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The Companies Act 2008[4] came into effect on May 1 2011 and replaced the previous Companies Act 1973,[5] which was repealed.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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London, W I I  IQQ

United Kingdom

Tel: +44 20 7908 1178

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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.

 

ADMINISTERING OF AN ESTATE

The administering of a deceased estate is regulated by the Administration of Estates Act No 66 of 1965 (as amended) and divided according to a valid will or the Intestate Succession Act No 81 of 1987 (as amended) or a combination of both acts.

Various other acts and regulations may, however, also be applicable, like those applicable to income tax (with due allowance for VAT and CGT), Estate duty and Donations tax, and support of surviving spouse.

When someone dies, his/her estate must be reported to the Master of the High Court as soon as possible, and certain report documents, together with the original will, where applicable, should be delivered to the Master.

In the case of estates with a gross value of less than R250 000 the Master may dispense with an official appointment of an Executor to execute the required administering process. In all other cases an Executor will be appointed by the Master, who will issue an Executor’s letter to the appointed Executor.

As soon as the Executor’s letter has been issued the formal administering of the estate, which the Executor has to follow, will commence. One of the Executor’s first tasks would be to announce to the creditors, acquire details regarding estate assets and have it valued if necessary, and recover certain assets. Known and filed liabilities should be investigated and attention must be paid to income tax.

The Executor is now compelled to submit a liquidation and distribution account (statement of assets and liabilities) to the Master of the High Court within six months after being issued with the Executor’s letter, or ask for a formal postponement. This estate account will indicate all assets and liabilities, distribution of heirs and details of assets outside the estate which are directly payable to beneficiaries.

The Master will check the estate account and then issue a questionnaire to the Executor. As soon as the Master has granted approval the Executor may proceed to announce the account as being open for inspection for 21 days at the Master and the nearest Magistrate’s Office.

Should any written challenges be submitted, it should be dealt with according to the regulations in the Administration of Estates Act. Should there be no challenges, or when the Executor has disposed of all challenges, may the Executor proceed to make payments to heirs and carry over any other assets to the beneficiaries.

In most cases the administering process should not be complicated, therefore it would be possible to finalise within a fair period of time (approximately 6 to 9 months). There are, however, many obstacles which may slow down this process and even bring the administering process to a virtual standstill. Some of the most well-known and general obstacles are poor service from government and private institutions, invalid and unpractical wills, shortage of cash, quarrels and disputes among family members and beneficiaries, lack of information, disorder in the tax and other affairs of the deceased, lawsuits before and after death, and legal postmortems in case of an unnatural death, which may sometimes be required before policies can be paid out.

It is therefore clear that the administering of an estate is a specialised environment which should be left to capable people with knowledge of the Administration of Estates Act and years of experience. Ignorance regarding the run of events as well as errors of judgement may eventually cost you dearly if you don’t make use of the available expertise.

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. (E&OE)

IMPLICATIONS OF ESTATE DUTY

Estate duty is charged on the dutiable value of the estate in terms of the Estate Duty Act. The general rule is that if the taxpayer is ordinarily resident in South Africa at the time of death, all of his/her assets (including deemed property), wherever they are situated, will be included in the gross value of his/her estate for the determination of duty payable thereon.

The current estate duty rate is 20% of the dutiable value of the estate. Foreigners/non-residents also pay estate duty on their South African property.

To minimise the effects of estate duty you need to understand the calculation thereof. The following provisions apply in determining your liability:

    1. Which property is to be included.
    2. Which property constitutes “deemed property”.
    3. Allowable deductions: the possible deductions that are allowed when calculating estate duty.

Property includes all property, or any right to property, including immovable or movable, corporeal or incorporeal – registered in the deceased’s name at the time of his/her death. It also includes certain types of annuities, and options to purchase land or shares, goodwill, and intellectual property.

Deemed property

A. Insurance policies

      1. Includes proceeds of domestic insurance policies (payable in South Africa in South African currency [ZAR]), taken out on the life of the deceased, irrespective of who the owner (beneficiary) is.
      2. The proceeds of such a policy are subject to estate duty, however this can be reduced by the amount of the premiums, plus interest at 6% per annum, to the extent that the premiums were paid by a third person (the beneficiary) entitled to the proceeds of the policy.

Premiums paid by the deceased himself/herself are not deductible from the proceeds for estate duty purposes.

  • If the proceeds of a policy are payable to the surviving spouse or a child of the deceased in terms of a properly registered antenuptial contract (i.e. registered with the Deeds Office) the policy will be totally exempt from estate duty.
  • Where a policy is taken out on each other’s lives by business partners, and certain criteria are met, the proceeds are exempt from estate duty.

B. Donations at date of death
Donations where the donee will not benefit until the death of the donor and where the donation only materialises if the donor dies, are not subject to donations tax. These have to be included as an asset in the deceased estate and are subject to estate duty.

C. Claims in terms of the Matrimonial Property Act (accrual claim)
An accrual claim that the estate of a deceased has against the surviving spouse is property deemed to be property in the deceased estate.

D. Property that the deceased was competent to dispose of immediately prior to his/her death (Section 3(3)(d) of the Estate Duty Act), like donating an asset to a trust, may be included as deemed property.

Deductions

Some of the most important allowable deductions are:

    1. The cost of funeral, tombstone and deathbed expenses.
    2. Debts due at date of death to persons who have their ordinary residence in South Africa.
    3. The extent to which these debts are to be settled from property included in the estate.This includes the deceased’s income tax liability (which includes capital gains tax) for the period up to the date of death.
    4. Foreign assets and rights:
      1. The general rule is that foreign assets and rights of a South African resident, wherever situated, are included in his/her estate as assets.
      2. However, the value thereof can be deducted for estate duty purposes where such foreign property was acquired before the deceased became ordinarily resident in South Africa for the first time, or was acquired by way of donation or inheritance from a non-resident, after the donee became ordinarily resident in South Africa for the first time (provided that the donor or testator was not ordinarily resident in South Africa at the time of the donation or death). The amount of any profits or proceeds of any such property is also deductible.
    5. Debts and liabilities due to non-residents:
      1. Debts and liabilities due to non-residents are deductible but only to the extent that such debts exceed the value of the deceased’s assets situated outside South Africa which have not been included in the dutiable estate.
    6. Bequests to certain public benefit organisations:
      1. Where property is bequeathed to a public benefit organisation or public welfare organisation which is exempt from income tax, or to the State or any local authority within South Africa, the value of such property will be able to be deducted for estate duty purposes.
    7. Property accruing to a surviving spouse [Section 4(q)]:
      1. This includes that much of the value of any property included in the estate that has not already been allowed as a deduction and accrues to a surviving spouse.
      2. Note that proceeds of a policy payable to the surviving spouse are required to be included in the estate for estate duty purposes (as deemed property), but that this is deductible in terms of Section 4(q).
      3. Section 4(q) deductions will not be granted where the property inherited is subject to a bequest price.
      4. Section 4(q) deductions will not be granted where the bequest is to a trust established by the deceased for the benefit of the surviving spouse, if the trustee(s) has/have discretion to allocate such property or any income out of it to any person other than the surviving spouse (a discretionary trust). Where the trustee(s) has/have no discretion as regards both the income and capital of the trust, the Section 4(q) deduction may be granted (a vested trust).

Portable R3.5 million deduction between spouses

The Act allows for the R3.5 million deduction from estate duty to roll over from the deceased to a surviving spouse so that the surviving spouse can use a R7 million deduction amount on his/her death.

Life assurance for estate duty

Estate duty will also normally be leviable on these assurance proceeds.

Source: Moore Stephens’ Estate Planning Guide.

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. (E&OE)

COMBINED DEVELOPERS

Public policy trumping pacta sunt servanda (“agreements must be kept”) rule – is public policy dictating the future of the enforcement of clauses in commercial agreements? 

Acceleration clauses are commonly found in commercial agreements where one party (“the borrower”) is afforded a period of time to make payment of an amount or amounts due in terms of such agreements to the other party (“the lender”). This clause offers protection to the lender as it affords the lender the option to demand the balance of the unpaid debt, upon failure by the borrower to pay any amount on the due date for such payment.

Acceleration clauses have always been enforceable in our courts.  However, in the recent judgment of Combined Developers v Arun Holdings and others [2014] JOL 31897 (WCC), the Western Cape High Court had to determine the legality and enforceability of an acceleration clause having regard to the dictates of public policy.

The parties in Combined Developers entered into a written loan agreement in terms whereof Combined Developers, as lender lent money to Arun Holdings, the borrower. The agreement contained an acceleration clause, which provided that if the borrower fails to pay the lender any amount when due, together with mora interest at the floating interest rate to the lender within 3 business days after receipt of a written demand from the lender, an event of default shall be deemed to have occurred and the lender shall be entitled to recover from the borrower all amounts owing under the agreement, immediately due and payable upon deliverance by the lender of the aforesaid notice.

It was common cause that the borrower failed to pay an amount of R42,133.15 on or before the due date for such payment. The lender sent an email to the borrower, informing it of its failure to pay. The borrower paid the amount of R42,133.15, but omitted to pay the mora interest, which amounted to an insignificant amount of R86.57.

The lender argued that the borrower’s failure to pay the mora interest constituted an event of default as contemplated by the acceleration clause, which entitled the lender to claim from the borrower payment of the full outstanding amount of the loan, being an amount of R6.7 million and invoking the lender’s rights in terms of securities granted in its favour to secure payment in terms of the agreement.

The question the court was asked to determine was whether the enforcement of the acceleration clause in these circumstances was against public policy due to the severe consequence the enforcement would have for the borrower.

The lender, relying on the pacta sunt servanda (agreements voluntarily concluded should be adhered to) rule, argued that acceleration clauses are valid and strictly enforceable according to its terms and that a court has no equitable jurisdiction to relieve a debtor from the automatic forfeiture resulting from such a clause.

The court rejected this argument and found that even if the rule is a key principle in our law, testing the contents of an agreement against public policy is still the default position.

The court confirmed that the test is an objective one of determining whether the values of the constitution, which is an important source of the values of public policy, are breached by an interpretation of the clause as proposed by the lender.

The judgment confirmed that although a contractual provision itself may not run counter to public policy, the implementation thereof may be so objectionable that it is sufficiently oppressive to constitute a breach of public policy, in which case public policy can be invoked in justification of a refusal to enforce a provision.

The court found that it was apparent that the manner in which the lender wished to enforce the acceleration clause was contrary to public policy, due to the unconscionable result it had in demanding payment of R6.7 million for the failure on the part of the borrower to pay R86.57. There was no reasonable commercial need in enforcing this debt against the borrower and this could have been dealt with amicably and expeditiously, without instituting litigious proceedings, the court concluded.

The reasoning in Combined Developers was recently confirmed by the Constitutional Court, evidencing that our courts are moving towards a constitutionalised approach when interpreting contractual provisions. The Constitutional Court found that it would lead to a great injustice to enforce a contractual provision rigidly, by adhering to the pacta sunt servanda principle and indicated that the law of contract, based on the principle of good faith, contains the necessary flexibility to ensure fairness in commercial agreements. This confirmation does open the door to great uncertainty for contracting parties, whose rights and obligations in terms of commercial agreement will no longer be determined solely in accordance with the terms of the agreements.

Combined Developers is a warning also to contracting parties that although an acceleration clause itself is not a clause that is deemed to be against public policy, the implementation thereof could be against public policy. Contracting parties, in particular lenders, should therefore always act in good faith when drafting and implementing commercial agreements, as lenders may lose the protection acceleration clauses is intended to afford to them.

Authored by: Lucinde Rhoodie: Director: Dispute Resolution and Mari Bester: Candidate Attorney Dispute Resolution

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. (E&OE)

ANNOUNCEMENT: FROM THE DESK OF THE CEO

It is with great pleasure that I extend a warm welcome to LEBOGANG MPAKATI, who joined our company on Tuesday, 1 March 2016.  LEBOGANG is a member of our  existing experienced Restructuring, Business Rescue and Corporate Recovery Team.

Lebo

Lebogang Mpakati holds a BCompt and Bcompts Hons qualification from the University of South Africa which she obtained in the year 2000.  She has built a sound track record and has worked in various financial institutions such as the National Empowerment Fund, the Land Bank, the Independent Development Corporation and the National Treasury.

Lebogang resumed her career in Turnarounds, Workouts and Restructuring in 2005 at the IDC as a Senior Account Manager where she carried out feasibility studies on IDC’s clients that were in distress to ascertain whether they have the potential of becoming economically viable again and determine the most feasible solutions to prevent the client’s financial failure. She has extensive experience over a broad range of industries such as construction, manufacturing and the service industry.

Lebogang joined the Landbank in 2013 as Head of Turnarounds, Workouts and Restructuring where she was responsible for setting and developing strategic direction and managing the implementation of Workout and Restructuring policies with regards to the restructurings, turnarounds and business rescue.  Before joining us, she was Manager of Turnarounds, Workouts and Restructuring at the National Empowerment Fund.

Regards

J F KLOPPER
CEO – INDEPENDENT ADVISORY (PTY) LTD