Duet and Magnum Financial Services CC (In Liquidation) v J H Koster

Duet and Magnum Financial Services CC, a micro-lender, was placed under winding-up on 17 May 2001, with liquidators appointed on 18 July 2001. On 12 July 2005, the liquidators issued summons against Mr Koster, claiming that certain dispositions made by the close corporation fell within sections 26(1)(b), 29(1) or 30(1) of the Insolvency Act 24 of 1936. The liquidators sought orders setting aside these dispositions and declaring Mr Koster obliged to repay moneys alienated between September 2000 and the date of the winding-up order. Mr Koster filed a special plea of prescription, arguing that prescription commenced to run before 12 July 2002 (three years before the summons was issued) and that the liquidators had or should have had knowledge of the relevant facts by that date. The liquidators replied that no 'debt' existed until the court made the order, and alternatively that they obtained knowledge of the facts at an enquiry on 4 August 2003. The High Court upheld the special plea, following Burley Appliances Ltd v Grobbelaar NO and Barnard NO v Bezuidenhout, and declining to follow Barnard and Lynn NNO v Schoeman. The liquidators appealed. Mr Koster did not oppose the appeal, citing lack of funds.

• Whether a liquidator's claim under section 32 of the Insolvency Act 24 of 1936 to set aside impeachable transactions constitutes a 'debt' subject to prescription under the Prescription Act 68 of 1969
• When prescription commences to run against such a claim
• Whether the right to have a court set aside a disposition and declare an obligation to repay constitutes an existing right capable of prescription before judgment is obtained

The appeal was dismissed with costs.

A liquidator's right under section 32 of the Insolvency Act 24 of 1936 to have a court set aside impeachable transactions and declare an obligation to repay constitutes a 'debt' for purposes of the Prescription Act 68 of 1969. The cause of action accrues, and prescription commences to run, when the liquidator obtains the right to seek such a declaration (ordinarily no later than the date of the liquidator's appointment), not when judgment granting the declaration is obtained. The sections of the Insolvency Act create a new statutory remedy that gives liquidators a right to have a debt brought into existence where none existed before, and this right (with its complement, the liability to have such a declaration made) is subject to prescription. The 'debt' is the existing right to seek the declaration, not the future obligation to pay that will only arise once the declaration is made.

The court noted that whether the relevant date for commencement of prescription is the date of winding-up or the date of the liquidator's appointment need not be determined, as section 12(3) of the Prescription Act means the question will never practically arise. The court also observed that 'debt' under the Prescription Act encompasses all rights that were subject to prescription under the Prescription Act 1943, and that the complement of a 'right' is better described as a 'liability' (which can be passive as well as active) rather than an 'obligation', which might be too limiting. The court suggested that if a 'debt' is the complement of a 'right', and if all 'rights' are susceptible to prescription, then the converse includes situations where exercise of a right requires the 'debtor' merely to submit to its exercise rather than to do something actively. The court referenced comparative jurisprudence from New Zealand and England dealing with analogous statutory remedies under company law, finding them instructive regarding the nature of such remedies as creating new rights rather than merely providing summary procedures for enforcing existing debts.

This case settles a conflict in High Court authorities concerning when prescription begins to run against liquidators' claims to set aside impeachable transactions under the Insolvency Act. It establishes that such claims constitute 'debts' subject to prescription and clarifies the nature of the statutory remedy created by sections 26-32 of the Insolvency Act. The case is significant for insolvency practitioners as it imposes time limits on liquidators' ability to pursue impeachable transactions and emphasizes the need for liquidators to act expeditiously once appointed. The judgment also provides important analysis of the concept of 'debt' under the Prescription Act and the distinction between existing rights and future obligations arising from judicial declarations. It overrules Barnard and Lynn NNO v Schoeman and confirms the correctness of the approach in Burley Appliances Ltd v Grobbelaar NO.