such amount or any part thereof is “repaid” or “reinvested” by the recipient (creditor) with Usapho in terms of the “scheme” referred to in clause 1.3 or for whatever reason and irrespective of the timing of such repayment or “reinvestment”.

[7] Clause 4.3 of the agreement reads:

“Reinvestment by a creditor of a payment received from Usapho as described in clause 4.2 has been stated a “rollover” and is distinguished by the trustees from an arrangement by a creditor with Usapho where funds due to the creditor are not actually received by the creditor and the existing debt due by Usapho is extended for a period of time by agreement between Usapho and the creditor without actual payment of funds, by Usapho to the creditor”.

[8] Clause 4.4, of the agreement forms the subject-matter of the debate in this case before me and reads as follows:

“If a court of competent jurisdiction in a final judgment holds that a “roll over” does not constitute a disposition within the meaning of the provisions of the Insolvency Act, then the settlement amount provided herein shall be reduced to R348 000.00. The trustees shall repay to Venter (the plaintiff) upon request, the amount received by the trustees (the defendants) in excess of the adjusted settlement amount. Venter (the plaintiff) shall have no claim for interest on any amount paid to the trustees (the defendants) in excess of the adjusted settlement amount, if appropriate”.

[9] Clause 4.5 of the agreement states the following:

“For purposes hereof “final judgment” shall mean a judgment by a competent court where no appeal has been lodged to the appropriate Court of Appeal or the Constitutional Court or no application has been lodged for leave to appeal within the time permitted by the applicable Rules of Court or if such application for leave to appeal has been timeously prosecuted, such leave to refused and the proposed appellant has exhausted its remedies in securing to appeal”.

[10] In the stated case it is recorded that the Supreme Court of Appeal delivered a judgment in Fourie and Others v Edeling NO and Others (2005) 4 All SA 393 (SAC) and paragraphs 3 and 4 of the stated case provides that if I find that the judgment in the Fourie matter did not constitute the event contemplated in paragraph 4.5 above, then judgment must be granted in favour of the plaintiff. If not, his claim must be dismissed.

[11] The plaintiff contends that the event referred to in clause 4.4 read with 4.5 of the agreement occurred, in that it was held (by a court in a final decision) that a so-called roll over does not constitute a disposition within the meaning of the Act, and did so in Fourie and Others vs Edeling NO and Others. Accordingly, the plaintiff’s counsel argued that the trustees must repay the plaintiff the amount of R300 000.00 being the amount received by the defendants, in excess of R348 000.00. The defendants disputed that the delivery of the Fourie judgment constituted the event referred to in clause 4.4 read together with clause 4.5 of the agreement.

[12] The parties agreed that the question of law in dispute between the parties is whether on a proper interpretation of the Fourie judgment, the events contemplated in sub paragraphs 4.4 and 4.5, have occurred or not. The sole issue seems to be whether a “roll over” is a disposition in terms of the Insolvency Act. If it is not, then the amount in question must be reduced with R348 000.00 the plaintiff must be paid R3000 00.00.

[13] Attached to the stated case is a schedule (marked “SCI”), reflecting of monies invested with, and payments received by the plaintiff from the Usapho Trust. Insofar as the Schedule mentions Majuba Trust, the parties are in agreement that Majuba Trust also means Usapho. According to the schedule, on 2 December 1999, the plaintiff paid or invested a capital sum of R300 000.00. The schedule reflects that this was an investment with Majuba Trust. Thereafter the capital sum (R300 000.00), was paid out to the plaintiff together with interest thereon and the same amount was then reinvested by the plaintiff in different amounts and this reinvested amount without interest, is the amount sought by the plaintiff to be repaid.

[14] The case for the defendants is that each payment by the insolvent trust (Usapho) to any creditor, such as the plaintiff, whether it is categorized as a payment of interest or repayment of a capital amount or both, constitutes a disposition by the insolvent trust, irrespective of whether the amount, or any part thereof is repaid or reinvested by the recipient (creditor) with Usapho, and is not owed to the plaintiff.

[15] In the Fourie matter, the appellants were the provisional liquidators of certain companies which had, as in the present case, conducted a fraudulent investment scheme. The appeal arose from an order made by Hartzenberg J on 28 February 2003 confirming in part a rule nisi issued pursuant to an application launched by the appellants for an order under section 26 and 30 of the Insolvency act 24 of 1936. Hartzenberg J declared that the investment scheme was insolvent in that its liabilities exceeded its assets and that contracts concluded between the investment scheme and investors in the scheme were illegal and null and void. The third paragraph (of six paragraphs) of the order read as follows:

“3. All actual payments …… by the aforesaid investment scheme to investors, including second and further respondents are set aside as dispositions by the scheme to investors at times when its liabilities exceeded its assets with the intention of preferring the particular investor above other investors in terms of section 30 of the Insolvency Act, provided that a reinvestment is not to be regarded as a payment and that the right of investors to rely on the provisions of section 33 of the Insolvency Act, is in no way affected by this order.”

[16] The part of the order setting aside “all actual payments” gave rise to an interpretational difficulty. It was not clear, having regard to the reasons of the order, whether the order meant that all payments to investors, including capital repayments, were set aside or whether it meant that only the gains of each investor were set aside. The liquidators favoured an interpretation in the first sense, and the further respondents favoured the second interpretation which meant that they (the investors) only had to repay their “profit” (interest earned or gains).

[17] In the judgment of the Supreme Court of Appeal, setting out the facts, Conradie JA found it necessary to record (paragraph [6]) that: “Everyone was agreed, though, that book-entry type investments, that is to say, investments that were not paid out before being reinvested, but were simply “rolled over” in the scheme’s books, did not qualify as “dispositions” and were therefore untouched by the order” and that he said, explained the use of the term “all actual payments” at the outset of paragraph 3 quoted as above.

[18] The parties then approached Hartzenberg J for clarification of his order, which he then amended so that it was clear that only that amount which exceeded the investment (or loan) of each investor, in other words, the gain made by each investor, was set aside.

[19] The amended paragraph then read (the changes are underlined):

“All actual payments ……. by the investment scheme to investors in so far as they exceed the investment of each particular investor are set aside as dispositions by the scheme to investors at times when its liabilities exceeded its assets with the intention of preferring the particular investor above other investors in terms of section 30 of the Insolvency Act, provided that a reinvestment is not to be regarded as a payment and that the right of investors to rely on section 33 of the Insolvency Act is in no way affected by this order, what is to be regarded as a re-investment is to be determined objectively in each case.”

[20] The interpretation of the first and second orders of Hartzenberg J became the subject matter of the appeal and cross-appeal in the Fourie matter.

[21] The legal scheme dealt with in Fourie matter was similar in most, if not all respects, to the scheme operated by the sequestrated Usapho Trust. The modus operandi in both each matters were the same.

[22] The liquidators, who were the appellants in the Fourie appeal hearing, attempted to show that the person who was the directing mind of the scheme had the intention to prefer one creditor above another. As the liquidators tasked with the duty to recover dispositions which are recoverable in terms of the Insolvency Act, the reason for the interpretation opted by them is obvious.

[23] Section 30(1) of the Insolvency Act deals with undue preferences and provides that:

“If a debtor made a disposition of his property at the time when his liabilities exceeded his assets, with the intention of preferring one of his creditors above another, and his estate is thereafter sequestrated the court may set aside the disposition.”

[24] A colourless disposition, one not made with the required intent, is not caught by section 30(1) of the Insolvency Act. (See Fourie, paragraph [9]). It was further held by Conradie JA, that in considering whether an intention to prefer has been shown, all the relevant facts must be considered. One such relevant fact was whether the insolvent at the time of the disposition contemplated insolvency. It was held that although the gains that were paid over to each investor was illegal, the evidence did not support a finding that the operator of the scheme contemplated the threat of insolvency.

[25] It was held that there was no evidence that the gains (amounts that exceeded the investments) were paid over with the intention to prefer one creditor above another, any more than that the investments were repaid with that intention. Accordingly it was held that making the order under section 30(1) of the Insolvency Act was an error, because it should have been made under section 26(1) of the Insolvency Act which provides that:

“Every disposition of property not made for value may be set aside by the court if such disposition was made by an insolvent –

1. more than two years before the sequestration of his estate, and it is proved that immediately after the disposition was made, the liabilities of the insolvent exceeded his assets;

2. within two years of the sequestration of his estate, and the person claiming or benefited by the disposition was made the assets of the insolvent exceeded his liabilities”.

[26] With reference Estate Jager v Whittaker and Another 1944 AD 246, and other cases, Conradie JA reiterated that a disposition is not made for value if the payment is illegal (See Rouseau en ‘n andere v Malan en ‘n ander 1989 (2) SA 451 (C) at 459 I-J and Visser en andere v Rouseau en andere NNO 1990(1) SA 139 (A)). Accordingly he held (in paragraph [19] that the promise to reward investors with the returns paid by the scheme was a “mere nullity” and any payment of a profit or interest would have been a disposition not made for value. He mentioned that although the application before Hartzenberg J was premised on, amongst other things, that book-entry repayments by the schemes were dispositions, this contention was not persisted with before Hartzenberg J or at the appeal hearing. He then stated the following (also paragraph [19] b-c) of his judgment:

“If a “repayment” of capital retained in the scheme by way of a book-entry reinvestment does not qualify as a disposition, then the “payment” of gains retained in the scheme is not a disposition either. Where gains on retained gains were made (in the manner that compound interest might be earned by capitalizing it) only the actual payment of the accumulated gains would be a disposition without value. The question that arose in the court a quo in relation to a disposition of capital under section 30(1) of the Insolvency Act regarding the circumstances under which the repayment of a reinvestment could be characterized as a disposition, does not arise in the case of the payment of a gain.”

[27] Conradie JA accordingly found it was not necessary to issue any order with regard to payment of the gains. He then went on to repeat, with apparent approval of the approach of all the parties before the court who accepted that “the repayments of an investor’s capital were not a disposition without value: the investor’s condictio prevented it from taking on that character: where a disposition was made it was made in discharge of an obligation to return the illegal payment.” (paragraph [19] e-f). In paragraph [20] e-f of the judgment he observed that an investor who was the recipient of a disposition “defeasible as one without value” and who parted with property or lost a right against another as consideration for a disposition of this kind, need not restore anything received under the disposition, if he acted in good faith, which the plaintiff in this matter contends he did.

[28] The defendants, relying on the disinclination of the Supreme Court of Appeal in Fourie’s case to make an order concerning the repayment of a reinvestment, argued that judgment was not the “event” contemplated in clause 4.4 of the agreement. It was submitted that the statement in the judgment, that all the parties accepted that the repayment of an investor’s capital was not a disposition without value and was made in the discharge of an obligation to return the illegal payments, was not part of the court’s ratio decidendi, but reference to what was common cause. Accordingly, the argument went, the effect of the judgment in the Fourie case was that the payment of profit, gains, or interest on capital invested in a pyramid scheme by a debtor (such as Usapho) to a creditor (such as the plaintiff) is a disposition without value in terms section 26(1) of the Insolvency Act, and because the judgment was not concerned with the repayment of a reinvestment, it does not assist the plaintiff’s case which is based thereon.

[29] The defendants placed strong reliance on those cases which caution courts to interpret contracts in accordance with the language used in them and not to let sympathy towards a party who may have contracted “inadequately” to blunt any understanding of the meaning of the clear words in the agreement concerned.

[30] The defendants submitted that a “roll over” as defined in the agreement, concerns the repayment of a reinvestment not by the debtor (Usapho) to the creditor (plaintiff), but the repayment of the reinvestment by the creditor (the plaintiff) to the debtor (Usapho), and it is this type of “roll over” which was to be held in a final judgment, not to constitute a disposition in terms of the Insolvency Act, and in particular section 1, 26, 29, 30 and 31 thereof.

[31] In so far as dispositions which may be set aside are concerned, it was argued, that these would only be payments made by the debtor to the creditor, and not the reverse. In this regard the defendants relied on section 26(1) of the Insolvency Act which refers to dispositions made by a “debtor” and section 31(1) of the same Act which refers to “a disposition of his property [made by] a debtor”.

[32] The defendants argued that the “roll over” contemplated in the agreement is a payment of a reinvestment by the creditor to the debtor, because clause 4.3 of the agreement states that a “roll over” is a “reinvestment” by the plaintiff to Usapho of an amount previously received by the plaintiff from Usapho – and not a payment by the debtor to the creditor as contemplated by the Act. In my view, this is an artificial construction of the facts of this case. The Fourie judgment clearly intends the investor to recover his illegal loan, but without any profit or interest.

[33] I agree with the defendant’s submission that the Fourie judgment dealt specifically in its order with the payment of gains or profits by the debtor (an insolvent trust) which are impeachable in terms of the Insolvency Act. I do not however agree that the “roll over” referred to in the agreement only refers to the repayments of reinvestments by the debtor to the creditor. That interpretation loses sight of the definition of a disposition which in these circumstances will not amount to a “payment” made as envisaged in the definition of a disposition because it is the repayment of a loan, albeit an illegal one. That clause 4.4 of the agreement requires a finding that a “roll over” does not constitute a disposition, it being a negative finding as opposed to a positive one, such as that gains are indeed dispositions, does not result in failure for the plaintiff’s case as submitted by the defendant.

[34] If a “roll over” is not found to be an impeachable disposition, the plaintiff is entitled to the payment of R300 000.00 which he bona fide invested in or loaned to Usapho. It forms part of his reinvestment. Even though Conradie JA in the Fourie case recorded what the parties accepted, without incorporating it in the order, it does not mean the question, as a matter of law remains unanswered. It is apparent from the wording of the judgment as quoted above, that the court agreed with what was accepted by the parties, as a matter of law.

[35] It is not correct to say the judgment does not at all deal with the issue of reinvestment. It does. It just did not find it necessary to make an order relating thereto. In my view, if “all the parties” were wrong in accepting that the repayment of an investors capital was not a disposition for value (a negative finding) because it was made in the discharge of an obligation to return the illegal payment, Conradie JA would have said so. His approach is quite the opposite as is evident at the end of paragraph [19] quoted above. The same reasoning applies to paragraph [6] of the judgment quoted above. Quite plainly, the judgment in Fourie case (which has not been upset on appeal) means that a “roll over” is not an impeachable disposition and the plaintiff is therefore entitled to payment of the R300 000.00 he reinvested, in terms of the agreement between the parties.

The following order is made:

1. The defendants is to pay the plaintiff the amount of R300 000.00.

2. Interest is payable on the aforesaid amount at the prevailing legal rate calculated as from 1 December 2005 to date of payment.

3. The defendant is to pay the costs of the action.

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E REVELAS

Judge of the High Court

FORM A

FILING SHEET FOR SOUTH EASTERN CAPE LOCAL DIVISION JUDGMENT

PARTIES: JAN ABRAHAM VENTER v LESLIE NEIL SACKSTEIN N.O. AND 2

1. Case Number: 9229/05

2. High Court: SOUTH EASTERN CAPE DIVISION

3. DATE HEARD: 21 June 2007

DATE DELIVERED: 15 May 2008 (order delivered)

26 May 2008 (reasons available)

JUDGE(S): REVELAS J

LEGAL REPRESENTATIVES –

Appearances:

3. for the Applicant(s): Adv Beyleveld

4. for the Respondent(s): Adv Adv Rorke

Instructing attorneys:

1. Applicant(s): De Villiers & Bekwa

4. Respondent(s): Pagdens & Stulting

CASE INFORMATION -

1. Nature of proceedings:

2. Topic:

3. Key Words:

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