Not that clear cut...

Lisa Silberman, writing for the Werksmans Business Recovery and Insolvency Werks publication, says its wonderful thing when you have been owed money for some time and your debtor eventually pays.

Your debtor hands you a cheque and you glance at the cheque in order to ensure the cheque is current, that you are the payee and that the cheque is marked non-transferable.

You do not give any consideration as to the identity or solvency of the drawer of the cheque because as far as you are concerned, the only matter of importance is that the cheque clears and the debt is settled.

The cheque does clear and you are thrilled at the prospect of not having to resort to litigation at substantial cost to recover the outstanding debt.

Your joy however is short lived as within a few months of receiving payment, you are contacted by the trustee of the insolvent estate of the drawer of the cheque advising you that the insolvent drawer was not indebted to you in any respect and that the payment made by the insolvent was therefore made without value.

The trustee then demands that the payment made to you be returned to the insolvent estate. The trustee mumbles something about section 26 of the Insolvency Act 24 of 1936 ("the Insolvency Act") and you immediately adopt a defensive stance and refuse to pay any money to the trustee.

You allege that the money was due to you and that the payment resulted in the outstanding debt being settled, notwithstanding that the drawer of the cheque was not in fact your debtor.

After costly litigation, the trustee eventually succeeds in establishing that:

* the payment constituted a disposition of the insolvent drawer's funds at a time when the drawer was insolvent;

* the drawer was not indebted to you in any amount whatsoever; and

* no value was received by the drawer for the payment.

You are then compelled, in terms of a court order, to repay the money to the insolvent estate.

The above constitutes a classic example of an application of section 26(1)(b) of the Insolvency Act which reads as follows:-

"(1) Every disposition of property not made for value may be set aside by the court if such disposition was made by an insolvent:

(a) …;

(b) within two years of the sequestration of his estate, and the person claiming under or benefited by the disposition is unable to prove that, immediately after the disposition was made, the assets of the insolvent exceeded his liabilities …"

The question which arises is what happens when the creditor is a company or as in the case referred to hereunder, a banking institution?

Although section 26(1)(b) of the Insolvency Act deals with the insolvent estate of a natural person, it is applicable to liquidations of companies by virtue of section 340(1) of the Companies Act 61 of 1973 (as amended) ("the Companies Act"). Section 340(1) reads as follows:

"Every disposition by a company of its property which, if made by an individual, could, for any reason, be set aside in the event of his insolvency, may, if made by a company, be set aside in the event of the company being wound up and unable to pay all its debts, and the provisions of the law relating to insolvency shall mutatis mutandis be applied to any such disposition."

The relevant provisions of the Insolvency Act and Companies Act ensure that companies are not afforded a higher status than individuals.

Notwithstanding that companies may be involved in complex commercial transactions or in the collection of large sums of money, if a payment or disposition is made to a company by an individual or other legal entity at a time when the individual or legal entity is insolvent and when the individual or legal entity is not indebted to the company, the company will be obliged to return any payment made to it to the insolvent estate.

Is there then a distinction between a company referred to above and a banking institution?

A banking institution is likely to receive thousands, if not millions, of payments in a day which payments may be utilised towards the settlement for example of a client's overdraft account or homeloan.

In the case of an overdraft account, the bank receives payment earmarked for its client or debtor's account and the bank then utilises the funds received to reduce the overdraft account.

Part 2 tommorrow...