September 7, 2021
“Creditors have better memories than debtors” (Benjamin Franklin)In these hard times of pandemic and economically destructive unrest, an unfortunate number of businesses face collapse, and many will opt for the “first aid for companies” option of business rescue. Creditors coming out of that process with a shortfall (only the luckiest creditors are likely to emerge with full settlement) will naturally look to any personal suretyships they hold to cover that shortfall. A recent SCA (Supreme Court of Appeal) decision has brought welcome clarity to the question of whether – and in what circumstances – such personal suretyships will survive the business rescue process. Both directors and creditors need to understand the outcome, and to act accordingly.
Sued for R6m, a CEO’s defence crumbles
- A company CEO (Chief Executive Officer) signed a personal suretyship in favour of a creditor supplying the company with petroleum products.
- When the company fell upon hard times it was placed into business rescue. Eventually a business rescue plan was adopted, the rescue process was terminated, and the creditor sued the CEO for the shortfall on its claim of just over R6m.
- The CEO’s main defence was that his liability as surety was an “accessory obligation” – in other words, if the creditor’s claim against the principal debtor (the company) fell away, he should be released from his liability as surety.
- But, held the Court, although a principal debtor’s discharge from liability does indeed ordinarily release the surety, our law allows the creditor and the surety to agree otherwise.
- And the suretyship agreement in this case did just that. It contained “unobjectionable” and “standard” terms which included a specific agreement by the surety that he would remain liable even if the creditor “compounded with” the company by accepting a reduced amount in settlement of its claim. Nor was there any mention in the business rescue plan of its effect on creditor claims against sureties (it could, for example, have provided specifically for sureties to remain on the hook, or to be released). But the deciding factor remained that the wording of the suretyship was such that the creditor did not abandon its claim against the surety by supporting the business rescue plan.
- Bottom line – the CEO goes down over R6m, and the creditor has another shot at emerging unscathed from the mess.
June 30, 2020
“You can be a good neighbour only if you have good neighbours” (Howard E. Koch)
It looks as if we will still be under “restricted movement” orders for a while – even when we finally get down to Alert Level 2 and who knows when that will be.
Tensions between neighbours are no doubt at an all-time high, and whether you are working from home or just trying to stay sane until our “new normal” starts kicking in, you are no doubt noticing more than ever all those little irritants from next door that would normally fly below your radar or at least be tolerable.
And of course remember it’s a vice-versa situation – your neighbour is in exactly the same position. That’s a recipe for dispute, and going to war with a neighbour is a classic lose-lose option, in court or out of it. Any short-term victory you may think you can achieve will pale against the ongoing trench warfare that will inevitably result.
First prize: A negotiated win-win
Negotiation will always be your best path to a win-win outcome, and whether you open up dialogue with a friendly chat over WhatsApp or a socially-distanced masks-on discussion over your boundary wall, here is one bit of advice that will substantially increase your chances of a happy outcome for everyone: Understand your legal rights before you start negotiating!
Should your negotiations come to naught, consider as your next step mediation, arbitration or official intervention (more on possible municipal or police intervention options below). Remember that if you live in a “community scheme” such as a sectional title development or a Homeowners’ Association community, the CSOS (Community Schemes Ombud Service) provides a dispute resolution service to assist with a wide range of community disputes.
Then – and this should normally be your last option only to be resorted to when all other avenues have failed – you have the legal route, normally in the form of an interdict application and/or damages claim.
How can our law help you? It’s a balancing act…
The principles laid down by our courts in dealing with neighbour disputes over many years are firmly rooted in common sense. You are entitled to the use and enjoyment of your property – so long as you act lawfully – without unreasonable interference. “An interference” our courts have held, “will be unreasonable when it ceases to be a ‘to-be-expected-in-the-circumstances’ interference and is of a type which does not have to be tolerated under the principle of ‘give and take, live and let live’.”
As the Supreme Court of Appeal (SCA) put it in 2016: “Nuisance involves the unreasonable use of property by one neighbour to the detriment of another.” It’s a balancing act between competing rights – yours and those of the other property owners around you.
Peacocks, a cherry tree, and the court’s wide discretion
It is also difficult to set out too much in the way of hard and fast rules here, for as our courts have put it “modern conditions require the exercise of a wide discretion in the adjustment of neighbour relationships”.
Thus the High Court, in a 2013 case involving nuisance peacocks, a “much loved” cherry tree on the boundary of two properties and in danger of being chopped down, and a partially-demolished boundary wall, both quoted and applied that principle with an order encapsulating a resolution of the neighbourly disputes in a detailed and pragmatic manner. The peacocks for example had made a major nuisance of themselves by being noisy, messy and destructive trespassers (they had damaged expensive vehicles by pecking at them when they saw themselves reflected in the rear-view mirrors and highly polished metal surfaces). The court order included both authority for them to be removed by either the municipality or by the SPCA (there being no municipal permit to keep them as required by the municipality’s bye-laws), and an admonition to find them “good and lawful homes”. The cherry tree on the other hand is now protected by an interdict against its removal, with detailed instructions in the court order as to the reconstruction of the boundary wall next to it.
Bear in mind therefore that what is said below is of necessity a simplified and brief summary only – every case will be different, our courts will take into account a whole range of factors in deciding a dispute, and in many instances technical questions of “wrongfulness”, “fault”, “moving to the nuisance” and so on may apply. If your dispute gravitates towards legal action, specific advice is essential!
What is a “nuisance”?
The range of potential disputes falling into the “neighbour law” and “nuisance” categories is wide. Some examples (from the SCA again – emphasis supplied) – “repulsive odours, smoke and gases drifting over the plaintiff’s property from the defendant’s land, water seeping onto the plaintiffs property, leaves from the defendant’s trees falling onto the plaintiff’s premises, slate being washed down-river onto a plaintiff’s land, causing a disturbing noise, causing a common wall to become unstable by piling soil up against it, overhanging branches and foliage, an electrified fence on top of a communal garden wall, blue wildebeest transmitting disease to cattle on neighbouring ground, and occupants of structures on neighbouring land allegedly causing a nuisance.”
Two common areas of dispute – noise and trees
Let’s have a closer look at how those general principles have been applied to two of the more common areas of dispute –
- Noise: If barking dogs, power tools, loud music or the like are making your life a misery – keeping you awake at night perhaps, or (a common concern in this time of remote working) unable to concentrate on that business project or to participate in your daily Zoom “office” meeting – sooner or later you will need to take action.Particularly relevant here are the various national statutes and local bye-laws dealing with noise pollution. Contact your local municipality or the police for help if you need to. If you live in a complex, Body Corporate or Home Owners Association rules and regulations will probably come into play as well. SAPS should respond to serious violations of our anti-noise laws, and just a warning visit from a blue uniform might solve your problem once and for all.If you end up in a legal fight, our courts will take into account factors such as “the type of noise, the degree of its persistence, the locality involved and the times when the noise is heard”. As we said above, every case will be different.
- Trees: If your neighbour’s trees are damaging your property (common complaints relate to boundary walls, underground pipes, building foundations, driveways and the like), or are causing a nuisance in the form of falling leaves or branches, or are blocking your views/depriving you of light, you are once again left with no hard and fast rules. A court will look at what is “objectively reasonable” in all the circumstances. As a general rule, don’t count on much sympathy from a court if damage is minor and easily repaired, if the nuisance caused is controllable by you with regular maintenance (clearing leaves from gutters and so on) or if your only complaint is loss of your views. That last aspect is a whole separate debate with many twists and turns, but all based on the concept that you will have no automatic right to a view.Where you are dealing with an “overhanging branches” issue, old common law principles will usually apply unless factors such as local bye-laws, heritage protection of older trees etc come into play. You will generally have a right to cut overhanging branches back to your property line if the neighbour refuses to do so and to keep or dispose of the branches if your neighbour declines to take them.
May 21, 2020
The COVID-19 crisis has changed everything. Our personal lives have been upended and our businesses hit hard.
And with many businesses operating out of leased premises, a great many landlords and tenants are asking themselves what happens if the crisis leaves a tenant unable to pay the agreed rental.
What follows is of necessity a general guide only – professional advice specific to your case is essential here.
Tenants – your risk
As always “With Great Change comes Great Opportunity”, but if you aren’t able to very quickly find and exploit a viable new opportunity you may well struggle to pay your rental.
Don’t just stop paying rental! Failing to pay rental on time means breaching your lease, and if you do that you face cancellation, legal action for recovery of outstanding rental, damages claims for breach (substantial if your lease has a long time to run and your landlord struggles to re-let) and calling up of your personal suretyships (exposing you to loss of all your personal assets, house etc).
Bottom line – take professional advice before you just stop paying!
Landlords – your balancing act
As a landlord you have a very delicate balancing act – on the one hand you won’t want to lose even half-reasonable tenants at a time when finding new ones is going to be problematic. One wonders for example how many small businesses will now either fail entirely or be forced to cut costs. And how many others, having had an enforced period of “working from home”, will now be reconsidering the whole concept of leasing separate office space at all.
On the other hand of course you need to cover your ongoing costs, which probably means enforcing payment of rent. That in turn means understanding your legal position – for example does your tenant now have an excuse to cancel the lease without penalty? If so, you lose a tenant without recompense. But if your tenant is still bound by the lease, you are free (if you wish – long-term support of your tenant may still be your best option) to demand full payment, then to reduce your losses by cancelling, evicting, executing against the tenant’s assets and calling up personal suretyships.
What about “force majeure” or “impossibility of performance”?
“Force majeure” (a French legal term meaning “superior force”) is an event, either due to “natural causes” (earthquakes, cyclones and so on) or to “human agency” (war, riots, legislation and the like) that makes it impossible to comply with the lease.
We really are sailing into uncharted waters here with worldwide debate over whether or not this pandemic is indeed a case of force majeure. There is bound to be a great deal of litigation before we can be certain whether or not the crisis (particularly the declaration of a national state of disaster and the lockdown period) will be accepted by our courts as a “force majeure” event. If it is, many tenants will argue that their failure to pay rental is not a breach of lease but rather a lease-destroying “supervening impossibility of performance”.
So where do you stand? There are two main scenarios to consider –
- What does the lease say? The onus of proving a force majeure is on the tenant trying to escape from the lease, and the first thing for both parties to check is what the lease says.Many leases have a clause that deals with a tenant’s inability to occupy premises as a result of damage to or destruction of the premises which won’t apply here, but some leases do have specific force majeure clauses. If yours has such a clause you are bound by whatever it says so check whether a pandemic or government order to cease business might fall under the clause, and if so what results and remedies are specified.
- What must the tenant prove if there is nothing in the lease? If there is no force majeure clause in your lease, our common law applies. Your problem here is that there are a lot of grey areas involved and every case will be different, so what follows is just a general and non-exhaustive guide.A tenant would have to prove not only that the impossibility caused a loss of beneficial occupation (entitling the tenant perhaps to a rebate of rental for the lockdown period, or perhaps frustrating the lease altogether) but in all probability also that it is –
- “Unforeseeable with reasonable foresight”. In this regard we may well hear arguments along the lines of “the emergence of the coronavirus and its impacts were neither unexpected nor improbable”. Could such an argument prevail? Only time will tell.
- “Unavoidable with reasonable care”.
- An absolute as opposed to a probable impossibility. “The mere likelihood that performance will prove impossible is not sufficient to destroy the contract.”
- An absolute not a relative impossibility. “If I promise to do something which, in general, can be done, but which I cannot do, I am liable on the contract”.
- Not the fault of either party. “A party who has caused the impossibility cannot take advantage of it and so will be liable on the contract.”
- The “contrary common intention of the parties” could override the defence of impossibility. Consider any representations made by either party to the other that may be relevant.
Moreover our courts have held that “In each case it is necessary to ‘look to the nature of the contract, the relation of the parties, the circumstances of the case, and the nature of the impossibility invoked by the defendant, to see whether the general rule ought, in the particular circumstances of the case, to be applied’.”
That’s all fertile ground for expensive and draining litigation, at a time when neither of you is likely to have an appetite for either.
Which brings us to…
A practical template for negotiation
Take this advice from Roman lawyer and statesman Cicero over two millennia ago: “Agree, for the law is costly”.
So if you are a tenant, rather than just stopping rental payments and then having to fight it out through the legal system, ask your landlord to agree to a win-win compromise that will limit both short-term and long-term damage to your respective businesses.
Draw up a checklist including matters such as –
- Do you or your landlord have any sort of insurance cover for this sort of disaster?
- If you want to cancel the lease entirely, consider whether, if the protections of the Consumer Protection Act are available to you (see below*) it might pay you to give your 20 business days’ notice and pay the “reasonable cancellation penalty” the landlord is entitled to demand. (*You need to take advice on this – leases between “juristic persons” such as companies and trusts in particular are excluded from this particular protection).
- Alternatively consider what you can offer the landlord to accept your cancellation without a fight.
- If you want to continue in the premises, make sure that your failure to pay on time is specifically recorded as not being a breach of the lease.
- Decide whether you will ask for a full rental holiday, or a rental reduction. For how long? The better a tenant you have been, the more incentivized your landlord is going to be to help you stay in place. Offering an extension of the lease – if it ties in with your long-term planning – could help a lot with that.
- If you run into a brick wall there, think of proposing that the arrears not be written off but rather just be deferred until your business is back up on its feet. Specify when payment of arrears will be made, what if any interest will be charged and so on.
- If the tenant is a corporate entity and you signed a personal suretyship for it, don’t forget to specifically cover that aspect in your agreement.
- Remember to include in your agreement what happens to any deposit the landlord may be holding from you.
- If you agree on a new or amended lease, think of including a professionally-drawn force majeure clause (or check an existing clause for possible update).
Beyond leases – force majeure and contracts generally
Although this article specifically addresses landlords and tenants, the general principles of “force majeure” and “impossibility of performance” apply to all contracts and might in some cases entitle you to delay or avoid contractual obligations beyond lease agreements. Take professional advice specific to your circumstances!
March 30, 2020
“It is unquestionable that an owner of land is not permitted to perform activities which contravene the restrictive title conditions or the zoning restrictions” (extract from judgment below)
You decide to open a home business, or perhaps you are about to buy a house in order to run a business from it. You apply for rezoning but the council is taking forever to decide (although it has happily started charging you rates and taxes on the business tariff), your immediate neighbours are supportive, you won’t cause any nuisance, you know of many other businesses operating undisturbed “under the radar”, and anyway the suburb’s residential character has been eroding for years. Surely you are safe to just go ahead and open your business?
On the other side of the coin, perhaps you bought your dream house in a leafy suburb, secure in the knowledge that its residential character is protected by strong and effective zoning laws. Then businesses start moving in – what can you do about it?
A recent High Court decision addresses both questions directly…
A suburban office and the interdict application
- A construction company opened an administrative office in a suburban area, manned from 8 am to 4.30 pm on weekdays by a staff of four (with the occasional visitor).
- Three complainants in the suburb, objecting strongly to this move, applied to the High Court for an interdict against the running of any business on the property. They had, they said “acquired their properties with a keen expectation of residing in a residential suburb with amenities that are consistent with a residential suburb and with a residential character” – sentiments which will no doubt resonate with many other home-buyers.
- Critically, one of the restrictive conditions in the offending property’s title deeds read “this erf shall be used for residential purposes only and no trade or business or industry whatsoever shall be conducted thereon”. That, said the Court, rendered the property’s usage illegal. Full stop.
All the defeated defences
The property owner and the business (let’s refer to them together as “the business” for simplicity) raised a series of defences to the interdict application, all of them rejected by the Court on essentially the same ground that “the use or continuation to use the property for any business or trade other than for residential purposes constitutes an illegal act” –
- The suburb’s character had been changing over the years with businesses moving in, including a large shopping mall. Not relevant.
- The business had applied to the local council for re-zoning and removal of the title deed restriction over a year before, no objections had been received and it had in fact been supported by at least one neighbour. Not relevant.
- Although the rezoning application had yet to be granted or declined, council was already collecting rates and taxes payable by business and commercial properties. Not relevant.
- The office caused no nuisance to anyone in the area. Not relevant.
- Other property owners in the area were also in contravention of the law. Not relevant.
Who can object and who can’t?
The business also argued that only property owners living “in close proximity” to the office had any right to object. That, it said, excluded not only the complainant who was not an owner (she lived with her parents) but all three of the complainants because they all lived about a kilometer away from the office.
No problem, said the Court, “the essence of town planning schemes is conceived in the interest of the community to which it applies” and the complainants lived “in an area affected by an applicable zoning scheme”. All the complainants had “protectable interests” and therefore locus standi (in plain English, the ‘right to bring a legal action’) and were entitled to enforce their rights under the planning scheme.
The interdict and the request to suspend it
“Once it is accepted”, quoted the Court from an earlier judgment “that the nature of the right in question is a public right, then it must follow … that for continuing infringements of that right the only effective remedy is an interdict, all the more so where such infringements amount to an offence.” Final interdict granted with costs.
Finally, the Court rejected a request by the business to suspend the application of the interdict. The business had been continuing to act in an unlawful manner for at least fifteen months, it was “hell-bent to do so without the necessary relaxation of the restrictive conditions” and to suspend the interdict would be to support or give approval “to an ongoing illegality which is also a criminal offence … tantamount to the subversion of the doctrine of legality and undermining of the rule of law”. The business “must be brought into line immediately when such matters are brought to the attention of the court.” Interdict effective immediately.
Owners – must you always rezone?
Have your attorney check what title deed restrictions your property is subject to, what your current zoning is and what it allows and doesn’t allow. Your local town planning scheme may perhaps let you run a small scale “home enterprise” or “micro business” either without any municipal consent (there will be conditions attached) or with a municipal permit. Or you may need to formally apply for rezoning and removal of title deed restrictions. Every local authority will have its own rules on this and the important thing is to comply with them or risk unhappy neighbours applying to close you down.
January 15, 2020
Here’s another warning from our courts to make sure that all your contracts are properly drawn to reflect both accurately and fully what you have agreed to.
The problem with leaving anything out – or agreeing to something that isn’t then fully recorded in your contract – is a principle in our law known as “the rule of parol evidence”.
A recent SCA (Supreme Court of Appeal) decision illustrates the rule in action, and the facts will resonate with the many farmers, businesses and city dwellers facing empty dams in drought-stricken areas…
The water diviner and the “insufficiently yielding” borehole
- A fruit farm/wine estate accepted a quote from a contractor to drill a borehole.
- The contractor, having successfully used his water divining skills and over 20 years’ experience to locate a good drilling spot, quoted to drill on the basis of his standard “No Water, No Pay” policy. The farm accepted the quote with a modification requiring a drill to 70m (or 100m if no water was found at 70).
- The resultant 76m deep borehole yielded some 4,000 litres of water per hour – something which, as the Court put it, “would put a smile on the face of most farmers in this country”.
- Nevertheless, and despite the borehole “gaily being used by the [farm] to irrigate its orchards”, the farm refused to pay the drilling contractor a cent, arguing that the water yield was insufficient to meet the contractor’s agreed obligations.
- One long (and no doubt expensive) legal battle through the courts later, the fight ended up before the SCA.
- One of the farm’s defences to the claim (and the one relevant to this article) was its (hotly denied) insistence that the contractor had guaranteed a minimum water supply of 10,000 litres per hour.
Oral evidence disallowed – it’s the written contract that counts
- Bad defence, said the Court. A guarantee of water yield “is not what the agreement says, and to find that there was agreement on such a guarantee would breach the rule of parol evidence which prescribes that where the parties to a contract have reduced their agreement to writing, it becomes the exclusive memorial of the transaction; and no evidence may be led to prove its terms other than the document itself, nor may the contents of the document be contradicted, altered, added to or varied by oral evidence.” (Emphasis supplied).
- On that basis “the considerable volume of evidence led by both sides in regard to their negotiations and what their intention had been was all clearly inadmissible”. All that mattered was that the contract specified that payment was due if the borehole produced water and wasn’t “dry” – its actual yield was irrelevant.
- The farm also tried to rely on the “partial integration rule” whereby, when a contract is partially written and partially oral, evidence can be led to prove the oral part of the agreement. But, held the Court, that rule cannot be used to “contradict or vary the written portion” of the agreement – which is exactly what the farm was trying to do.
- End of that argument, so the farm must pay its borehole bill in full, plus legal costs.
The bottom line – make sure your contracts cover everything both clearly and comprehensively!
June 5, 2019
“There’s no such thing as a free lunch” (Economist Milton Friedman)In these days of online banking and electronic payment, it’s not uncommon to find out to your horror that you have made a payment to someone in error, either to the wrong recipient or in an incorrect amount. If that happens to you and the recipient refuses to pay you back, what can you do about it? The other side of the coin of course is whether the recipient of an unexplained and unexpected bank account credit can safely go ahead and spend the windfall (the answer in a nutshell is very strong “no” – if there are indeed any free lunches in the world, this is unlikely to be one of them!). A recent High Court judgment sets out the requirements for a claim based on “unjustified enrichment”.
A banking app duplicates payments of R861,940
- A couple were the happy beneficiaries of a malfunction in their bank’s “remote banking” app.
- In effect they received duplicate transfers into their two accounts totalling R861,940
- The bank duly sued them for return of the money on the basis that they had been “unjustifiably enriched” at its expense.
- Initially the couple denied that any duplication had taken place, but at trial they dropped their denial, claiming instead to have repaid the bank in cash.
- The husband’s story was that he had paid a bank employee, since deceased, who had put the cash into a safe “in case a claim was made”. He was unable to say how much money had been handed over, he could not give dates, and no receipts were requested or given. Nevertheless his evidence was accepted by the trial court and the bank’s claim failed.
- However on appeal to a “full bench” (a “full court” of three High Court judges, sometimes more), the husband’s version was rejected as “inherently improbable”, and the couple was ordered to repay the bank together with interest and legal costs.
What must you prove?The requirements for an unjustified enrichment claim are –
- The recipient has in fact been enriched by receiving the money (it needn’t be money, it could for example be an asset of some sort)
- You have been “impoverished” by the transfer
- The recipient’s enrichment was at your expense
- The enrichment was legally unjustified.
Disclaimer: The information provided herein should not be used or relied on as 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 professional adviser for specific and detailed advice.
March 19, 2019
“It is the duty of an employee when rendering his or her services always to act exclusively in the interest of the employer … an employee is not entitled to use his or her employment relationship with the employer without the employer’s permission to make a profit or earn commission for his or her own account” (Extracts from judgment below)
Employees have very strong rights in our law, but employers also have effective remedies when employees “go rogue”.
A recent case, in which an employee was ordered to repay his employer R33m in “secret profits” including R9m in damages, provides a good example.
Diverted sales opportunities and secret profits
- A manufacturer employed a “Key Accounts Manager” as its agent in dealing with customers. He was trusted with an “almost unlimited discretion” and minimal management oversight to act in his employer’s interests.
- His employer sued him in the High Court on allegations that he breached both his employment contract and his duty to his employer, firstly by selling product to customers at below-minimum prices, and secondly by selling through his own companies to secretly profit thereby.
- The employee’s denials of wrongdoing cut no ice with the Court, which held that he “was clearly under a general obligation to do his best for his employer and to conduct the plaintiff’s business in good faith and for its benefit” but “was in breach of his fundamental obligation of loyalty and good faith which he owed to … his employer”.
- The secret profits claim. Ordering the employee to “disgorge” his secret profits of R33,291,599.24 (less any “amounts paid in making such profits” which the employee is able to prove), the Court held that the employer had proved the three elements needed to succeed in such a claim –
- The employee owed it a “fiduciary obligation” (a duty to act honestly and in utmost good faith),
- In breach of that obligation he placed himself in a position where his duty and his personal interest were in conflict, and
- He made a secret profit out of corporate opportunities belonging to the employer.
- The damages claim was for losses on product sold to customers at prices well below the employer’s base price “in order to further [the employee’s] secret profit-making activities.” Finding that but for the employee’s wrongdoing the customers would have bought product at no less than the base price, the Court awarded the employer R9,407,651.05 in damages (to be allocated, when paid, to the R33m claim).
Rubbing salt in…
To really rub salt into the employee’s wounds, he was ordered to pay costs, and the bill will be a big one, including –
- Costs on the punitive “attorney and client” scale, an appropriate order said the Court “given the secret and unlawful nature of the scheme which the defendant ran for four years at the expense of his employer”,
- The cost of audio visual equipment used in the trial, and
- The (no doubt substantial) travel and subsistence costs of both the employer’s legal team and its six witnesses, all of whom travelled from Gauteng to Cape Town for the trial.
February 20, 2019
“A small debt produces a debtor; a large one, an enemy” (Publilius Syrus, Roman writer)
You are owed money by a debtor, whose “insolvent estate” is “sequestrated” (in the case of an individual or trust) or “liquidated” (in the case of a company or other corporate).
The Master of the High Court appoints a “trustee” (in the case of a sequestration), or a “liquidator” (in the case of a liquidation) to sell all the debtor’s assets and to distribute the sale proceeds between proved creditors.
When you learn of your debtor’s sequestration/liquidation, ensure firstly that the trustee/liquidator knows that you are a creditor so that you receive reports on the financial position of the estate and on progress towards its finalisation.
You will have an opportunity to lodge and prove your claim in the sequestration/liquidation, which you do by completing a formal “claim form” for proof at a meeting of creditors.
The question is – should you prove your claim or shouldn’t you?
Adding insult to injury – contributing to costs
Note: For simplicity we’ll refer below only to “insolvent estate”, “sequestration” and “trustee”, but the principles apply equally to corporate liquidations.
If you don’t prove your claim as above, you won’t receive any dividend and will effectively have to write off your debt entirely.
But the other side of the coin is that by proving your claim you may be exposing yourself to an even worse fate –
- When the costs of sequestration of an insolvent estate exceed the funds in the estate available to pay them, the trustee of the estate recovers a “contribution” from proved creditors to cover those costs.
- In that case you as a proved creditor risk adding insult (having to pay a contribution into the estate) to injury (having to write off your original debt). That’s why, as a creditor, you should be very wary of formally proving your claim against an estate until you are satisfied that no danger of contribution exists.
The special case of the “petitioning creditor”
Now the rub here for the “petitioning creditor” (the creditor who applied for the debtor’s sequestration in the first place) is this – whether or not you formally prove your claim in the estate, you must still contribute to the shortfall.
That’s why, although applying for sequestration can be an excellent way of recovering debt from a recalcitrant debtor, it is essential to consider the danger of contribution before making any such application.
What if you hold security for your claim?
Note that we are only talking here about holding security over a debtor’s asset/s. If you hold outside security – a surety from a company director for example – you can recover that separately, entirely outside the sequestration/liquidation process.
- If you hold some form of security for your claim, like a mortgage bond over the debtor’s property for example, you are a “secured creditor”.
- You need to prove your secured claim to be awarded the net proceeds of the property. In practice the trustee sells the “encumbered” property, pays out of the proceeds all costs directly related to that property – maintaining it, selling it, paying rates and taxes to pass transfer, the trustee’s fees and so on – and then pays out the balance to you as secured creditor in an “encumbered asset account”.
- On the other hand the proceeds of all unencumbered assets fall into the “free residue” account, and if after being paid your secured dividend as above there is still a shortfall on your claim, that shortfall ranks in the free residue as a “concurrent” claim.
- And that’s where your danger comes in – you are now in line to pay a contribution based on the concurrent portion of your claim.
- The good news is that you can largely protect yourself from having to contribute by “relying on the proceeds of your security” in satisfaction of your claim. That means you waive your concurrent claim for any shortfall, but equally by removing your shortfall claim from the free residue account you no longer contribute together with other proved (or petitioning) creditors.
- In some very restricted circumstances even relying on your security won’t protect you from a contribution (for example when no one else has proved claims or other contributors are unable to pay their share), but relying on your security is the best protection you have.
Note that there are grey areas in some of these provisions, so there is no substitute to asking your lawyer for advice on your specific circumstances.
December 13, 2018
Believing someone to be guilty of a crime you call the police and have the suspect arrested, only to have the charges dropped. Can you be sued for defamation?
A recent High Court case provides some answers.
A fraudulent iPad order, an arrest and a R1.6m claim
- A government employee was, at the instigation of officials in his department, arrested and taken in for questioning by police on suspicion of fraudulently ordering R138,000 worth of 14 iPads on departmental letterheads.
- The police released him after taking a statement and his employers did not pursue disciplinary charges against him. They also withdrew an accusation of unlawful conduct in the workplace, with however an indication that the matter might be revisited if further information came to light.
- The employee accused his employers of defamation and sued them for R1.6m in damages for his tarnished dignity and reputation at work, trauma, post-traumatic stress, medical expenses and loss of earnings
Holding that the publication or allegation of a suspicion of a criminal offence is defamatory and the onus is upon the accuser “to prove justification”, the Court concluded, on the facts of this particular case, that there was indeed a “reasonable suspicion” that the employee had been involved in the fraudulent order. The employer had therefore been justified in its conduct.
The employee’s claim for damages accordingly failed and he is lumbered with a (no doubt substantial) legal bill.
The acid test – 3 things an accuser must prove
An accuser relying on reasonableness of the publication as a defence must prove, held the Court, that he or she –
- Had reason to believe in the truth of the statement,
- Took reasonable steps to verify its correctness, and
- Acted reasonably when reporting the matter to the police, or that publication of the statement was reasonable in all the circumstances of the case.
What that all boils down to is this – whether in the workplace or out of it, you aren’t automatically guilty of defamation just because no prosecution ensues.
What is vital is that you have enough evidence to prove all three legs of the reasonableness test if it comes to justifying your actions in court.
August 8, 2018
“…aye, there’s the rub” (Shakespeare)
Levies are the lifeblood of a sectional title scheme, and the Body Corporate has a duty to recover arrears from defaulting owners. It has the power, in addition to following standard debt collection procedures and perhaps approaching the Community Schemes Ombud for assistance, to apply for the sequestration of the owner’s estate. Indeed just the threat of a sequestration application is sometimes enough to frighten a recalcitrant debtor into paying up.
But, as Shakespeare might have put it, there’s an alarming “rub” here that body corporate trustees ignore at their peril. It arises from ‘the danger of contribution’ in insolvent estates. In a nutshell, where the ‘costs of sequestration’ exceed the funds in the estate available to pay them, proved creditors may well have to contribute towards those costs in addition to losing their claims. Talk about adding insult to injury!
A R46k shortfall – must the body corporate contribute?
- A body corporate successfully applied for the sequestration of the personal estate of a defaulting section owner.
- The property was bonded to two banks who duly proved their claims against the insolvent estate. Wisely, no other creditors proved claims and the trustee of the insolvent estate drew an account providing for the two banks alone to pay pro-rata contributions to cover the R46,663-16 shortfall in the costs of sequestration.
- The banks objected to the account on the basis that the body corporate should also contribute as ‘petitioning creditor’, although it hadn’t formally proved a claim. The Master of the High Court ruled that the body corporate was protected from contributing as its claim related to arrear levies (and the costs of recovering the arrears) – claims which didn’t need to be formally proved and would by law be paid out of the proceeds of the property anyway.
- The banks asked the High Court to set aside the Master’s ruling, and the Court duly held that as “petitioning creditor” the body corporate must indeed contribute to the shortfall pro-rata with the bondholders.
The bottom line – trustees of bodies corporate should, before applying for a defaulting owner’s sequestration, make certain that there is no danger of contribution.