CONTRACTING WITH MINORS IN A DIGITAL CONTEXT

In this article, we examine whether contracts entered online by minors, using their parents’ credit cards, are legally binding in the specific context of social media such as Facebook.

Both Common law and legislation deal with the capacity of minors who enter into different types of contracts. According to the Children’s Act, 38 of 2005 a minor is a person between the ages of seven and 18 years. In terms of common law a minor does not have sufficient capacity to incur binding obligations under a contract and must obtain the assistance or consent of their guardian to do so. This consent can be given before the contract is concluded or thereafter, in which case it is seen as ratification of the contract. There are exceptions to this rule, which may be found in various pieces of legislation as well as in common law, such as contracts where the minor obtains only rights and no duties (e.g. a donation).

A minor can escape liability even when they have been bound in terms of the contract (i.e. where the guardian has assisted the minor in the conclusion of the contract, consented to or ratified the contract). This can be done where the contract was prejudicial to him or her at the time that it was concluded. The court may then, on application, set the contract aside and order that each party be placed in the same position as what they were in before the contract had been concluded.

Facebook is currently involved in an ongoing class-action lawsuit. In this lawsuit, a class of parents in America are pressing their claim that Facebook should change how it handles online transactions by minors.

Attorneys for the parents in the above case note that it is important that Facebook has knowledge of a user’s actual age but still treats children the same as adult users when it comes to taking their money.

One of the biggest issues here is that reciprocal performance, being the payment of money via credit or debit card and the child obtaining credits, takes place almost immediately. Therefore, if the parent were to be refunded, the minor would be unjustifiably enriched using the credits.

The system, that Facebook currently employs, is therefore problematic since it takes advantage of children who may not fully understand the contracts that they are entering into when they purchase game credits. Furthermore, should the parents be immediately refunded in the current system, it may lead to situations where the parent consents to the purchases and then after the child obtains the enjoyment from the credits, request that their accounts be credited due to a ‘lack of consent’.

It is therefore clear that this system of payment should be changed. We should obtain clarity on how to deal with this in South Africa once the class-action suit in America has been concluded and a solution has been reached. At present, it seems that there will be no alternative for parents whose children overspend or use their credit or debit cards, without permission. If your child has, a Facebook gaming habit it is a good idea to keep a close eye on your wallet until we have clarity on the recourse available to parents who find themselves in this situation.

Bibliography

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

CASE UPDATE – MAINTENANCE CLAIM BY A MINOR AGAINST ESTATE OF A PARENT

By M B Cronje – BA (UP) BIur LLB (UNISA)          

Du Toit NO v Thomas NO and others [2015] JOL 33337 (WCC)

The maintenance court may order the executor of the estate of the father of a minor child to pay maintenance in respect of the minor for the period before the executor’s account has lain open for inspection

Following an application by the mother of a minor child, the Magistrate ordered the executor of the estate of the minor’s father, to pay R10,000 per month towards the maintenance of the child, commencing on 7 August 2014, and thereafter on the seventh day of every following month (maintenance that applicant was liable to pay in terms of section 16(1)(a)(i) of the Maintenance Act 99 of 1998 – the “Maintenance Act”); secondly, to make a once-off payment of R720,000 (money that was payable to the mother of the child in terms of section 16(1)(a)(ii), being the amount which she was entitled to recover from the executor in respect of expenses she had previously incurred for 72 months in connection with the maintenance of the child); and thirdly, to pay an amount of R7,500 on or before 14 August 2014 (a contribution towards the fees of an accountant whose expert report had been relied on to quantify the payment in terms of section 16(1)(a)(ii)). No appeal against these orders has been lodged in terms of section 25 of the Act and the merits of the decision by the magistrate are not in issue.

The executor contends that an executor is not “a person” who has a legal duty to maintain any other person; that the provisions of the Maintenance Act do not apply to the obligation of the deceased estate to maintain the minor child; and that the maintenance court was not entitled to make a maintenance order against the executor. The executor contends that the High Court is the proper forum to adjudicate any dispute relating to the maintenance claims in question. The executor also submits that an interpretation of the Maintenance Act which makes an executor liable to maintain another person is inconsistent with the provisions of the Administration of Estates Act 66 of 1965 (“Administration of Estates Act”); firstly, because the provisions of subsections16(1)(a)(i) and (ii) of the Maintenance Act are contrary to the processes set out in the Administration of Estates Act for establishing rejected claims, and the normal process of paying out claims only after the account has lain open for inspection and objections thereto have been dealt with; and contrary to the requirements for payment and distribution of monies to minors in terms of section 45 of the Administration of Estates Act; and because the requirements that payments of claims for maintenance can, pending the confirmation of the account, only be paid with the consent of the Master in terms of section 26(1A) of the Administration of Estates Act).

It is settled law that the duty of a parent to maintain a child does not cease upon a parent’s death, but is transmissible and becomes a debt resting upon the deceased estate. [Carelse v Estate de Vries (1906) 25 SC 532; Glazer v Glazer NO 1963 (4) SA 694 (A) at 706H – 707A.] The right of a child to maintenance does not arise out of any principle of inheritance, but out of the family relationship between parent and child. A testamentary executor steps into the shoes of the deceased and from the date the executor receives letters of executorship he represents the estate. This included paying, under certain circumstances, estate liabilities. Maintenance of the minor child is one such liability.

In section 1 of the Administration of Estates Act 66 of 1965 executor means “any person who is authorised to act under letters of executorship granted or signed and sealed by a Master, or under an endorsement made under section 15″. An executor is therefore a person in terms of the Administration of Estates Act, and may be regarded as one for purposes of the Maintenance Act.

In terms of section 26(1A) of the Administration of Estates Act the executor may, before the executor’s liquidation and distribution account has lain open for inspection and with the consent of the Master, release such amount of money and such property out of the estate as in the executor’s opinion are sufficient to provide for the subsistence of the deceased’s family or household. This subsection was specifically designed to alleviate family hardship pending the winding-up of the estate.

The construction of the Administration of Estates Act suggests that there are two stages at which a child may claim maintenance from the executor; before or after the executor’s account lies open at the office of the Master. This matter relates to a claim before the account has lain open for inspection. The power to release money or property for the subsistence of the deceased’s family is expressed in the section 26(1A) anterior to and independently of the sections which regulate the separate process of winding up the estate.

The second stage provides a child in need of maintenance with a different remedy to the first. The child (and surviving spouse) of the deceased normally only receive maintenance payments or benefits during the second stage; after the liquidation and distribution account has lain for inspection and during the distribution process. A child’s maintenance claim is a debt sui generis. It does not compete with the claims of creditors. [Lotz v Boedel Van der Merwe 1958 (2) PH.M16 (O).] On the other hand such a claim is preferred to the claims of heirs and legatees whose claims in the event of competition would have to abate proportionately. All of this has to be considered before a final distribution of maintenance is made.

At the first stage a responsibility to alleviate hardship is placed squarely on the executor for the period before his account lies open for inspection. The requirement of consent by the Master does not detract from the above conclusion. Such consent would serve to protect the executor from personal liability should he make a wrong distribution. [Meyerowitz on Administration of Estates and Estate Duty (2007 ed) 12.2A.]

The decision of the Master to give or withhold consent in terms of section 26(1A) constitutes administrative action. An unreasonable refusal of consent would be subject to judicial review in terms of section 7 of the Promotion of Administrative Justice Act 3 of 2000. Such refusal is not an insuperable obstacle to maintenance. However, it would create a situation where the maintenance remedy of a child would have to be pursued in a High Court, albeit that the executor’s account has not yet lain open.

The Legislature must have intended the Maintenance Act to provide a remedy against an executor who fails to carry out responsibility in terms of section 26(1A); and also that the legal duty described in section 2(1) of the Maintenance Act includes a person such as an executor who was already vested with responsibility for the subsistence of a deceased’s family in terms of the earlier Administration of Estates Act.

Six years after the passing of the deceased the child had allegedly not been paid maintenance. As the executor’s account had not been finalised, satisfaction of the child’s overall maintenance claim could not be satisfied in the ordinary course of winding up of the estate. This situation demands the same cheap and effective maintenance relief for the child whose parent is deceased as a child with living parents would be entitled to in terms of the Maintenance Act. Failing this, inequality before the law would exist. The provisions of the concluding clause in section 2(1) of the Maintenance Act make it clear that the Act is intended to cast a wide jurisdictional net. This goes well beyond relationships by blood. It covers an executor exercising the responsibility under section 26(A1) of the Administration of Estates Act. The executor is a person with a legal duty to maintain the minor child of the deceased. He is a person “legally liable to maintain any other person” for purposes of subsections 16(1)(a)(i) and (ii) of the Maintenance Act. Before his account lies open he is a person who may be subjected to investigation under section 6(1)(a) of the Maintenance Act arising from any alleged failure to maintain the minor child of the deceased.

Acting Judge Donen dismissed the application to review and set aside the proceedings in the maintenance court with costs.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

MAY THE SOUTH AFRICAN REVENUE SERVICES IMPOSE POST COMMENCEMENT CHARGES BECAUSE OF OUTSTANDING RETURNS UNDER BUSINESS RESCUE

By: Hans Klopper

It is trite law that SARS will be unable to contend that a claim, which arose in respect of activities of a company prior to the date of liquidation, but in respect of which returns were only submitted to SARS subsequent to the date of liquidation, must be dealt with by the liquidator as a cost of administration in the liquidation process and that SARS is under such circumstances released from the duty to prove its claim as it existed as at the date of concursus creditorum as provided for in terms of the Insolvency Act.

For SARS to contend, as they seem to be doing in on-going communication with business rescue practitioners, that they are a “super preferent creditor’ in terms of Section 135 of the Companies Act, 71 of 2008 (“the Act”) merely because returns were outstanding at the beginning of business rescue proceedings and thereby achieving a “higher status” than what they would ordinarily have received under the Laws of Insolvency is fallacious. We are of the view that, on the same basis that SARS cannot, upon the liquidation of a company, assert to have an entitlement to be treated as a cost of administration where returns have been submitted post the commencement of concursus creditorum, they can equally not content to be entitled to treated as a “post commencement cost” under business rescue.

The purposes of the Act are contained in, inter alia, Section 7(k) thereof. This sub-section provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.

Before and during the enactment of the Act it was widely publicised  that the intention of the legislature was,  with the promulgation thereof, to ensure that businesses be rescued as opposed to prior to 2011, when companies in financial distress were merely liquidated. This led to unnecessary job losses. SARS’s attitude in developing a contrived (or artificial) interpretation as contained in your letter under reply would appear to fly in the face of what the legislature intended.

It is therefore fundamentally flawed to argue that claims against entities, already incurred as at the commencement date of business rescue proceeding, but at that stage unassessed, should now be treated as “super preferent” in terms of the provisions of section 135 of the Act. The simple reason for this has been dealt with above. We are of this view for the same reason as to why claims already incurred upon the arrival of concursus creditorum, but as yet unassessed at that date, would rank as a statutory preferent claim in terms of the Laws of Insolvency are not costs of administration in liquidation circumstances such claims cannot be “post commencement finance” under business rescue.

The provisions of Section 135 of the Act are furthermore clear insofar that the plain wording thereof contemplates the following to be incurred by the company (under the management of the BRP) during business rescue proceedings[1]:

  • the remuneration, reimbursement for expenses or any amount relating to employment due and payable to any employee during business rescue proceedings[2];
  • finance obtained[3];
  • payment of the BRP’s remuneration and expenses incurred under Section 143 of the Act;
  • other claims arising out of the cost of business rescue proceedings

These claims will be treated equally but will have preference over finance obtained as envisaged above[4]

Section 135 of the Act therefore provides that “post commencement finance” relate to expenses incurred and finance confirmed by the company [5]post the commencement of businesses rescue proceedings. SARS continuously express the view that the company is under the management control of the BRP and therefore it follows that the company, represented by the BRP, can thus only be liable for expenses and costs incurred at the BRP’s behest and duly authorised by the BRP after the commencement of proceedings.

In fact, nowhere does Section 135 suggest that the company, duly represented by the BRP, will become liable for post commencement finance as a consequence of a mere act or omission by the company prior to the commencement of proceedings.

For SARS to read into Section 135 that there could be an ‘automatic” imposing of post commencement funding upon by virtue of some event prior to the commencement of proceedings (over which the BRP had no control whatsoever) is most certainly fanciful. SARS ought to be aware and is hereby reminded that the High Court of South Africa found that SARS used an “artificial and strained interpretation” of certain provisions of Chapter 6 of the Act[6] insofar as that matter was concerned.

We furthermore submit that the clear intention of the legislature with the promulgation of the Act was to create a platform for a business under financial distress to make a fresh start. The post commencement finance provisions contained in Section 135 of the Act were introduced to provide for a mechanism to introduce new money to the business and not to burden the business with historic debt. If it was the intention of the legislature to retain old debt under section 135 it would have made it clear as appears from the following dictum by Fourie J:

I would have expected that, if it were the intention of the legislature to confer a preference on SARS in business rescue proceedings, it would have made such intention clear.”[7]

The purpose and nature of post commencement finance was extensively discussed and dealt with in a recent MBA dissertation[8]  by Wanya du Preez of Deloitte & Touche and the following passage appears therein[9] with reference to the United Nations Commission on International Trade Law (UNCITRAL) model Law that has been developed for cross-border insolvencies and rescue legislation. Post commencement or “post-petition” funding is described as follows:

“It is critical for the company in distress to have access to funds to be able to pay for crucial day to day costs. This funding may come from existing liquid assets of the company or incoming cash flow from operations. Alternatively this funding should be sourced from a third party through extended trade credit or loans. These financing needs should be established early to accommodate financing requirements post filing and post acceptance of the business plan (UNCITRAL, 2005).”  

In another article[10] by Wanya du Preez referred to above she summarised the purpose of PCF as follows:

“Therefore one of the critical components of the business rescue plan involves securing turnaround finance to meet short-term trade obligations (such as working capital requirements), covering turnaround/restructuring costs, and restoring the company’s balance sheet to solvency.”

In an article by Vatsal Gaur[11] a comparative study of post-petition regimes over various jurisdictions was conducted in respect of:

  • The United States of America – debtor in possession finance under Chapter 11 of the USA Bankruptcy Code;
  • The United Kingdom – under the Insolvency Act, 1986 and Enterprise Act 2002;
  • Canada- the Companies Creditors Arrangement Act (CCAA);
  • China- Enterprise Bankruptcy Law (2007); and
  • India – Indian Companies Act 1956.

It is clear from this article that, internationally, the funding in the nature of post commencement finance is “funding” in the nature of:

  • Finance;
  • goods delivered; or
  • services rendered

to the business under distress and no mention is made of a contrived “snatching” at an opportunity by the relevant country’s Revenue services to create a “post commencement preference” as SARS would appear to be trying to achieve in this matter.

It is furthermore stated in this article by Guar that it is “very common” (sic) in the USA for Chapter 11 debtors to seek post-petition financing, either from pre-petition lenders or from another source and that the “economic desirability of this debtor in possession financing is that it would inject absolutely new value into the distressed firm.”

In Canada, the need for post-petition financing stems from the inability of financially distressed companies to either obtain trade credit from existing suppliers or to raise fresh funds to finance after the filing under the CCAA.

What is therefore clear and which is consistent with the South African legislation, is that, internationally, the intention with post-petition funding is the introduction of new funds to the distressed business with view to procuring a turnaround and not whereby old, but as yet unassessed, debt is forced upon the post commencement period by way of an artificial mechanism.

By:  HANS KLOPPER ATTORNEY

MANAGING DIRECTOR AT INDEPENDENT ADVISORY

[1] As was confirmed in Merchant West Working Capital Solutions v Advanced Technologies And Engineering Company (Pty) Limited – Case No: 13/12406 – South Gauteng High Court (Johannesburg) Judgement by Kgomo J – 10 May 2013 : p 9-10

[2] Section 135(1) of the Act

[3] Section 135(2) of the Act

[4] Section 135(3)(a)(i) of the Act

[5]As was confirmed in Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314

[6] See Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314 – line 25

[7] Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 311 – paragraph 24

[8] By Wanya Du Preez  in a research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Masters of Business Administration named “ The status of post commencement finance for business rescue in South-Africa

[9] Du Preez – p 22

[10] “Post-commencement finance: The silver bullet of business rescue”

[11] Gaur, V. (2012). Post-petition financing in corporate insolvency proceedings. Issue I of Taxmann‘s SEBI & Corporate Laws Journal, Volume 111, 17-26.

Hans Klopper, Attorney and Managing Director at Independent Advisory.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

HOW GENERAL IS THE GENERAL MORATORIUM IN BUSINESS RESCUE

By: Danielle Koen and Thabile Fuhrmann

Since the inception of Chapter 6 of the Companies Act 71 of 2008, many creditors have become loathe of the word moratorium albeit the cornerstone of business rescue procedures. Section 133(1) of the Companies Act heralds the automatic and inevitable consequence of the commencement of business rescue proceedings, the general moratorium. The section sets out, with a number of exceptions that, during business rescue proceedings, no legal proceeding, including enforcement action, against the company or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum.

What we have come to understand about Section 133(1) is that it acts as a general moratorium or stay on legal proceedings or executions against the company, its property and its assets and, on the exercise of the rights of creditors of the company. This general moratorium, in principle, restricts legal proceedings against the company since such proceedings may have a detrimental effect on the outcome of the business rescue process. The stringency of the protection afforded to the company is however not a blank restriction against proceedings and can be relaxed by inter alia, (a) the written consent of the business rescue practitioner and (b) leave of the court.

The ambit of what is meant by legal proceedings and enforcement action was initially an uncertainty. A practical interpretation of the section clearly intends that enforcement action relates to formal proceedings ancillary to legal proceedings, such as the execution of court orders by means of writs of execution or attachment. These steps against the company cannot be initiated, and if they have already commenced, are frozen until the written consent of the business rescue practitioner or leave of the court has been obtained. A clear understanding of ‘enforcement action’ or legal proceedings relates to that which must be commenced or proceeded with in a forum, i.e. a court or tribunal. If this is what is understood by ‘enforcement action’ what then is left of a creditors contractual rights and obligations in terms of an agreement concluded between it and the company in rescue?

In a recent decision of the Supreme Court of Appeal, Cloete Murray NO & another v FirstRand Bank Ltd (20104/2014) [2015] ZASCA 39, the issue to be decided by the court was, whether once business rescue proceedings have commenced, the creditor of a company under business rescue can unilaterally cancel an existing agreement that it had concluded with the company prior to it being placed under business rescue.

Briefly set out, on 22 July 2010, FirstRand Bank Ltd t/a Wesbank, concluded a written Master Instalment Sale Agreement (the MISA) with Skyline Crane Hire (Pty) Ltd, in terms of which Wesbank sold and delivered movable goods to Skyline, with Wesbank retaining ownership in the goods until the purchase price had been paid in full. Skyline was voluntarily placed under business rescue on 30 May 2012 and by that date had fallen into arrears with its monthly payments to Wesbank. On this same date, Wesbank sent a letter to Skyline cancelling the MISA as a result of Skyline’s failure to make payment and reserved its right to repossess the goods, value and sell same and credit the relevant accounts. In any event, Wesbank sought and obtained the written consent of the business rescue practitioner to cancel the MISA. The business rescue proceedings were eventually discontinued and Skyline was placed in liquidation.

The liquidators of Skyline, the appellants in this instance, were of the view that in terms of Section 133(1), the cancellation of an agreement constitutes ‘enforcement action’ which requires the consent of the business rescue practitioner or the court. The court disagreed and found that if this interpretation was favoured, it would fundamentally change our law of contract which provides for unilateral cancellation in the case of a breach of contract.

Business rescue is intended to provide a company in distress with the necessary breathing space to enable it to restructure its affairs by placing a moratorium on legal proceedings and enforcement action but is not intended to interfere with the contractual rights and obligations of the parties to an agreement. This lends itself then to the concept that the general moratorium is a temporary one in respect of a creditor bringing claims against the company, rather than a greater restriction on a creditors’ rights. The decision of the Supreme Court of Appeal has therefore confirmed that the general moratorium is not as generally wide or far reaching so as to equate a creditor’s contractual right of cancellation to that of enforcement action and, that these concepts are in fact mutually exclusive.

Danielle Koen and Thabile Fuhrmann are attorneys at Cliffedekkerhofmeyer Attorneys at their Johannesburg Office

www.cliffedekkerhofmeyr.com

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)