Alert Steel (Pty) Ltd v Mercantile Bank Limited

Alert Steel (Pty) Ltd (the company) was a wholesaler and retailer of steel and hardware products. In March 2014, Mercantile Bank Limited (the bank) granted the company overdraft facilities of R104 million, secured by a registered notarial bond over stock and movable assets, cession of book debts, and cession of insurance cover. In May 2014, the company was placed in voluntary business rescue, and the bank cancelled the facilities and demanded repayment. In July 2014, the company was provisionally wound up and liquidators were appointed. West Lake Trade and Investments made an offer to purchase all the company's assets for R100 million. The bank was a secured creditor and agreed to accept the offer on condition that the purchase price would reduce the company's indebtedness to it, with no flow of funds to the insolvent estate. The liquidators accepted these conditions and obtained the Master's approval. The bank financed the West Lake purchase and the company's account was credited R100 million, reducing its debt to the bank from R106,138,295.35 to R6,138,295.35. The debt was further reduced by R5,226,381.17 from book debts collected. The bank did not prove a claim at the first or second meetings of creditors. In 2017, the bank submitted a claim under s 44(4) of the Insolvency Act but withdrew it at a special meeting in 2018. The company claimed repayment of R105,226,381.17 on the basis that the liquidators acted ultra vires and the bank was unjustly enriched.

• Whether the liquidators acted ultra vires by allowing payment of the sale proceeds to the bank without the bank proving a claim in the insolvent estate
• Whether the bank was enriched at the expense of the company
• Whether the company could recover the amounts paid to the bank on the basis of condictio indebiti or condictio sine causa
• Whether the requirements for an enrichment action were satisfied

The appeal was dismissed with costs, including the costs of two counsel.

An ultra vires payment by liquidators cannot be recovered through condictio indebiti or condictio sine causa unless all the essential elements of an enrichment action are established: (1) the defendant was enriched (gained a financial benefit that would otherwise not have occurred); (2) the plaintiff was impoverished; (3) the defendant's enrichment was at the plaintiff's expense; and (4) the enrichment was unjustified (no legal basis to justify retention). Where a valid underlying debt exists and payment merely reduces that debt, there is no enrichment at the plaintiff's expense and no unjustified enrichment, even if the payment procedure was irregular. The quantum of a plaintiff's enrichment claim is limited to the lesser of the amount by which it was impoverished or the amount by which the defendant was enriched.

The court observed that it would be unjust to require the bank to prove its claim years after the transaction when the secured assets had been transferred to the purchaser and used in its business, with no possibility of restoring the bank to its position as a secured creditor. The court noted that if the bank were ordered to repay the collected amount, it would merely have to go through the formality of proving its original claim and be repaid from the estate less liquidators' fees, suggesting that recovery of liquidators' fees was the true motive for the claim. The court reiterated the principle from Mars that a liquidator who pays a creditor before confirmation of a liquidation and distribution account does so at his own risk.

This case clarifies the application of enrichment principles (condictio indebiti and condictio sine causa) in the context of insolvency law. It confirms that an ultra vires payment by liquidators is not automatically recoverable without establishing all the essential elements of an enrichment claim: enrichment of the defendant, impoverishment of the plaintiff, enrichment at plaintiff's expense, and absence of legal justification. The judgment emphasizes that where a valid underlying debt exists, payment toward that debt cannot constitute unjust enrichment even if procedurally irregular. It also reinforces the principle that liquidators who make payments before confirmation of liquidation and distribution accounts do so at their own risk. The case demonstrates the interaction between insolvency procedures and enrichment law, and the importance of proving actual enrichment and impoverishment rather than relying solely on procedural irregularities.