South Africa: Master Of The High Court Decision: Set Off Overturned But Liquidators Permitted To Disregard Set Off

In NSP Unsgaard (Pty) Ltd v Master of the High Court, Cape Town and Another, the applicant, NSP Unsgaard (Pty) Ltd sought to review and set aside a decision of the first respondent, the Master of the High Court made on 28 January 2022 in terms of section 46 of the Insolvency Act,1936 ("the Act"). The decision in question permitted the liquidators of the second respondent, Green Tissue (Pty) Ltd ), to disregard a set off applied by NSP in its dealings with Green Tissue before the latter's liquidation.

Section 46 outlines the rules regarding the treatment of set-offs when one of the parties involved in the set-off becomes insolvent or bankrupt. The trustee has the discretion to honour the set-off or, in certain cases, disregard it and require the party to pay their debt to the insolvent estate. Exceptions are made for set-offs that occur in specific financial market contexts.

The relationship between the two companies was based on Green Tissue manufacturing and supplying paper-based products to NSP. Between 2007 and 2013, Green Tissue entered into various agreements with Investec and Standard Bank which saw Green Tissue pledging in favour of the two banks all its book of debts with set off being excluded. In March 2018, Green Tissue experienced financial challenges which resulted in it selling 100% of its shares to Lion Match Company (Pty) Ltd.

Following the sale, a further manufacturing agreement (Master Supply Agreement ("MSA")) was concluded between NSP and Green Tissue with NSP supplying raw materials, packaging, and advanced working capital to Green Tissue to enable it to fulfil orders received from NSP. NSP then purchased the goods produced by Green Tissue, with the amounts paid by NSP deducted from the amounts owed.

Following a perfection of bonds on 31 October 2019, which created a cession in favour of Investec and authorised it to take and retain possession of the business of Green Tissue and its movable assets, an application to place Green Tissue in provisional liquidation succeeded, with a final order of liquidation being granted on 6 December 2019. On 3 September 2021, Green Tissue's liquidators wrote to the Master seeking that the set off applied by NSP be disregarded in terms of section 46 of the Insolvency Act. This was on the basis that it was not in the normal course of business and would give rise to an undue preference in favour of NSP and prejudice other creditors.

On 28 January 2022, the Master granted the liquidators permission to disregard the set off in favour of NSP, with no reasons provided. Consequently, on 6 May 2022, NSP's attorneys addressed a letter to the Master setting out the terms of the MSA with Green Tissue. It explained that the MSA was evidence that the set off was done in the normal course of business for NSP and Green Tissue. This letter did not yield any response of substance from the Master.

Before the Cape Town High Court, NSP argued that the decision of the Master to disallow the set off was both procedurally and substantively unfair, since NSP were not given the opportunity to be heard or make submissions prior to the decision being made.

This meant that the decision was made without consideration of all relevant information. For NSP, this was reason enough for the Master's decision to be set aside. The liquidators of Green Tissue in opposition stated that the decision of the Master was procedurally fair as NSP had received a copy of the section 46 application was within its rights to make submissions to oppose it.

The court, in considering the submissions before it, stated that the review of the Master's decision in terms of the Act, which permits a person aggrieved by any decision of the Master to bring it under review by the court, had been recognised as a review in the very widest sense. The court therefore could have regard to all relevant material placed before the court, including new material which was not previously before the court.

The Cape Town High Court therefore considered section 46 of the Act and stressed that a wide review under section 151 was not an appeal.

In considering the merits of NSP's review application, the court pointed out that there was no dispute between the parties and that the Master had not provided NSP with an opportunity to make representations before making the section 46 decision disallowing the set off. The court further highlighted that there was no explanation by the Master, who had not opposed the review application, as to why NSP was not provided with an opportunity to make submissions before the decision was made. Consequently, the court found that by not providing NSP with an opportunity to make submissions, the decision of the Master was procedurally unfair.

In respect of the substantive fairness of the decision, the court noted that the Master had not provided reasons for the decision taken nor had the Master indicated on what information the decision was based. According to the court, this was sufficient for the decision of the Master to be reviewed and set aside on the grounds that it was both procedurally and substantively unfair.

The court ultimately decided to make the determination instead of remitting it to the Master to avoid any further delay in finalising the matter. In its order, the court remarked that set off occurs automatically by operation of law and that only where it was not effected in the ordinary course of business, may a set off be disregarded in terms of section 46.

Whether a transaction occurred in the ordinary course of business was an objective question, which had to be considered in light of all relevant facts. The court pointed out that such a transaction would need to be one which does not surprise the ordinary person of business and one that solvent, business people would, in similar circumstances, enter into.

On the facts, the court found that the set off was directed at protecting NSP's exposure in respect of the goods and money it had advanced while preserving a benefit to its business in being able to purchase the goods produced by Green Tissue. Accordingly, the court found that from an objective perspective, it could not be said that the set off was effected in the ordinary course of business and therefore fell to be disregarded by the liquidators of Green Tissue.

Consequently, even though the review application succeeded on technical grounds, the court reached the same conclusion as the Master, that the set off can be disregarded, and thus, for this reason, the court did not award costs in the matter.

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