Tag Archives: Creditor

Credit law

WHAT IS MEANT BY REAL SECURITY?

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A3BReal security means that, on the basis of a creditor’s right against the debtor (principal debt), a creditor acquires a limited real right in the property of the debtor as security for the payment of the creditor’s right (principal debt) by the debtor. Real security differs from personal security in that a creditor does not acquire a limited real right in the property of the debtor in the case of personal security, but only acquires a creditor’s right against a third party as security for the payment of the principal debt by the debtor. Such a third party is normally surety of the debtor.

A requirement for real security is the existence of a valid and enforceable principal debt. The real security is accessory to the principal debt, in other words the real security is terminated automatically if the principal debt is paid in full.

If the object of security is moveable property, real security can be in the form of either pledge or notarial bond. In the case of pledge the object of pledge (corporeal or incorporeal moveable property) must be delivered by the pledgor (debtor) to the pledgee (creditor). Physical control of the pledge object is a requirement for the establishment and continuation of a limited real security right to the security object. The pledgee has the obligation to maintain the pledged property within reason and, on termination, to return the property to the pledgor. A notarial bond can be registered in respect of specified, corporeal moveable property of the debtor (mortgagor) in favour of the creditor (mortgagee) in the deeds registry. After registration of this bond, the mortgagee acquires a limited real right to the encumbered property without delivery thereof to the mortgagee.

Immoveable property of the debtor serves as the object of security in that a mortgage is granted by the debtor (mortgagor) to the creditor (mortgagee) and registered in the deeds registry. A mortgage is a liquid document which grants the mortgagee a limited real right in respect of the immoveable property of the mortgagee without the physical control of the property being passed to the mortgagee. More than one mortgage can be registered over the same immoveable property at the same time. Priority is given, in this case, to mortgagees in the order that the mortgages were registered (prior in tempore, prior in iure).

The pledge of the mortgagee (creditor) can, if the principal debt is not paid in full by the mortgagor or pledgor (debtor), have the security object sold in execution and is entitled to the proceeds of the sale in execution for payment of the principal debt. In the case of insolvency of the pledgor or mortgagor, the pledge or mortgagee acquires a preferent claim to the proceeds of the sale of the security object.

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)

Liquidation

COMPANY LIQUIDATION STRATEGIES

A creditor who’s claim against a company has not been paid on due date is, as a matter of law, entitled to apply for the liquidation of the company.  If the court is satisfied that the company is unable to pay the debt, a liquidation order will normally be granted, with the often distressing consequence that jobs are lost, assets are sold at far below their value and a business which, if given a respite, would have regained its financial health, ceases to exist.

The new Companies Act, No 71 of 2008, has introduced the concept of business rescue, which is intended to assist financially distressed companies in restructuring their business in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.  Business rescue certainly has its place in the South African economic environment, and its growth and wider application should be encouraged.  There are, however, a number of drawbacks.  The business rescue practitioner has to be paid, and his fee is frequently substantial.  Furthermore, the business rescue plan has to be approved by 75% of the creditors voting interests, and by 50% of the independent creditors (i.e. creditors who are not directors, shareholders or members of the same company group).  If the business rescue plan is not approved, liquidation of the company will be the almost inevitable result.

Item 9 of Schedule 5 to the 2008 Companies Act provides that the liquidation of companies continues to be governed by the applicable provisions of the previous Companies Act, No 61 of 1973 (“the 1973 Companies Act”).  Which brings me to Section 347(1) of the 1973 Companies Act, dealing with the powers of the court hearing a liquidation application.  It provides as follows:  “The court may grant or dismiss any application under s 346, or adjourn the hearing thereof, conditionally or unconditionally, or make any interim order or other order it may deem just …”.

The power which the court has to adjourn the application, or make “any other order it may deem just” is a power infrequently exercised and one which has received insufficient attention by the courts.  That power should, for example, be exercised in conjunction with the power granted a court in terms of Section 354(1) of the 1973 Companies Act, which states that the court may at any time after commencement of a winding up, on the application of a liquidator, creditor or member “and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed or set aside, make an order staying or setting aside the proceedings …”.

In Klass v Contract Interiors 2010 (5) SA 40 (W), the court held that the power vested in the court by Section 354 is an unfettered discretionary power.  The court may, in deciding whether a winding up is to stayed, have regard to the wishes of the majority of creditors, and to considerations of commercial morality.  This approach echoes the reasoning adopted in Calgary & Edmonton Land Co Ltd (1975) 1 All ER 1046 (CH).  It is also consistent with a line of cases which state that, in liquidation and sequestration applications, a court may postpone the granting of a liquidation or sequestration order to enable a debtor to pay the claim of the applicant creditor, where it appears that the debtor has realistic prospects of doing so (Rosenbach & Co (Pty) Ltd v Singh’s Bazaars (Pty) Ltd 1962 (4) SA 593 (D);  Payslip Investment Holdings CC v Y2K Tech Ltd 2001 (4) SA 781 (C) at 787-789).

A company faced with a liquidation application may therefore, if it is able to show that it will be able to pay the debt within a realistic time, succeed in averting the liquidation application.  A couple of self-evident and practical points need to be made, in this regard.  Firstly, a company running into cash flow problems must keep its creditors fully informed.  If it becomes clear that debts are not going to be paid on due date, the company should timeously ask the creditors for extensions of time, make realistic proposals as to the payment of any arrear amounts and, most importantly, ensure that it treats all its creditors equally, as regards payments of debts.  A creditor that finds out that its claim has been unpaid, while those of other creditors met, is likely to speedily resort to liquidation or other litigation proceedings.

By managing its creditors in this manner, a company will, if in due course one of the creditors loses patience and brings liquidation proceedings, be able to successfully resist liquidation by invoking Section 354 and the proviso to Section 347(1).

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.