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LANDLORDS - BEWARE THE CESSION TRAP
Banks - and other creditors - often require a cession of your debtors as security before advancing loans or credit. That's good business practice on the creditor's part, but if you sign a cession, don't lose sight of it (easy to do over time), or you could find yourself in the same unhappy position as a landlord recently before the Supreme Court of Appeal.
The landlord's bond agreement incorporated a standard "cession of rentals" clause. Then when the tenant fell into (substantial) arrear with rentals, the landlord duly sued it.
The dismissal of the landlord's claim on appeal highlights the trap that the landlord had fallen into. Ceding a debt deprives you of the right to recover the debt; only the holder of the cession can sue. The landlord's defeat lumbered it with legal costs (doubtless considerable) - but, possibly even worse, a major risk in the wrong creditor suing is always the waste of time, which could cause you to lose your claim altogether through prescription. - Record all debtor cessions as you sign them;
- Ensure that all cessions are formally cancelled as soon as you have settled the creditor;
- Haul out your list of cessions when instructing your attorneys to sue any debtor, so that the necessary legal steps can be taken to have the debt receded to you before you start running up costs.
DEBT COLLECTION: HARD TIMES, HARD MEASURES
As a creditor in these tough times, how do you go about recovering from a recalcitrant debtor?
If the normal collection process is clearly not going to yield results, take advice on whether a sequestration application may be an option - it won't get blood from a stone, but it's well worth considering if a debtor is hiding assets or just delaying the inevitable.
Note that it is not enough just to show that the debtor is factually insolvent, or has committed an "act of insolvency": - - You must further prove that sequestration will be advantageous to creditors - if the debtor has no assets, and there is no prospect of any coming to light, you are going to fail at this hurdle;
- The advantage must be to the general body of creditors (as opposed to the interests of individual creditors, yourself included);
- You don't need to prove that sequestration will be advantageous to creditors - merely that there are facts that, at first sight, "engender a rational and reasonable belief" that it will;
- Calling for an investigation of the debtor's true financial situation (at an enquiry in terms of the Insolvency Act) isn't enough in itself. You must also show that there is a "not too remote possibility that concealed assets will be found or others recovered" through such an enquiry. Thus the High Court recently granted a provisional sequestration order in just such a case, over the objections of both the debtor and a major creditor (a bondholder).
BUYING A BUSINESS? READ THIS FIRST!
When you buy anything, make sure that the sale agreement correctly records both any representations the seller may make to you, and the consequences if they turn out to be unsubstantiated.
If your purchase turns out to be defective, you will normally have a claim for a reduction in price (even rescission of the whole sale in some instances) if you can show: -- That the thing sold was defective at the time of the sale, and
- That the seller made a "material statement" to you, which you relied on in agreeing to the sale and/or the price, and
- That the statement related to the "quality" of the thing sold, and went "beyond mere praise and commendation" (lots of grey areas there!), and
- That the statement turned out to be wrong, and
- That you paid more than the thing was worth on the basis of the statement.
That last requirement can be particularly challenging when you are buying a business. In a case recently before the High Court, the parties had negotiated a sale price on the basis of a "management account", which showed a profit in the business. The seller warranted that the audited income and expenditure statement, when produced, would not differ materially from the management account. But they didn't match - the final statement showed a loss.
The buyer, when sued for the balance of the purchase price, brought in an accountant to give an expert opinion that the true value of the business was only about half the agreed price.
The problem was that the buyer's accountant reached his valuation on the basis of the financial statements prepared by the seller, which the Court had held to be "unreliable" and "fatally flawed". Hence there were "insufficient reliable and accurate facts and figures to enable the court to arrive at a proper value", and the buyer had failed to prove the "diminished value of the business".
In effect the seller's own inaccurate financials protected him from having to accept a reduced price, and the moral clearly is that proving the true value of the business after the sale is never going to be straightforward.
Have the sale agreement and financial figures professionally checked before you sign.
DIRECTORS' DUTIES AND UNLAWFUL COMPETITION
Directors have "a fiduciary duty to exercise their powers in good faith and in the best interests of the company", they may not make "secret profits", they must avoid any conflict between their duty to the company and their personal interests, and a director may not acquire or exploit any "corporate opportunity" (e.g. a new customer or product) that should correctly be given to the company.
Determining what is and what isn't a "corporate opportunity" involves "in each case a close and careful examination of all the relevant circumstances" - there is no hard and fast definition, and every case will be different.
Another grey area arises where the new opportunity - or some part of the existing business of the company - is given to a third party, perhaps to a shelf company acquired by a departing director for the purpose of setting up a new business. That could amount to "unfair competition", a broad concept in our law designed to protect businesses from a wide-ranging variety of unfair conduct.
There will be cases where there is nothing wrong with a director diverting an opportunity outside his/her company (in a recent Supreme Court of Appeal case, a director was exonerated in respect of 4 of 5 opportunities complained of), but tread carefully - and take advice if there is the slightest doubt.
SCHOOL DRUGS, DRINKING, DISOBEDIENCE - THE EXPULSION OPTION
Our constitutional right to "proper basic education" means that schools cannot lightly expel learners for misconduct.
But two recent High Court cases send a clear warning to such learners (and their guardians) that expulsion is justified where serious misconduct jeopardises the right of other learners to be educated "in a safe environment", or (as in the case of the second school) where it takes place "in a progressively worsening disciplinary situation" at the school.
Expulsions were confirmed, in the first case, of a learner found guilty of selling dagga on the school premises (and smoking it in school uniform elsewhere); in the second, of 11 learners variously found guilty of drinking liquor or of smoking dagga on the school premises, or of gross insubordination to the headmaster.
Schools must act in terms of a Code of Conduct conforming to statutory requirements, and, when misconduct is alleged, must hold "fair disciplinary proceedings", and must "act fairly in affording the affected individual the opportunity of a fair hearing".
WHY DID THE COW CROSS THE ROAD?
"Because it could", seems to have been the answer in a case recently before the Supreme Court of Appeal. A herd of cattle strayed onto a public road, and a motorist who collided with one of them sued the farmer from whose lands the cattle had strayed.
The Court found that it was not enough that the farmer had fenced and gated the grazing camp, nor that his employee had closed the gates on the day in question. Someone else had clearly subsequently left the gates open, and the farmer had been "causally negligent" in failing to take further precautions (such as padlocking the one gate, or installing a cattle grid).
The fact that someone else owned the bull in question was no excuse - the owner had leased grazing from the farmer, who "clearly exercised control over the grazing camp in which the bull had been allowed to roam freely unsupervised".
The principle is important to all of us, not just to farmers. We are at risk of liability whenever we exercise control over animals - or over property containing animals - no matter whose they are.
WEBSITE OF THE MONTH: AWESOME SOUTH AFRICA!
If after last month's visit to www.sagoodnews.co.za you still need a reason or two not to emigrate, or if you're working on an expatriate to come home (getting easier by the day, that one, with all the financial turmoil on foreign shores!), have a look at Awesome S.A.'s website at www.awesomesa.co.za and at the other sites on their links page at http://awesomesa.co.za/content/view/33/9/.
Have an Awesome November!
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