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The creditor of an insolvent can institute legal proceedings to recover monies paid to other creditors prior to the formal declaration of insolvency

The Insolvency Act, 1936, contains provisions which allow the liquidator of an insolvent estate, in certain circumstances, to apply to the High Court to recover money that had been paid out to creditors of the insolvent individual or company at a time when that person or entity was factually insolvent (although not yet formally declared insolvent by a court) with the result that those creditors had received preferential treatment over the generality of creditors. [section 32(1)(a) states that “proceedings to recover the value of property or a right in terms of section 25(4), to set aside any disposition of property under section 26, 29, 30 or 31, or for the recovery of compensation or a penalty under section 31, may be taken by the trustee”].

Equal treatment of concurrent creditors

It is a fundamental principle of insolvency law that the concurrent creditors of an insolvent (in other words, creditors who hold no security for their claims) must be treated equally, and that no concurrent creditor should receive preferential treatment over the others.

So, if a person or company which owes you money goes insolvent, it would be well worth your while to explore the possibility of using these provisions of the Insolvency Act to compel any concurrent creditors who have received preferential payment to repay those amounts into the insolvent estate, so that the funds can be distributed, pro rata to the amount of their claims, to all the concurrent creditors.

If the liquidator fails to institute such legal proceedings, the Insolvency Act allows a creditor of the insolvent to do so. Section 32(1)(b) states that “if the trustee fails to take any such proceedings they may be taken by a creditor in the name of the trustee upon his indemnifying the trustee against all costs thereof”.

However, as the recent judgment in Western Flyer Manufacturing (Pty) Ltd v Dewrance and others NNO: in re Dewrance and others NNO v North West Transport Investments (Pty) Ltd (under judicial management) and others 2007 (6) SA 459 (B) makes clear, the creditor must be careful to strictly follow the processes laid down in section 32 of the Insolvency Act.

Indemnity for costs, and proceedings to be taken in the name of the liquidator

First, a creditor of the insolvent who wishes to institute legal proceedings to recover payments made by the insolvent at a time when his liabilities exceeded his assets, (even though he had not formally been declared insolvent) must institute the proceedings in the name of the liquidator, and not in his own name.

Before doing so, he must give the liquidator a formal indemnity against the legal costs to be incurred in those proceedings. (See section 32(1)(b) of the Insolvency Act.)

That indemnity must be given up-front, before the legal proceedings are instituted. The Act does not prescribe the form which such an indemnity must take, but a worthless indemnity (for example, one given by a company that is a mere shell) will not suffice.

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