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RETENTION OF TITLE OR OWNERSHIP IN INSOLVENCY

by Hans Klopper

of Independent Advisory (Pty) Ltd

South African law regulating insolvency is substantially provided for in the Insolvency Act.[1] The common law of insolvency as contained in Romano-Dutch sources also applies in so far as it is not inconsistent with any legislation.

The effect of insolvency is, however, not unified in a single piece of legislation. The Insolvency Act essentially governs the relationship between creditors and debtors where natural persons, trusts or partnerships become subject to insolvency proceedings[2]. Insofar as legislation governing corporate entities such as companies and close corporations does not provide otherwise, the Insolvency Act also applies to such entities, as further explained below.

South African corporate entities are companies and close corporations. Companies are incorporated in accordance with the company laws of South Africa, and close corporations in accordance with the Close Corporations Act.[3] The Companies Act 2008[4] came into effect on May 1 2011 and replaced the previous Companies Act 1973,[5] which was repealed. The Companies Act 2008, however, provides, as a transitional arrangement, that Chapter 14 of the Companies Act 1973 continues to apply with respect to the liquidation (or winding-up) of companies[6] and close corporations. 

In accordance with the Companies Act 2008, the Close Corporations Act was amended and close corporations that existed as at May 1 2011 were permitted to remain in existence but no new close corporations could be formed thereafter.

Therefore, upon the liquidation of a company, the provisions of Chapter 14 of the Companies Act 1973 apply. Even so, where Chapter 14 of the 1973 Companies Act does not deal with any specific set of circumstances, the provisions of the Insolvency Act apply subject to any necessary alterations.

Furthermore, where the Close Corporations Act also does not provide for any specific set of circumstances, the provisions of Chapter 14 of the Companies Act 1973 may apply; and where Chapter 14 of the 1973 Companies Act does not apply, the provisions of the Insolvency Act will apply.

The Insolvency Act applies to a situation where a purchaser under an instalment sale agreement, as described above, becomes subject to insolvency proceedings; in other words where there is an instalment agreement under the terms of which possession and use of the asset was transferred to the purchaser subject to reservation of ownership, and where the purchaser becomes subject to insolvency proceedings.[7]

Section 84(1) of the Insolvency Act will apply to any transaction that meets these requirements even if the National Credit Act itself does not apply to the transaction.[8]

Special rules apply[9] where the party subject to insolvency proceedings bought goods under an agreement falling within paragraphs (a), (b) and (c)(i) of the definition of ‘instalment agreement’ in Section 1 of the National Credit Act which provides as follows:

“instalment agreement” means a sale of movable property in terms of which–

(a) all or part of the price is deferred and is to be paid by periodic payments;

(b) possession and use of the property is transferred to the consumer;

(c) ownership of the property either–

(i) passes to the consumer only when the agreement is fully complied with; or

(ii) passes to the consumer immediately subject to a right of the credit provider to re-possess the property if the consumer fails to satisfy all of the consumer’s financial obligations under the agreement; and

(d) interest, fees or other charges are payable to the credit provider in respect of the agreement, or the amount that has been deferred.

The most interesting aspect of Section 84 of the Insolvency Act, however, is that the seller, despite reserving ownership, loses ownership upon the commencement of insolvency proceedings in respect of the buyer. Ownership in fact passes to the buyer’s estate upon the commencement of the insolvency proceedings. This follows from the wording of Section 84(1), which provides that, in circumstances where the buyer becomes subject to insolvency proceedings, the seller automatically acquires a security (in the form of a ‘hypothec’) over the goods, whereby the balance outstanding under the agreement is secured. Since it is not possible in law, for any party, to have a hypothec over his or her own property, ownership in the goods passes from the seller to the buyer’s insolvent estate to be administered by the trustee or liquidator.[10]

If the seller validly reserved ownership of the assets under the agreement and is able to identify the assets, and, as a result, can prove which assets have been paid for and which not, then the seller will be afforded the protection provided for in the Insolvency Act.

Where a buyer entered into an agreement, under which the seller has validly reserved ownership of assets which are in the possession of the buyer, is subject to insolvency proceedings outside South African jurisdiction but which have been recognised in South Africa, the seller will be afforded the protection of the South African laws on insolvency in that it will be recognised as a secured creditor. The proceeds to be derived from the assets subject to the reservation of ownership provisions in the agreement will be the subject matter of the seller’s security.

Where a seller who reserved the ownership of assets sold to a buyer under a valid agreement is subject to insolvency proceedings, the trustee or liquidator of the insolvent seller will have the right to elect whether to abide by the agreement or not. In other words, the seller’s liquidator or trustee cannot force the buyer to do anything other than what is provided for under the terms of the instalment sale agreement or agreement containing a valid reservation of ownership clause.

In practice, the buyer will either arrange to obtain finance to settle the claim with the seller’s liquidator or trustee by paying in full for the assets that are subject to the reservation of ownership provisions, or the buyer may continue or perform the terms of the original agreement and continue paying the trustee or the liquidator in accordance with the agreement.

Where a seller is subject to insolvency proceedings outside the jurisdiction of South Africa which have been recognised in South Africa, the duly appointed South African liquidator or trustee will have to make an election whether to abide by the agreement or not as described above.

This is an extract of a Chapter written by the Author in an International Publication: Retention of Title in and out of Insolvency

Consulting Editor Marcel Willems;© 2015 Globe Law and Business Limited

Website: www.globelawandbusiness.com

Published: December 2015

Publisher:  Richard Davey

Published by:

Law Business Research Ltd

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United Kingdom

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[1] Act 24 of 1936.

[2] Referred to as ‘sequestration’ in the Insolvency Act.

[3] Act 69 of 1984, which was repealed with effect from May 1 2011.

[4] Act 71 of 2008.

[5] Act 61 1973

[6] Schedule 5, Paragraph 9 of the Companies Act 2008.

[7] Section 84 (1) of the Insolvency Act

[8] Potgieter v Daewoo Heavy Industries (Pty) Ltd 2003 (3) SA 98 (SCA) at 100-102.

[9]Sharrock.van der Linde.Smith, Hockley’s Insolvency Law, ninth edition, p95.

[10] Williams Hunt Vereeniging Ltd v Slomowitz 1960 (1) SA 499 (T) at 501; see also van der Burgh v van Dyk 1993 (3) SA 312 (O); Standard Bank of South Africa Ltd v Townsend 1997 (3) SA 41 (W) at 50.