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IN THE HIGH COURT OF SOUTH AFRICA

(TRANSV AAL PROVINCIAL DIVISION)

DATE: 30/11/2007

CASE NO: 4945/2007

REPORTABLE

In the matter between:

THE LIQUIDATORS OF TRADEFIRM 195 (PTY) LTD Applicant

And

KROONS GOURMET CHICKENS (PTY) LTD Respondent

JUDGMENT

RAMAGAGA. AJ

The applicants seek to set aside a sale agreement dated 16 February 2004 in terms of which the respondent acquired a poultry farm and chicken foods farm. Further, the applicants seek to obtain return of such assets and business together with the fruits thereof. The applicants primarily rely on the common law action pauliana edict and secondarily on the provisions of sections 26, 29, 31 and 34 of the 339 of the Companies Act 61 of 1973 as well as section 228 of the Companies Act.

The respondent resists the application, it contends that at the time the sale and transfer of the business took place, the now insolvent company was trading in solvent circumstances. Further the respondent contends that the business was transferred for value. Respondent prays that the application be dismissed alternatively be referred to the hearing of oral evidence further alternatively be referred to trial.

The applicants in this case are liquidators of Tradefirm 195 (Pty) Ltd in liquidation (Tradefirm/insolvent company). Tradefirm was registered in 1996. It conducted a poultry business from around 1997, 1998 until 2004 when respondent took transfer of the business. A few months after respondent took transfer of the business, the sole director of Tradefirm applied for the liquidation of Tradefirm. Pursuant to that application, the company was liquidated provisionally on 12 October 2004 and finally on 12 January 2005. At the time of winding up, Tradefirm had no business, as a result the liquidators had no assets to take possession of.

The respondent is Kroons Gourmet Chickens (Pty) Ltd (Kroons Gourmet/respondent). Respondent was a shelf company incorporated on 16 October 2003 under the name of Nelesco 33 (Pty) Ltd (Nelesco) and whose name was later changed to Kroons Gourmet Chickens (Pty) Ltd. The record does not indicate as to when Nelesco was acquired from the shelf, all what can be established from the record is that the application for name change was lodged on 7 November 2003 and the change was registered on 21 November 2003.

Respondent claims that it acquired the Tradefirm poultry business through a sale agreement dated 16 February 2004. In terms of this agreement, Tradefirm sold the business to respondent who was to take over the business on 1 March 2004. It is this sale and transfer that the applicants seek to set aside.

The poultry business evolved from the Die Kroon Familie Trust (the trust) to Tradefirm and eventually from Tradefirm to the respondent. At all material times of this evolution, the control and management of the business was in the hands of the same individuals namely Richard William Kroon (Kroon) and his wife. The financial advisor was one Mohammed Aneez Tayob (Tayob). Kroon assisted by Tayob was responsible for the tax affairs of the business. Kroon represented both the disposer and the acquirer as the business changed hands. He represented the trust as a seller on the one hand and Tradefirm as the purchaser on the other hand when transfer from the trust to Tradefirm occurred. He also represented Tradefirm as the seller on one hand and the respondent as purchaser on the other hand when transfer from Tradefirm to the respondent occurred. Kroon passed a director's resolution to liquidate Tradefirm. Having passed the resolution, he proceeded to apply for the liquidation in his capacity as a creditor of Tradefirm. What this boils down to is that Kroon was litigating against Tradefirm as a creditor but at the same time he would be acting for Tradefirm as the director of the Tradefirm, hence the resolution.

The decision to transfer the business and to ultimately liquidate Tradefirm were made purely for tax advantage to the prejudice of the Receiver of revenue, this is illustrated by the following:

Fictitious Tax Losses (Transfer from Trust Tradefirm)

For the financial year ending 1998, the trust had represented to have an assessed loss of more than R7,5 million. Having made this representation, Kroon transferred the business to Tradefirm as a going concern. Tradefirm stood to benefit R7,5 million income tax relief in that this amount would be set off against any income tax due and payable to Tradefirm. In fact, Tradefirm enjoyed this benefit until SARS informed it in October 2003 that it had conducted investigations and established that the R7,5 million losses were fictitious SARS accordingly informed Tradefirm that the fictitious losses were disallowed and further that assessment would be raised in order to reduce the assessed losses to nil. The effect of this notice by SARS was that Tradefirm was liable for the full amount of assessed losses.

Avoidance of Sale transaction Vat Rafu!L(Transfer from Tradefirm to respondent)

When transfer from Tradefirm to the respondent took place, SARS had given Tradefirm notice of intention to raise income tax assessment to the sum of

R10 771 049, 64. After receiving this notice from SARS, Kroon went about quietly with Tayob, arranging a scheme of disposing of the Tradefirm assets and frustrating the SARS claim.

They acquired a shelf company registered in the name of Nelesco 33 (Pty) Ltd (Nelesco). On the 7^th November 2003 Kroon applied to change Nelesco's name to Kroon Gourmet chickens (Pty). On the 18^th November 2003, Nelesco the respondent herein opened a bank account with ABSA. The name change was registered on the 21^st November 2003. Tradefirm continued with its poultry business while Nelesco remained dormant. In 2004, Kroon transferred the business from Tradefirm to the respondent as a going concern on the understanding that the sale transaction was zero rated for VAT. Tradefirm neither gave SARS notice of this disposal nor did it submit the transaction to SARS for VAT rating. Tradefirm avoided paying VAT on this "sale transaction". SARS only became aware of the fact that Tradefirm was no longer trading when it enquired after the VAT affairs of Tradefirm on the 13th September 2004.

Avoidance of entire SARS claim (Transfer from Tradefirm to respondent and Liquidation of Tradefirm)

Following receipt of the information of disposal of the business SARS sent notification to Tradefirm on the 22^nd September 2004 that taxes in the amount of R12 287 217,30 were due and that SARS would proceed to collect payment. A day after receiving this notification, Kroon passed a director's resolution to liquidate Tradefirm. Also, on the same day, he deposed to an affidavit bringing an application for winding-up of Tradefirm. This affidavit was commissioned by Tayob. I have already mentioned that in the liquidation court application, Kroon was litigating against Tradefirm. As to why Kroon deemed it necessary to pass the liquidation resolution while he knew that he as an individual would be litigating against Tradefirm puzzles me. Perhaps this is one of those instances where he preferred to wear two hats, one being that of an applicant and the other being that of the representative of the respondent against whom he was litigating. In this application, Kroon and Tradefirm were opposing parties.

In the affidavit, Kroon alleges that:

(a) Tradefirm owed him R117 000.00 which loan account was made out of the monies he put into the company during the first year of starting the business.

(b) Tradefirm owed SARS an amount of R12 287 217.30 and that Tradefirm was unable to pay its debts.

(c) Tradefirm had office equipment and furniture to the value of R15000.00.

(d) The company was dormant and had no real prospect of trading at a profit.

Section 31 Kroon and his wife were the only people working in the

business.

The application was launched on 1 October 2004, provisional order was granted on 12 October 2004 and made final on 12 January 2005.

The liquidation is a disposal that fell squarely within the ambit of section 228(1) of the Companies Act 61 of 1973 in that this disposal resulted in Tradefirm being totally flushed of any assets that it might have had. Applicant's counsel submits that the disposal is not valid because the resolution was not passed by the members as required by the Companies Act. While I agree that the disposal of this nature should be authorised by members, I cannot loose sight of the fact that for all intents and purposes, Kroon was the sole member of this company although he was not registered as such. The Companies Act does allow for ratification of the disposal in the event that the disposal occurred before the members passed a resolution authorising that disposal. In the result, the applicant's argument about section 228 cannot carry the day.

Mr Matsepe and Mr Kajee were appointed liquidators of Tradefirm in liquidation on 10 May 2005. On taking their office, the liquidators were faced with a company that had no assets. They discovered that Tradefirm had disposed of its poultry business with the result that it was flushed of its assets and had nothing.

Upon inquiry, they came across the sale of business agreement dated 16 February 2004. This is the same agreement that was furnished to SARS after it discovered the disposal. The sale agreement provided as follows:

"Business means poultry farm business carried on by the seller as a going concern as at effective date, and includes the business assets and liabilities'.

"Effective date means 1 March 2004 and more particularly the commencement of business on the date'.

"Liabilities means all liabilities of whatsoever nature or kind of the seller arising from the conduct of the business as at the effective date and which arose prior to the effective date'.

"Purchase consideration and payment

The consideration payable for the assets listed hereunder, less trade liabilities.

The total net value of the assets listed less trade liabilities amount to R1 085 080. The seller undertakes to accept the further liability of DIE KROON FAMILlE TRUST in the amount of R998 750.00 in lieu of the payment due to the seller'.

The liquidators conducted enquiry in terms of section 415 of the Insolvency Act, they hoped to go to the bottom of this sale agreement in order to ascertain as to what the sale price was, who received payment and when did the sale take place.

At this point, I must say that I agree with the applicant's counsel that the sale price of the business is not determinable from this sale agreement. What is even more puzzling is that neither Kroon nor Tayob seem to know the sale and purchase price of this business nor does it appear that they know as to whether the purchase price was paid and if so, to whom it was paid. This is evidenced by the evidence given by Tayob and Kroon respectively when they were questioned at the section 415 inquiry. The relevant extracts of this inquiry forms part of the record of this application.

The following evidence was elicited during the section 415 inquiry.

Kroon conceded that he was not able to explain as to what the purchase price of the business was. He indicated that the person who would know as to what the price was would be Tayob. Tayob on being asked about the price, said that it was basically

R1 085 000,00 plus R998 000,00. He could not tell as to how the figure was arrived at. He stated the price was decided by Kroon.

Kroon and Tayob were unable to show that the respondent did in fact pay any amount for the purchase of the Tradefirm business. The inquiry was adjourned in May to afford them opportunity to prove that payment was made when respondent acquired the business. The inquiry resumed in August, even after this long adjournment, neither Tayob nor Kroon could trace payment of the "purchase price".

Tayob conceded that the assumption was that nothing had been paid Kroon when asked whether payment of the purchase price to the respondent did exist or not, his answer was that he did not think so. He did not have proof by way of cheques, bank transfer or anything that the respondent paid Tradefirm.

The evidence elicited at the section 415 hearing was not contested at any stage and is thus accepted as admitted by the respondent.

If the sale did in fact take place, how on earth would Kroon who represented both the seller on the one hand and the purchaser on the other hand be heard to be saying that he neither knew the sale price nor did he know whether payment was made by Kroon's Gourmet and received by Tradefirm, the insolvent company. Even worse still, how can it be heard of Tayob who advised on the transaction, who drew the sale contract and who was the financial advisor of Tradefirm and subsequently the respondent to be saying that the sale price was decided by Kroon who in turn says Tayob is the one who was working with the figures.

On the facts before me, I arrive at an inescapable conclusion that no sale took place. The agreement was just on paper. Neither was the sale price fixed nor was any payment made.

Regarding the disposal of the business from the trust to Tradefirm and then from Tradefirm to the respondent, it is common cause that the motive for transfers was solely for tax benefit. The following information emerges from the Section 415 inquiry:

Kroon and Tayob conceded that the sole and only reason and only purpose of the sale of the business from Tradefirm to the respondent was to try and somehow get away from the SARS claim. It was further to preserve the assets of the insolvent company (Tradefirm) and move into a new company (Respondent). They stated that as at the 20th October 2003, Tradefirm was already insolvent as it could not pay the SARS claim of the assessed loss. As a result of this, they made another arrangement of trading under a new company, the respondent

The evidence elicited during the section 415 proceedings point to the following:

• that there was no sale;

• that three was no payment received

• that as at 20 October 2003 Tradefirm was insolvent, even when

• the transfer was effected;

• the business was transferred solely for the purpose of defeating the tax claim;

• the transfer transaction virtually flushed Tradefirm of all its assets.

Having looked at the authorities cited in argument in the present case, I now turn to deal with the submissions made by the parties.

Actio Pauliana

At the outset, it is necessary to quote in full the relevant dicta in the judgment of RUSSEL CJ in the case of Hockey, N. O. v Rixom, N. O. and Smith 1939 SR 107 at 118 and Kerbyn 178 (Pty) Ltd v Van den Heever and Others NNO 20004 SA 804 (W) 817H-818A. In the former RUSSEL CJ said:

"In order that a transaction may be rescinded under this edict, the following factors must be present:

1. that it should be of such a nature that the debtors assets are diminished thereby;

2. that the person who receives from the debtor does not receive his own property;

3. that there should be an intention to defraud;

Section 32 that the fraud should have its effect."

On the uncontested facts before me I am satisfied that the appellants have proved all the four elements required in the Actio Pauliana claim.

Even if I may be wrong in the conclusion reached regarding the Actio Pauliana action, I am of the view that the applicant would nevertheless have succeeded on the claim based on the Insolvency Act 24 of 1930 in the following regard:

Section 26(1)(b) of the Insolvency Act provides as follows:

"Every disposition of property not made for value may be set aside by the court if such disposition was made by the insolvent within two years of the sequestration of his estate, and the person claiming under or benefited by the disposition is unable to prove that immediately after the disposition was made, the assets of the insolvent exceeded liabilities."

Kroon and Tayob have admitted that the business was transferred lock stock and barrel, respondent the beneficiary of the transfer has only made a blunt statement that the company was solvent at the time of and even immediately after the transfer. I must at this stage point out that this blunt statement flies right in the face of Kroon's evidence that by October 2003 the company was already insolvent and a plan was thought through and actioned from as far back as then to acquire a new company and transfer the business thereto. May I at this point pause to say that it would seem that when the legislature put the onus of proving that after the alienation the alienator's assets exceeded its liabilities, it was mindful of the fact that the creditors if the insolvent company would have no readily available means of establishing the solvency of the alienating entity at the time of disposal, this would, however be, peculiarly within the knowledge of the alienator. In the present case the alienator and the alienee were represented by the same persons Kroon, when the business was disposed of. The respondent, being the alienee has failed to discharge the onus.

Section 29(1) of the Act provides that:

"Every disposition of his property made by a debtor not more than six months before the sequestration of his estate or, ... which has the effect of preferring one creditor above another, may be set aside by the Court if immediately after the making of such disposition the liabilities of the debtor exceeded the value of his assets, unless 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".

The only aspect that needs be given attention in this case is whether the applicants have proved that the disposal of the property was effected within six months prior to the liquidation. I say this because it is common cause that the disposition was not made in the ordinary course of business and further that it is uncontested that when the business was disposed of all the other creditors were paid except SARS. Tradefirm disposed of the business in order to frustrate the claim of SARS.

I have already made a finding that no sale took place between Tradefirm and Kroons gourmet, however, I am satisfied that the business was transferred. The cardinal question is, when it was transferred.

The answer to this can be found in the following undisputed facts:

1. Respondent opened a banking account on 18 November 2003, there were only two deposits made in this account being R200 on the 20 November 2003 and R500 on 2 March 2004 for the period from 18 November 2003 to 4 May 2004. Other than bank costs and charges, there was no activity on the account.

2. On the other hand, reliance being had to the Tradefirm bank account statements for the period from 26 February 2004 to 10 March 2004, these being the only statements on record it is observed that the account, under the name of R W Kroon was hectic. Over the aforesaid period of less than a month, the account received no less than R1.904 million rand.

3. Per notice dated 30 April 2004, Tradefirm notified its creditors of change of banking details. The account details of respondent were furnished and deposits into this newly furnished account were to commence on 1 May 2004. 1 May 2004 was a public holiday, the 2^nd and 3^rd May was a weekend. From 4 May 2004, the respondent's account became vibrant and hyperactive, by mid-July 2004, no less than R5 million rand had been deposited into the account.

The facts of this case point in one direction and that is that Tradefirm developed the idea of transferring the business sometime during October­ - November 2003. Kroon put the plan in place by acquiring Nelesco and changing its name to a name similar to the trading name of Tradefirm which was Kroons Gourmet Chickens and Nelesco changed its name to Kroons Gourmet Chickens (Pty) Ltd, thereafter Nelesco was kept on ice while waiting for the right moment to take over the business. The 1^st May was identified as the right moment, resultantly; Tradefirm gave notice of change of account details with effect from 1 May 2004.

Having regard to all the circumstances under which the disposition was made, reason dictates an inescapable conclusion that transfer took effect as intended on 1 May 2004. Tradefirm was liquidated on 1 October 2004 in the circumstances I hold that Tradefirm business was alienated within six months before sequestration.

The balance sheet of Tradefirm represents the following liabilities as at 29 February 2004

Long term liabilities R5 662 383,00

H P Creditors R457 354

Loans from shareholders R5 205 029

Current liabilities R1 427 449,00

Accounts payable R896792,00

Provisions (Tax) R570657,00

On the balance sheet, total liabilities including tax provision amounted to R7 089 832,00.

When the application for liquidation was launched only two creditors were mentioned namely Kroon the director with a loan account claim of R 117 163,05 the loan account liability of members in the amount of about R5,2 million had clearly been wiped off the slate, if such liabilities exists they had all been paid alternatively all loan account claims except Kroons had been settled, the current liabilities had been wiped off the slate too.

The evidence of Tayob and Kroon is that the transferee of the business in this case the respondent was to settle all the debts of Tradefirm excluding the receiver and further that the motive for disposition was to avoid the receiver's claim. This illustrates that the disposition had the effect of preferring other creditors above the Receiver. After the disposition, Tradefirm virtually had nothing. The applicant has satisfied the requirements of the provisions of this section, the respondent has shied away from setting out facts that could prove that the disposition was made in the ordinary course of business and that it was not intended thereby to prefer one creditor above another. The choice to refrain from making the assertions may have been deliberate especially regards being had to the fact that the business of Tradefirm was poultry farm not sale of businesses.

Section 30(1) of the Act provides that:

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

Kroon's evidence is that on or about 20 October 2003 he decided then that Tradefirm could not pay the SARS claim as the company was insolvent. The scenario painted by all the facts in this case is that Tradefirm was not solvent at the time of the disposition. Accordingly respondent's argument that there is a dispute as to whether Tradefirm was solvent at the time of the disposition or not does not hold water.

Section 34(1) of the act provides that": if a trader transfers in terms of a contract any business belonging to him or the goodwill of such business, or any goods or property forming part thereof... and such trader had not published a notice of such intended transfer... within a period not less than thirty days and not more than sixty days before the date of such transfer the said transfer shall be void as against his creditors for the period of six months after such transfer, and shall be void against the trustee of his estate if his estate is sequestrated at any time within the said period."

It is common cause that Tradefirm was a trader at the time of disposition and further that the notice of intention to transfer the business was not advertised. I have already made a finding that transfer took place on 1 May 2004 and not 1 March 2004 as purported by the sale agreement dated 16 February 2004. Of cardinal importance in this section is that the six months period limit is focussed on the date of transfer and not on the date of agreement to transfer.

In the light of the findings I have made relating to the sale agreement an issue arises whether the section is restricted to bona fide sales or whether it is wide enough to even cover purported sales. A creditor, being an outsider has very limited means (if any) to can say whether the sale agreement is genuine or not, thus it cannot be expected of the creditor or trustee to concern itself with establishing whether the sale agreement is genuine or not. I therefore hold the view that it is irrelevant whether the contract is genuine or not, what the trustee or creditor must prove is that:

1) The trader represented that it disposed of the business by sale agreement and;

2) That notice of intention to so transfer the business was not published in accordance with the Act or at all, and;

3) The business was disposed of in terms of or under the guise of a sale agreement, whichever is applicable.

It needs to be emphasised that the time limits in this section, are focused solely on the date of transfer in that:

4. regardinq publication of notice - notice is to be published not less than thirty days and not more than sixty days before the date of such transfer.

5. reqardinq a void transaction - transaction is void as against creditors for six months after the transfer and void as against trustees if the estate is sequestrated within six months after transfer.

I am satisfied that this disposal would in any event be void by virtue of section 34.

Section 31 of the act provides that "after sequestration of a debtor's estate the court may set aside any transaction entered into by the debtor before sequestration, whereby he, in collusion with another person, disposed of property belonging to him in a manner which had the effect of prejudicing his creditors or of preferring one of his creditors above another."

I have already dealt with the facts that point to the fact that all the requirements of this section have been met. Perhaps what I need to highlight at this point is the fact that Kroon was clearly conflicted, he paralysed Tradefirm by transplanting its business to the respondent and ultimately killed Tradefirm by liquidation. The arrangement between Tradefirm and respondent was one to their mutual advantage. The former was to walk away from the business without having to pay SARS and the latter was to acquire the business without bearing the risk of loosing clients and of carrying the VAT burden as the two, under the representation of Kroon, had agreed that respondent would be zero rated on purchase price of the business. Bearing in mind that no purchase price was fixed or paid what this means is that the respondent was not to pay a cent including VAT on the purchase price and in the event SARS sought to recover VAT from Tradefirm, Tradefirm would either be just a shell completely flushed of its assets or even worse, Tradefirm would be no more after the liquidation.

Applicant's action is based on the common law Dction pauliana. I have already stated that the applicants have met all the requirements of the edict.

At all material times hereto, Kroon assisted by Tayob have directed the financial affairs of both Tradefirm and the respondent. Defendant took the business lock, stock and barrel as a going concern with the result that naturally, the business was not interrupted. Tradefirm financials on record are up to the end of 2004 tax year. Respondent, having taken over the business is responsible for the tax year beginning 1 March 2004.

Regarding costs, I see no reason why Tradefirm 195 (Pty) Ltd in liquidation should be burdened with costs at all. It is the respondent that should be visited with the costs order and on a punitive scale.

In the circumstances it is ordered as follows:

1. The respondent is to deliver to the applicants such property comprising the business of a poultry farm and chicken food business, consisting of the rearing, feeding, slaughtering and processing of chicken for human consumption, conducted from the premises situated at plot 84 Wildebeeshoek, De Wilt.

2. Respondent to render applicants within 30 days after the grant of this order, a full and proper accounting, supported by source documentation, of the conduct of the said poultry farm and chicken foods business from 1 March 2004, to date of delivery of the property in accordance with order 1 supra.

3. Respondent must provide applicants with a full debate of the accounts rendered by in accordance with order 2 supra.

4. Respondent to pay such amount as may be due upon the debate of the account.

5. Respondent to pay the costs of this application on attorney and client basis.

THE HIGH COURT

M J RAMAGAGA

HEARD ON: 22 AUGUST 2007

FOR THE APPELLANT: ADV JOHN PETER

INSTRUCTED BY: MESSRS

FOR THE RESPONDENT: ADV R A SOLOMON SC

INSTRUCTED BY: MESSRS BRIAN LEBOS JHB

DATE OF JUDGMENT: 26 NOVEMBER 2007

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