Griffiths v Janse van Rensburg NO

The Usapho Trust operated a pyramid scheme through which Maureen Clifford and associates obtained investments from the public. Mr Griffiths made two investments of R100,000 each with the Trust in December 1999 and April 2000, based on fraudulent misrepresentations that the scheme was lawful and viable. Both investments were repaid with interest at rates exceeding 42% and 74% per annum respectively, paid in four separate dispositions (two capital payments and two interest payments). The Trust was sequestrated on 24 September 2000. The investments were made pursuant to void and illegal contracts as the scheme contravened s 11(1) of the Banks Act 94 of 1990 and constituted a harmful business practice under the Consumer Affairs (Unfair Business Practices) Act 71 of 1988. Mr Griffiths had no knowledge of the illegality. The trustees in insolvency sought to set aside the four payments under s 29 of the Insolvency Act 24 of 1936.

• Whether dispositions (payments) made to repay capital invested pursuant to void and illegal pyramid scheme contracts were made 'in the ordinary course of business' as required by s 29 of the Insolvency Act
• Whether payments made under void contracts could satisfy the proviso in s 29(1) of the Insolvency Act
• Whether a recipient of payments could rely on the condictio ob turpem vel iniustam causam (enrichment action) when payments were actually made pursuant to void investment agreements
• Whether mora interest runs from the date of disposition or from the date of judgment when a disposition is set aside under s 32(3) of the Insolvency Act

Appeal dismissed with costs. Cross-appeal dismissed with costs. The four dispositions (two capital payments of R100,000 each and two interest payments of R12,000 each) were set aside. Mr Griffiths was ordered to pay R224,000 with interest from the date of judgment at the prescribed rate.

When determining whether a disposition was made 'in the ordinary course of business' under s 29 of the Insolvency Act, a court must apply an objective test examining the actual transaction and business relationship between the parties at the time the disposition was made. Payments made pursuant to void and illegal contracts do not constitute dispositions made in the ordinary course of business, even where the recipient might have had an alternative legal basis (such as an enrichment claim) for recovering the amounts paid. A party cannot retrospectively rely on a legal basis (such as the condictio) that was not actually invoked at the time payment was demanded and made. Where a disposition is set aside under s 32(3) of the Insolvency Act, the statutory debt only comes into existence upon the court's declaration; therefore mora interest can only run from the date of judgment, not from an earlier date such as service of summons or the date of the disposition.

The court left open the question of whether, in appropriate circumstances, a court could award an amount exceeding the nominal amount of a disposition to account for diminution in the value of money between the date of disposition and the date of judgment under s 32(3) of the Insolvency Act, as this issue was not properly raised or argued in the case. The court also observed that had Mr Griffiths become aware of the illegality immediately before demanding payment and then demanded only the capital on the basis of the condictio ob iniustam causam, he might have been in a different position. The majority noted that if the Trust had entered into ordinary commercial contracts (such as leasing premises or obtaining municipal services) while conducting its unlawful pyramid scheme, payments under those lawful contracts would not necessarily be impeachable as not made in the ordinary course of business, illustrating that the focus is on the particular business relationship giving rise to the disposition, not merely the general unlawful nature of the insolvent's business.

This case clarifies the application of the 'ordinary course of business' test in s 29 of the Insolvency Act, particularly in the context of pyramid schemes and void contracts. It establishes that: (1) The court must focus on the actual basis upon which dispositions were made, not theoretical legal bases that could have been invoked; (2) Payments made pursuant to void and illegal contracts do not satisfy the 'ordinary course of business' requirement, even if alternative legal grounds (such as enrichment claims) might have justified the payments; (3) The nature of the business relationship between the parties at the time of disposition is critical to the analysis; (4) In actions to set aside dispositions under s 29, mora interest runs only from the date of judgment because the statutory debt only comes into existence upon the court's declaration, distinguishing such cases from contractual or delictual debts where mora can arise earlier. The case also distinguishes Gazit Properties on the basis that in that case the underlying loan agreements were valid and enforceable, whereas here the investment agreements were void.