FirstRand Bank Limited v Master of the High Court (Pretoria) and Others

The insolvent, Mr J Z Msimango, owned two sectional title units, each separately bonded to Nedbank Limited (property 1) and First National Bank (FNB), a division of FirstRand (property 2). The Body Corporate (second respondent) launched an application to sequestrate the insolvent's estate on 7 October 2009 based on arrear levies of R22,000. A final sequestration order was granted on 14 June 2010. Both properties were sold: property 1 for R350,000 (later resold for R580,000) and property 2 by FNB in a sale in execution for R330,000. The Body Corporate recovered arrear levies from the proceeds in terms of s 15B(3)(a)(i)(aa) of the Sectional Titles Act and did not prove a claim. Both Nedbank and FNB proved claims and indicated they relied solely on their security. When the trustees prepared the First and Final Liquidation, Distribution and Contribution Account, there was insufficient free residue to meet sequestration costs. The account reflected a contribution of R46,663.16 payable pro rata by FNB and Nedbank. FNB objected, arguing the Body Corporate as petitioning creditor should be solely liable under s 14(3) of the Insolvency Act.

• Whether a petitioning creditor who did not prove a claim is liable to contribute to the costs of sequestration when there is no free residue or the free residue is insufficient
• Whether secured creditors who rely solely on their security are liable to contribute to costs of sequestration
• The proper interpretation of sections 106, 89(2) and 14(3) of the Insolvency Act 24 of 1936
• Whether the proviso in s 106(a) operates independently from s 14(3) or must be read in conjunction with it
• Whether bodies corporate that petition for sequestration are exempt from contribution under s 15B(3)(a)(i)(aa) of the Sectional Titles Act

The appeal was upheld. Paragraph 3 of the order of the Gauteng Division of the High Court, Pretoria was set aside and replaced with an order directing the third and fourth respondents (trustees) to amend the first and final liquidation, distribution and contribution account to reflect that the second respondent (Body Corporate) is solely liable to pay the contribution of R46,663.16. There was no order as to costs.

When there is no free residue or it is insufficient to meet the costs of sequestration, the liability for contribution must be determined by reading sections 106, 89(2) and 14(3) of the Insolvency Act together. A petitioning creditor under s 14(3) is required to contribute whether or not it has proved a claim, and must be treated in the same manner as a creditor who has proved its claim for purposes of determining contribution under s 106. Secured creditors who rely solely on their security are not liable to contribute except as provided in the provisos to s 106. The proviso in s 106(a) operates only where there are no concurrent creditors (including the petitioning creditor) able to contribute. Where the only creditors who have proved claims are secured creditors relying solely on their security, and there is a petitioning creditor who has not proved a claim, the petitioning creditor is solely liable for the contribution under s 14(3). Section 15B(3)(a)(i)(aa) of the Sectional Titles Act does not exempt bodies corporate from liability to contribute to sequestration costs under s 14(3).

The Court observed that the interpretation it adopted overcomes potential unfairness to secured creditors that may arise with friendly sequestrations and instances where petitioning creditors do not prove their claims. The Court noted that when applying for sequestration, a claim would be made that sequestration would be to the advantage of creditors, whereas the facts may not support that allegation. The insolvent may only have bonded properties and a shortfall would arise with no benefit to creditors. The Court commented that section 14(3) seeks to avoid a situation where a creditor would petition for sequestration and not prove a claim, only for other creditors "to pick up the costs." In cases involving bodies corporate, the unfairness is heightened because they petition for sequestration, recover outstanding monies under the Sectional Titles Act once a unit is sold, and where there is a shortfall in free residue, other creditors who have proved claims bear the costs, including costs paid by the petitioning creditor to their attorneys. The Court noted that FirstRand gave examples of suffering losses running into millions in instances where it was called upon to make contributions notwithstanding that it had relied solely on its security.

This judgment provides authoritative guidance on the proper interpretation of sections 106, 89(2) and 14(3) of the Insolvency Act 24 of 1936 regarding liability for costs of sequestration when there is insufficient free residue. It clarifies that: (1) Secured creditors who rely solely on their security are not liable to contribute to costs except in circumstances set out in s 106(a) and (b); (2) The petitioning creditor must contribute whether or not it proved a claim (s 14(3)); (3) The proviso in s 106(a) is not independent of s 14(3) and operates only when there are no other concurrent creditors (including the petitioning creditor) able to contribute; (4) Bodies corporate that petition for sequestration cannot rely on s 15B(3)(a)(i)(aa) of the Sectional Titles Act to avoid liability for sequestration costs. The judgment overrules the approach in Snyman v The Master and affirms the principle in Bank of Lisbon regarding the purpose of s 89(2). It prevents unfairness where petitioning creditors recover their debts but leave other creditors to bear sequestration costs.