Business Rescue: Are Your Suretyships Enforceable? A R5.5m Lesson for Directors and Creditors

Business Rescue: Are Your Suretyships Enforceable? A R5.5m Lesson for Directors and Creditors

“Some people use one-half their ingenuity to get into debt, and the other half to avoid paying it” (George Prentice, newspaper editor and author)

You are owed a lot of money by a company that goes into business rescue. The business rescue plan provides for creditors like you to accept a dividend of only a few cents in the Rand in settlement of your debt. You stand to lose heavily.

But perhaps there’s hope yet – a director with assets has signed personal suretyship. Can the director now say “sorry, you adopted the business rescue plan so your claim no longer exists”, and refuse to pay you? 

The directors’ defence
  • A creditor was owed R6.5m for the lease of mining equipment to a company which was placed under business rescue. In terms of a business rescue plan approved by the creditor it was paid only a portion of its claim, losing its right to claim anything further from the debtor company.
  • The two directors of the debtor had signed a deed of suretyship in terms of which they stood as co-sureties and co-principal debtors with their company for all amounts owing.
  • The creditor duly sued the directors for its shortfall of some R5.5m The directors’ defence was that they were not liable because – 
    • The suretyship entitled the creditor to go after them only for “any sum which after the receipt of such dividend/s or payment/s may remain owing by the Debtor.” (Own underlining). 
    • Nothing remained owing by the debtor which had been released from its debt by the business rescue plan.
  • In other words, argued the directors, nothing was owed by the debtor company, so they were liable for nothing. 

  • Not so, said the Court. That “would render the terms of the deed of suretyship nonsensical and militates against the very reason for a creditor obtaining security against the indebtedness of a debtor i.e. to mitigate the risk of the debtor being unable to fulfil its obligations due to inter alia business rescue.” The business rescue plan made no provision for the position of sureties and therefore “the liability of the sureties is in my view preserved.  And while the debt may not be enforceable against [the company], it does not detract from the obligation of the sureties to pay in the circumstances of this case.” In other words, a surety’s liability is unaffected by the business rescue unless the plan itself makes specific provision for the situation of sureties.
  • Bottom line – the directors must personally cough up the R5.5m (plus interest and costs).
Lessons for directors and creditors

The outcome here could have been very different had the wording of either this particular suretyship or the business rescue plan supported the directors’ defence.

Creditors – when securing your claim with a director’s suretyship check that you are fully covered in any form of business failure situation.  And ensure that a business rescue plan specifically provides that its adoption does not release sureties. 

Directors – when you sign personal surety understand exactly what you are letting yourself in for. And if you are unlucky enough to find yourself in the middle of a business rescue, actively manage your personal liability danger – particularly when it comes to the wording of the rescue plan.

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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Your Website of the Month: Coming Soon – More Courts Offering Mediation Options

Your Website of the Month: Coming Soon – More Courts Offering Mediation Options

“Agree, for the law is costly” (wise old proverb)

The cost, delay and risk of contested litigation sometimes makes it sensible to rather try to resolve a dispute with mediation. Ask your lawyer for advice on whether your dispute is a suitable one, and if so be aware that in addition to the option of existing “private” mediation, you can refer a dispute to “court-annexed” mediation at selected magistrate’s courts around the country, either before or during a trial. 

The list of courts offering mediation options expands greatly on 1 July 2019 – see the full list here

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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Accidentally Paid the Wrong Person? Lessons From a R862k Banking App Error

Accidentally Paid the Wrong Person? Lessons From a R862k Banking App Error

“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 –

  1. 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)
  2. You have been “impoverished” by the transfer
  3. The recipient’s enrichment was at your expense
  4. The enrichment was legally unjustified.

Once the couple admitted receiving the money without a legal basis, held the Court, the onus shifted to them to prove that there was no enrichment. So their failure to prove repayment was the end of their case. 

Don’t despair if the facts of your case don’t tie in fully with the above requirements – our law may have other remedies for you. Ask your lawyer for help.

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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Employers: When Should You Sue Rogue Employees? A R33m Example

Employers: When Should You Sue Rogue Employees? A R33m Example

“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 credited, 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.  

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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Reporting Crime and the Defamation Danger: Lessons from the Workplace

Reporting Crime and the Defamation Danger: Lessons from the Workplace

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.

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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How to Escape from a Property Suretyship

How to Escape from a Property Suretyship

“Suretyship is the precursor of ruin” (Thales of Miletus, one of the Seven Sages of Ancient Greece)

As the philosopher and mathematician Thales pointed out two and a half millennia ago, signing surety for another’s debts carries huge risk. Yet every day directors of property holding companies happily sign personal suretyships for their company’s (usually substantial) debts.

The problem is that it all seems so safe in the beginning. You need a bank loan to buy or develop a property, you’ve done your homework and the deal’s a good, sensible one. It’s only when things go wrong down the line that your signature on that suretyship document comes back to haunt you, and by then it’s far too late – or is it?

A recent High Court decision illustrates one of the very restricted circumstances in which you may be able to escape from the trap you signed yourself into.

 

The developer, the trust and the bank
  • A property developer lent some R10m to an associate’s companies for a shopping mall development. The associate’s companies then borrowed a further R5m from a bank, which took a R5m mortgage bond over the one company’s property as security. And – here’s the rub – the developer also signed suretyship to the bank for the R5m both personally and on behalf of his family trust.
  • The developer signed these suretyships believing that there was enough equity in the bonded property (valued at R12m) to cover both the R5m bond and another bond that he was told about of R2.7m. What he didn’t know at the time was that there was yet another bond over the property, and this was a big bond for R15m. Neither his associate nor the bank had told him about it.
  • Only when both of the associate’s companies failed did the developer realise that there was no equity in the property at all, with bonds totalling R22.7m against a value of R12m, and that the bank’s liquidation dividend would leave it with a large shortfall.
  • The bank duly sued the developer and his trust as sureties for R5.7m (R5m plus interest). To understand how that turned out in court we need to look at when our law will let you off the hook, and when it won’t…

 

So when can you escape from a suretyship?
  • Our law will generally hold you to the agreements you make, and a suretyship is no exception.  You can only free yourself from it if it “was induced by fraud, duress, undue influence or mistake, whether induced by misrepresentation or otherwise”.
  • Without going into all the legal niceties (you definitely need your lawyer’s specific advice if you ever find yourself in this unhappy position) the general principle is that, where you rely on a “justified error as to the nature or contents of the [suretyship] document”, you must show that you were “misled as to the nature of the document or as to the terms which it contains by some act or omission (where there was a duty to inform) of the other contracting party.”
  • In lay terms, you have to prove that the bank either actively misrepresented, or failed to disclose, something “material” (significant or vital) to you. And where you rely on a failure to disclose something (as in this case) you have to further show that the bank had a “duty to speak” i.e. had a duty to tell you about it. That’s because our law generally requires you to be aware of what you are contracting yourself into, rather than requiring the other party to “tell all”. The exception to that is where you can prove that the other party had “exclusive knowledge” of something material and your right to know about it “would be mutually recognised by honest men in the circumstances”.
  • That’s quite a mouthful and it’s not easily proved, but in the particular circumstances of this case the developer succeeded in doing so. The Court had accepted that the developer wouldn’t have signed surety if he had been aware of the R15m bond, and that the bank officials knew of his concern about there being enough equity in the property to cover the R5m.  Moreover the developer hadn’t done a deeds search (which would have revealed the extra R15m bond) because as he saw it there was a “relationship of trust” between him and the bank’s officials and he would have expected them to tell him about it.
  • Critically, the bank’s disclosure to the developer of the R2.7m bond but not of the R15m one led the Court to conclude that, having thus made an incomplete disclosure to the developer, “a duty arose requiring the [bank]’s officials to speak and to make a full and honest disclosure to the [developer] of the material facts in their knowledge.”

The developer and his trust are accordingly off the hook. But there’s a strong confirmation there of just how narrow your potential escape route is from a suretyship.

So as always take legal advice before signing anything!
 

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

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