Case  CCT246/20 & CCT160/20
[2021] ZACC 48

Judgement Date: 13 December 2021

Post Judgment Media Summary  

The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.

On Monday, 13 December 2021 at 10h00, the Constitutional Court handed down judgment in an application for leave to appeal against a judgment of the High Court of South Africa, Western Cape Division, Cape Town, which granted an order of final sequestration of the HNP Trust (the Trust).

The applicants are the trustees of the HNP Trust. The background facts and issues pertaining to this application are as follows: Mr Louw was an auditor and financial adviser who confessed that he had defrauded his clients of around R110 million and the funds had been used in his company, Pholaco. His joint estate with his wife, Mrs Louw was declared insolvent. Mr and Mrs Louw were trustees of the HNP Trust together with Mr Cronje who also happened to be Mr Louw’s business partner. This Trust held some shares in two companies, Pholaco and Quintado. The other shares in Quintado were held by Mr Kellerman’s family trust, who is Mr Louw’s brother-in-law. The Trust was used to launder the stolen money and advanced R62 790 451 to Pholaco and became insolvent.

The trustees of the Louw insolvent estate launched an application in the High Court for the sequestration of the Trust. They alleged that approximately R70 million from the R110 million was advanced by Mr Louw to Pholaco through the Trust. Thus, the Louw insolvent estate had a claim against the Trust. Further, the Trust’s liabilities exceeded its assets, and it had no underlying commercial activities or sources of income. The trustees of the Louw insolvent estate contended that Mr Kellerman, transferred an amount of R17 680 000 to the Trust in December 2018, allegedly at Mr Louw’s request. The Trust agreed to assume liability for this amount, and Mr Kellerman obtained as security the 50% shares in Quintado that the Trust held. After this transaction, Mr Kellerman owned 100% of Quintado’s shares. According to the trustees of the Louw insolvent estate, this was a fraudulent transaction. The Trust denied the allegations and contended that it was only indebted to the Louw insolvent estate for R150 000 which it received from Mrs Louw and that it would be able to repay it. Based on this evidence, the High Court granted an interim sequestration order and issued a rule nisi calling on interested parties to show cause why the order should not be made final on 7 September 2019.

On the return date, the High Court first considered an application by Mr Kellerman for intervention and granted him leave to intervene. Thereafter, the Court determined the application for the final sequestration of the Trust in terms of sections 9(1) and 12 of the Insolvency Act. On assessing the evidence, the High Court concluded that the Trust was indeed used as a conduit to disguise the source of the misappropriated funds. This was borne out by the lack of evidence on the indebtedness of the Trust to the Louw insolvent estate. Thus, the funds flowed from Mr Louw’s bank account to Pholaco’s bank account and were recorded as a loan from the Trust to Pholaco. The Court then held that the Trust was insolvent and that the Louw insolvent estate had established its standing to apply for a sequestration order in terms of section 12(1)(a) of the Insolvency Act. A final order of sequestration of the Trust was issued. An application for leave to appeal was dismissed.

The Trust’s application for leave to appeal to the Supreme Court of Appeal suffered a similar fate. Its application for reconsideration of the order was also dismissed.

The joint trustees of the HNP Trust approached this Court for leave to appeal. They submitted that the trustees of the Louw insolvent estate lacked locus standi to apply for the sequestration order. Further, Mr Louw was not authorised to bind the Trust as all three trustees are required to approve the transactions. Therefore, if a loan was advanced to the Trust from Mr Louw for Pholaco’s benefit, it was unauthorised. The loan must have come directly from Mr Louw, and the creation of a loan account in favour of the Trust against Pholaco was a fiction to hide the origin of the money.

The trustees of the Louw insolvent estate opposed the application on several grounds. First, the Court lacks jurisdiction to hear the matter as the Trust is raising points of fact rather than law. Second, the respondents submitted that the R150 000 owed is sufficient to establish locus standi. In addition, the trustees of Louw insolvent estate relied on an act of insolvency by the Trust in terms of section 8(c) of the Insolvency Act to establish locus standi, this was based on the agreement and subsequent transfer of Quintado shares between Mr Kellerman and the Trust.

Regarding the authority to oppose the sequestration application, the trustees of the Louw insolvent estate submitted that Mr Cronje had the necessary authority to oppose the provisional sequestration application from a common sense reading of the Trust Deed. Further, Mr Cronje was cited as a party in the proceedings and when a party is cited, they are entitled to participate in those proceedings. Although no money entered the Trust’s bank account, the trustees of the Louw insolvent estate argue that the Trust was used as a vehicle for fraudulent activities as a borrower can conclude a loan agreement with a lender on the basis that the money be paid to a designated third party – in this instance Pholaco was the designated third party. Finally, on remedy, the trustees submitted that should the appeal be upheld; the matter should be remitted back to the High Court for admission of oral evidence which surfaced during the section 152 of the Insolvency Act inquiry of the Louw insolvent estate and the Trust.

In a unanimous judgment penned by Mhlantla J, the Constitutional Court refused to grant leave to appeal on the basis that this Court’s jurisdiction was not engaged. Mhlantla J held that because the applicants had not contended that any constitutional issue was raised, they were obliged to demonstrate that there were arguable points of law of general public importance that ought to be considered by this Court. In that regard, the applicants had been unable to establish the existence of arguable points of law as the questions raised were riddled with factual disputes. In this case, there were two factual disputes, namely, (a) whether the Louw insolvent estate loaned various monies to the Trust and whether the Trust, in turn, advanced those monies to Pholaco; and (b) if so, whether Mr Louw was authorised to conclude the alleged loan agreements on behalf of the Trust. These do not ordinarily engage the jurisdiction of this Court.

In relation to the question whether Mr Louw had the authority to unilaterally bind the Trust in a loan agreement, the Constitutional Court held that the law on this point was well-settled and remains uncontradicted. Mhlantla J further emphasised that the application of a settled legal principle does not engage this Court’s jurisdiction. The powers of trustees are located within the four corners of the trust deed. Therefore, nothing more need be said about the requirements to bind a trust. The argument that the High Court misdirected itself in concluding that Mrs Louw and Mr Cronje acquiesced to Mr Louw’s administration of the Trust also does not assist the applicants as a challenge to a finding of fact by the court a quo does not engage this Court’s jurisdiction.

In the result, because the application did not engage this Court’s jurisdiction, the application for leave to appeal was dismissed with costs.

The Full judgment  here