Emontic Investments (Pty) Ltd v Bothomley NO and Others (1123/2022) [2024] ZASCA 1 (9 January 2024)

Can a creditor who has realized its security under section 83(3) of the Insolvency Act 24 of 1936 claim set-off of a post-liquidation debt owed to it against the proceeds of the realization that it is required to pay to the trustee or liquidator under section 83(10) of the Insolvency Act?

Emontic Investments (Pty) Ltd (Emontic) owned an immovable property known as the farm Tamboekiesfontein, located near Heidelberg, south of Johannesburg. This property was previously used by Montic Dairy (Pty) Ltd (Montic), which was placed under liquidation. The first three respondents in the case were the joint liquidators of Montic, namely Mr. P.C. Bothomley, Mr. S.I. Ganie, and Ms. E.M. van Wyk.

Montic was established in 1984 and operated a sophisticated milk processing and bottling complex. It was profitable for nearly two decades until it faced significant operational difficulties starting in May 2014, which included a three-month strike by employees and technical issues with its packaging machinery. These challenges led to a decline in operational efficiency and an inability to meet contractual obligations, particularly with major clients like Pick n Pay.

In February 2014, Montic merged with Sonnendal Dairy (Pty) Ltd, which aimed to expand its operations into Gauteng. However, the relationship between Montic and Sonnendal deteriorated, leading to Sonnendal's withdrawal from the merger. This withdrawal resulted in Montic's bankers terminating their finance facilities, leaving Montic in a precarious financial position.

In light of its financial troubles, Montic initiated voluntary business rescue proceedings, which later transitioned into liquidation proceedings. On June 14, 2016, Montic was placed under final winding-up by court order, with claims against it exceeding R112 million.

At the time of liquidation, Montic owed Emontic a substantial amount for unpaid rent, totaling R5,675,536.19. Emontic claimed to hold security for this debt through a common law landlord’s lien over Montic’s movable property located on the premises. The movable property included various equipment and vehicles essential for Montic's operations.

Despite the lease not being automatically terminated upon Montic's liquidation, the liquidators failed to notify Emontic within the required three-month period of their intention to continue the lease. Instead, they terminated the lease in November 2016.

Prior to the second meeting of creditors, Emontic notified the liquidators and the Master of the High Court of its intention to sell the property over which it held security. Emontic engaged Kopano Auctioneers (Pty) Ltd to auction the property, which took place on November 8, 2016, yielding net proceeds of R6,745,561.78.

Following the auction, Emontic's attorneys informed the liquidators that they intended to set off a post-liquidation rental amount owed to them against the proceeds from the auction. However, the liquidators contended that set-off was not permitted without their consent and demanded the full payment of the net proceeds.

Emontic made partial payments to the liquidators but ultimately refused to remit the remaining balance, leading the liquidators to seek a court order compelling Emontic to pay the net proceeds from the sale of Montic's property. The legal dispute centered on whether Emontic could claim set-off for the post-liquidation rental against the proceeds it was obligated to pay to the liquidators.

The ratio decidendi of the case is that a creditor who has realised its security under section 83(3) of the Insolvency Act 24 of 1936 is not entitled to claim set-off of a post-liquidation debt against the net proceeds of the realisation that it is required to pay to the trustee or liquidator under section 83(10). The court emphasised that the explicit language of section 83(10) imposes a clear obligation on the creditor to promptly pay the net proceeds to the trustee, without allowing for set-off against any post-liquidation claims. This principle reinforces the statutory framework of insolvency law, which aims to ensure equitable treatment of all creditors and the orderly distribution of the insolvent estate's assets. The court further clarified that post-liquidation rental claims are considered costs of sequestration or liquidation, to be paid from the free residue of the estate, rather than from the proceeds of the realisation of the creditor's security.

The court relied on several cases in its reasoning process, including:

- Standard Bank of South Africa Limited v Townsend and Others 1997 (3) SA 41 (W)
- Commissioner, SARS v Stand Two Nine Nought Wynberg [2005] ZASCA 55; [2006] 4 All SA 11 (SCA)
- Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; [2012] 2 All SA 262 (SCA)
- Minister of Justice and Another v South African Restructuring and Insolvency Practitioners Association and Others [2016] ZASCA 196; [2017] All SA 331 (SCA)