P W M Reynolds NO and Others v Mercantile Bank Ltd

The three appellants were liquidators of Duchini (Pty) Limited, which was placed in final liquidation on 27 July 1999. Within two years of liquidation, two cheques totaling R104,496.68 and R158,466.36 were drawn by Duchini on 22 October 1998 and 19 January 1999 respectively. The cheques were crossed, marked 'not transferable', and made payable to Mercantile Bank Ltd (the respondent bank). The cheques were signed by two directors of Duchini - Mr J Makrides (managing director) and Mr G Delyannis (financial director). Makrides deposited both cheques into the respondent bank's account at Standard Bank's Southdale branch, with instructions that the amounts be credited to his personal loan account with the respondent. The respondent credited Makrides' loan account on the same dates, reducing his personal debt to the bank accordingly. At the time of these payments, Duchini was not indebted to the respondent bank. The liquidators claimed these payments constituted dispositions without value under section 26(1)(b) of the Insolvency Act.

• Whether payments made by a company subsequently wound-up amounted to dispositions to the bank within the meaning of section 26(1)(b) read with section 2 of the Insolvency Act 24 of 1936
• Whether the intention behind the payments was relevant to determining who benefited from the disposition
• Whether the bank was the recipient of the disposition or merely acted as a conduit for payment to Makrides

The appeal was allowed with costs (of one counsel only). The order of the court a quo was set aside and replaced with: (1) a declaration that the payments of R104,496.68 and R158,466.36 were dispositions by Duchini (Pty) Limited to the defendant; (2) the defendant was ordered to pay the costs of the hearing on the separated issue; and (3) the matter was postponed sine die for decision on the remaining issues.

The binding legal principle is that under section 26(1)(b) of the Insolvency Act 24 of 1936, read with section 2 and applied to company liquidations via section 340(1) of the Companies Act 61 of 1973, a disposition is determined by who benefited from the payment, not by the intention of the parties. When a company makes a payment by cheque (crossed and marked not transferable) payable to a bank, which the bank then credits to reduce a third party's debt to it, the bank is the recipient of the disposition because: (1) the bank obtains an immediate benefit in the form of a claim against its banker to honour the transfer; and (2) the bank uses that credit to reduce a debt owed to it. The subjective intention or purpose of the payment (such as notation that it is for a particular debtor's account) does not alter who has benefited from and received the disposition. In substance, where a company pays a third party's debt to a creditor, the disposition is made to the creditor who benefited, not to the third party debtor.

The court noted that the reference by the court a quo to Malk (Pty) Ltd v Franks and Solomon, NO 1935 TPD 85 ignored the essence of that judgment, which was to broaden a trustee's right to recover a disposition rather than restrict it. In any event, that case dealt with section 27 of the Insolvency Act 32 of 1916 (corresponding to section 29, not section 26, of the 1936 Act). The court also observed that while the court a quo mentioned the importance of the matter for banks generally, the matter was not of sufficient importance or complexity to warrant the employment of two counsel. The court distinguished the reference to Ensor NO v Nedbank Ltd 1978 (3) SA 110 (D) by noting that case involved section 29, not section 26, of the Insolvency Act.

This case is significant in South African insolvency law as it clarifies the scope and application of section 26(1)(b) of the Insolvency Act regarding dispositions without value. It establishes that the focus is on who actually benefited from the disposition, not the subjective intention of the parties. The case demonstrates how corporate insolvency principles apply through section 340(1) of the Companies Act, and provides important guidance on banking transactions in the context of voidable dispositions. It illustrates that technical payment mechanisms (such as using one bank account to credit another) do not alter the substance of who receives the benefit of a disposition. The case is particularly relevant for understanding how liquidators can recover payments that benefit third parties through indirect payment mechanisms within the two-year clawback period.