January 2024 | Company / Corporate / Compliance, Debt Recovery
“He who is quick to borrow is slow to pay” (Old proverb)
A recent High Court decision means that, for the first time, creditors of debtor companies are specifically cleared to apply for the company’s directors to be declared “delinquent” in certain circumstances. And that has significant implications for both directors and creditors.
For directors – major long-term career risks
Company directors need to manage a whole range of duties, responsibilities and risks, including being declared “delinquent” in terms of the Companies Act. For more serious categories of misconduct a director risks disqualification from holding any directorship or senior management position for a period ranging from 7 years to a lifetime.
A wide range of less serious categories of misconduct can lead to “probation” orders, with possible disqualification for up to 5 years, supervision by a mentor, remedial education, community service and payment of compensation.
The fact that creditors can now make delinquency applications adds a new level of director risk, the reality being that of all the stakeholders out for blood after a corporate failure, unpaid creditors may well be the fiercest. Your best defence against any personal attack is to always be aware of, and to scrupulously comply with, all your many fiduciary duties.
For creditors – a new door opens
As a creditor on the other hand, your chances of recovering a company debt from a director personally will depend on a range of factors – whether you hold personal suretyships, whether you can prove personal liability for breach of statutory duties and so on (this is a complex topic – specific legal advice is essential).
Now another door has opened to you, and although as we shall see below you will have to convince the court that you are acting in the public interest, it will certainly make directors think twice about defrauding you or exposing you (and creditors and the public generally) to loss through corporate misconduct.
- The case in question stems from the creditors of a company in liquidation failing to recover their debt from it, and consequently taking action against the directors in their personal capacities for over R370m.
- They also asked the High Court to declare the directors delinquent, and one of the directors objected on the basis that creditors have no power to bring such an application. Indeed, the Companies Act gives this right only to a specific list of stakeholders – namely a shareholder, director, company director, secretary or prescribed officer, registered trade union, employee representative, Takeover Regulation Panel, some organs of state and the CIPC (Companies and Intellectual Property Commission).
- The Court however agreed with the creditors that they could apply under another provision of the Companies Act which allows anyone to apply “acting in the public interest, with leave of the court”. On the facts of this particular matter, the creditors were cleared to proceed under that provision.
- In reaching this decision, the Court took account of the (as yet unproven) serious allegations levelled against the directors – extreme breaches of fiduciary duty over a long period of time and involving substantial amounts of money, “a full panoply of misdemeanours” including gross abuse of position and gross negligence, the large number of directorships held by the directors, the (indirect) involvement of public entities – the list goes on.
- Importantly, the Court rejected the director’s argument that “the danger of giving the creditor such standing was that it could use the threat of a delinquency declaration to squeeze the proverbial few extra bob out of the directors.” Every case, said the Court, must be decided on its own facts, and the fact that creditors are suing directors personally does not automatically mean that they are acting cynically and opportunistically.
- But clearly, to succeed you will have to prove that you are acting in the public interest and not just in your own interest as a creditor. It will help to be able to argue, as the creditors in this case did, that “the general public and creditors deserve and require to be protected in their dealings, engagements and transactions with the companies and close corporations of which the defendants are respectively directors and/or members; and … the relief will protect the public from the defendants repeating or replicating their delinquent conduct in other entities.”
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.
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August 2023 | Debt Recovery
“Creditors have better memories than debtors” (Benjamin Franklin)
How well you manage your debtors’ book, and how successful you are in actually collecting monies due to you, should always be a management priority. It can spell the difference between a successful, profitable business and a failed one.
If you are new to the game (the owner of a new start up perhaps), the debt collection process might seem confusing and a bit intimidating, but it needn’t be.
If you need to understand the basic principles and terminology, have a look at our simple overview below of a pretty “standard” debt collection process. We follow that with an alternative suggestion, which even established businesses with a long track record of debt collection will find useful.
Of course, some debts are easily collected – a gentle reminder and a few courtesy calls often do the trick. But when a debtor turns recalcitrant – dodging calls, ducking and diving, delaying, hiding assets – it’s time to bring out the big guns and go the legal route.
Let’s discuss two possible avenues of recovery –
1) Recovery Avenue One: The “standard” debt collection process
Let’s start off with a brief (and simplified) overview of a fairly typical sequence of debt collection events –
- A courtesy call: This is most effective coming from your attorney – there’s nothing like an official legal communication to convey that you mean business. In most cases it will be a polite but firm communication (think “iron fist in velvet glove”) – perhaps via a voice call, perhaps in writing, perhaps both – telling the debtor that the matter has now been handed over for collection. Warnings of the legal process about to be unleashed, and mention of the extra costs and the credit rating implications for the debtor, might be all that’s needed to extract payment, or at least an offer of payment and an Acknowledgment of Debt. If not, on we move…
- Letter of demand: This is a formal notification (you’ll hear it called a “Section 129 Notice” where the National Credit Act applies) officially demanding payment within a specified deadline period. It’s the last step before the actual legal process starts…
- Summons: A summons is now issued at the appropriate court, and served on the debtor, who now has an opportunity to defend the action. Expect an experienced debtor to enter an “appearance to defend” as a delaying tactic, but if the debtor just ignores the summons or takes no further steps to defend the matter, the next step is…
- Judgment: Your attorney now asks the court to issue a “default judgment”, which entitles you to proceed to the enforcement/collection stage…
- Execution: Depending on what assets or income the debtor has, this could be a warrant of execution against movable property, a financial enquiry or an emoluments attachment or garnishee order. A debtor who knows the ropes will be experienced in dodging and/or frustrating these attempts, and if the debt still remains unsatisfied you can move on to another form of execution…
- Application to sell immovable property: You can now apply to the court for leave to execute against any immovable property (a house, land or the like) owned by the debtor. This may or may not be easy to obtain, given everyone’s constitutional rights to housing.
The above is just an overview of general principles, and it is essential to have legal assistance at every stage to make sure that your process complies with all the rules and regulations involved.
2) Recovery Avenue Two: Apply for liquidation or sequestration
This may not be the best option for every debt collection scenario, but in the right circumstances it can be dynamite!
Before we get going, a quick note on terminology – if your debtor is a company, you apply for “liquidation” (“winding-up”) of the company, and the appointment of a liquidator. If your debtor is an individual, you apply for “sequestration” of the debtor’s estate, and appointment of a trustee.
Either way, the pressure you bring to bear on the debtor is the threat of imminent loss of control of all assets. Company directors must suddenly focus on the looming risk of losing all control over their businesses, an individual on losing all their personal assets, house etc – whatever they have.
As a side note, if your debtor is a company, a particularly useful section of the Companies Act allows you to serve on the company’s registered office a “section 345 letter of demand”. The company is then “deemed” to be unable to pay its debts if the debt isn’t paid or secured within three weeks. That makes your liquidation application a lot easier to support and increases pressure on the debtor to pay up.
Just be aware of two factors in particular –
- You may be in for substantial cost. A recalcitrant director or debtor can still delay the process by defending your application, and whilst our courts do not look kindly on delaying actions and other “abuses of process” calculated to postpone the inevitable, getting to that stage in opposed matters can be expensive. And if you do eventually succeed in getting an order, not only could you end up recovering nothing (or perhaps only a part of the debt) but you might even have to pay into the estate, so ask your attorney beforehand about the “danger of contribution” aspect.
- You cannot use a liquidation/sequestration application as a way to short-circuit any genuine dispute over liability, and with individuals you will also have to show that sequestration will benefit creditors generally. Unless you have good grounds for the application you risk having to pay a large adverse costs order for “abuse of process.” Legal advice specific to your case is essential!
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.
© LawDotNews
June 2023 | Debt Recovery
“The requirement that credit providers must be registered allows for their control and regulation, especially in relation to their financial probity and integrity, thereby avoiding the unscrupulous exploitation of credit consumers by so-called fly-by-night operators and loan sharks.” (Extract from judgment below)
A recent High Court case highlights once again the dangers of lending money, or granting credit, in contravention of our credit laws. By understanding the pitfalls associated with being an unregistered credit provider and of not complying with the National Credit Act (NCA), you can protect yourself from the potential legal and financial risks.
Close friends fall out, and the lender loses R1.5m
- The parties involved in this unhappy saga were previously close friends. An admitted but non-practicing advocate, who acted as a trustee of his friend’s personal trust, asked the friend (who had just sold his house) for a loan. The friend obliged with loans totalling R2.5m.
- To simplify a long and complicated factual history, disputes arose and a series of acknowledgments of debt (AODs) were signed to document the loan, the last AOD recording a settlement agreement/compromise.
- Over time, the borrower had made payments totaling just over R3m to the lender, the dispute went to arbitration, an arbitration award was made, and ultimately the lender sued his ex-friend in the High Court for a balance of R1,535,000.
- The Court, holding that the loan agreement and AODs were unlawful and invalid, dismissed the lender’s claim – which leaves him R1.5m out of pocket, plus costs and lost interest. That’s a very hard lesson that all would-be lenders should take careful note of.
How do you lose everything by not complying with the NCA?
In protecting consumers from incurring debt beyond their means, our National Credit Act (NCA) requires that, with only a few exceptions, “credit providers” (which would include anyone lending money or giving credit to a friend) must –
- Register in terms of the NCA; and
- Conduct a “credit assessment” to confirm that the borrower is in a financial position to enter into the loan and repay it.
Registration is unnecessary in some circumstances – for example loans between family members who are dependent on each other, whilst only “arm’s length” transactions will as a general rule fall under the NCA. There are other cases in which the NCA won’t apply or will only partially apply, but with all the grey areas involved, get specific legal advice before lending to anyone – friend or not.
Your risk is that any loan made by an unregistered credit provider becomes uncollectable. That means you could lose everything. If you find yourself in that position, there is still a ray of hope for you in that a court normally still has a discretion to help you on the basis of fairness, by making a “just and equitable” order of any sort. But don’t rely on that happening – you will have to justify making the non-compliant loan and hope for the best when it comes to the court weighing up the balance of fairness between the two of you. Rather be safe and check whether you need to comply with the NCA or not before you make the loan.
Besides, sometimes the court has no discretion at all to come to your rescue, which is exactly what happened in this case because the claim here was based not on the original credit agreement but on a settlement agreement. So the Court couldn’t have helped the lender even if it had wanted to.
There are no longer any thresholds – all loans are at risk
Finally, note that no matter what you may read in the media to the contrary, there is no longer any R500,000 debt threshold – any loan of any amount falls into the net since 2016. And since 2014 even one-off loans are at risk (before that, the NCA applied only to providers with one hundred or more credit agreements).
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.
© LawDotNews
September 2022 | Debt Recovery, Insolvency / Liquidation
You should always take as much security for your claims as you possibly can before advancing credit or lending money to a debtor. That’s because if your debtor fails and is “liquidated” (if a corporate) or “sequestrated” (if an individual), without security you will have only a concurrent claim in the estate.
And with a concurrent claim, you will be lucky to get back more than a few cents in the Rand, because you will rank right at the bottom of the ladder after both secured creditors and preferent creditors (employees, SARS etc).
So, first prize is always to hold security for your claim
Having a “secured claim” greatly increases your chances of being paid out a decent amount (hopefully your claim in full), because the proceeds of the asset/s subject to your security are earmarked (after payment of some estate costs and the like) to paying out the claims of the “secured creditors” holding security over each particular asset.
If your debtor owns immovable property, registering a mortgage bond over it will generally give you a very strong security, whilst with movable property you have various options. There are many options here, applicable to various types of claim in various circumstances – liens, cessions, tacit hypothecs, rights of retention and so on – but for the moment let’s have a look at the more general concepts of pledge and notarial bonds.
One of the strongest options with movables is to take a pledge over them, but that will require you to actually hold the movables in your possession. And of course it’s not always viable for a debtor to give you that possession – a much more likely scenario with most business debtors is that they need to keep possession and use their assets (machinery, fittings, vehicles, stock etc) to carry on trading. So what are your options in that situation?
The two types of notarial bond
In that case – where you cannot take actual possession of the movables – consider registering a notarial bond over them. There are two types of notarial bond, both requiring registration in the Deeds Office –
- Your first and best option is a special notarial bond. This gives you substantial security, in the form of a “deemed pledge”. You now have first bite at the cherry over any movable asset listed in the bond, even though you don’t have possession. Note that these assets need to be clearly identified in the bond (“….specified and described in the bond in a manner which renders it readily recognisable…”) so list full descriptions, models, serial numbers, and the like for every asset.
- Secondly, take a general notarial bond over all the debtor’s movable assets generally. That will bring into your net those assets which are not individually identifiable, such as stock, building materials and so on. The bad news is that a general notarial bond in itself gives you only a weak preference on liquidation, but the good news is that you can convert that into full, “real”, security if you move quickly enough.
How do you convert a General Notarial Bond into full security?
Provided you seek legal assistance quickly at the first sign of financial distress in your debtor, you may well have time to “perfect” the bond into full security by way of a court order prior to liquidation. Armed with the court order you take possession of all the debtor’s movables and hey presto you have a “real” security over them.
Let’s look at a recent example –
- A supermarket group, owed over R2m by a trading store, held two general notarial bonds over its movable assets (presumably shop fittings, fixtures, equipment, stock etc).
- Fearing that the store’s owner (a company) was trading in insolvent circumstances and would be liquidated, the creditor applied for an urgent High Court order allowing it to perfect its security.
- The debtor opposed the application, asking the Court to exercise its discretion not to grant a perfection order. But the Court refused to do so, and granted the perfection order, on the basis that the creditor had no other remedy available to it (such as a damages claim). The Court was equally unimpressed with the debtor’s argument that the terms of the bonds were “unconscionable and contra bonos mores [offensive to conscience]”.
That’s clear judicial confirmation of the strong position you are likely to find yourself in where you hold properly drawn and registered general notarial bonds, and act quickly to perfect them in appropriate circumstances.
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.
© LawDotNews
August 2022 | Debt Recovery, Property
“A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted” (High Court Rules)
Selling a house in execution is not as simple as getting judgment and sending the Sheriff of the Court off to arrange a sale.
This article is important to you if –
- You are about to lend money to, or do business with, an individual (or a trust or company) that you feel comfortable dealing with because they own a substantial asset in the form of a house.
- You are trying to enforce a judgment against a recalcitrant debtor by selling the debtor’s house.
- You live in a house threatened with sale in execution (or are trying to help a friend or relative in that position).
- The “owned by a trust” angle (more on that below) will also be relevant to you if you are wondering whether to buy a residential property in your own name or in a trust or company.
The “judicial oversight” rule means delay and risk for the creditor
High Court Rules provide that “A court shall not authorise execution against immovable property which is the primary residence of a judgment debtor unless the court having considered all relevant factors, considers that execution against such property is warranted.”
This is to give effect to the right to have access to adequate housing which is enshrined in section 26 of our Constitution, and the court will look at whether the property is the primary residence of the debtor, at whether there may be an alternative means of satisfying the judgment debt, and at a host of other relevant factors.
Bottom line is that the court will not order an execution sale if it concludes that execution isn’t warranted or will deprive the debtor of adequate housing. Even a successful application for execution will involve cost and delay, whilst an unsuccessful one will be a body blow to the creditor’s prospects of recovering the debt.
That’s clearly a factor to bear in mind when lending to, or transacting with, an individual. But what if the house is owned by a trust or company?
The case of the trust-owned wine farm
- A bank loaned R8.5m to a trust operating as a wine farm, wine cellar, wine merchant and restaurateur. The loans were secured by mortgage bonds over the property. Trustees, trust beneficiaries and trust employees occupied the house and cottages.
- When the trust failed to repay the loans, the bank took judgment against it and applied for an order to sell the property in execution, an application vigorously opposed by the trustees.
- The High Court held that the judicial oversight procedure only applies when a property is the debtor’s primary residence. In other words, it wouldn’t apply in a case such as this where, although the debtor is a trust, the actual occupants are individuals.
- Not so, held the Supreme Court of Appeal on appeal: “Due regard must be had to the impact that the sale in execution is likely to have on vulnerable and poor beneficiaries who are occupying the immovable property owned by the judgment debtor, who are at risk of losing their only homes.” Moreover, the fact that the farm was used commercially did not deprive the occupants of constitutional protection.
- “Judicial oversight” was accordingly necessary despite the properties being owned by a trust and not by the occupants themselves. Note that there are indications in the judgment that although this case concerns trust-owned property, the oversight principle is likely to apply equally to the occupants of company-owned properties.
- On the facts however, the trustees had failed to show that “as a result of indigence, the beneficiaries will be left vulnerable to homelessness if the farm in question is sold in execution. On the contrary, the farm is valued at between R35 million and R40 million, and the reserve price was fixed at a minimum of R21 million; the ability to acquire alternative accommodation is unquestionable.” Also relevant – at one stage of negotiations, the trustees had actually consented to the judgment and to the property being declared executable.
The practical result is a win for the bank and the farm can now be sold in execution. But the principle remains – don’t assume that lending money to, or transacting with, a home-owning trust or company is a safe bet because of the value in the property. It carries the same risk as if the property were owned and occupied by an individual debtor.
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.
© LawDotNews
July 2022 | Company / Corporate / Compliance, Debt Recovery, Uncategorized
“… for the benefit of immunity from liability for its debts, those running the corporation may not use its formal identity to incur obligations recklessly, grossly negligently or fraudulently. If they do, they risk being made personally liable.” (Quoted in the judgment below)
Particularly in hard times, it is not at all uncommon to find yourself unable to recover a debt from a company in financial straits whilst at the same time you know that its directors hold assets in their own names. Can you attack them personally?
The answer is founded in the centuries-old concept of companies as separate legal entities or “juristic persons”. They trade in their own names and have their own assets and liabilities, so as a rule directors will not be personally liable for a company’s debts unless either –
- They signed personal suretyship for them, or
- They fall foul of one of our law’s provisions entitling a court to declare them personally liable.
So, in the absence of personal suretyships, when in practice can you recover a company debt from its director/s? And when are you as director at risk of being sued personally?
Let’s look at the facts and outcome of a recent High Court case for some insights –
The fraudulent car auction, the disappearing company and the director’s defence
- The buyer of a car on auction subsequently discovered that it was a 2010 model despite being sold to her as a 2012 model.
- She cancelled the sale, returned the car to the auction company that had sold it to her, and, when her demand for a refund of the purchase price was refused, took a default judgment against the company.
- What followed was a saga of unsuccessful attempts to recover her money from the company, its address having changed and the director claiming to have resigned and sold the company, which he said had ceased trading and was awaiting deregistration.
- The buyer eventually sued the director personally, asking the Court to “pierce the corporate veil”. The director’s defence boiled down to saying that he had not used the company “as a front”.
Piercing the corporate veil
“Piercing the corporate veil” in this context is, simply put, a court holding directors personally liable for a company’s debts by declaring that the company is to be “deemed not to be a juristic person” in respect of particular debt/s.
On what grounds will a court make such a declaration? Per the High Court in this matter:
- Where there is “fraud and the improper use of a company or conduct of the affairs of a company” or
- “[W]here its incorporation, use or an act performed by or on its behalf [the Court’s underlining] constitutes an unconscionable abuse of the juristic personality of the company as a separate entity.”
The director’s misrepresentation and “cavalier disregard” for the company’s interests
- On the facts, the Court found that the director had misrepresented the details of the motor vehicle to the buyer, that this misrepresentation was material and induced her to purchase the vehicle, and that it “was deliberate such that it amounted to fraud, alternatively dishonesty, further alternatively improper conduct.”
- “Additionally, as the director and owner, he acted with cavalier disregard for the interests of the company … Such conduct is manifestly not in the best interest of the company and may be considered reckless and dishonest. This conduct was indubitably with callous disregard for its effect on the company as a separate legal entity and at a time when he describes its financial situation as being parlous.Therefore, whilst a director is entitled to resign at any time, his resignation cannot be used as a means of evading his fiduciary duties as a director.”
- Concluding that “the conduct of the director adversely affected the [buyer] in a way that reasonably should not be countenanced and which constitutes an unconscionable abuse of the company’s juristic personality”, the Court declared him personally liable to repay her the purchase price, interest, and costs.
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.
© LawDotNews