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Business rescue and reservation of ownership

July 7, 2017

Since the inception of business rescue proceedings, there is uncertainty in respect of the rights of creditors they previously enjoyed. One of these rights is ownership in movable assets.

Often creditors reserve ownership in moveable assets in case the debtor is unable to pay. Business rescue practitioners often dispute these rights and dispose of the assets.

In Energydrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd and Others 2017 (3) SA 539 (GJ) the court was called upon to determine the meaning and effect of a reservation of ownership clause in the context of a business rescue.

The lessor leased equipment to the lessee, which contained a reservation of ownership clause. The lessee’s business, including the leased assets, was sold after it commenced with business rescue proceedings. The lessor sought to recover its assets from the purchaser.

In terms of Section 134 of the Companies Act, a company in business rescue may dispose of ‘any property over which another person has any security or title interest’. However, the company must obtain the prior consent of that person, unless the proceeds are sufficient to settle the indebtedness. The company must however promptly settle the indebtedness or provide security.

In the above matter, the purchaser argued that the proceeds of the sale were sufficient to fully settle the indebtedness to the lessor and therefore become the owner of the assets.

The court interpreted the reservation of ownership clause in a lease to be a ‘title interest’ in terms of section 134(3) of the Act. The court found that the lessee was entitled to sell the assets, with or without consent, despite the reservation of ownership. However, the practitioner must promptly pay the debt due to the lessor, or provide security, therefore.

The practitioner did not promptly pay the debt or provide security. The court ruled that these conditions are a requirement for the valid transfer of ownership. As the practitioner did not comply with these conditions the court ordered the return of the leased assets to the lessor.

The Energydrive judgment provides some comfort to creditors who reserve their rights of ownership.