THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

REPORTABLE
Case No: 245/13
In the matter between:
ELLERINE BROTHERS (PTY) LTD                                                        APPELLANT
and
McCARTHY LIMITED                                                                          RESPONDENT
Neutral citation:
Ellerine Bros v McCarthy (245/13) [2014] ZASCA 46 (1 April
2014)
Coram:
Navsa, Mhlantla, Leach, Petse JJA and Van Zyl AJA
Heard:
19 March 2014
Delivered:
1 April 2014
Summary:
Insolvency – s 348 of the Companies Act – commencement of
winding-up – lessor giving insolvent lessee written notice to cure
breach as required by contract – insolvent failing to do so – lessor
cancelling the contract after the commencement of winding-up – right
to cancel the contract not lost – cancellation of the contract valid.

___________________________________________________________________
ORDER
___________________________________________________________________
On appeal from: North Gauteng High Court, Pretoria (De Vos J sitting as court of
first instance):

The appeal is dismissed with costs, including the costs of two counsel.

___________________________________________________________________
JUDGMENT
___________________________________________________________________
Van Zyl AJA (Navsa, Mhlantla, Leach and Petse JJA concurring)

[1] The appeal concerns the validity of a cancellation of a lease agreement. The
problem presenting itself is the following: Notice of cancellation was given before the
commencement of legal proceedings for the winding-up of the lessee, but the period
provided for had not yet expired when those proceedings commenced and
cancellation followed thereafter. Put simply, the question is whether the right to
cancel was lost because of a concursus creditorum. This issue was placed before
the high court for decision pursuant to an agreement between the parties that it be
decided on an agreed statement of facts as envisaged in rule 33 of the Uniform
Rules of Court. The high court decided the issue in favour of the respondent and
dismissed the appellant’s claims with costs. The appeal is with the leave of the high
court.

[2] The agreed facts are the following. In 2006 the appellant, Ellerine Brothers
(Pty) Ltd (Ellerine), concluded a lease agreement with a company called Toits Motor
Group (Pty) Ltd (the insolvent) in terms of which it let to it certain business premises.

In the same year the insolvent entered into a sub-lease agreement with the
respondent, McCarthy Limited (McCarthy) in respect of a portion of the property. The
events which follow took place in 2009. The insolvent failed to timeously pay the
agreed rental. Ellerine notified it in writing on 16 January that should it fail to remedy
its breach of the lease within seven days of receipt of the letter, Ellerine would take
steps to cancel the agreement. The letter was received by the insolvent on the same
day.

[3] The insolvent did not comply with this demand. On 27 January Ellerine
delivered a letter cancelling the lease with immediate effect. Shortly before this, on
21 January, an application for the liquidation of the insolvent had been lodged by a
creditor with the registrar of the high court. The application was enrolled for hearing
on 27 January but was postponed to 27 February for the filing of answering and
replying affidavits. On the latter date a final order was issued for the winding-up of
the insolvent.

[4] In June, Ellerine and the liquidators of the insolvent entered into a cession
agreement. As consideration for the rental payable by the insolvent to Ellerine under
the lease, the liquidator ceded to Ellerine the insolvent’s rights to the rental payable
by McCarthy under the sub-lease. It was recorded in the deed of cession that the
lease was still in existence; that Ellerine was not entitled to cancel the lease from the
date of the presentation to court of the application for the liquidation of the insolvent,
and that the liquidator had exercised an election to continue the lease.

[5] In October, relying on the cession Ellerine issued summons against McCarthy
in the high court claiming the rental and other amounts allegedly due in terms of the
sub-lease. McCarthy denied liability for the amounts claimed and defended the
action. At the hearing of the matter the parties agreed that the only issue in dispute
was whether Ellerine could validly cancel the lease after the commencement of the
proceedings for the winding-up of the insolvent. The high court was asked to
determine this issue on the stated case. The legal submissions of the parties

recorded in the statement of agreed facts were premised on their pleadings. In its
plea, McCarthy did not place the existence of the cession agreement in dispute.
Instead, it alleged that the sub-lease was terminated when Ellerine, on 27 January,
advised the insolvent that it had elected to cancel the lease, and that there were no
rights in existence which the liquidator could cede to it. McCarthy’s defence is
consistent with the legal nature of a sub-lease.1 As the sub-lessee’s rights to the
leased property are subject to those of the lessee, determination of the lease ipso
jure also brings the sub-lease to an end.2 Put differently, a sub-lessee cannot
acquire more rights from the lessee than what the lessee himself has.

[6] Ellerine’s response in its replication was that by reason of the winding-up of
the insolvent, it could not validly cancel the lease when it purported to do so on
27 January. This contention has as its basis the provisions of s 348 of the
Companies Act 61of 1973.3 It reads as follows:
‘A winding-up of a company by the Court shall be deemed to commence at the time of the
presentation to the Court of the application for the winding-up.’
An application for the winding-up of a company is presented to the court when it is
lodged with the registrar.4 In this matter that date was 21 January 2009. The case
advanced by Ellerine in this court and in the high court was in essence that as a
result of the retroactive commencement of the insolvent’s liquidation the right of
Ellerine as the sub-lessor to cancel the lease had been lost. It was submitted that the
estate of the insolvent had been frozen on 21 January when an application for the
liquidation of the insolvent was lodged with the registrar.

1 Sewpersadh v Dookie 2009 (6) SA 611 (SCA).
2 Ntai & others v Vereeniging Town Council & another 1953 (4) SA 579 (A) at 589A-B.
3 As a transitional arrangement, in terms of para 9(1) of Schedule 5 of the new Companies Act 71 of
2008, the provisions of Act 61 of 1973 continue to apply with respect to the winding-up and liquidation
of companies until a date determined by the relevant Minister.
4 J A Kunst, P Delport and Q Vorster Henochsberg on the Companies Act (Vol 1, 5 ed) at 740(1) and
the authorities referred to.

[7] This contention is premised on the creation of a concursus creditorum on that
date.5 The argument is that the concursus interposed between the giving of notice on
16 January and the expiry of the seven day period therein. The interruption of the
required time period by the concursus prevented Ellerine from claiming any further
performance from the lessee under the lease until the liquidator had elected to abide
by the lease. This meant that a condition for the existence of its right to cancel the
lease remained unfulfilled. Relying on the decisions in De Wet NO v Uys NO &
andere and Roering NNO & others NNO v Nedbank Ltd6 it was argued that in the
absence of a right to cancel which accrued before the concursus, Ellerine could not
validly cancel the lease. This, it was contended, meant that the sub-lease remained
in force and the liquidator was entitled after his appointment to cede his right and title
in the sub-lease to Ellerine.

[8] Furthermore, Ellerine submitted that the provisions of s 37 of the Insolvency
Act 24 of 1936 (the Insolvency Act), which applies to the winding-up of a company,
supported its case.7 The relevant sub-sections provide:
‘(1)
A lease entered into by any person as lessee shall not be determined by the
sequestration of his estate, but the trustee of his insolvent estate may determine the lease
by notice in writing to the lessor: Provided that the lessor may claim from the estate,
compensation for any loss which he may have sustained by reason of the non-performance
of the terms of such lease.
(2)
If the trustee does not, within three months of his appointment notify the lessor that
he desires to continue the lease on behalf of the estate, he shall be deemed to have
determined the lease at the end of such three months.
(3)
The rent due under any such lease, from the date of the sequestration of the estate
of the lessee to the determination or the cession thereof by the trustee, shall be included in
the costs of sequestration.’

5 Thomas Construction (Pty) Ltd (in liquidation) v Grafton Furniture Manufacturers (Pty) Ltd 1988 (2)
SA 546 (A) at 566H.
6 See De Wet NO v Uys NO & andere 1998 (4) SA 694 (T) at 698I; Roering NNO & others NNO v
Nedbank Ltd 2013 (3) SA 160 (GSJ) at 164E-H.
7 Section 339 read with s 386(4)(g) of the 1973 Companies Act.

It was contended that the effect of s 37 is to create a right for the liquidator to end the
lease. That being the position, the liquidator must be given time to decide whether to
exercise that right. Should the lessor be permitted to cancel the lease, it would
negate the liquidator’s right to elect to either terminate or continue the lease.

[9] The high court (per De Vos J) found that the lease was validly cancelled and
that the provisions of s 37 of the Insolvency Act did not find application. It appears to
have arrived at this conclusion on the basis that Ellerine acquired the right to cancel
the lease when, in compliance with clause 20.1 of the lease, it gave the insolvent
written notice on 16 January to remedy its breach of the agreement and the insolvent
failed to comply therewith. Clause 20.1 is a lex commissoria. It provided that if the
lessee failed to pay the rental ‘. . . and continues that failure for more than 7 (seven)
days after receipt of a notice demanding payment . . . then the lessor shall have the
right, but shall not be obliged, forthwith to cancel this agreement . . . .’ The
importance of this clause, in the context of a lease agreement, is that in the absence
thereof a lessor cannot cancel the lease unless it has first placed the lessee in
mora.8 Clause 20.1 was solely for the benefit of Ellerine. It reserved the right to
cancel the lease upon the fulfilment of a condition, namely the failure of the lessee to
comply with the notice within the required time period. The letter of 16 January was
clearly written in compliance with this clause. Its purpose was to enable Ellerine to
bring the lease to an end should the rental not be paid within seven days.

[10] The conclusion arrived at by the high court is correct. The arguments
advanced by Ellerine lose sight of the effect, or rather the lack thereof, that the
insolvency of the lessee has on a lease. Following on the insolvency of the lessee
the position is governed by the ordinary principles of the common law which apply
when a party to an executory contract goes insolvent.9 As in the case of any other
uncompleted contract, the liquidator inherits the lease in its entirety. The creation of
the concursus creditorum therefore does not terminate the continuous operation of a

8 Spies v Lombard 1950 (3) SA 469 (A) at 487A-C; Goldberg v Buytendag Boerdery Beleggins (Edms)
Bpk 1980 (4) SA 775 (A) at 793 (C); Nel v Cloete 1972 (2) SA 150 (A).
9 Norex Industrial Properties (Pty) Ltd v Monarch SA Insurance Co Ltd 1987 (1) SA 827 (A) at 838H-I.

lease agreement to which the insolvent is a party.10 The concursus neither alters nor
suspends the rights and obligations of the parties thereunder and the liquidator, as
the universal successor, steps into the shoes of the insolvent and does not acquire
any rights greater than those of the insolvent.11 This means that the liquidator must
perform whatever is required of the insolvent in terms of the lease, including
unfulfilled past obligations of the lessee.12

[11] The intended aim of the concursus, or as it has also been described, the
‘community of creditors’,13 created immediately upon the liquidation of the insolvent,
is to give equal protection to all the creditors without undue preference and to
preserve and distribute the estate to the benefit of all of them.14 To give effect to the
concursus, the liquidator must decide whether it would be to the benefit of the
community of creditors to continue to perform the inherited obligations of the
insolvent under an uncompleted contract. He may elect not to do so. In that event a
consequence of the concursus is that the other party to the contract cannot demand
performance by the liquidator of the insolvent’s contractual obligations. The
statement, ‘frequently encountered, that a trustee or a liquidator in insolvency has a
“right of election” whether or not to abide by a contract’ means no more than that by
reason of the existence of the concursus ‘the other party cannot exact specific
performance against the trustee or liquidator if the latter should decide to abandon
the contract’.15 The act of the liquidator in deciding not to continue the lease
constitutes ‘. . . a repudiation of the contract, which would have afforded the lessor . .
. the right, concurrently with other creditors, to claim from the liquidator the payment
of damages for the non-performance by the company of its contractual obligations’.16
The claims of the other contractant are therefore reduced by the concursus to a
monetary claim and participation in the insolvent estate as a concurrent creditor,
where it is treated on the same basis as all the other creditors in the insolvent estate.

10 Norex Industrial Properties above at 838H-I.
11 Thomas Construction (Pty) Ltd (in liquidation) v Grafton Furniture Manufacturers (Pty) Ltd above at
568C.
12 Goodricke & Son v Auto Protection Insurance Co Ltd (in liquidation) 1968 (1) SA 717 (A) at 723G;
Bryant & Flanagan v Muller & another NNO 1978 (2) SA 807 (A) at 812H-813B.
13 Richter NO v Riverside Estates (Pty) Ltd 1946 OPD 209 at 223.
14 Ward v Barrett NO & another NO 1963 (2) SA 546 (A) at 552.
15 Thomas Construction above at 566J-567A.
16 Per Botha JA in Norex Industrial Properties above at 838J-839A-B.

[12] As stated in Smith & another v Parton NO,17 there is ‘really only one legal
principle involved and that is that there is nothing in the law of insolvency which
affects uncompleted contracts in general; the contract is neither terminated nor
modified nor in any way altered by the insolvency of one of the parties (cf Uys &
another 1998 (4) SA 694 (T)) except in one respect, and that is that, because of the
supervening concursus, the trustee cannot be compelled to perform the contract’.18
The existence of the concursus, does not, on this principle, in any way affect the
continued existence of the rights and obligations of the respective parties to an
uncompleted contract. There is accordingly nothing, as Galgut AJ correctly found in
Porteous v Strydom NO,19 that ‘excuses the trustee from performing the insolvent’s
obligations which fall due to be performed between the date of sequestration and the
date upon which the trustee makes his election’ to abide the contract.

[13] It follows that there is no merit in the appellant’s suggestion that the demand
for payment in the letter of 16 January offended against the concursus because it
constituted a claim for specific performance, nor that payment of the amount
demanded would have meant that one creditor was preferred over another. As
stated in Porteous ‘after the concursus occurs, the trustee steps into the shoes of the
insolvent, and the trustee is then obliged to perform whatever is required of the
insolvent in terms of the contract, including unfulfilled past obligations of the
insolvent’.20 It is only in the event of the liquidator making an election not to abide by
the uncompleted contract that the lessor, because of the concursus, cannot compel
performance. Absent such an election, the terms of the lease remain in place and
the liquidator must comply with it.

[14] Turning to the relevant provisions of s 37 of the Insolvency Act quoted earlier,
its effect must be assessed against the background of the position under the
common law. The reason is that the Insolvency Act is not a codification of the

17 Per Friedman J in Smith & another v Parton NO 1980 (3) SA 724 (D) at 728H-729A.
18 See also Estate Friedman v Katzeff 1924 WLD 298 at 302; Mitchell v Sotiralis’s Trustee 1936 TPD
252 at 254 and Tangney & others v Zive’s Trustee 1961 (1) SA 449 (W) at 452-453.
19 Porteous v Strydom NO 1984 (2) SA 489 (D) at 494G-H.
20 Porteous v Strydom NO above at 494F.

common law of insolvency.21 It follows that save to the extent that it may have been
changed by the Insolvency Act, or is inconsistent with it, the common law still finds
application. The provisions of s 37(1) to (3) are substantially no different from the
common law position sketched earlier, and do not otherwise confer any rights and
obligations on the lessor or the liquidator which are inconsistent with the position
under the common law. The insolvency of the lessee therefore does not terminate
the lease. The liquidator may, however, elect not to continue the lease in which
event s 37(1) authorises him to determine it. Should he decide to do so, s 37(1)
requires the liquidator to notify the lessor of his decision in writing. At common law
the liquidator has to give reasonable notice of his intention to continue the contract,
otherwise the other party may treat the contract at an end.22 Section 37(2), however,
requires the liquidator to notify the lessor of his desire to continue the lease within
three months, failing which he shall be deemed to have determined the lease.
Although the liquidator’s authority to determine the lease is derived from s 37(1), it is
consistent with the election of the liquidator at common law not to perform
uncompleted contracts where it may not be to the benefit of the concursus. The
proviso to that subsection in turn preserves the lessor’s right to claim compensation
flowing from the liquidator’s decision to prematurely terminate the lease.23

[15] Section 37 therefore does not materially change the common law position and
none of its provisions prevent the lessor from exercising a right to cancel which
became enforceable after the concursus. I should mention that in this context it is
unhelpful to speak of an ‘accrued right to cancel’ which survives the establishment of
the concursus or of a right to cancel which only matures after the commencement of
the winding-up (as has been done in certain cases). The issue is simply whether
there was an effective and enforceable right at the critical time – the time of the
cancellation. In this case, Ellerine had such a right and its cancellation was valid.
The conclusion reached in both Smith & another v Parton NO and Porteous v
Strydom NO are to be preferred to those relied upon in support of Ellerine’s present
argument.

21 Fey NO and Whiteford NO v Serfontein & another 1993 (2) SA 605 (A) at 613A-F; Millman NO v
Twiggs & another 1995 (3) SA 674 (A) at 679H-680A.
22 Du Plessis & another NNO v Rolfes Ltd 1997 (2) SA 354 (A) at 363G.
23 Norex Industrial Properties above at 839I-J.

[16] In the result the appeal is dismissed with costs, including the costs of two
counsel.

____________________
D van Zyl
Acting Judge of Appeal

APPEARANCES

For Appellant:
S du Toit SC (with him M A Jonker)

Instructed by:

Gideon Pretorius Inc, Cresta

Symington & De Kok, Bloemfontein

For Respondent:
K J Kemp SC (with him L K Olsen)

Instructed by:

Cox Yeats, Durban

McIntyre & Van der Post, Bloemfontein

THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From:
The Registrar, Supreme Court of Appeal
Date:
1 April 2014
Status:
Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal.

ELLERINE BROTHERS (PTY) LTD v McCARTHY LIMITED

The Supreme Court of Appeal (SCA) today handed down their unanimous decision in an
appeal against a decision of the North Gauteng High Court concerning the validity of the
cancellation of a lease agreement in circumstances where the lessee had been placed in
liquidation, ie whether the right to cancel was lost because of a concursus creditorum.

The appellant, Ellerine Brothers (Pty) Ltd (Ellerine), concluded a lease agreement with a
company called Toits Motor Group (Pty) Ltd (the insolvent) in terms of which it let to it
certain business premises. When the insolvent failed to timeously pay the agreed rental,
Ellerine put it to terms in a letter which gave it seven days to remedy the breach, failing
which Ellerine stated it would take steps to cancel the agreement. During the running of this
time period, an application for the liquidation of the insolvent had been lodged by a creditor
with the registrar of the high court. The application was duly enrolled for hearing, at which
point the concursus creditorum was established. Some days later, the insolvent having failed
to remedy the breach of its rental agreement, Ellerine purported to cancel the lease with
immediate effect.

Ellerine and the liquidators of the insolvent subsequently entered into a cession agreement.
As consideration for the rental payable by the insolvent to Ellerine under the lease, the
liquidator ceded to Ellerine the insolvent’s rights to the rental payable by its sub-lessee
McCarthy Limited (McCarthy), which Ellerine thereafter attempted to enforce.

McCarthy defended the action on the grounds that Ellerine had cancelled the rental
agreement (which would have the effect also of cancelling the sub-lease agreement) and
therefore could not validly claim rent in terms thereof. Ellerine’s response was that because
the concursus interposed between the giving of notice and the expiry of the seven day period,
it could not validly cancel the lease when it purported to do so. The concurses operates to
prevent Ellerine from claiming further performance from the lessee under the lease until the
liquidator had elected to abide by the lease.

The high court (per De Vos J) found that the lease was validly cancelled, which finding was
confirmed by the SCA. The arguments advanced by Ellerine were held to misconstrue the
effect, or rather the lack thereof, which the insolvency of the lessee has on a lease. As in the
case of any other uncompleted contract, the liquidator inherits the lease in its entirety. The
concursus neither alters nor suspends the rights and obligations of the parties thereunder and
the liquidator, as the universal successor, steps into the shoes of the insolvent and does not
acquire any rights greater than those of the insolvent. In the result, the appeal was dismissed.