Al-Kharafi & Sons v Pema and Others NNO

• Jurisdiction: South Africa
• Citation: 2010 (2) SA 360 (W)

Al-Kharafi & Sons v Pema and Others NNO
2010 (2) SA 360 (W)

2010 (2) SA p360

Citation	2010 (2) SA 360 (W)
Case No	2008/12359
Court	Witwatersrand Local Division
Judge	Malan J
Heard	June 9, 2008; June 9, 2008; June 9, 2008
Judgment	August 27, 2008
Counsel	PN Levenberg SC (with HJ Smith) for the applicants.; LS Kuschke SC (with JC Butler) for the respondents.

Flynote : Sleutelwoorde D

Insolvency — The master — Decisions — Review — Court sitting as both court of review and of appeal — Approach on review — Court to consider factual E material placed before master, together with the master's decision and report — To consider whether in the light of material, master erred or misdirected himself in any material respect — If any basis for interfering with master's decision appearing ex facie documents before master, as read with his decision and rulings, then reviewing court can reconsider matter based on the material before it — Insolvency Act 24 of 1936, s 151.

F Insolvency — The master — Decisions — Review — Decision to disregard set-off occurring within six months before sequestration — Set-off not effected in ordinary course of business — 'In the ordinary course of business' not limited to terms of particular transaction — Master obliged to consider all relevant circumstances pertaining to transaction — Insolvency Act 24 of 1936, s 46.

G Insolvency — The master — Decisions — Review — Decision to disregard set-off occurring within six months of sequestration — Collusion not a requirement — Insolvency Act 24 of 1936, s 46.

Insolvency — The master — Decisions — Review — Decision to disregard set-off H occurring within six months of sequestration — Relevance of cession to enquiry whether transaction in ordinary course of business — Cession giving rise to set-off — Cession relevant circumstance — Insolvency Act 24 of 1936, s 46.

Insolvency — Insolvent — Unlawful alienations and preferences — Voidable dispositions — Expression 'ordinary course of business' as applying to voidable I dispositions also applying to term in s 46 of Insolvency Act — Enquiry therefore into all circumstances under which disposition occurred — Insolvency Act 24 of 1936, s 46.

Headnote : Kopnota

The first applicant (Kharafi), a Kuwait-based construction company, sought the review and setting-aside of a decision of the Master of the High Court (the J seventh respondent), made under s 46 of the Insolvency Act 24 of 1936, to

2010 (2) SA p361

disregard a pre-liquidation set-off made by Kharafi against a claim by a A subcontractor, a company in liquidation originally called Protech, arising from an arbitration award. The second applicant (MAK) was a construction company based in Botswana, responsible for conducting construction activities on behalf of Kharafi in Botswana. The first to sixth respondents were the joint liquidators of Protech. The basis upon which the liquidators approached the master was that the claim to be set off against the arbitration B award was a claim for moneys owed by Protech to MAK, a claim which had subsequently been ceded to Kharafi for the purposes of set-off. The master concluded that the set-off was not done in the ordinary course of business, and the liquidators were accordingly entitled to disregard the set-off in terms of s 46. The master's reasons were that the shareholdings in MAK and Kharafi were not the same and that they were two separate entities, there C being a deliberate and conscious election by Kharafi to create a separate legal person. There was therefore no basis for lifting the corporate veil and treating the companies as a single economic entity. Moreover, the master said that he could not ignore the cession between MAK and Kharafi, which occurred between two separate business entities.

The applicants submitted that the master wrongly held that the set-off was D affected by s 46, raising four contentions: (1) That s 46 could only be invoked where there was collusive conduct or active participation by the insolvent in the transaction resulting in the set-off; as Protech did not participate or collude, the invocation of s 46 was inappropriate. (2) The master and liquidators focused on whether their cession, and not the set-off, occurred in the ordinary course of business. (3) For all intents and purposes E MAK and Kharafi operated as a single economic entity and the cession had occurred in the ordinary course of business. Protech also treated MAK and Kharafi in this way. Furthermore, it was contended that the parties routinely 'set off' amounts owing by Kharafi to Protech against amounts owing by Protech to MAK. Accordingly, even if it were the cession (not the F set-off), that was subjected to scrutiny, the transaction occurred in the ordinary course of business. (4) The liquidators had produced no evidence of how similar construction entities conducted themselves in similar situations, nor had they provided evidence concerning the manner in which Protech ordinarily did business; this failure was fatal to the contention that the set-off occurred outside of the ordinary course of business. On review,

Held, that the review was brought in terms of s 151 of the Insolvency Act, and as G such the court sat as both a court of review and a court of appeal. The approach was to consider the factual material placed before the master, together with the master's decision and his report, and to consider whether, in the light of that material, the master erred or misdirected himself in any material respect. If any basis for interfering with the master's decision appeared ex facie the documents before the master, as read with his decision H and rulings, then the reviewing court could reconsider the matter based on the material before it. (Paragraph [11] at 369F/G - J.)

Held, that the disputes between the parties were whether the set-off alleged by Kharafi was effected in the ordinary course of business, and, if it was not, how the master should exercise his discretion under s 46. (Paragraph [14] at 370H.) I

Held, that, having regard to correspondence it appeared that Kharafi had knowledge of Protech's inability to pay its debts, knowledge predating the cession by about a year, and probably longer. The object of the cession and the set-off was thus to escape the consequences of a concursus. Kharafi must have known that creditors of Protech would be prejudiced by the cession and set-off. If the object of the transaction were to give one creditor an J

2010 (2) SA p362

A advantage over other creditors such disposition amounted to a fraud on third parties and could not be in the ordinary course of business. (Paragraph [15] at 370H/I - 371D.)

Held, further, that, given the litigious background between the parties, it seemed to follow that MAK and Kharafi must have intended to obtain satisfaction other than by the formal adjudication of their alleged rights in court B proceedings. (Paragraph [16] at 371E.)

Held, further, that ex facie the cession document, the purpose for effecting the cession was to assist Kharafi in avoiding payment of the arbitration indebtedness to Protech arising from the arbitrator's award, some of which predated the cession. A letter from Kharafi to Protech also stated this in unequivocal terms. (Paragraph [17] at 372B - 373E.)

C Held, further, regarding the consideration that MAK was to receive, that ex facie the documents available, no credit was agreed to or given by Kharafi to MAK as consideration for the cession. (Paragraph [18] at 373E - H.)

Held, further, that having regard to financial statements and the loan account of MAK, one could infer that neither MAK and Kharafi's internal bookkeepers nor their auditors were accustomed to cessions of this nature. D (Paragraph [21] at 375D.) Furthermore, MAK was not a subsidiary of Kharafi (as alleged by Kharafi and MAK); even if this were the case the transaction did not fall into the category of providing funding to a subsidiary, and this on its own took the transaction out of the ordinary. (Paragraph [22] at 375E - G.) There was also no evidence of another transaction of a similar nature effected between the companies. (Paragraph [23] at 375G/H.) E Further, set-off would, if allowed to stand, result in a substantial disturbance of the normal distribution of proceeds of assets of Protech. (Paragraph [24] at 376C - F.)

Held, further, that, regarding the meaning of 'in the ordinary course of business' as found in s 46, the enquiry was not limited to the terms of the particular transaction. The master could, and was obliged to, consider all of the F relevant circumstances pertaining to the transaction. Furthermore, collusion was no requirement for the applicability of s 46, and the applicants correctly did not proceed with their argument in this respect. (Paragraph [25] at 377C.)

Held, further, if a transaction was not effected in the ordinary course of business and had, as a result, the substantial disturbance of the distribution of the G proceeds of the assets, then the master should approve of the set-off being disregarded. The cession and the set-off were effected as a unique arrangement. It was a 'special course of dealing'. The purpose of the cession and set-off was to obtain payment of a disputed debt. In circumstances where litigation had commenced, the normal course would have been to await a court's judgment on the claim. Instead they sought to secure payment in a H roundabout way. (Paragraph [26] at 377D - 378C.)

Held, further, that the question was whether businessmen would regard the transaction, with all of its particular facets, as unusual or anomalous. The court agreed that the transaction was odd in almost every respect. The expression 'in the ordinary course of business' did suppose that, according to the ordinary and common flow of transactions in...