Business Buyers And Banks: Beware A Statutory Trap!

 

With rampant business failures a feature of our economy these days, do not buy (nor finance the purchase of) a business, its goodwill or assets
– not, that is, without first seeking advice on whether or not the sale must first be advertised in terms of the Insolvency Act.

 

Playing with fire – the Appeal Court case, and the facts

 

A recent Supreme Court of Appeal case illustrates the dangers of not doing so. A company had sold its business and assets – movable and immovable –
to a buyer for just over R22m. The buyer financed the deal with a loan from a bank, secured by means of mortgage bonds registered over the property.
The parties had specifically agreed not to advertise the sale in terms of the Act. And that, as we shall see, can be a dangerous move indeed – a real case
of playing with fire.

 

 

The company was thereafter liquidated, and the sale attacked by the liquidators. The Court held that both the sale and the mortgage bonds were invalid – leaving the buyer and the bank with unsecured concurrent claims (normally very cold comfort indeed in a liquidation scenario).

 

The danger

 

The danger is that, for a period of 6 months after such a sale, it is subject to challenge by the seller’s creditors, or by the liquidator if the seller is liquidated- unless the sale has first been properly advertised in terms of the Act.  

 

The fact that the creditors and other stakeholders may all know of the sale anyway is irrelevant – formal compliance with the Act is still necessary.

 

An unadvertised sale will be valid only – 

  • If it was made “in the ordinary course of business” (unlikely where the business subsequently fails), or  
  • For “securing the payment of a debt” (seldom under the control of anyone but the seller), or 
  • If the buyer can prove that the seller wasn’t a “trader”. As the term is widely defined in the Act, that’s not going to be easy.

The bank whose bond went bad

 

The bondholder in this case must be particularly irked by the result, the Court having found that even if it had, as claimed, acted entirely reasonably and in good faith in financing the deal, this was of no assistance to it. The bonds, although registered in the Deeds Office, were invalid and provided no security whatsoever for the bank’s claim.

 

The moral of the story

 

There will always be a lot at stake here, and the advertising process must be handled correctly to be valid – take advice or risk getting burnt!

 

 

Varying A Trust Deed? Be Careful!

 

Here’s a warning from a recent Supreme Court of Appeal case – don’t amend the provisions of a trust deed without first checking whether or not you need to get consent from the beneficiaries.

 

In the case in question, a father originally nominated his two minor children as beneficiaries of a trust. But, after a bitterly disputed divorce and remarriage, he and the trustees agreed to vary the trust’s provisions substantially. Amongst other things, the original beneficiaries were no longer to be guaranteed any benefit, but were reduced to the status of potential beneficiaries along with the father’s new wife, and her children from a previous marriage.

 

What the law says

 

Our law in this regard is clear – the founder (in this case the father) and trustees of a trust may vary its provisions, or even cancel it, without the consent of the beneficiaries; but only if the beneficiaries haven’t yet accepted benefits conferred on them by the trust. As soon as beneficiaries accept benefits, they acquire rights in the trust and any variation without their consent is invalid.

 

The factual question

 

What isn’t always so clear is the factual question of whether benefits have or have not actually been accepted.

 

In this case the preamble to the trust deed (translated from the original Afrikaans) contained this statement: “And whereas the beneficiaries have indicated (Afrikaans – ‘aangedui’) their acceptance of the benefits conferred upon them in terms hereof”. That, held the Court, indicated upfront acceptance by the father – as natural guardian acting on behalf of his minor children – of their trust benefits. The subsequent purported variation of the trust deed’s provisions was accordingly invalid, and the original provisions prevailed.

 

Take advice upfront!

 

Some trust deeds (not all) may have similar wording, and every case will be different. Tread carefully, and take advice in doubt!

 

 

When The Lights Go Out, Even Though You Paid Your Accounts

 

 

The scenario

 

Consider this scenario (not an entirely unlikely one in these challenging times): – 

  • Your property (residence, office, shop or factory) is part of a sectional title scheme 
  • You have paid all your own municipal service accounts, and all levies due to the body corporate
  • Nevertheless the local municipality cuts off lights and water to the entire complex – i.e. including you – because the body corporate itself is in arrears with its rates account. 

Can that really be possible?

 

Yes, following a recent Supreme Court of Appeal decision, which confirmed the right of a municipality to cut services to a shopping mall whose body corporate had run up a bill of over R2.7m for rates, penalties and interest.  

 

The bottom line

 

The bottom line is this – 

  1. Even if all electricity and water consumption has been paid for, the municipality has the power to consolidate all accounts for rates, services, and “other municipal taxes, levies and duties”. This in turn means that it can enforce payment of the full consolidated account by termination of services – even if the arrears are for rates, not services. 
  2. Although accounts cannot be consolidated – nor services cut – if there is a dispute over an outstanding account, this only applies if (i) The amount disputed is “properly specified”, and (ii) If the dispute in regard thereto is “properly raised”, in writing, with the municipality.
  3. In this case, held the Court, the “so-called ‘dispute'” belatedly relied on by the body corporate was “merely a delaying tactic” and could not avail it. 

Although sectional title owners are responsible for their own rates – and often also for their own electricity and water – they are still at risk if their body corporate fails in its duty to pay its own municipal accounts.