Cohen v Absa Bank Limited

In 2006, A Million Up Investments 105 (Pty) Limited (AMU) purchased property in Cape Town and undertook construction of a hotel called 15 on Orange. Absa Bank Limited extended substantial loans to AMU for the construction. Mr Chaim Cohen was the CEO and chairman of AMU's holding company, Quantum Property Group Limited (QPG), and described himself as the "driving force and controlling mind" of the companies. In January 2008, Mr Cohen signed a deed of suretyship in favour of Absa, binding himself as surety and co-principal debtor jointly and severally with AMU for repayment of amounts owed to Absa, limited to a minimum of R20 million plus interest and costs. The hotel construction was delayed and over budget. The hotel did not open until December 2009 with only partial completion. AMU required additional funding and the loan repayment date was extended multiple times. In November 2010, parties signed a "Term Sheet" to restructure the loan, which required: (1) AMU to raise R50 million in external equity by 30 November 2011; (2) AMU to acquire 100% of hotel revenue by purchasing Protea's 50% stake in the hotel operating company, Darwo, for R25 million; and (3) sale of penthouses to reduce the debt. An Amended and Restated Loan Agreement (ARLA) was concluded on 31 August 2011 reflecting these terms. AMU failed to pay the mandatory equity injection by 31 March 2012. AMU was placed under provisional winding-up on 29 June 2012, made final on 14 August 2012. The liquidators accepted Absa's claim for R576,991,787.69. After sale of the property, there was a deficiency of R380 million payable to Absa. Absa sued Mr Cohen on 1 September 2012 for R40 million (R20 million principal plus interest at in duplum limit) plus costs under the suretyship.

• Whether a surety has locus standi to invoke section 31(2) of the Insolvency Act 24 of 1936 to avoid liability to a creditor after the liquidation of the primary debtor
• Whether section 31(2) of the Insolvency Act provides a defence to a surety where the primary debtor allegedly colluded with the creditor to dispose of property in a manner prejudicing creditors or preferring one creditor over another
• The correct interpretation of sections 31 and 32 of the Insolvency Act, read together
• Whether the remedies in section 31(2) can be invoked by third parties or only by the liquidator (or creditor in the liquidator's name)

1. The application for condonation and reinstatement of the appeal is dismissed with costs, including those of two counsel. 2. The appeal is struck from the roll with costs, including those of two counsel. The High Court's judgment ordering Mr Cohen to pay Absa R40 million plus interest and costs under the suretyship was upheld.

The binding legal principles established by this judgment are: 1. Section 31(2) of the Insolvency Act 24 of 1936 does not confer locus standi on a surety to invoke its provisions to avoid liability to a creditor after the liquidation of the primary debtor. 2. Only a liquidator or trustee (or a creditor acting in the name of the liquidator/trustee) has standing to institute proceedings under section 31 to set aside a collusive disposition and to claim the remedies specified in section 31(2), including compensation, penalty, and forfeiture of a creditor's claim. 3. Section 31 establishes a unified process that requires: (a) the collusive disposition to be set aside in proceedings initiated by the liquidator under section 31(1); (b) the loss to the insolvent estate to be made good; (c) a penalty to be imposed; and (d) if the transgressor is also a creditor, ex lege forfeiture of that creditor's claim against the estate. 4. The forfeiture provision in section 31(2) only operates where a collusive disposition has been set aside through the procedure prescribed in sections 31 and 32. If no such proceedings are instituted by the liquidator, the disposition remains valid and the remedies in section 31(2) are not available to anyone. 5. Section 31 of the Insolvency Act serves as a "sword" for liquidators in administering insolvent estates for the benefit of the body of creditors, not as a "shield" for third parties such as sureties in subsequent litigation to escape their contractual obligations. 6. The word "such" in section 31(2) refers specifically to a collusive disposition that has been set aside under section 31(1), not to any alleged collusive disposition generally or in the abstract.

The Court made the following non-binding observations: 1. The Court noted that when assessing applications for condonation, "very weak prospects of success may not offset a full, complete and satisfactory explanation for a delay; while strong merits of success may excuse an inadequate explanation for the delay (to a point)." 2. The Court observed that Mr Cohen's founding affidavit failed to provide a full and reasonable explanation covering the entire period of delay in filing the appeal record, which caused the appeal to lapse under rule 8 of the Supreme Court of Appeal Rules. 3. The Court did not decide the factual question of whether AMU had actually entered into a transaction in collusion with Absa to dispose of property in a manner prejudicing creditors or preferring one over another. The Court stated: "The question likewise does not need to be decided by this Court" because Mr Cohen lacked standing to raise the defence in the first place. 4. The Court noted that Absa's assertions regarding the legitimate purpose of the ARLA and sale agreement (to provide AMU with the best chance of trading out of its distressed situation and to enable AMU to pay existing creditors) were "plausible, taken at face value," though this was not determinative given the anterior question of standing. 5. The Court affirmed the dictum from Emontic Investments (Pty) Ltd v Bothomley NO regarding the fundamental purpose of insolvency legislation: to establish a concursus creditorum where the liquidator administers the estate for the benefit of competing creditors in the manner specified in the Insolvency Act, with no single creditor able to transact to the prejudice of the general body of creditors after sequestration. 6. The Court cited with approval the statement from Louw NO v Sobabini CC that the imposition of a penalty under section 31(2) is not discretionary (the use of "shall" indicates it is mandatory), though the quantum lies within the court's discretion, and that forfeiture of a creditor's claim is an automatic consequence of a finding of collusive dealing with no discretion.

This judgment is significant in South African insolvency law as it definitively clarifies the scope and application of section 31(2) of the Insolvency Act 24 of 1936. It establishes that: 1. The remedies provided in section 31(2) for collusive dispositions (including forfeiture of a creditor's claim) are available only to liquidators or trustees (or creditors acting in the liquidator's name), not to third parties such as sureties. 2. Section 31 must be read holistically with section 32, which prescribes the procedure for setting aside improper dispositions. The remedies in section 31(2) only become available after a collusive disposition has been successfully set aside through proceedings initiated by the liquidator. 3. A surety cannot use section 31(2) as a defensive shield to avoid liability under a suretyship on the grounds that the creditor allegedly colluded with the now-liquidated primary debtor. This prevents sureties from collaterally attacking transactions that were not challenged by the liquidator. 4. The case reinforces the principle that insolvency remedies are designed to protect the collective body of creditors through the liquidator, not to provide defences to individual third parties who have contractual obligations to creditors. 5. It provides important guidance on statutory interpretation methodology, demonstrating how textual, contextual and purposive analysis must be applied cohesively. The judgment protects the integrity of suretyships in commercial lending and prevents abuse of insolvency provisions by third parties seeking to escape contractual obligations.