South Africa: Judgment Confirms Practice Of Advance Dividends In Insolvencies

Last Updated: 24 March 2014
Article by Letitia Field

Most Read Contributor in South Africa, July 2019
  1. The making of advance dividends before the confirmation of a liquidation and distribution account has been a longstanding insolvency practice.
  2. This practice was confirmed in a judgment handed down by Mr Justice Binns-Ward in the High Court, Western Cape Division, Cape Town on Friday 13 December 2013 in the matter between Gore N.O. & 3 Others v Shaff & 3 Others.
  3. ENSafrica represented the liquidators in this matter.
  4. Tessa Wolpe, a former director and surety of A Million Up Investments 105 (Pty) Ltd (in liquidation) ("AMU"), applied for an order directing, inter alia, Absa Bank Limited ("Absa") to repay an advance dividend made by the liquidators of AMU to Absa on the basis that such payment was beyond the powers of the liquidators and, having been made ultra vires, was consequently unlawful.
  5. The advance dividend was made after AMU's immovable property was sold.  The property was mortgaged in favour of Absa and Absa's secured claim in the amount of R569 million had been admitted to proof at a meeting of creditors.
  6. The sale agreement expressly made provision for the advance dividend to Absa (in reduction of Absa's secured claim) and an undertaking by Absa to repay same to the liquidators, if so directed by the Court or the Master. 
  7. In support of her allegation that the advance dividend was unlawful, Wolpe contended that the effect of s409 of the Companies Act, 61 of 1973, was that the liquidators of AMU could only pay a lawful dividend to Absa in terms of a confirmed account.
  8. Section 409(1) provides that:

"Immediately after the confirmation of any account the liquidator shall proceed to distribute the assets in accordance therewith or to collect from the creditors and contributories liable to contribute thereunder the amounts for which they may respectively be liable".

  1. The liquidators of AMU submitted that the making of the advance dividend was unexceptionable and in accordance with long established insolvency practice.  This practice is recorded in the insolvency commentaries, which, in turn, rely on cases cited as far back as 1915. 
  2. In his judgment, Binns-Ward J considered the governing legislation applied in the cases cited in the commentaries and found that the provisions are not materially distinguishable from the current relevant provisions.  He further found that the provisions do not prohibit a trustee or liquidator from making an advance dividend to a proved secured creditor at his own risk. 
  3. Binns-Ward J also considered the general duties of the liquidators set out in s391 of the Companies Act, which provides that:

"A liquidator in any winding-up shall proceed forthwith to recover and reduce into possession all the assets and property of the company, movable and immovable, shall apply the same so far as they extend in satisfaction of the costs of the winding-up and the claims of creditors, and shall distribute the balance among those who are entitled thereto".

  1. Binns-Ward J then found that although a creditor is not entitled to enforce payment from a trustee or liquidator until their claim has been recognised in terms of a confirmed account, the trustee or liquidator is not prohibited from making an advance dividend. 
  2. In this regard, he held that  "[b]y making payment of an amount owed to a secured creditor whose claim has been admitted to proof it cannot be said, in my view, that a liquidator would be acting outside his powers merely because payment is not yet due to, or exigible by the creditor.  The liquidator undertakes a risk that he may be render himself personally liable to make good on the advance payment if the dividend is subsequently not confirmed in the relevant liquidation and distribution account and he is unable to recover the amount from the creditor, but in dealing with the proceeds of the realisation of mortgaged immovable property in favour of the secured creditor whose claim has been formally accepted, the risk will usually be negligible; a fortiori, when, as usually is the case, the mortgagee is a registered financial institution.  The practical reason for taking the risk is usually that by making the payment before it is due the liability for payment of interest on the claim is limited, which no doubt explains how the practice of making such advance payments... became established and has stood the test of time.  In my view, in making a reasonable determined upon advance payment to a secured creditor from the proceeds of the realised security, a trustee or liquidator is acting within the ambit of his general duties".
  3. Binns-Ward J accordingly found in favour of the liquidators of AMU and Absa, ruling that the advance dividend was made in terms of the standard practice and the decision to do so was one a reasonable liquidator would have made in the circumstances. 
  4. In light of this decision, creditors can now be assured that trustees and/or liquidators are entitled to make advance dividends to secured creditors where the creditor has proved its claim and the security has been realised.  Creditors, however, are not entitled to force a trustee and/or liquidator to make such payment before the confirmation of the account.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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