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Protection of security or title interest of a third party when a business rescue practitioner disposes of property belonging to the company

When a company becomes financially distressed, it is placed under business rescue. Section 128(b) of the Companies Act 71 of 2008 (“the Act”) defines business rescue as proceedings that are initiated to facilitate the rehabilitation of a company by providing for the temporary supervision of the company and of the management of its affairs, business and property. A temporary moratorium (prohibition) is placed on the rights of claimants against the company or in respect of property in its possession. Additionally, a plan is developed and implemented, subject to approval, to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

Section 134(3) of the Act governs the protection of property interests during business rescue proceedings. It provides, inter alia, that if during business rescue proceedings the company wishes to dispose of any property over which another person has any security or title interest, the company must obtain the prior consent of that person, unless the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by that person’s security or title interest. Furthermore, the company must promptly pay to that other person the proceeds attributable to that property equal to the amount of the company’s indebtedness to that other person or provide security for the amount of those proceeds to the reasonable satisfaction of the other person.

The position outlined above found application in the case of Energydrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd and Others 2017 (3) SA 539 (GJ). In this matter, the Applicant (Energydrive) was the owner of certain equipment which it leased to the Second Respondent (Winplas), subject to a reservation-of-ownership clause. When the latter went into business rescue proceedings, the Fourth Respondent (Knoop) was appointed its business rescue practitioner. Knoop proceeded to sell the equipment to the First Respondent (Tin Can Man), without complying with the requirements as set out in S134(3) of the Act. When Energydrive sought to recover the equipment from Tin Can Man, it was contended that as the proceeds of sale were sufficient to satisfy the title interest of Energydrive, Tin Can Man was protected by S134(3) of the Act and could retain the equipment. However, the Court disagreed with this contention and granted the application, directing Tin Can Man to deliver the equipment to Energydrive.

The Court held that S134(3) of the Act allowed a business rescue practitioner to dispose of property, which was subject to security or reservation of ownership clause without the consent of the creditor concerned, only if the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by the security. Such an instance required the practitioner to promptly pay the debt due to the secured creditor or owner, or provide reasonably satisfactory security therefore.

The obligation to pay or secure the debt was not a mere personal right against the practitioner, as interpreting it that way would do away with the agreed security or ownership and replace it with a personal right against the practitioner. The obligation to promptly pay or secure the debt was a requirement for a valid transfer of ownership by the practitioner by way of a sale and delivery in terms of the section, if there was no consent on the part of the creditor. The rights of the creditor would only be terminated on payment or the provision of other security.

In the present matter, the practitioner did not pay or secure the debt due to Energydrive. As a result thereof, the practitioner did not validly destroy the right of ownership of Energydrive who remained the owner of the equipment.

Prepared by:

Ashley Adriaans | Director | Dispute Resolution

Matthew Cannon | Candidate Attorney

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)