Western Cape Business News

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FINANCE: Good Paper Trail Is Vital


Recent Western Cape Business News

IN the first four months of 2009 the number of businesses liquidated has soared more than 45% compared to the same period of 2008 according to StatsSA – a consequence of the economic downturn and increasing financial constraints. The number of individuals that have faced sequestration has also escalated with insolvencies recorded for the first quarter of 2009 rising by more than 10% compared with the first quarter of 2008.

With these figures in mind anyone who has loaned goods, sold goods on instalment sale or placed goods in storage should ensure that the transaction is properly recorded in writing, says Nick Theunissen, a partner in Shepstone & Wylie’s Corporate and Commercial Department.

Sequestrations and liquidations have an obvious impact on creditors but they also affect third parties if the insolvent or the company in liquidation is in possession of assets owned by the third party.

What can be done in these circumstances to protect a third party’s rights to its assets, which are in the possession of an insolvent or a company in liquidation by virtue of a loan, an instalment sale agreement, a sale with reservation of ownership or a storage contract?

Ideally these transactions would be properly documented clearly demonstrating that ownership is retained by the lender, seller or depositor of the goods. If that was so then there should be little difficulty in securing the release of the goods, subject to paying any amount which may be owed to the insolvent or the company in liquidation.

Unfortunately this is not always the case.

An example of a loan which may lead to difficulties is where a manufacturer outsources part of its production process, and for that purpose lends plant and equipment and supplies raw materials to another entity which then encounters financial difficulties and is sequestrated or liquidated.

If the loan and the manufacturing arrangements are not recorded in a written contract the trustee or liquidator will, in all probability, claim that the plant, equipment and the raw materials are assets of the insolvent or the company in liquidation, and the owner will have to prove ownership. This is a simple matter if there is a written contract. But if not, proof by oral evidence may be difficult bearing in mind that the evidence of the insolvent or the directors of the liquidated company might not support the owner’s version of events.

If the manufacturer in this example has lent assets it should address the potential problem immediately and properly record the loan in writing.

If a loan has not been recorded in writing and a sequestration or liquidation has occurred it is too late to document the transaction. The owner will have to rely on its records and oral evidence to prove to the trustee or liquidator that it is in fact the owner of the goods.

The better the document trail in relation to the ownership of assets, the sooner those assets will be released by the trustee or liquidator.

A trustee or liquidator is not entitled to levy a commission in respect of assets which are not part of the insolvent estate and any attempt to do so should be resisted.

Where the asset is sold on instalment sale or with reservation of ownership and the purchaser is sequestrated or liquidated the situation is different, and section 89 of the Insolvency Act applies. In terms of that section the cost of maintaining and realising any property which is subject to an instalment sale or a right of retention is payable by the creditor or from the proceeds of the sale of the asset.

The asset can only be removed from custody with the consent of the trustee or liquidator or, if necessary, by court order.


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