June 30, 2020
Unemployed, Can’t Pay Bond and Credit Instalments?
“Credit Life Insurance” May Save You
If you are one of the many employees retrenched or put on short pay or unpaid leave as a result of the COVID-19 crisis and lockdown, you will be wondering how to cover the monthly instalments on your mortgage bond and other credit agreements. You have no doubt heard of the “payment holidays” banks are offering, but remember that although these are a lot better than losing your house, car etc, they are no free lunch. Interest and fees will still be building up.
Credit life insurance is not just death cover
That’s why you need to check right now whether or not any of your credit agreements are covered by “credit life insurance”. Many people don’t even realise they have this cover in place, and those that do may look at the “life” part of the name and think “well that’s no good to me or my family, I’m unemployed not dead”. The good news there is that most policies cover a host of other events leaving you unable to pay instalments – see below for more.
Do you have cover?
You may well have this cover in place without even realising it because it is commonly required when you take out any form of credit – think mortgage bonds, vehicle finance, credit cards, retail credit (store cards etc) and so on.
If you aren’t sure, check your latest bond or credit statement for any sign of an insurance premium deduction (it may be called “balance protection” or the like). Then contact the bank (or whichever credit grantor you are with) and ask them to check. You may not have it for example if at the time you ceded another life policy to the credit grantor.
What are you covered for?
Check what the terms of your particular policy are, but the minimum cover required by National Credit Act Regulations (which only affect credit agreements entered into on or after 9 August 2017) is –
- Death or permanent disability: The outstanding balance of your total obligations under the credit agreement is covered.
- Unemployment or inability to earn an income: You are covered until you find employment or are able to earn an income, with a maximum of 12 months’ instalments.
- On temporary disability: You are covered until you are no longer disabled, with a maximum of 12 months’ instalments.
Exclusions – the Regulations allow a long list of exclusions to be incorporated in your policy so check which apply to you. Most of them are common sense – for example lawful dismissal, retirement or resignation from employment – but if you are told that a particular exclusion applies to you and you don’t agree ask your professional advisor for advice before conceding anything. Employers may be able to assist in this regard when structuring crisis outcomes with staff, but remember to do so only after taking your own legal advice!
Self-employed people and pensioners should check what cover they have under their particular policy, and what terms apply to them.
February 20, 2020
“I always advise people never to give advice” (P. G. Wodehouse)
If you want to send shivers down the spine of any investor, mention “Steinhoff”, or “Sharemax”, or any one of the many other spectacular corporate collapses that have plagued both local and overseas investors in recent times.
Quite apart from the high-profile failures it’s been a hard few years for investors generally, and if your nest egg has taken a painful tumble recently you may well wonder whether you can sue your financial advisor for giving you bad advice.
The short answer, as several recent cases have highlighted, is “It depends…”.
Case 1: A R2.5m claim succeeds
- A widow, still reeling from her husband’s death and unversed in financial products, invested R2m in Sharemax on the advice of her trusted financial advisor, an authorised Financial Services Provider (FSP).
- She made it clear that she needed a safe, low risk investment and “that she could not risk losing even two cents as the money was earmarked for her son’s upbringing”.
- The advisor did not explain any other investment products and emphasized that “it was so good that he did not even want to introduce other financial instruments and/or investments to her.”
- Sharemax of course collapsed, and the investor duly sued the advisor for her R2m plus interest – a total of almost R2.5m by the time this case found its way through the High Court and an appeal to the Supreme Court of Appeal (SCA).
- The advisor was found liable on the basis of having been negligent “and even dishonest” and to have “failed to exercise the degree of skill, care and diligence which one is entitled to expect from a FSP”.
Case 2: An R11m claim fails
- A UK couple temporarily in South African sought a local financial advisor’s advice on how best to invest some “spare cash”.
- They ended up putting GBP 565,000 and R700,000 (about R11m in all) into investment products offered by UK based investment companies. The companies failed and the investments were rendered worthless.
- The investors successfully sued the advisor in the High Court for R11m in damages, but on appeal to the SCA their claim was dismissed.
- The investors, said the Court, had failed on the evidence to “identify what a reasonably skilled financial service provider would know about products in the market place; what due diligence they would have done before making a presentation to a prospective client and what sources of information they would have consulted.” They had failed to prove that any negligence on the advisor’s part in “making a presentation without adequate knowledge of the proposed investments, resulted in advice materially different from that which a reasonably competent advisor would have given.” (Emphasis supplied).
- End result – the investors lose their R11m and face a (doubtless substantial) legal bill.
Case 3: A R5m claim fails
To the High Court now for some insight into the range of factors that a court is likely to take into account in deciding liability –
- This was another Sharemax investment, this time for R5m.
- The difference was that this investor was found to have been an astute and wealthy businessman who managed his own share portfolio and went into the investment understanding the risks and “with his eyes open” after taking independent advice.
- Claim dismissed.
The bottom line, and some advice for investors
Let’s start off with this thought – unless you are fully qualified to make your own investment decisions, seeking help from a financial advisor is a no-brainer. A trained and certified professional advisor brings elements of insight, knowledge and objectivity that you can never match on your own.
Just be sure that your chosen advisor is the right advisor for you and is both competent and trustworthy. As a first step check for FSCA (Financial Sector Conduct Authority) authorisation (and a list of products the advisor is approved to provide) here.
If worst comes to worst and you feel that your advisor has let you down and should refund you, the bottom line (in a nutshell) is that to successfully sue you will have to prove that you suffered loss in consequence of following your advisor’s negligent advice.
The million dollar question (literally perhaps) is of course – how do you establish that necessary element of negligence? Whilst it will never be easy, and whilst each case will be treated on its own merits, the SCA (in the R11m case above) usefully held that an advisor’s legal duties are mirrored in the FAIS (Financial Advisory and Intermediary Services) Act and its Codes of Conduct. So perhaps start off by proving a breach of the General Code of Conduct’s provision that “an authorised financial service provider ‘must at all times render financial services honestly, fairly, with due skill, care diligence and in the interests of clients and the integrity of the financial services industry‘.”
There’s also the FAIS Ombud option
You may not need to go to court to recover your losses, in that the “FAIS Ombud” (Ombudsman for Financial Services Providers) has the power to resolve complaints against FSPs. It can award “fair compensation for the financial prejudice or damage suffered” up to its jurisdictional limit of R800,000. In at least two Sharemax complaints, compensation orders have been issued, but many more have been dismissed.
Ask your lawyer which route is best for you.
And last but not least, some advice for financial advisors
Make sure that all your documentation protects you from liability as much as possible, that you have insurance cover in place in case you are sued (in the R2.5m case mentioned above, the insurers were ordered to indemnify the advisor against the claim), and that you comply strictly with FAIS and its Codes.
August 8, 2018
“…prescription started its deadly trudge on the day the loan at issue in these proceedings was advanced” (extract from judgment below)
You will know that most debts prescribe (become unclaimable) after 3 years, so as a creditor you need to know exactly when it starts running. From that moment on, the clock is ticking…
A recent Constitutional Court case highlights one particular instance where prescription kicks in a lot earlier than you might think – namely, in the case of the “on demand” loan.
What “on demand” really means
Lending money to someone on an “on demand” basis means that the loan need only be repaid to you when you actually “demand” it from the debtor.
It’s a common way of making loans, particularly to family members and between related businesses, and you may think that because no fixed date for repayment is set, prescription never starts to run. Not, at least, unless and until you actually decide to call the loan in – perhaps in a week, or 5 years, or 50 years, whenever you want.
Not so! With an “on demand” loan – unless you agree otherwise – the loan is automatically “due and payable” on the day you advance the loan. The loan has, says our law, been due to you from Day 1 and all that “on demand” means is that you can call for repayment of that loan whenever you like. Prescription therefore starts “its deadly trudge” on the day you make the loan, not on the day you eventually call it in.
That’s a subtle distinction that might not sound that logical at first blush, but bear with us and we’ll have a look at what the Constitutional Court said about this. (Don’t worry if what follows seems complicated – it is! You can if you like just skip to the “practical” bit at the end).
On the “never-never” or not?
- Company A lent Company B an amount of R3.05m on condition that it would be “due and repayable to the Lender within 30 days from the date of delivery of the Lender’s written demand”.
- 6 years later Company A demanded repayment and a year after that it applied for Company B’s liquidation on the basis of its inability to repay the amount then owing of R4.6m. The High Court dismissed the liquidation application, upholding B’s defence that the loan had prescribed.
- The Supreme Court of Appeal agreed and so did the Constitutional Court, holding that –
- A contractual debt becomes due as set out in the contract, and when no due date is specified, it “is generally due immediately on conclusion of the contract”.
- Where however there is a “clear and unequivocal intention” that the creditor is entitled to determine the time for performance and that the debt becomes due only when demand has been made as agreed, prescription will only start running on that date.
- On the facts (and the Court’s interpretation of this particular contract), A’s right to claim payment had arisen immediately on making the loan, A was “able to trigger repayment of the loan from [B] anytime” (at which stage B would have 30 days to pay), and therefore the claim had prescribed.
So company A is down R4.6m, plus no doubt a lot of interest and some serious legal costs (a journey through the High Court, Supreme Court of Appeal and Constitutional Court is for neither the faint-hearted nor the shallow-pocketed!).
The Court pointed out that sometimes, such as in cases of family members making loans to each other, it is clear that the loan is on a “never-never” basis and that the debt “won’t be due, in any sense, legal, technical or practical, until you say, ‘Please won’t you pay back’.” But with most commercial loan agreements, prescription starts to run immediately once the money is paid over unless the parties specifically agree otherwise.
The practical issue – not losing your money
Don’t worry if you find all that complicated – the Court itself was split 6-5 on whether the debt had prescribed or not – but the important thing is the practical issue of you not losing your money to prescription.
Here’s what you do – if you decide not to specify a repayment date but rather to make the loan repayable “on demand”, do specify exactly what you mean by that.
May 4, 2017
We are clearly in for some challenging times, with predictions of price rises, interest rate increases, and restricted earnings. Fin24’s powerful Infographic “How Junk Status Will Affect You” below says it all –
A good start to surviving until things improve is to control your spending. Have a look at The Citizen’s “Top 5 finance apps you should be using” here.
Meanwhile, remember we’ve been here before and we survived it! See this chart of our grading history since 1994 –
Source: Adapted from a Nedbank chart
Also read “Downgrade to junk may not mean disaster – yet” on TimesLive (you may need a subscription) for some interesting thoughts on our first experience of “Junk” since 2000.
“Why ‘junk status’ is not the end of the world for SA” on BusinessTech is another worthwhile read.
May 4, 2017
Some good news for creditors here – the SCA (Supreme Court of Appeal) has just held that a 30 year prescription period applies to special notarial bonds.
That’s important because it’s always prudent when making a loan or extending credit to take as much security from the debtor as you can. And whilst a mortgage bond over immovable property is usually going to be first prize here, movables can also provide strong security.
If possible, hold the debtor’s movables yourself and take a pledge over them. Where however your debtor cannot give you actual possession (which is likely to be the case with substantial business assets such as machinery in a factory), consider registering a “special notarial bond” over them.
That will give you the same strong security (in law, not necessarily in practical terms) as you would have with a pledge, even though you don’t have actual possession. Just make sure that each asset is listed in such a way that it is, as required by law for validity, “…specified and described in the bond in a manner which renders it readily recognisable…”, so give full descriptions with any available serial numbers and the like.
What about prescription?
You will know that most debts prescribe after 3 years, but some only after 6 (cheques for example), some after 15 (most State debts), and some after 30 – judgment debts, tax debts, some State debts and “any debt secured by a mortgage bond”.
A creditor’s R500k victory
- A bank’s loan to a close corporation was secured by a special notarial bond over specified movables. The sole member also signed a personal suretyship.
- Having failed to pay per the loan agreement, both the close corporation and the member were sued by the bank for just under R500k. They defended the action on the basis that the claim had prescribed after either 3 or 6 years.
- Agreeing with the High Court that the term “mortgage bond” was wide enough to encompass a special notarial bond, which in consequence won’t prescribe for 30 years, the SCA handed victory to the bank.
If your debtor has significant movable assets, ask your lawyer about registering a special notarial bond over them. Not only will it give you security for your claim, but it will also protect you from a “3 year prescription” defence.
March 7, 2017
“Pyrrhic victory”, n.
A victory gained at such great cost that it is actually a defeat
Joe Debtor owes you a fortune but does everything he can to frustrate your debt collection attempts. He strings you along with spurious queries and false promises, and when you issue summons he defends your action with every delaying tactic he can come up with.
Joe, you suspect, has one reason and one reason only for this delay – he needs time to get rid of all his assets so that when you finally get your judgment against him he has nothing left worth attaching, and you are left with a classic Pyrrhic victory and a large legal bill to pay.
The good news is that our law comes to your rescue in such cases with an “anti-dissipation interdict” (you might hear lawyers referring to it as a “Mareva Injunction” after a famous English case) which effectively freezes the debtor’s assets and preserves them until your litigation is finished.
The delaying debtor who sold all her properties
A recent High Court judgment paints a typical picture and nicely encapsulates our law on the matter –
- The creditor in this case had lent money to a close corporation (CC), which was then liquidated
- A surety had disclosed three immovable properties as being her only assets
- The creditor sued the surety for almost R600,000 and in defending the claim she entered a “terse” plea (her answer to the claim) acknowledging the suretyship but baldly denying everything else and putting the creditor to the proof thereof. She was then unwilling to attend a pre-trial conference, saying that the date set for it wasn’t suitable but then not responding when offered alternative dates
- When the creditor found out that the debtor had sold her three properties, it asked her for an unconditional undertaking to hold back transfer until the litigation was finalised
- Again, silence from the debtor, and when it became clear that transfer of the properties was imminent, the creditor asked the Court for an urgent anti-dissipation interdict
- The debtor failed to file any intention to oppose, nor did she lodge any answering affidavit. Her legal team did however appear for her at the hearing, to argue that the interdict should not be granted.
What you must prove; and the outcome
Stopping someone from dealing freely with their own assets is of course a pretty drastic remedy but our courts will do so when necessary to prevent a dishonest debtor from perverting the course of justice and causing an injustice to a creditor. What you must show, said the Court, is that –
- The debtor is wasting or getting rid of assets, or is likely to do so; and
- The debtor has “a particular state of mind”, i.e. the debtor is getting rid of assets, or is likely to do so, “with the intention of defeating the claims of creditors”.In all the circumstances of this case the Court found that the debtor was delaying the inevitable in order to transfer all her properties to the creditor’s prejudice, and accordingly it ordered the transferring attorneys to hold in their trust account, pending finalisation of the litigation against the surety, both the R600k and an additional amount of R100k.
January 10, 2017
“She just did not want to be liable if he defaulted, a common regret felt by those who stand surety for defaulting debtors” (extract from judgment below)
In the beginning …
But in the end …
The mother, the son and the suretyship
- A mother signed an unlimited suretyship as “co-principal debtor” for her son’s bank debts totaling almost R4.8m from a home loan, an overdraft, and a credit card account.
- After her son’s estate was sequestrated the bank sued her for the shortfalls.
- The mother tried everything she could to evade liability. Her main defence was an attack on the validity of the suretyship, and she supported this with a string of claims, often self-contradictory. The bank official had misled her into thinking that she was signing not a suretyship but simply a consent form for an account migration. She hadn’t read the document. She had read the heading. Blank spaces in the document were filled in later. It conflicted with an oral agreement. It was limited not unlimited. Her signatures on other documents had been forged.
Let the signer beware – “I signed by mistake” won’t cut it
January 10, 2017
“My best entrepreneurial advice is to start” (Dave
Morin, entrepreneur, angel investor, CEO and co-founder of social network Path)
What is a private company?
7 advantages of private companies…..
A company has “perpetual succession” – it survives the death/incapacity/insolvency/exit of the directors and shareholders. That carries a host of practical benefits, including making it a possible estate planning tool.
Transferring ownership and management is easy – shareholders and directors change but the company lives on.
Directors and managers have limited liability. Note however that directors and senior managers can be held personally liable in cases of reckless or fraudulent trading, non-compliance with statutory duties and the like – the “new” Companies Act in particular has imposed a whole new set of duties and risks in this regard. Bear in mind also that that your limited liability falls away to the extent that you sign personal surety for company debts.
Shareholders are in general not liable for the company’s debts, although they do risk liability for some tax debts e.g. if they control or are regularly involved in the management of the company’s financial affairs.
It is generally easier to raise funding for a company than it is for a sole tradership or partnership.
Similarly, a company is adaptable to both small and large businesses, so if you are starting off small but planning to grow substantially, consider using a company from day one.
- Tax: Sometimes an advantage ….. see below.
… and 3 disadvantages
Formation: Unlike sole traderships and partnerships, companies require formal registration and compliance with various formalities. Factor the attendant delay and cost into your plans. Using a shelf company can reduce the hassle but make sure you buy it from a reputable business.
Costs of administration: Prepare for a higher administrative and regulatory burden than with your other choices. Factor in both the time and financial costs of complying with the host of legal requirements, statutory returns and general red tape associated with companies. Find out up front for example whether you are going to have to pay for a full audit or independent review every year.
- Tax: Sometimes a disadvantage ….. see below.
The tax angle
The bottom line is this – take full professional advice on both the legal and the tax implications of using each type of entity before choosing.
October 5, 2016
SARS has launched a new TCS (Tax Compliance Status) system. See “How to Access Your ‘My Compliance Profile’ (MCP) via SARS eFiling” on the SARS website for a comprehensive guide on how to use it –
- To view your current tax compliance status (colour coded red for non-compliant,green for compliant),
- To remedy any non-compliance, and
- To challenge your compliance status if you disagree with it.
September 7, 2016
SARS has appointed 3 debt collection agencies (currently named as CSS Credit Solutions, NDS Credit Management and Lekgotla Trifecta Capital Consortium) to chase up outstanding taxes. But with reports of scamsters contacting taxpayers, pretending to be SARS officials or official debt collectors, and demanding immediate payment, SARS advises that –
- Direct queries to the SARS Contact Centre at 0800 00 7277 (0800 00 SARS)
- Any suspicious activity should be reported to the SARS Anti-Corruption and Fraud Hotline at 0800 00 2870
- Outstanding tax, VAT or duties must only be deposited directly into SARS bank accounts
- No money should be paid over to debt collectors or self-proclaimed SARS officials. In fact, collectors who want money to be handed over to them must be immediately reported.