Reservation of ownership: How protected are you?

Our courts are making progress in finding a path through the muddy waters in this regard and every day a judgment is delivered that sheds some light on previous uncertain propositions.

Creditors often reserve ownership in movable goods when entering into certain transactions for comfort that should the other party become financially distressed or be wound up, some form of security in respect of such movable property will be retained, if not pure ownership.

Business rescue practitioners often dispute such rights of creditors and attempt to dispose of movable assets subject to reservation of ownership.

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.

Energydrive Systems (Pty) Limited (Applicant) leased a power-saving variable-speed drive system (Equipment) to Winplaas (Pty) Limited (Second Respondent) by way of a written lease. The lease contained a reservation of ownership clause in favour of the Applicant. The value of the Equipment was approximately R800 000. The Equipment was installed in the plant of the Second Respondent on the latter’s premises. The Second Respondent went into business rescue. The fourth respondent was the business rescue practitioner of the Second Respondent. In that capacity, the fourth respondent concluded a sale agreement with Tin Can Man (Pty) Limited (First Respondent). The sale agreement described the goods sold to include the “movable items situated
in the premises”, which in turn included the Equipment. 

The Applicant brought an application, in the form of a rei vindicatio, and claimed from the First Respondent return of possession of the Equipment on the basis that the Applicant, pursuant to the reservation of ownership clause, remained the owner of the Equipment. 

Pursuant to the sale, the First Respondent took possession of all the movable goods on the said premises, including the Equipment, and the First Respondent claimed that it became owner of the goods on the premises in terms of the sale agreement and delivery when it took possession.

The court confirmed that the First Respondent could not raise the defence that the Applicant did not retain ownership of the goods as such a defence would not have been available to the Second Respondent because of the reservation of ownership clause, and the Second Respondent could not transfer more rights than it had. The court confirmed that the common law does not allow the Second Respondent to transfer ownership of the property of another (the Applicant’s) because a transferor of rights cannot transfer more rights than it has.

The First Respondent in its defence, however, also relied on a statutory right in terms of s 134(3) of the Act, which provides that: 

(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:

• 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
• promptly:
• 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
• provide security for the amount of those proceeds, to the reasonable satisfaction of that other person.

The argument advanced on behalf of the First Respondent was that the fourth respondent had the right to sell the Equipment without the consent of the Applicant because the proceeds of the disposal were sufficient to fully discharge the indebtedness of the Second Respondent to the Applicant. 

The court, in determining whether the Equipment constituted “security or title interest” in terms of s134(3), considered recent cases which dealt with the correct approach to interpretation of legislation. In essence the courts now approach interpretation of, among other things, legislation by attributing meaning to the words used in a document and by having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence.

The Act does not define the word “security” as used in s134. After seeking guidance from definitions in other statutes, the court concluded that, in general terms, the phrase “property over which another person has any security” in s134(3) of the Act refers to property of the company under business rescue which secures an indebtedness of the company, for example property subject to a notarial bond.

The Applicant’s case was not that the Equipment was the property of the Second Respondent over which the Applicant held “security” and the court held that the reference to “security” in s134(3) did not assist the Applicant.

The court conceded that reference to “title interest” in s134(3) is more difficult to deal with and noted that the meaning of the combination of these two words, “title interest” is novel in South African law. The court found that the legislature chose to refer to “title interest” as an alternative to security and that it must have been intended to mean something other than “security”. The last portion of ss(a) indicates that, like “security”, “title interest” is something which safeguards the payment of the indebtedness due to the creditor of the company under business rescue.

Considering that it is not unusual for the word “title” to be used as a synonym or alternative for ownership, the court held that the term “title interest” would include a reservation of ownership clause such as the one in the lease between the Applicant and the Second Respondent. 

The court concluded, after finding that the purpose and context of business rescue are not aimed at the destruction of the rights of a secured creditor, that s134(3) of the Act allows a company under business rescue to dispose of property which is subject to “security” or a reservation of ownership clause without the consent of the creditor concerned only if the proceeds of the disposal would be sufficient to fully discharge the indebtedness protected by the security. Section 134(3)(a) authorises a business rescue practitioner to dispose of the property of the company under business rescue by selling and delivering such property. In such event s134(3)(b) requires the practitioner to promptly pay the debt due to the secured creditor or owner, or provide security therefore to the reasonable satisfaction of the Applicant.

Of importance for creditors in this position is the finding by the court that such obligation to pay or secure the debt is not a mere personal right against the practitioner but that the obligation to promptly pay or secure the debt and the consideration is a requirement for 

the valid transfer of ownership by the practitioner by way of a sale and delivery in terms of s134 without consent of the creditor. The rights of the creditor will only be terminated on payment or the provision of other security.

On the facts the court held that the fourth respondent did not pay or secure the debt due to the Applicant and as such the practitioner did not validly destroy the right of ownership of the Applicant and found the Applicant is still to be the owner of the Equipment.

The Energydrive judgment provides some comfort to creditors who reserve their rights of ownership. It also emphasises the importance of seeking proper legal advice when entering into commercial agreements to ensure that all your rights are properly protected in the event of further financial distress of your co-contracting party.