Khan NO & another v Maxprop Holdings (Pty) Ltd & another

The appellants were joint trustees of the insolvent deceased estate of Colin Bernard Cowan. Cowan operated an unlawful pyramid or ponzi scheme while employed as an executive consultant at Garlicke & Bousfield, a firm of attorneys. Funds from the scheme were deposited into and withdrawals made from the attorneys' trust account. The appellants instituted action against Maxprop Holdings (Pty) Ltd to set aside a series of payments made by Cowan to Maxprop as interest on investments in the pyramid scheme. They alleged these payments were dispositions without value as contemplated by section 26(1)(a) or (b) of the Insolvency Act 24 of 1936, made when Cowan's liabilities exceeded his assets. Maxprop joined Garlicke & Bousfield as a third party. The third party excepted to the particulars of claim on the ground they disclosed no cause of action because there was no allegation that payments received by Cowan became his property and part of his estate. Bezuidenhout AJ upheld the exception and granted leave to amend. The appellants delivered notice to amend. The respondent and third party objected that the defect remained uncured. The court a quo (Moodley J) dismissed the application to amend and dismissed the claim with costs.

• Whether the appellants' particulars of claim, read with the proposed amendments, disclosed a cause of action under section 26(1) of the Insolvency Act 24 of 1936
• Whether the payments made by Cowan to Maxprop constituted 'dispositions' of property as defined in section 2 of the Insolvency Act
• Whether it was sufficiently alleged that Cowan had control over or rights to the funds paid to Maxprop such that they formed part of his estate
• What is the appropriate relief when an exception is upheld - whether the claim should be dismissed or leave to amend granted
• Whether the court a quo erred in dismissing the claim after refusing the amendment application

The appeal was upheld to the limited extent that paragraphs 2 and 3 of the order of the court a quo were set aside and replaced with an order granting leave to the plaintiffs (appellants) to amend their particulars of claim in terms of rule 28. The appellants were directed to pay the costs of appeal.

When an exception is upheld on the basis that a pleading does not disclose a cause of action, the court should grant leave to amend as a matter of course unless there is good reason that the pleading cannot be amended. The upholding of an exception disposes of the pleading against which it was taken, not the action or defence itself. A court should not dismiss a claim merely because amendments sought did not cure the defect, unless it is shown that the defect cannot be cured. For a payment to constitute a 'disposition' under section 26(1) of the Insolvency Act 24 of 1936, it must be sufficiently pleaded that the insolvent had rights to or control over the property or funds such that they formed part of the insolvent estate, and that there was a transfer or abandonment of those rights.

The court observed that under certain circumstances, an insolvent may have a right of disposal over money that is the subject matter of an illicit transaction, which empowers the insolvent to deal with it in such a way as to make it or an equivalent amount part of his assets. Such a right of disposal will have monetary value, particularly where the insolvent could direct money to be paid to creditors thereby releasing him from obligations. However, what must be established is whether there are sufficient allegations that the insolvent was empowered or had legitimate control over the account from which payments were made. The court also noted that although counsel for the appellants ultimately conceded that it was not sufficiently pleaded that Cowan had a right of disposal over the funds, this did not mean the defect could not be cured by further amendment.

This case reaffirms and applies the principle established in Ocean Echo Properties 327 CC v Old Mutual Life Assurance Company (South Africa) Limited that when an exception is upheld, leave to amend is a matter of course, not an indulgence, unless there is good reason that the pleading cannot be amended. The upholding of an exception disposes of the pleading, not the action or defence itself. The case also clarifies the requirements for pleading a disposition under section 26(1) of the Insolvency Act - it must be sufficiently alleged that the insolvent had rights to or control over the property disposed of such that it formed part of the insolvent estate. The case demonstrates the limits of extending the concept of 'disposition' based on De Villiers NO v Kaplan, requiring proper pleading of a right of disposal with monetary value.