Rectification post concursus creditorum

The Supreme Court of Appeal[1] (“SCA”) recently had occasion to consider whether the recordal of a security cession (a cession of book and other debts) could be rectified subsequent to the liquidation of the debtor and establishment of a concursus creditorum.

Background

The factual background is set out below:

• ????????on about 18 April 1995, First Strut (RF) Limited (“First Strut”), completed a credit application form requesting credit from Voltex (Pty) Ltd, a company with registration number 88/06535/07 (“Voltex 1”). The credit application form embodied a suretyship and a cession of book debts;
• ????????on about 15 June 1998, Voltex 1 sold its distribution business to Voltex Distributors (Pty) Ltd, a company with registration number 1964/006740/07 (“Voltex 2”). Voltex 1 retained its manufacturing division and continued its manufacturing trade (until it was de-registered on 12 November 2011);
• ????????on about 31 July 1998:

o??Voltex 1 changed its name from Voltex (Pty) Ltd to Aberdare Cables SA (Pty) Ltd;

o??Voltex 2 changed its name from Voltex Distributors (Pty) Ltd to Voltex (Pty) Ltd;

• ????????on 26 January 1999, First Strut completed a new credit application form (identical in its standard form wording to the one completed in April 1995) in favour of Voltex 2. However, the registration number reflected on such credit application form was that of Voltex 1 - not that of Voltex 2 (the form used appeared to be Voltex 1’s standard credit application form printed prior to its name change);
• ????????First Strut conducted business with Voltex 1, Voltex 2 and Voltex 2’s competitor Prevance Bonds (Pty) Ltd (“Prevance”);
• ????????on 8 July 2013 First Strut was liquidated;
• ????????after First Strut’s liquidation, Voltex 2 realised that the credit application form, signed by First Strut in Voltex 2’s favour, reflected Voltex 1’s company registration number (and not the company registration number of Voltex 2);
• ????????on 13 November 2013 Voltex 2 submitted and proved its claims to the liquidators of First Strut in an approximate amount of ZAR 26.9 million for goods sold and delivered to First Strut. First Strut’s liquidators accepted that Voltex 2’s claims were secured by the security cession and reflected this in a first liquidation and distribution account;
• ????????on 2 March 2017, Prevance objected to the liquidation and distribution account, in terms of section 407 of the Companies Act, 1973, recording Voltex 2 as a secured creditor;
• ????????on 3 May 2017, the Master of the High Court, Pretoria upheld Prevance’s objection and directed the liquidators to amend the liquidation and distribution account to exclude Voltex 2 as a secured creditor;
• ????????on 27 June 2017, Voltex 2 applied to the Pretoria high court for rectification of the recordal of the registration number on the credit application form and security cession;
• ????????Prevance, to whom First Strut also ceded its book debts, opposed Voltex 2’s application. Prevance denied that Voltex 2 was a secured creditor. Prevance’s stance was taken on the following two bases:

o??Voltex 2 failed to make out a case for rectification (in that the founding papers did not disclose sufficient evidence of the common continuing intention of the parties to the security cession-necessary for rectification of the recordal of the registration number); and

o??rectification of the security cession was incompetent after the establishment of the concursus creditorum;

• ????????the Chief Executive Officer (“CEO”) of Voltex 2 (also a legal director of Voltex 1) submitted, as follows, in Voltex 2’s papers:

o??at the time when the security cession was signed, and at all times thereafter, First Strut intended to furnish Voltex 2 with security;

o??Voltex 2, erroneously used Voltex 1’s standard credit application form to record the security cession and, as a result, Voltex 1’s registration number appeared thereon;

o??First Strut’s representatives signed the form in the bona fide, but mistaken, belief that the form correctly recorded the common continuing intention of the parties - that the security cession be furnished by First Strut in favour of Voltex 2.

High Court

The high court rejected Prevance’s grounds of objection and granted rectification of the recordal of Voltex 2’s registration number as reflected on the form.

SCA

The two issues before were the SCA were as follows:

• ????????whether Voltex 2 provided sufficient evidence to sustain a claim for rectification of the security cession in motion proceedings; and
• ????????whether it is competent to order rectification of a document after the establishment of a concursus creditorum.

Rectification

In dealing with these issues, the SCA described rectification as follows:

“Rectification of a written agreement is a remedy available to parties in instances where an agreement reduced to writing, through a common mistake, does not reflect the true intention of the contracting parties.

… it is not the agreement between the parties which … is rectified. The Court has no power to alter it. To do so would be to amend their common intention and in effect to devise a fresh pact for them. That is their exclusive prerogative. All that the Court ever touches is the document. The onus is on a party seeking rectification to show, on a balance of probabilities, that the written agreement does not correctly express what the parties had intended to set out in the agreement.[2] ….

Rectification of an agreement does not alter the rights and obligations of the parties in terms of the agreement to be rectified: their rights and obligations are no different after rectification. Rectification, therefore, does not create a new contract; it merely serves to correct the written memorial of the agreement. It is a declaration of what the parties to the agreement to be rectified agreed.[3]”

Sufficiency of evidence to sustain a rectification claim in motion proceedings

Prevance made, inter alia, the following submissions:

• ????????the matter should not have been brought by way of motion proceedings;
• ????????Voltex 2’s CEO did not state he was present when the security cession was concluded. The submission that information was within his personal knowledge was insufficient without an indication of how that knowledge was obtained (as without such detail it would be difficult to determine the weight to attach to such evidence);
• ????????Voltex 2’s evidence was not confirmed by First Strut’s representatives who concluded the security cession on behalf of First Strut;
• ????????affidavits deposed to on behalf of Voltex 2 were false;
• ????????Prevance’s lack of a witness to the conclusion of the security cession to rebut Voltex 2’s evidence was not determinative as Prevance had no case to meet (Prevance suggested that the lack of evidence in opposition, to Voltex 2’s evidence, did not transform Voltex 2’s allegations into acceptable evidence);
• ????????the purpose of Voltex 2’s application was to substitute an unsecured creditor for a secured creditor where the unsecured creditor’s claim should not have been admitted.

The SCA (and high court) rejected Prevance’s submissions that Voltex 2’s evidence was not sufficient to sustain a claim for rectification of the security cession. The SCA held that it was not open to a non-party, to the security cession, to challenge Voltex 2’s evidence (as Voltex 2’s CEO was actively involved in the negotiation and conclusion of the security cession, and approved the credit application).

The SCA found that Prevance’s defences were based on the allegation, made without a factual foundation, that Voltex 2’s application to the high court was to substitute an unsecured creditor for a secured one.

The SCA held further that it was not open to Prevance, in response to Voltex 2’s prima facie case, to contend that it was not required to answer such case because Voltex 2’s evidence (by its CEO) was inadmissible hearsay evidence.

The SCA found significance in Voltex 2’s CEO’s position that he had no difficulty having his version subjected to cross-examination consequent upon a referral to oral evidence (Voltex 2’s attorneys had in fact called upon Prevance’s attorneys to agree to a referral to oral evidence or a trial, something Prevance’s attorney’s rejected claiming that there were no serious factual disputes on the affidavits and that the application should be determined on the affidavits).

Effect of rectification on concursus creditorum

Prevance’s second defence was to the effect that it is incompetent to rectify a document after the establishment of a concursus creditorum in instances where its effect would enable an otherwise unsecured creditor to establish a secured claim.

The SCA confirmed that the effect of a sequestration order is as follows:[4]

“The sequestration order crystallises the insolvent’s position; the hand of the law is laid upon the estate, and at once the rights of the general body of creditors have to be taken into consideration. No transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body. The claim of each creditor must be dealt with as it existed at the issue of the order.”

The SCA also reiterated the following principles:

• ????????the relationship between the estate and the creditors, and between the creditors themselves, becomes fixed and their rights and obligations become vested and complete;[5]
• ????????a creditor, who at the date of winding up was only a concurrent creditor, cannot by rectification of an agreement alter its position to become a preferent or secured creditor (as this would disturb the concursus creditorum);[6]
• ????????rectification, once granted, operates ex tunc (from the outset), as if the document, from inception, read as it has been reconstructed to read (pursuant to rectification).[7] What is rectified is not the contract itself as the juristic act but rather the document to the extent that it fails to express the true intention of the parties;[8]
• ????????although rectification takes effect from inception of the document, it does not operate to the detriment of third parties who have relied on a written instrument in good faith.[9]

The SCA rejected Prevance’s attempt to argue that the reason for the retroactive operation of the rectification of the document, to reflect the parties’ common intention, did not apply to the transfer of personal rights under the security cession (as the document constituted both an obligatory agreement and instrument of delivery/transfer).

The SCA maintained its previous stance[10] that cession is an abstract legal act independent of the underlying obligatory agreement. Cession of personal rights is brought about by agreement and formalities are not required.

The SCA therefore concluded that the cession occurred in January 1999 by stating the following:

“As the document in which the security cession was embodied was the recordal of the agreement and cession, …, it was capable of being rectified without offending the concursus creditorum.”

The SCA held that the high court was correct in concluding as follows:

• ????????a valid security cession agreement was concluded between Voltex 2 and First Strut prior to the liquidation order;
• ????????such agreement did not reflect the parties’ common intention - in that Voltex 2 was not correctly described (its registration number was incorrectly recorded);
• ????????First Strut and Voltex 2 are in fact parties to the security cession;
• ????????rectification will neither create not detract from any rights as it existed when the concursus creditorum came into being;
• ????????it is a misconception to view ex post facto rectification of the description of a party to an agreement as an interference with the position obtained at concursus creditorum;
• ????????in circumstances where there is only an erroneous description of a party to the security cession, there can be no prejudice to third parties if the document capturing the agreement is rectified to reflect the correct description of the parties (the status quo is not thereby affected);
• ????????the rectification did not result in any prejudice to First Strut’s third party creditors, and none was established;
• ????????an indicator of intention is the attitude of creditors seeking to gain an advantage for themselves out of an accidental misdescription (which in itself could not have caused prejudice and is not prejudice to them).

The SCA held that the decision in Nedbank Ltd v Chance and Others[11] to the effect that rectification post concursus creditorum would almost inevitably prejudice the rights of other creditors could not be supported and was clearly wrong (as the decision is contrary to established legal principles). In doing so the SCA distinguished one of the cases relied on in the Nedbank case - as that case required registration of a right (which was not the case in Nedbank). The second case relied upon in Nedbank did not support the conclusion reached in Nedbank.

Conclusion

The SCA therefore concluded that rectification:

• ????????did not bring about a change in Voltex 2’s status; and
• ????????therefore did not offend the concursus creditorum principle and did not prejudice the rights of third-party creditors.

In matters like this one always has to establish the true facts to determine whether a misdescription is genuine or not. Prevance, it appears, was unable to do so.

[1] Prevance Bonds (Pty) Ltd v Voltex (Pty) Ltd, First Strut (RF) Ltd, and Master of the High Court, Pretoria [2023] ZASCA 40 Case no: 58/2022 (31 March 2023)

[2] Quoting pp 310A-F in Spiller and Others v Lawrence 1976 (1) SA 307 (N)

[3] Quoting from Boundary Financing Ltd v Protea Property Holdings (Pty) Ltd 2009 (3) SA 447 (SCA)

[4] Walker v Syfret 1911 AD 141 at 160

[5] Incledon (Welkom) (Pty) Ltd v Qwaqwa Development Corp Ltd 1990 (4) SA 798 (A) at 803 J

[6] Durmalingham v Bruce N O 1964 (1) SA 807 (D) at 811G-H; Thienhaus N O v Metje & Ziegler Ltd and Another 1965 (3) SA 25 (A) at 30A-C; Klerck N O v Van Zyl and Maritz N N O and Another and related cases 1989 (4) SA 263 (SE) at 279F-G; Nedbank Ltd v Chance and Others 2008 (4) SA 209 (D) at 212, para 9; The Standard Bank of South Africa Limited v Strydom N O and Others [2019] ZAGPPHC 142 (GP) para 81

[7] Milner Street Properties (Pty) Ltd v Eckstein Properties (Pty) Ltd 2001 (4) SA 1315 (SCA) para 33

[8] Spiller and Others v Lawrence 1976 (1) SA 307 (N)

[9] Weinerlein v Goch Buildings Ltd 1925 AD 282 at 291

[10] Grobbelaar and Others v Shoprite Checkers Ltd [2011] ZASCA 11 (SCA) para 18

[11] 2008 (4) SA 209 (D)