The importance of a well-drafted security agreement in the event of liquidation

0

The effect of a winding-up order is to crystallize in time the position of an insolvent company and to ensure that no further transactions can be entered into by that entity. In other words, once a company is in liquidation and OK has occurred, no creditor may exercise its rights against that company in a manner detrimental to other creditors.

This is a well-established principle of South African law, but what does it mean for a security taker wishing, in agreement with the insolvent company, to rectify a written agreement entered into before liquidation?

Van der Schyff J recently examined this question in Voltex (Pty) Ltd v First Strut (RF) Ltd (in liquidation) and others (GP), where a written assignment of title (in the form of an assignment of book debts) granted by First Strut to Voltex prior to liquidation, was found to contain an error, which was not detected until after liquidation.

The court held that two questions had to be decided when considering a request for rectification in the context of a liquidation:

  • whether rectification of the written agreement would change the nature of the petitioner’s insolvency claim to be something more than it was at the time the winding-up order was made; and
  • whether innocent third parties would be harmed as a result of the rectification?

In considering these issues, the court concluded that if the facts prove that:

  • a valid transfer of securities agreement was entered into between the parties before a liquidation order was issued, but
  • the agreement does not reflect the common intention of the parties in that the creditor is not properly described (as was the case here) and the evidence indicates that the insolvent and the creditor are in made the parties to the agreement,

rectification will not create or diminish any rights, because at law it existed when the competition creditorum have been established.

After reviewing the evidence, the court of Voltex The case held that, in effect, a security right had effectively arisen when the assignment of the security right had been concluded between the parties. As the law does not require that a transfer of securities be recorded in writing, the paper on which the agreement was recorded may be rectified to make it conform to the common intention of the parties at the time of the conclusion of the agreement.

The court further held that the rectification did not alter or enhance Voltex’s rights against First Strut. According to the evidence presented in court, Voltex had always been a secured creditor of First Strut and the rectification of the assignment of security merely corrected the documentation evidencing such an agreement.

As such, the court ordered that no other creditor could be harmed by a rectification order because rectification does not change the nature of the plaintiff’s claim, but rather confirms the status quo as it existed at the time of liquidation.

This case highlights the importance of a well-drafted security agreement. In the Voltex In this case, the rectification was granted because there was no formal requirement for the performance of the guarantee and the common intention of the parties was not disputed by the liquidators of First Strut. If the document had required, for example, registration at the Deeds Office and/or if the liquidators had disputed the identity of the security provider, the result could very well have been different.

Warranty documents should be carefully reviewed in each case to ensure that they accurately describe the parties, the subject matter of the warranty and the intention of the licensor and the collateral taker. Considerations of how the subject is to be handled during the term of the security document should also be carefully considered by the parties and appropriate contractual provisions should be included.

Share.

About Author

Comments are closed.