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INSOLVENCY:

CHAPTER 7

UNCOMPLETED CONRACTS:

Contracts completed by the insolvent but not by the other contracting party:

. If insolvent carried out his side of the contract but the other party has not yet carried out his side, the right to claim that performance is an asset in the insolvent estate and the trustee is vested with that asset. . If the right is one of payment (i.e. the other party was the one paying for something) the trustee can claim the payment the same way he recovers money due to the estate. . If the right is one to performance (i.e. the other party had to deliver a thing bought) the trustee can sell the right along with the other assets in the estate or he can claim the performance and then sell it.

Contracts not completed by the insolvent:

. Sequestration does not suspend or put and end to the contract. . The trustee has a choice – to perform in terms of the contract or not. . Thus, he can choose to abide by it and perform the insolvent’s performance or he can terminate the contract (i.e. stop the other party’s power to sue for specific performance.). . The trustee must act in the interests of the concursus creditorim, so he can’t allow the other party to claim specific performance as this would only benefit one creditor. . Once trustee decides to continue with the contract or not, his decision must be final. If he does not decide in reasonable time, it’s presumed he does not intend to perform.

STATUTORY CONTROLS ON THE TRUSTEE’S ELECTION:

1. Contract to ACQUIRE immovable property:

REMEMBER that ownership of immovable property only passes once the property has been registered in the name of the buyer. . Section 35 applies when the immovable property concerned has not yet been transferred from the seller to the buyer of the immovable property. . Thus, the seller is still the registered owners of the property thus the property is part of the seller’s estate and not the purchaser’s estate. If the PURCHASER’S estate is sequestrated, the immovable property does not automatically fall into the insolvent estate. . Section 35 provides for the procedure that the seller must follow in order to prevent the immovable property from falling into the insolvent estate. . Thus where the insolvent contracted to acquire immovable property and it has not yet been transferred to him, the trustee must make the choice to uphold or repudiate the contract within 6 weeks after receiving written notice from the other party asking him to do so (s35). If the trustee fails to do so, the other party can apply to court for the cancellation of the contract and get return of the property, plus he 2

has a claim against the insolvent estate for damages he may have suffered due to the non-fulfillment of the contract – concurrent claim. . Note that s35 is not limited to contracts of purchase of immovable property, but in practice what is usually involved is a contract in terms of which the later insolvent bought immovable property, that person also has to pay the purchase price in installments, and he’s entitled to transfer only after the full purchase price is paid. . S35 does not apply at all to the case where the seller on immovable property goes insolvent before transfer has been given to the buyer – this is seen later. . What if the property was transferred to the estate of the insolvent?? I.e. the immovable property has been registered in the name of the buyer and the buyer has been declared insolvent before making his performance in terms of the contract. This is not s35. Here, the property forms part of the insolvent estate. Now the previous owner of immovable property is in a weak position at common law – he no longer owns the property; he merely has a personal right under the law of contract to claim the insolvent’s performance. Because the remedy of specific performance will not be granted in favour of the seller, the seller’s claim against the estate will be a concurrent claim for damages for breach of contract. (Thus, if seller sold house to insolvent, it was transferred to insolvent and insolvent not yet paid, the immovable property is still an asset in the estate, belonging to the estate, which will be sold to pay the creditors – the seller merely has common law on his side, which is a concurrent claim for breach of contract. No statute helps him like s35 – which can be used if the immovable property was NOT transferred and seller wants to get back possession from insolvent’s trustee.)

2. Hire of property:

. Where the insolvent hired property, the trustee may only repudiate or determine the contract of lease by giving notice to the lessor in writing. If the trustee does not within 3 months of his appointment notify the lessor that he desires to continue the lease on behalf of the insolvent, he is deemed to have repudiated. . Repudiation in accordance with s37 deprives the insolvent estate of any right to compensation for improvements. . The lessor has: (1) a preferent claim for rent payable from the date of sequestration to the date the lease was repudiated by the trustee. (2) If the property is immovable, a secured claim by reason of his tacit hypothec for unpaid rent owed at the time of sequestration (3) a concurrent claim in respect of any loss sustained because of the non- performance of the lease. . Section 37 only applies of the LESSEE goes insolvent not the LESSOR.

Consequences of repudiating the contract:

 If the solvent party cancels the contract by accepting the trustee’s repudiation, the solvent party may reclaim an asset already delivered to the insolvent only if the solvent party still owns it. If ownership has already passed to the insolvent the asset 3

falls into the insolvent estate. The solvent party can’t then compel the trustee to return the asset. He will have a concurrent claim for loss suffered (see below).  Thus, if the trustee repudiates the contract, the other party is stopped from suing for specific performance, even if he’s performed in full. But he may use the other remedies available for breach (cancellation and damages).  If the opposite party disregards the trustee’s repudiation and keeps the contract alive, he may prove a concurrent claim for damages in lieu of performance. But then he must deliver his side of the contract.  If he accepts the repudiation, he may: (1) recover any property handed over in performance of his obligations and still owned by him. (2) He is obliged to make restitution in accordance with the normal principles of law of contract. (3) He has a concurrent claim in respect of property already transferred and payments which he has made, to the debtor, and for loss suffered because of the breach.

Consequences of abiding by the contract:

 The trustee may choose to carry on with the contract, and then he steps into the shoes of the insolvent. He may then insist on receiving any performance owed by the other party and then he is bound to carry out the counter-performance owed by the insolvent.  In Brayant & Flanagan, see page 82 text book – this is a good e.g. of when trustee upholds the contract, then he must uphold the contract in full. The trustee and the other party must then perform the contract in full. Thus trustee can’t uphold in part and repudiate in part. The exception then is if the contract is divisible, the trustee may uphold the contract in part and repudiate in part.  The Act limits the right of the other party to exercise an accrued right of cancellation where the sale is a cash sale for movable property – s36 – a seller of movable property for cash, who has delivered the property but has not been paid, and who therefore has the right to cancel the contract and recover the property in terms of normal contract law, CANNOT reclaim the property from the trustee of the buyer’s insolvent estate unless:

* the seller has given notice in writing to the buyer or his trustee within 10 days after DELIVERY (not sequestration) that he reclaims the property and * if the trustee disputes his right to reclaim the property, he institutes legal proceedings within 14 days of receiving notice of the trustee’s objection. Thus, 14 days after trustee has disputed the seller’s right to reclaim the property.  S36 only regulates the position in the case of a cash sale of movable property where the buyer’s estate is sequestrated before he has paid the full purchase price, but after the property has been delivered to the buyer. A contract of sale is a cash sale if the purchase price is to be paid on delivery. Thus, where the parties have expressly agreed that the price will be paid on delivery or where they have not agreed about when the price will be paid. The opposite is a credit sale – here the parties agree that the seller will deliver the property but that the purchase price will be paid only on a later agreed date. So section 36 applies where it a cash sale of a movable, and the buyer, for example, gets delivery and pays by cheque, and then only is the cheque dishonoured. The seller remains the owner of the goods if he follows the procedure under s36. 4

Do self test questions in study guide page 88 – q1, 2, 4, 5 and 6.

Contracts which suspend or terminate on sequestration:

1. Employment contracts:

The sequestration of an employer’s estate suspends the employment contract between him and the employee with immediate effect. During the suspension: * the employee is not obliged to render services, he’s not entitled to his wage or salary, but may recover compensation for any loss suffered from the suspension. * No employment benefit accrues to the employee. The trustee may terminate the contracts as long as he has engaged in consultation aimed at reaching consensus regarding the measures to rescue the whole or part of the insolvent’s business. Trustee to consult with persons in terms of a collective agreement, or workplace forum, or trade unions or employees themselves. The contract will be terminated in one of 2 ways: * by the decision of the trustee or * by the expiry of 45 days after the appointment of the trustee. If the contract of employment is terminated, the ex-employee has a preferent claim against the insolvent estate. If his arrear remuneration exceeds the limits of the preference, he’ll have a concurrent claim for the balance as well as a concurrent claim for damages for premature termination of the employment contract.

2. Mandate

This is an agreement to perform some task or render a professional service to another – and it comes to an end on the insolvency of the principal or the agent, i.e. when the estate of either is sequestrated. It ends, it is not suspended. The contract of mandate is thus terminated.

Contracts which the trustee CANNOT repudiate:

1. Lease of immovable property:

o Because of the maxim “huur gaat voor koop”, the trustee, as a general rule, can’t repudiate a lease of immovable property where the insolvent is the lessor, and he must sell the property subject to the lease. o However, the trustee may be compelled to repudiate the lease if the property is subject to a real right like a mortgage bond that was registered BEFORE the lease. But he is required initially to try to sell it subject to the lease. If the highest bid is not sufficient to cover the amount due to the holder of the real right, he must, at the request of the holder, sell it free from the lease. The lessee then has a concurrent claim for damages for loss suffered from the breach of the contract.

2. Sale of land on installments:

o The Alienation of Land Act Chapter II provides protection to the PURCHASER where the seller becomes insolvent. 5 o The trustee’s right to repudiate may be excluded where the insolvent has:

* sold land on installments; * alienated land, which has subsequently been sold on installments; * and the land has not been transferred yet. o The type of transaction in Chapter II is the sale of land on installments in which the purchase price is payable in 2 or more installments over a period exceeding 1 year. o To provide for the case where the land has been transferred again, the Act uses: * Remote purchaser and * Intermediary o A remote purchaser: person who buys land in terms of a contract from someone who is not the owner of the land. o An intermediary: is a person who sells land to a remote purchaser or who has alienated land which, after alienation, is sold by another person to a remote purchaser, and which at the time of the sale, has to still be transferred to the 1st mentioned person.

Intermediary ------R.P (not owner)

OR

Seller ------Intermediary ------sells land to------R.P (Insolvent) (Not owner yet)

OR

Insolvent ------X ------alienated land to------Y ------sells it to------R.P (Intermed) (still to be transferred to him)

 Therefore, if insolvent sold land to the buyer in terms of a contract, the buyer can compel the trustee to transfer the land IF he pays all the transfer costs PLUS either: * the total outstanding amount in terms of the alienation OR * All costs regarding the administration, endowments or levy’s or the amount to discharge a mortgage bond on the property

whichever is the larger.

Arrangements for payment are to be made to the satisfaction of trustee within the period allowed by the trustee, but not less than 30 days.

 If the insolvent alienated land to an intermediary, he is in the same position as a buyer and can compel transfer in his favour.  If the insolvent alienated land and it was subsequently alienated to an intermediary or remote purchaser, either the intermediary or the remote purchaser can claim transfer if: 6

* he fulfils the obligations in terms of his own deed of alienation AND * the obligation of every intermediary between the owner and himself.  If the transfer is not claimed by any of the parties entitled to it and the trustee abandons the agreement made by the insolvent and realizes the land for the benefit of the creditors, the buyer of the land under the contract which has been recorded against the title deeds of the land, has a preferent claim in respect of the proceeds of the realization. He ranks immediately after the claim of a mortgagee whose bond was registered before the recording of the contract and equals the amount the buyer may recover in the event of the contract being terminated.  Regarding the sale of land NOT covered by Chapter II, common law applies and the trustee becomes the owner of the land and must decide whether to perform or not – in the best interests of the creditors. If he chooses not to perform, the other party may not demand transfer, even if he performed in full, and he only has a concurrent claim for damages for breach.

3. Sale of goods in terms of installment sale transaction:

Some authors argue where that the seller of goods under an installment sale transaction is declared insolvent before the price has been fully paid and ownership has passed to the buyer, the trustee is not entitled to repudiate the contract and vindicate the goods, provided the buyer continues to fulfill his obligations in terms of the contract. It is submitted that the trustee is entitled to repudiate the sale, in the same way he can any other contract. If he does repudiate, he may recover the goods, and the buyer merely has a concurrent claim for damages.

4. Purchase of goods in terms of installment agreement:

Special rules apply where the insolvent has bought goods in terms of an agreement falling within the scope of the National credit Act of 2005. S84 (1) provides that, on sequestration of the buyer’s estate, the seller automatically acquires a hypothec over the goods, whereby the balance outstanding under the agreement is secured. This section applies only when goods are sold on credit. The goods are delivered immediately but payment is only made at some future date. The general rule that ownership, for credit sales, passes on delivery, is excluded by express agreement. The parties thus agree that ownership will pass only at a later stage. Thus the seller remains the owner until that date arrives. Should the seller become insolvent, the buyer is in a weak position. If the buyer goes insolvent, s84 applies The effect of s84 is that the seller loses his right of ownership and in return, as stated above, acquires a hypothec over the goods for the outstanding purchase price. BUT WHO IS THE OWNER? ONE CANT HAVE A HYPOTHEC OVER ONE’S OWN PROPERTY!! Thus ownership, by law, passes from seller to buyer and the goods fall into the insolvent estate, then only can the seller acquire a hypothec over it (neither the seller, buyer nor the trustee has a choice on whether the hypothec can be created – it arises by law). The trustee then, if required by the seller, must deliver the goods to 7

him, and then he has a secured claim and the sale of the goods will be used to pay him. In terms of s84 (2), if the debtor returns the property to the seller within one month before sequestration, the trustee may demand that the seller deliver to him the property or the value at the date of return, subject to the payment to the creditor by the trustee or a deduction by or from the value of the property of the difference between the total amount payable under the transaction and the total amount actually paid under it. The trustee can thus reclaim the property for the benefit of the creditors where the outstanding amount is disproportionately small compared to the value of the article returned.

Legal proceedings commenced before insolvency:

 Criminal proceedings are in no way affected by sequestration.  Civil proceedings by or against the insolvent are automatically stayed until a trustee is appointed.  A party who wishes to continue stayed proceedings against the estate must:

* within 3 weeks after the 1st meeting of creditors, give notice of his intention to the trustee and: * after expiry of 3 weeks from the date of the notice, prosecute the proceedings with a reasonable speed.  If he fails to give the required notice, the proceedings automatically lapse.

Summary:

Repudiation: breach of contract – the repudiating party doesn’t intend to perform his obligations under the contract. Repudiation gives the other party to the contract (innocent party) the right to claim appropriate remedies for breach.

Specific performance: requires the court to order the party who is in breach of contract to carry out his obligations under the contract. Usually the court would exercise its discretion to grant or refuse specific performance. Where sequestration has occurred before the insolvent has performed his contractual obligation, the court would refuse to grant specific performance in favor of the creditor who requests the order. If the court were to grant specific performance in favor of this creditor, this creditor would be given an unfair advantage over the others.

When the parties negotiating the terms of a contract reach an agreement and form the contract = concluded = the parties have entered into a contract. The contract imposes rights and duties on the parties to the contract and these duties to perform may still not have been performed by the time the estate of one of the parties is sequestrated = contract has been concluded but not yet completed 8

S36 example T sells his car to B- the parties don’t agree on when the purchase price is to be paid. T delivers the car to B and B gives him a cheque for the purchase price. B’s estate is sequestrated 2 days later. The bank refuses to pay the cheque, because there aren’t enough funds in the bank account. T may reclaim his car from the buyer = under S36 T must give written notice within 10 days after the delivery of the car to B – to the master or B’s trustee that he reclaims the car. If the trustee then disputes T’s right to reclaim the car – T must institute legal proceedings within 14 days after the received notice of the trustee’s attitude. If T fails to take these steps, the car will be an asset in the insolvent estate and T will only have a concurrent claim for the purchase price.

S20 example Before sequestration of his estate T sold his house to B in terms of a contract, which falls under chapter 2. The contract is registered against the title deed of the property BUT a prior mortgage has also been registered against the property. At the time of the sequestration of T’s estate, B has already made payment of R80 000 and he still owes R100 000 in terms of the contract.

The R100 000 is more than the total of the amount outstanding on the mortgage. B may now claim transfer of the trustee of T’s estate by making arrangements for the immediate payment of the R100 000 to the trustee. If B does so he gets transfer and the outstanding debt under the mortgage is paid from the amount of R100 000 But if B can’t make the satisfactory arrangements and the trustee sells the property by public auction, because he isn’t prepared to continue with the contract on its original terms. B has a secured claim for the repayment of R80 000 which he has already paid in terms of the contract. This secured claim is paid out of the proceeds of the auction and ranks directly after the mortgage.

S84 (2) Example Before sequestration of T’s estate he bought a car from city motors in terms of a contract to which S84 applies. Because he couldn’t meet his installments he returned the car to city motors within a month prior to the sequestration of his estate. At that stage the car was worth R40 000, the insolvent still owed R10 000 of the purchase price at the time the vehicle was returned. The trustee can now claim R30 000 from city motors. The trustee can rely on S84 only if the value of the goods is greater than the outstanding purchase price. Only then will it be in the interests of the creditors of the estate