South Africa: South Gauteng High Court, Johannesburg

[10]     The first two requirements in paragraphs (a) and (b) of s 10 are uncontroversial.  The respondents concede that they are insolvent.  The applicants are their creditors by reason of liquidated claims in amounts that exceed the prescribed amounts.  What is contentious is whether or not this Court can rationally form the opinion that there is reason to believe that sequestration of the respondents’ estate (or the sequestration of any one or more of the respondents’ estates) will be to the advantage of creditors.

[11]     In my view this is an inquiry that must be approached with caution.  It has already received judicial consideration by the Courts, including this division of the High Court[11] where Leveson J – identifying the reason[12] for the distinction between the standard to be adopted for determining what is to the advantage of creditors in instances where the debtor surrenders his own estate[13], on the one hand, and the standard to be adopted where a creditor seeks the sequestration of the debtor’s estate[14], on the other – said,

“In terms of s 10 the Court must only have reason to believe that there is advantage to creditors.”[15]

[12]     Although very little turns on this for purposes of this case, this short-hand formulation requires in my view some qualification.  As I understand the plain wording of the provision, the standard is not whether or not there is reason to believe (in the broad and objective sense) that sequestration will be to the advantage of creditors.  Rather, the standard is whether “the Court … is of the opinion that prima facie … there is reason to believe that it will be to the advantage of creditors” if a debtor’s estate were sequestrated. 

[13]     In other words, the jurisdictional fact for the granting of a provisional sequestration order is not so much “reason to believe” (which would countenance a probe into the existence of the fact constituting the reason on which the belief hinges) as “the opinion” of the decision-maker (which would not countenance an investigation into the existence of the fact by which the belief is sustained).  While the former is an objective inquiry, the latter is subjectively ascertainable.

[14]     What this means is that the standard for compulsory provisional sequestration orders seems to me on a plain reading of s 10 to be even less stringent than the “reason to believe” standard because all that is required is for the Court to be “of the opinion” that on the face of it there is reason to believe that sequestration will be to the advantage of creditors.  Nevertheless, I have already said nothing turns on this degree of proof for purposes of s 10 in the circumstances of this case because on either formulation the applicants have not met the standard.

[15]     The significance of the care that ought to be taken in the formulation of the appropriate standard in provisional sequestration applications becomes clear when regard is had to the development in our law of what is known as jurisdictional facts.  The locus classicus on jurisdictional facts in our law (admittedly in the sphere of Administrative Law which has now become infused into our supreme law) is South African Defence and Aid Fund and Another v Minister of Justice 1967 (1) SA 31 (C) (“the Defence and Aid Fund case”) where the Court said:

“Upon a proper construction of the legislation concerned, a jurisdictional fact may fall into one or other of two broad categories.  It may consist of a fact, or state of affairs, which, objectively speaking, must have existed before the statutory power could validly be exercised.  In such a case, the objective existence of the jurisdictional fact as a prelude to the exercise of that power in a particular case is justiciable in a Court of law.  If the Court finds that objectively the fact did not exist, it may then declare invalid the purported exercise of the power … .  On the other hand, it may fall into the category comprised by instances where the statute itself has entrusted to the repository of the power the sole and exclusive function of determining whether in its opinion the pre-requisite fact, or state of affairs, existed prior to the exercise of the power.  In that event, the jurisdictional fact is, in truth, not whether the prescribed fact, or state of affairs, existed in an objective sense but whether, subjectively speaking, the repository of the power had decided that it did.  In cases falling into this category the objective existence of the fact, or state of affairs, is not justiciable in a Court of law.  The Court can interfere and declare the exercise of the power invalid on the ground of a non-observance of the jurisdictional fact only where it is shown that the repository of the power, in deciding that the pre-requisite fact or state of affairs existed, acted mala fide or from ulterior motive or failed to apply his mind to the matter.”[16]

(emphasis supplied)

[16]     In President of the Republic of South Africa and Others v South African Rugby Football Union and Others 2000 (1) SA 1 (CC) the Constitutional Court said the Defence and Aid Fund case remains the leading authority on jurisdictional facts in our law.[17]  In addition, the principle in the Defence and Aid Fund case has relatively recently been followed by the Supreme Court of Appeal in Kimberley Junior School and Another v Head, Northern Cape Education Department and Others 2010 (1) SA 217 (SCA) at paras [12]-[13] where the Court said:

“[12] … .  As was pointed out by the Constitutional Court in President of the Republic of South Africa and Others v South African Rugby Football Union and Others … the judgment of Corbett J in South African Defence and Aid Fund and Another v Minister of Justice 1967 (1) SA 31 (C) remains the leading authority on jurisdictional facts in our law.  In that judgment Corbett J … identified two categories of jurisdictional facts that can be encountered in empowering legislation.  The first category, described as ‘objective jurisdictional facts’, includes the type of fact or state of affairs that must exist in an objective sense before the power can validly be exercised.  Here the objective existence of the fact or state of affairs is justiciable in a court of law.  If the court finds that objectively the fact or state of affairs did not exist, it will declare invalid the purported exercise of the power.

[13] In the second category, that of subjective jurisdictional facts, the empowering statute has entrusted the repository of the power itself with the function to determine whether in its subjective view the prerequisite fact or state of affairs existed or not.  Expressions often used by the legislature to express this intent are, e.g. ‘in his or her opinion’ or ‘if he or she is satisfied that’ the particular fact or state of affairs exists.  In this event the question is not whether the prescribed fact or state of affairs existed in an objective sense.  The court can only interfere where it is shown that the repository of the power, in forming the opinion that the fact or state of affairs existed, had failed to apply its mind to the matter.  Whether a particular jurisdictional fact can be said to fall within the one category or the other, will depend on the interpretation of the empowering statute.”

(emphasis supplied)

[17]     Most recently, in Democratic Alliance v President of the RSA and Others 2012 (1) SA 417 (SCA), the Court acknowledged the distinction between subjective and objective discretionary clauses but found the clause there in issue to be of the objective variety.[18] 

[18]     Thus, the distinction between subjective and objective discretionary clauses is still very much part of our law on jurisdictional facts.  The plain language of s 10 (“if the court … is of the opinion that …”) connotes a subjective discretionary power which can only be set aside on grounds that the Court was actuated by bad faith or by an ulterior motive or failed to apply its mind to the matter.  Not so the phrase “reason to believe” which, for its veracity, invites evidence of the existence of the fact by which the belief is sustained.  I mention this distinction because it may conceivably come into play in some sequestration application in future and so care should be taken in the formulation of the applicable standard.

[19]     Of course, it is the central conception of our constitutional order that those who exercise public power (such as the Courts) are constrained by the principle that they may exercise no power and perform no function beyond that conferred on them by law.[19]  There can be no doubt that s 10 of the Insolvency Act plainly confers upon the Court the power to make a sequestration order if it considers, in its opinion, that to do so will be to the advantage of creditors.  The consideration that a Court must bear in mind is that the opinion it holds in that regard is rationally held, or it must apply its mind to the matter when forming that opinion.  It can never be said that an irrational opinion is immune to challenge.  The Defence and Aid Fund case is not authority for such a proposition.

Applying Proper Standard to Applicants’ Case

[20]      In my opinion there is prima facie no reason to believe that sequestration in these matters will be to the advantage of creditors.  The pith and marrow of the applicants’ case, which is pleaded both in the founding papers and in reply, and also pursued with much vigour in argument, is that sequestration of the respondents’ estates is a condition precedent to the Fidelity Fund settling the respondents’ creditors’ claims that are founded on a raid on the firm’s trust account by Pienaar.  Invoking Meskin[20] and Supreme Court of Appeal authority[21], the applicants in all four applications say

“The applicant and the other trust creditors of the firm have a (not too remote) reasonable prospect of being reimbursed by the Fidelity Fund, should the estates of the respondent and his previous partners in the firm be sequestrated.”

[21]      From this proposition it is clear that the applicants consider sequestration in the circumstances of these cases as being the necessary trigger for the Fidelity Fund settling defalcation claims.  In my view this is neither the correct legal position nor a correct understanding of the Fidelity Fund’s requirements.  The Fidelity Fund’s requirement that a claimant “should first exhaust all available legal remedies against the attorney in question, or his estate, as well as all other person(s) liable in law, to the point of sequestration of the estate(s) of such person(s)”, cannot in my view be understood as requiring the claimant first to obtain a sequestration order.  The reason for this is that because there is no legal basis for such a requirement in the enabling statute of which the Fidelity Fund is a creature – the Attorneys Act[22] – such would not only be an ultra vires requirement; it would also be an affront to the principle of legality.[23] 

[22]      A provisional sequestration order is a rather blunt instrument in the hands of a creditor who seeks thereby to carve a crevice through which payments of claims by third parties are to flow into his pockets.  One cannot use sequestration orders in order to achieve results for which such orders are not intended.  That in my view is clearly the applicants’ purpose.  They seek sequestration orders not for purposes of recovering monies owing to them from the respondents but rather in order to facilitate payment of claims by the Fidelity Fund.  That, in my view, sails very closely to the wind that is abuse of sequestration proceedings.           

[23]     In any event, the applicants’ own version fails to indicate that there is a reasonable prospect that some pecuniary benefit will result to creditors if any one or more of the respondents’ estates were sequestrated.  The “pecuniary benefit” argument is advanced by the applicants not in relation to the residue of the estates sought to be sequestrated but rather in relation to the reimbursement by the Fidelity Fund that they say a sequestration will trigger.

[24]     In the result, the applicants have failed to make out a proper case that the sequestration of any one or more or all of the respondents’ estates will be to the advantage of creditors.

Order

[25]      In the result, I make the following orders:

1.            The application for a provisional sequestration order in case number 07385/2013 is dismissed with costs.

2.            The application for a provisional sequestration order in case number 18620/2013 is dismissed with costs.

3.            The application for a provisional sequestration order in case number 25313/2013 is dismissed with costs.

4.            The application for a provisional sequestration order in case number 25314/2013 is dismissed with costs.

V Ngalwana

Acting Judge of the High Court

Appearances

For the applicants:               CHJ Badenhorst SC; JG Botha

Instructed by:                        Benater Attorneys & KG Tserkezis Inc

For the respondent:             DP De Villiers & R Carvalheira

in 07385/2013

Instructed by:                        Wayne Van Niekerk Inc

For the respondents:           M Smit

in 18620/2013;

25313/2013 &

25314/2013

Instructed by:                        Stabin Gross & Shull

Date of hearing:                   25 November 2013

Date of judgment:                28 November 2013