12 October 2022 by and Business Rescue, Restructuring & Insolvency Newsletter

Dispositions without value: Are monies deposited into attorneys’ section 86 trust accounts by clients, invulnerable?

Section 26 of the Insolvency Act 24 of 1936 (Act) acts as a protective barrier for creditors as it regulates dispositions made without value. This barrier found particular importance in the recent case of Van Wyk Van Heerden Attorneys v Gore NO and Another (828/2021) [2022] ZASCA 128 (30 September 2022) (Van Wyk v Gore).

Section 26(1)(b) of the Act provides that a court may set aside any disposition of property not made for value, if such a disposition was made by an insolvent within two years of the sequestration of their estate and the person claiming under or benefiting from such a disposition is unable to prove that immediately after the disposition the assets of the insolvent exceeded their liabilities.

In summary, section 26(1)(b) provides that the following elements have to be present in order for a disposition to be set aside:

  • a disposition of property needs to take place;
  • the disposition needs to be by an insolvent;
  • the liabilities of the person (natural or juristic) need to exceed the value of their assets;
  • the disposition must not be made for value;
  • the disposition must have been made within two years of liquidation; 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 their liabilities.

The question before the court in Van Wyk v Gore was whether monies deposited into an attorneys’ trust account by an entity, that was for all intents and purposes insolvent at the time of the disposition, can be set aside by the liquidators of that insolvent entity?

The three deposits

In this matter, three deposits were made into the trust account of the appellant (the attorneys). Two deposits were made on 23 February 2018 and one on 30 April 2018. The first two were R1,25 million and R75,000 respectively and the third was R200,000. All three deposits were made from the account of Brandstock Exchange (Pty) Ltd (Brandstock). The actual client of the attorneys was Brandstock’s sole director, Bruce Philp, and another entity called BRP Livestock CC (BRP), not Brandstock itself.

Brandstock was provisionally wound up on 3 July 2018 and finally wound up on 20 August 2018.

BRP was placed under final liquidation on 8 March 2018 as a result of a liquidation application brought by Utexx Trust (Trust).

At the time the deposits were made Philp himself was facing a sequestration application.

The attorneys were instructed by their clients that there was a purchaser for the Trust’s claims against BRP. They were also instructed to draft and negotiate the terms of the sale agreement. The sale agreement was concluded. However, the final version incorrectly stated the attorneys as representing the purchaser and that the purchase price was to be paid from the attorneys’ trust account. The attorneys transferred an amount of R1,25 million from their trust account to the Trust, and the sale agreement was signed.

The attorneys later found out that the purchaser of the claims was actually Philp’s aunt who had offered to purchase the claim and allow Philip time to repay the BRP indebtedness to her. Philp had informed the attorneys that the funds received were from his aunt, not from Brandstock. At the time they were not even aware of the existence of Brandstock.

The other deposits were set off against fees and disbursements provided and incurred for Philip and BRP (not Brandstock).

Deposits then came to the attention of the respondents, Brandstock’s liquidators. The liquidators applied to have all three deposits set aside under section 26(1)(b) of the Act – i.e. that the deposits into the attorneys’ trust account amounted to dispositions without value.

The court in this matter focused on two contentious points, which are outlined below.

Capacity

The court made an enquiry into the capacity in which an attorney holds money in trust on behalf of their client. The court in this matter, through the use of a long line of cases and well-known banking and finance principles, came to the conclusion that when attorneys operate a trust bank account in accordance with their instructions, they function at two levels.

In the first place, because only the attorneys have the right to dispose of funds to the credit in their trust account pursuant to the banker-customer relationship, they do so as principals. In other words, although the attorneys are holding the monies on behalf of their client, it is their bank account into which the monies are deposited, and the bank is only beholden to the attorneys and their instructions (not the attorneys’ client).

However, in the second place, when the attorneys give effect to a mandate from the client in whose name the moneys are held in trust, they do so as agents.

It was on the latter basis that the court rejected the liquidators’ contentions that the attorneys’ power to operate the trust account meant that the deposit in the trust account was a disposition to the attorneys. 

The fifth element of section 26 of the Act

The next issue was establishing whether the person claiming under or benefited by the disposition is able to prove that, immediately after the disposition was made, the assets of the insolvent exceeded their liabilities.

As a general point, attorneys, subsequent to work performed, are entitled to account to their clients for fees and disbursements and to then appropriate moneys held in trust for that purpose. The court, however, took the time to point out that this does not necessarily render attorneys’ trust accounts immune to section 26(1)(b) of the Act.

In this regard the court distinguished between the reasons why each of the three deposits were paid to the attorneys.

The court gave specific attention to the fact that the R1,25 million disposition to the attorneys was at the instance of the attorneys merely giving effect to their mandate and that they only acted as a conduit in the onward transmission to Utexx and for its benefit.

The court correctly established that since the attorneys did not benefit from the R1,25 million disposition, they did not attract the onus under the fifth element of section 26(1)(b) to show the solvency of Brandstock immediately after the deposit was made.

Unlike the R1,25 million, the two dispositions of R75,000 and R200,000 were used to pay for work performed. The court therefore found that the attorneys attracted the onus of proof as the payments were to their direct benefit. Accordingly, the onus rested on the attorneys to prove that, at the relevant times, the assets of Brandstock exceeded its liabilities.

The attorneys were unable to establish this and it was found that the sums of R75,000 and R200,000 were dispositions without value as contemplated by section 26(1) of the Act.

These monies therefore had to be repaid to the liquidators.

This should act as a warning to any party holding funds on behalf of other individuals or entities. Know where the source of the funding emanates from and ensure the necessary authorities are in place and that all the checks and balances have been made. This will not only protect from section 26 of the Act, but is also becoming more necessary in relation to the ever increasing legislation around money laundering.   

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