Reservation of Ownership - Part Two
In our last article we discussed what an instalment sale agreement (credit agreement) is, and we went into some detail about how a seller (or creditor) of a vehicle (or any other goods) purchased under an instalment sale agreement could protect their right of ownership over the vehicle until such time as the purchase price has been settled in full by the purchaser (or debtor).
This protection of ownership is by virtue of a retention or reservation of ownership clause.
This clause states that legal ownership to the vehicle will not pass from the seller to the purchaser until such time as the purchaser has paid for the vehicle (or other goods) in full. A right for the seller to enter the purchaser's premises to repossess the vehicle would also be included under this clause – ensuring that the seller would not be trespassing on the purchaser’s private property if required to repossess the vehicle.
And that all seems straight forward enough. Right?
-> But what happens if it’s not the purchaser (or debtor’s) deferring of payment (or default) that raises alarms and causes issues?
It does happen. And the question inevitably is – NOW WHAT?!
When the Creditor is at fault..
Shock and horror all around.
What if the credit provider (or the car dealership) goes belly up? What is the right of recourse of the debtor (or purchaser of the vehicle) that is still paying the monthly instalments?
As unlikely as this sounds, it wouldn’t be the first time.
And the important thing now is the establishment of what happens to the vehicle the purchaser has been paying off? What happens to the funds?
All pertinent questions.
Ordinarily (and in the ordinary cause of events) if the debtor were to default on payments and later files for bankruptcy, the creditor – due to the reservation of ownership clause – would institute legal proceedings and either demand from the trustee or liquidator (if one is appointed) payment of the outstanding debt or would (eventually) acquire the right to repossess the vehicle – after all, that’s the entire point of the reservation of ownership clause.
But what happens when it’s the other way around i.e. the creditor goes insolvent? The instalment sale agreement, the actual instalments paid and transfer of ownership of the vehicle naturally comes into question.
So, let’s clarify.
The words “reservation of ownership” sound as if the vehicle (or other goods) sold in terms of an instalment sale agreement by a creditor (the car dealership) that shockingly goes into liquidation immediately results in a return of the vehicle to the creditor (car dealership). But that is not entirely true.
If the debtor in this instance is the actual purchaser, after the institution of legal proceedings, a return of the vehicle may be the outcome. But we are forgetting on very big piece of this pie.
-> The rights of the purchaser of the vehicle.
The instalment sale agreement does do – by virtue of the reservation of ownership clause, gives the purchaser both possession of the vehicle but also the real right of use and enjoyment. The purchaser (who is our “ideal” example has not defaulted on a single payment), would theoretically, become a creditor in the insolvent estate of the car dealership.
See where we’re going with this? The tables have kind of turned….
But before we talk liquidation, we first need to start off our discussion with business rescue – this is the normal and ordinary course of events, after all.
The car dealership is placed under business rescue
Before a company even gets to insolvency and the resulting liquidation of a business, it will – most likely – be placed under business rescue.
Section 128(b) of the Companies Act 71 of 2008 (CoAct) defines business rescue as follows –
“(b) ‘‘business rescue’’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for— (i) the temporary supervision of the company, and of the management of its affairs, business and property; (ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and (iii) the development and implementation, if approved, of a plan 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;”
And this essentially entails rehabilitating a company by providing it with a (temporary) supervision of its day-to-day activities but also (and more importantly) in managing its affairs, business, and property.
Whilst under business rescue, there is a prohibition placed on the rights of all claimants against the company under business rescue in respect of any property in its possession. In addition, in order to “rescue” the company, a restructuring plan is put into place to -
- reorganise the company’s affairs, business, property, debt, liabilities and any equity it may have in order to encourage the company to continue operations on a solvent and “a-ok” basis. But if after trying to rescue the company, it’s still not possible for it to continue operating – there is an overall more favourable result for the company’s creditors should it go into liquidation.
It’s important to note that Section 134(3) of the CoAct sets out the protection of property during business rescue. Something you may be curious about as the purchaser of a car that is “owned” by a car dealership that has – essentially – gone “belly-up”. What happens to the instalments you have been paying (religiously)?
“134. Subject to subsections (2) and (3), during a company’s business rescue proceedings—
(3) If, during a company’s business rescue proceedings, the company wishes to dispose of any property over which another person has any security or title interest, the company must— (a) obtain the prior consent of that other person, unless the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by that person’s security or title interest; and (b) promptly— (i) pay to that other person the sale proceeds attributable to that property up to the amount of the company’s indebtedness to that other person; or (ii) provide security for the amount of those proceeds, to the reasonable satisfaction of that other person.”
And what the above boils down to is quite simple – if during business rescue proceedings, the car dealership wants to sell your (as the purchaser’s) vehicle over which you have the right to use and enjoy (in other words over which you have security), the car dealership is obliged and must obtain your prior consent before selling the vehicle.
The caveat being – if selling the vehicle would be enough to fully discharge the car dealership’s indebtedness that is protected by your (as the purchaser’s) security. Which in reality is highly unlikely.
A further “but” arises here the car dealership would need to - as soon as possible – and after selling the vehicle, pay over the proceeds equal to the amount that you (as purchaser) have already paid.
In the matter of Energydrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd and Others 2017 (3) SA 539 (GJ), the Applicant (Energydrive) was the owner of certain equipment which was leased to the Second Respondent (Winplas). A reservation-of-ownership clause was included in the lease. When Winplas went into business rescue proceedings, the Fourth Respondent (Knoop) was appointed as its business rescue practitioner (the “practitioner”). Knoop proceeded to sell the leased equipment to the First Respondent (Tin Can Man), without complying with the requirements as set out in S134(3) of the Act. A definite no-no.
When Energydrive attempted 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 CoAct and could thus keep the equipment. However, the Court disagreed with this contention and granted the application, directing Tin Can Man to deliver the equipment back to Energydrive.
The Court held that S134(3) of the Act permitted a practitioner to sell the property, which was subject to security or reservation of ownership clause, without the consent of the creditor concerned, if the proceeds of the sale would be enough to fully discharge the indebtedness protected by the security. But in order for this to happen, the practitioner would have to – as soon as possible - pay the debt due to the secured creditor (or owner), or provide satisfactory security.The obligation to promptly pay (or secure by means of suitable security) the debt is a requirement for the valid transfer of ownership by the practitioner by way of a sale and delivery in terms of Section 134(3). 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.
The moral of
Energydrive matter? Get consent before selling the asset in question and then promptly pay the creditor - validly destroying any right of ownership of the company in liquidation.
The car dealership is under liquidation!
Should business rescue have failed and the car dealership does indeed go into liquidation, the purchaser( and once debtor of the car dealership) now becomes a creditor in the car dealerships insolvent estate.
In order for you - as the purchaser - of the vehicle and in order to protect your rights of use and enjoyment (and ensure that your studious payment of the instalment amounts has not been for nought), there are a few things that need to happen first.
Firstly, in order show reservation of ownership or to show that there is security over the vehicle, the asset needs to be identifiable. Section 83 of the Insolvency Act 24 of 1936 finds application here –
“83. (I) A creditor of an insolvent estate who holds as security for his claim any movable property shall, before the second meeting of the creditors of that estate, give notice in writing of that fact to the Master, and to the trustee if one has been appointed.
(3) If such property does not consist of a marketable security or a bill of exchange, the trustee may, within seven days as from the receipt of the notice mentioned in sub-section (I) or within· seven days as from the date upon which the certificate of appointment issued by the Master in terms of sub-section (I) of section eighteen or sub-section (2) of section fifty-six reached him, whichever be the later, take over the property from the creditor at a value agreed upon between the trustee and the creditor or at the full amount of the creditor's claim, and if the trustee does not so take over the property the creditor· may, after the expiration of the said period but before the said meeting, realise the property in the manner and on the conditions mentioned in sub-section (8),
(8) The creditor may realise such property in the manner and on the conditions following, that is to say- · (a) if it is any property of a class ordinarily sold through a stockbroker the creditor may forthwith sell it through a broker approved of by the trustee or the Master; (b) if it is a bill· of exchange, the creditor may realise it in any manner approved of by the trustee or by the Master; (c) if it consists of a right of action, the creditor shall not realise it except with the approval of the trustee or of the Master ; (d) if it ·is any other property, the creditor may sell it by public auction after affording the trustee a reasonable opportunity to inspect it and after giving such notice of the time and place of the sale as the trustee directed.
(10) Whenever a creditor has realised his security as herein before provided, he shall forthwith pay the nett proceeds of the realization to the trustee, or if there is no trustee, to the Master and thereafter the creditor shall be entitled to payment, out of such proceeds, of his preferent claim if such claim was proved and admitted as provided by section forty four and the trustee or the Master is satisfied that the claim was in fact secured by the property so realised. If the trustee disputes the preference, the creditor may either lay before the Master an objection under section one hundred and seven to the trustee's account, or apply to Court, after notice of motion to the trustee, for an order compelling the trustee to pay him forthwith. Upon such application the Court may make such order as to it seems just.”
- To put this in very simple terms – in the instalment sale agreement the purchaser of the vehicle (the original debtor) becomes a preferred creditor in the car dealerships liquidated estate.
In order to secure his/her/their rights over the vehicle, the purchaser (now a creditor) will need to give notice to this effect to the Master and to the Liquidator (if one is appointed). If the goods are not taken over by the Liquidator, the preferred creditor will now have a right to sell the vehicle in a public auction.
Following the public auction, the proceeds realised must be paid over to the liquidator, after which, the creditor is entitled to receive a dividend subject to the creditor having proved a claim in the liquidated estate i.e. the right to use and enjoy.
But this is strictly what is contained in applicable legislation. What actually happens in practice?
While there are rules to follow whether under business rescue or liquidation, there is no getting away from the fact that the car dealerships right’s to claim payment of the instalment amounts forms part of the car dealerships now liquidated estate.
But what saves the situation is this – the car dealership or it’s trustee or liquidator (if one is appointed) is not entitled to sell the asset (being the vehicle in this instance) without the consent of the creditor (which in terms of our example is the purchaser of the vehicle being paid off in instalments).
Practically speaking – and in order to ensure what is best for both the creditor (being the purchaser of the vehicle) and the debtor (now the car dealership) is taken into account.
Ordinarily – the terms of the instalment sale agreement are not altered – meaning the purchaser (or creditor) still pays over the instalment amounts to the liquidator. The terms of the agreement remain unaltered and the potential sale of the vehicle cannot happen without the explicit consent of the purchaser (as set out above).
- The liquidated estate is therefore still obliged to perform – meaning when the purchase price has been paid in full ownership of the vehicle will officially pass to the purchaser.
In some cases, the liquidator will assess the situation, taking into account the outstanding amount on an asset (being the sexy convertible in our example), he/she/they will discount the outstanding amount to an easily payable number so that the purchaser (who is now a creditor) is able to settle the outstanding amount and then claim the transfer of ownership from the – now insolvent - car dealership to the purchaser.
The liquidator does this in order to acquire cash – a valuable commodity in liquidation proceedings – so that the insolvent estate can be wound up “that much quicker”.
It’s important to note – that in practice – it is rare for the liquidator to take possession of the vehicle (or other asset) or terminate the agreement. The liquidator will usually still perform under the terms of the instalment sale agreement - and ensure the now creditor is able to pay for the vehicle in full (and at a discounted rate) and acquire the transfer of ownership.
Should the liquidator decide to sell the property, he/she/they will require the consent of the purchaser (who I now a creditor0 in order to do so. Once the asset is sold, the amount realised will form part of the estate and the purchaser (now a preferred creditor) will acquire a right to claim payment of a sum of money.
Yeah. We know.
This may be a little more complicated than when a debtor simply defaults on a payment. And there is a lot to take in. Both from a legal as well as a practical perspective.
So, if you have any questions on the information we have set out above or have a personal issue which you want to discuss with a suitably qualified legal professional, please don’t hesitate to contact us at NVDB Attorneys.
We are a law firm that considers honesty to be core to our business. We are a law firm that will provide you with clear advice and smart strategies - always keeping your best interests at heart.