BUSINESS RESCUE PROCEEDINGS – PROBLEMS, HEADACHES AND ANOMALIES

The 2008 Companies Act has been criticised, in many respects and in many quarters.  A great many of the provisions found therein are difficult to understand, and some of them are downright bizarre.

Take, for example, the business rescue dispensation created by Chapter 6 of the 2008 Companies Act.  Business rescue is, of course, a well-intentioned and potentially promising alternative to the liquidation of companies.  The liquidation process results in the destruction of the company, loss of jobs, the sale of assets frequently at a fraction of their market value.  It is a lose-lose situation.  The underlying aim of business rescue is to provide an alternative mechanism by which the company can be restored to commercial viability, which should ultimately better serve the interests of creditors, employees and other stakeholders.

To achieve this, Chapter 6 of the Companies Act provides that a company may be placed in business rescue by resolution of its board of directors, or by order of court.  A business rescue practitioner (hereinafter referred to as “the BRP”) is appointed, who has wide-ranging powers of investigation and control and who, ultimately, prepares a business rescue plan.  That plan is required, by Section 150 of the 2008 Companies Act, to list the assets and liabilities of the company, probable dividend if the company was to be liquidated, a list of shareholders, and business plan proposals which set out the steps to be taken to restore the company to the position where it can continue trading or (if that cannot be achieved) to wind up the affairs of the company in such a manner that creditors will receive a more favourable dividend than would have become payable, on liquidation.

In the course of the business rescue investigation, however, the BRP is vested with various powers which are, to say the least, perplexing.  One of these is found in Section 136(2)(a) which empowers the BRP to either partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company under business rescue (hereinafter referred to as “the BR company”) that arises under an agreement to which the BR company was a party, prior to the commencement of the business rescue proceedings, and which would otherwise become due during those proceedings.

The question is – how does that draconian power fit in with the well-known contractual principle of reciprocity?  Reciprocity means that, if two parties conclude a contract in which both of them have rights and obligations, Party A cannot enforce any of its rights without, at the same time, tendering to comply with its obligations.

So where does Section 136(2)(a) leave a creditor who concluded a contract with a BR company, prior to commencement of business rescue, under which both parties have outstanding rights and obligations?  Is the BRP able to suspend, for the duration of the business rescue proceedings, the obligations of the BR company but, at the same time, require the creditor to carry out the creditor’s obligations, without receiving any counter-performance from the BR company?

Take, for example, a distributorship agreement under which the manufacturer of products has, prior to BRP, appointed the BR company as a sole distributor in South Africa, on condition that the BR company markets and advertises the product in question, thereby ensuring that it acquires a reputation and market share.  May the BRP simply suspend those marketing and advertising obligations, but still insist that the BR company carry on acting as exclusive distributor?  Can the BRP of a franchise company under business rescue decide to suspend the obligation to pay royalties to the franchisor, but insist that the franchisee nevertheless be entitled to carry on the franchise operation?  Many other examples will illustrate why, in a commercial setting, it would be grossly unfair to expect a party to continue performing under a contract, although the obligations of the other party are suspended.

The courts have to thus far not had occasion to pronounce upon the meaning and effect of Section 136(2)(a), or how it will impact on contracts which create reciprocal obligations.  All that one can safely say is that, in the meantime, creditors with ongoing contractual obligations with companies in business rescue are left in a state of uncertainty and vulnerability, and exposed to a mechanism which is certainly open to abuse and exploitation by companies who have been placed in business rescue.

Clarification from the courts, or an amendment to Section 136 of the 2008 Companies Act, is urgently required.

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.

SHOULD YOU ASK FOR A RISK SURVEY FROM YOUR INSURER?

In a recent unreported decision in the High Court of South Africa, North Gauteng High Court, the Court was again faced with the principles regarding disclosure of material information by an insured to its insurer.

What is interesting about this case is that the insurer was estopped from raising the defence of non-disclosure by placing a burden on the insurer to undertake a certain risk assessment of the property. The facts of the matter are fairly simple. The insured instituted action against its insurer for a loss suffered as a result of a fire on its premises which destroyed the building. The insured further claimed for a loss of rentals. A lot of evidence was led about the underwriting of the policy. What is important is the fact that the insured, through its broker, requested that the property be insured. On 15 March 2010 the property was insured and the broker requested the insurer’s representative to urgently arrange for a survey of the premises. The insurer’s representative then requested the insurer to conduct an urgent survey to determine the risk pertaining to the premises. By 24 May 2010 the survey had still not been conducted. The insurer repudiated the insured’s claim on the basis that it was under the impression that it was insuring certain offices/warehouses, but that the actual tenant of the property conducted the business of fibreglass manufacturing. The insurer was of the view that fibreglass manufacturing is a different risk to that of an office or warehouse, or property developers and suppliers of bedding goods they thought they were insuring.

Our case law has developed to a point where the Short Term Insurance Act has cleared up what test should be applied to establish the materiality of a non-disclosure. It boils down to the simple question as to whether a reasonable person would have considered the facts that should be disclosed reasonably relevant to the risk and assessment thereof, to the insurer. In layman’s terms, if you sit down and apply for insurance, you must consider all facts that a prudent person would disclose to his insurer that may affect the risk. For example, if you have a property and a compost heap that has the risk of catching fire, it must be disclosed to this insurer that you have such a compost heap. Should you fail to do so this may have an adverse effect at claim stage if the compost heap catches fire and damages your property.

What is interesting, however, is that the Court in this instance upheld the insured’s Plea of Estoppel. The insured contended that it was stated to them that an urgent survey would be done.  The insurer did not revert to the insured to inform them that a survey would no longer be conducted, as a consequence of which the insured was entitled to accept that a survey had been done.

What we as consumers can take out of this case is that if you are in doubt as to what should be disclosed, you should request the insurer to conduct a survey of your risk. By doing this you place the burden on the insurer to make sure that they are satisfied with the risk that they are accepting.  This will in all probability raise potential problems for the insurance industry. Understandably, an insurer cannot employ people to assess every risk that it places on its books. If every insured requires such an assessment this can create an administrative and costly nightmare for the insurance industry.

The question should also be raised whether the insured should not from the outset have disclosed that its tenant was in the business of fibreglass manufacturing. Surely it would have been prudent to make such a disclosure at the outset. What the broker has done, however, is to place a burden on the insurer to satisfy itself about the risk, and the insurer failed to do this. That failure, in the Court’s view, entitled the insured to indemnification.

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.

MUTUAL WILLS

The most general mutual will is that of a married couple. This does not mean, however, that the estates are joined and that the Testator and Testatrix have to make a joint decision about the distribution of their estates. Each party may make independent decisions about the distribution of his/her estate within one will.  As a result a mutual will is very popular among married couples, but the person who draws up the will, should take into consideration each party’s assets, liabilities and needs regarding inheritance to determine whether he/she should draw up separate wills or a mutual will, i.e. 2 separate wills within one document or one will which determines that merging of the respective or mutual wills should take place.

In the case of a mutual will there should be a description regarding the execution of the will should the spouses die simultaneously or within a short period, e.g. 30 days of each other. For argument’s sake, the Testator and Testatrix could be in a car accident. The testator dies and the Testatrix is in a critical condition, rendering her unable to draw up a new will; provision should be made in the will  for such scenarios.

Legislation acknowledges the principle of freedom of bequeathment; each person therefore has the right to bequeath his/her assets according to his/her preference. Despite a Testator and Testatrix having a mutual will, one of the parties could decide, for whatever reason, to have another individual will drawn up which is dated later than the mutual will. The surviving spouse will not be able to insist that the mutual will be accepted as the last will and testament.

One party also does not need the other party’s permission to amend a mutual will. Each party has the right to draw up a new will at any time, without any obligation to inform the other party thereof. Should the mutual will turn out to be the last will of the deceased, it will become the valid will regarding the deceased, regardless of whether the surviving spouse had already drawn up another will.

Merging of estates takes place when the estates of two people are joined into one upon the death of  the first spouse, mainly with the aim of managing an asset in which both parties had an interest. Normally a limited right, such as a usufruct, should be created in terms of any of the assets in the estate to the benefit of the surviving spouse. Even with merging of estates the surviving party has the right to accept or reject the mutual will and the resulting merging of estate assets after the death of the first party. It boils down to the fact that, even where merging of estates is determined in the will, the mutual will does not have much value if the surviving party rejects the stipulations of the will after the death of the deceased party.

The way in which the creation of the merge is worded in a will is of extreme importance, as the wrong choice of words could have a major impact on the payment of policies outside the estate which should fall to the surviving party’s lot. The acceptance or rejection of a will in which a merge was created should also be considered carefully, as there are several implications, e.g. Transfer duty, Donations tax and Capital Gains Tax.

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.

DOG BITES AND THE FINANCIAL RISK IT POSES TO OWNERS

Having received a number of matters that ended up in costly litigation we have decided to point out certain risks to dog owners regarding how liability arises and how to manage such risks and protect oneself against potential liabilities.

When a person is bitten and injured by a dog the injured person can institute action against the owner of the dog to recover his/her damages suffered. Guilt on the part of the owner is not a requirement for liability to attach. If the requirements discussed below are met, the injured person need not prove any guilt on the part of the owner of the dog. Thus, irrespective of whether the owner of the dog was negligent or not, the owner can still be held liable for harm caused by his animal.

What must be proven for a successful claim?

In order to succeed with a claim for damages, the injured person must show that:

  1. The person being sued must have been the owner of the relevant animal at the time of the incident. The mere fact that a person is in control of an animal is not sufficient;
  2. The animal is a domesticated animal, which by implication excludes wild animals;
  3. Injury was caused by the actions of the animal acting contrary to the nature of its kind. The animal must have acted differently to what could be expected of a proper and well-mannered animal of its kind. A dog that bites is deeded by our courts to act contrary to the nature of its kind. Where the animal does not act spontaneously but acts due to incitement or other external factors such as a dog that is being teased etc., the animal does not act contrary to its nature when it reacts aggressively;
  4. He/she had a right to be present at the place where the damage was caused. Where a person enters the property of another without invitation, the person will not be able to succeed with this action because the injured person was unlawfully present on the property.

Defences available to the owner of the dog

Although guilt on the side of the owner is not a pre-requisite, a number of defences are available to the owner of the animal in the case of a claim for damages. Defences available to the owner include the following:

  1. Guilty conduct on the part of the injured person. For example, where the injured person provoked the animal by hitting, throwing objects at or teasing the animal;
  2. Causing of damage by a guilty third party. For example, where another person provokes the dog or hurts or teases the animal with the result that the injured person is attacked;
  3. Provocation by another animal. For example, where another dog attacks the owner’s dog and the owner’s dog in the attack bites the injured person;
  4. Consent to prejudice. Where the injured person expressly or tacitly through his/her conduct consents to prejudice. For example, where a person is bitten by a dog but was pre-warned against the dog and then indicates that he/she is not afraid of dogs – “the dog won’t bite me” – a court should find that the injured person tacitly consented to the prejudice and would the person not be able to claim damages from the owner.

What damages can be claimed?

Where a dog bites a person, the person usually suffers damage, therefore he/she can claim for a wide range of damages, including for pain and suffering, loss of life enjoyment, disfiguration or disability, medical expenses incurred and to be incurred in future, loss of income, etc. All of these damages are in principle recoverable from the owner of the dog. Even a person who witnesses the attack on another person, may as a result of the emotional trauma suffered (and upon proving it) claim for damages.

It is important for owners of dogs to take note of their potential liability for the actions of their animals. This liability may be extensive and owners are encouraged to be serious about the proper control of their animals and to keep the animals within the confines of their property. 

Short Term Insurance

Most short term householder policies will make provision for liability such as this at a minimal cost to the policyholder. Take the time to discuss this with your broker or insurer. Make sure that adequate insurance is in place. A claim such as this can amount to significant proportions. Your insurer can, however, help you cater for such a risk.

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.

WHY IS THE TRANSFER OF MY PROPERTY TAKING SO LONG?

After signing a deed of sale, the purchasers often want to move into the property with great excitement and as soon as possible.

When they are informed of the process involved prior to the property being transferred this may place a damper on their excitement.  Coupled with this there may even be delays in the transaction.

In order to avoid unnecessary frustration it is vital that parties to the transaction understand the processes involved and that delays are sometimes inevitable. Besides possible delays there are a number of processes that need to be followed before a house can be registered in a purchaser’s name.

At the outset, it must be determined if the deed of sale is valid and binding between the parties.  If not, a valid and binding contract will first have to be concluded between the parties.

The deed of sale will normally be the starting point in a transaction for a conveyancer who has been instructed to attend to the transfer. This conveyancer is also known as the transferring attorney and is normally the main link between the other attorneys involved the transfer transaction.  Other attorneys involved are normally a bond attorney and/or bond cancellation attorney.

A major role of the transferring attorney is informing any mortgagees, for example banks, about the transfer so that any notice periods for the cancellation of bonds can start running.  The notice period is normally up to 90 days.  If the bond is cancelled before then, there could be penalties payable. The transfer may therefore be delayed as a result of the notice period.

If the purchaser will be registering a new mortgage bond to finance the transaction, a bond attorney will be appointed. Since the transferring attorney will not normally be aware of whom the instructed bond attorney is, the bank will usually inform the bond attorney of who is attending to the transfer.  The bond attorney will then first make contact with the transferring attorney.

Obtaining the various certificates, receipts and consents applicable to the transaction in question also takes time.  Examples of these are rates clearance certificate, transfer duty receipt, homeowners association’s consent to the transfer, levy clearance certificate, electrical compliance certificate and plumbing certificate.

The transfer duty receipt is obtained from the Receiver of Revenue and should be lodged with all property transactions, even if no transfer duty is payable to the Receiver of Revenue.  During 2013 it took approximately seven working days from the submission of the request, until the transfer duty receipt was issued.

The rates clearance certificate is obtained from the local municipality in the area where the property in question is located.  The transferring attorney will first request the municipality to inform him of the amount they require in order to issue the certificate.  After receipt thereof the amount can be paid and the transferring attorney will then await the issued certificate.  The time this takes differs from municipality to municipality.  In the City of Cape Town, during 2013, figures were mostly issued on the same day they were requested and the receipt was issued within approximately five working days after payment.  This time frame is largely affected by whether or not the municipality works on an electronic system.

If the property is located in an area where a homeowners’ association is established, there will normally be a title deed condition in terms of which the consent of the homeowners’ association must be obtained prior to the transfer.  The time it takes for obtaining this certificate differs from one homeowners’ association to the other.

After an inspection by a plumber or electrician it may be found that certain work needs to be carried out before the certificates will be issued.  If the work that must be carried out is extensive this can cause major delays with the transaction.

If the property is being sold by an executor of a deceased estate, the consent of the Master of the High Court must first be obtained before the property can be transferred.  Major delays can be experienced if the Master of the High Court refuses to give such consent until certain requirements have been met.

Once the transferring attorney is satisfied that all relevant documents are in place he will arrange simultaneous lodgement at the Deeds Office by all attorneys involved in the transaction.  It is therefore vital that the bond attorney has by this time obtained the required approval to lodge from the mortgagee and that the bond cancellation attorney has the required consents in place to cancel the existing bond/s on the property.

Once all the documents are lodged at the Deeds Office, an internal process is followed, which has different time frames in the various Deeds Offices.  This time frame can also vary in a particular Deeds Office. It is best to enquire from your conveyancer what the Deeds Office time frame is at any given stage.

The list of possible delays in a transaction varies from one transaction to the other and the possibilities are endless.  It is advisable to contact your conveyancer for an explanation should you feel that the process is taking too long.

References: Aktebesorging, UNISA 2004, Department Private Law, Ramwell, Brink & West

Compiled by Riëtte Nel

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.