The SCA today dismissed an appeal against a judgment of the North Gauteng High Court, Pretoria concerning the proper distribution of the free residue of an insolvent estate and the preference to be afforded to a creditor holding a general notarial bond over movable property. The case arose from the liquidation of a company called Rubaco. Firstrand held a general notarial bond over all the movable property of the company and claimed a preference in terms of s 102 of the Insolvency Act over the entire free residue remaining after paying secured and prior preferent claims. The Land Bank was the largest concurrent creditor and said that Firstrand’s preference was limited to the value of the assets covered by its bond. It was particularly concerned because the bulk of the free residue had been generated by the disposal of immovable property not covered by Firstrand’s bond.

The court reviewed the nature of a general notarial bond over movable property and pointed out that it gave the holder of the bond a right to convert its security into a pledge by taking possession of the property covered by the bond prior to liquidation or sequestration and gave a preference over the proceeds of those assets after liquidation or sequestration. Section 102 had been included in the Insolvency Act in order to make it clear that the common law preference of the bondholder was preserved by the Act. To uphold Firstrand’s contentions would run counter to a basic principle of insolvency law, namely, that once a provisional winding-up or sequestration order had been granted the position of all creditors and their rights to claim that they enjoyed a security over assets or a preference in the liquidation and distribution of the assets of the estate was frozen. A construction of s 102 that gave Firstrand a preference over the entire free residue, irrespective of whether it was generated by the realisation of assets mortgaged under the bond would afford it a greater security after liquidation or sequestration than it had under its bond. That was an unbusinesslike result and not a sensible construction of the section.

The court accordingly held that on a proper construction of s 102 the preference afforded to the holder of a general notarial bond over movables was limited to the value of the assets hypothecated under the bond. The appeal was accordingly dismissed subject to some alteration to the order granted by the high court.