The effect of a liquidation order is to crystallise an insolvent company's position in time and to ensure that no further transactions can be concluded by that entity. In other words, once a company is in liquidation and the concursus has occurred, no creditor may exercise its rights against that company in a manner prejudicial to other creditors.
This is a well-established principle of South African law, but what does it mean for a security taker wishing to, by agreement with the insolvent company, rectify a written agreement concluded prior to liquidation?
Van der Schyff J recently considered this question in Voltex (Pty) Ltd v First Strut (RF) Ltd (in liquidation) and Others (GP), where a written security cession (in the form of a cession of book debts) granted by First Strut to Voltex prior to liquidation, was discovered to contain an error, which was only detected post winding-up.
The court held that two questions need to be determined when considering an application for rectification in the context of a liquidation:
- whether the rectification of the written agreement would change the nature of the applicant's claim on insolvency to constitute something more than what it was at the time when the liquidation order was granted; and
- whether innocent third parties would suffer any prejudice as a result of the rectification?
In considering these questions, the court found that if the facts prove that:
- a valid security cession agreement was entered into between the parties prior to a liquidation order being granted, but
- the agreement does not reflect the common intention of the parties in the sense that the creditor is not correctly described (as was the case in this instance), and the evidence indicates that the insolvent and the creditor are in actual fact the parties to the agreement,
rectification will neither create nor diminish any rights, as in law, it existed when the concursus creditorum was established.
After considering the evidence, the court in the Voltex matter held that on the facts, a security right did come into existence when the security cession was concluded between the parties. Because the law does not require a security cession to be reduced to writing, the piece of paper on which the agreement was recorded could be rectified to bring it in line with the common intention of the parties at the time that the agreement was concluded.
The court further held that the rectification did not alter or improve Voltex's rights vis-à-vis First Strut. On the evidence before the court, Voltex had always been a secured creditor of First Strut and the effect of the rectification of the security cession was merely to correct the documentation evidencing such agreement.
As such, the court ordered that no other creditor can be prejudiced by any order for rectification because the rectification does not change the nature of the applicant's claim, but rather confirms the status quo as it existed at the moment of liquidation.
This case highlights the importance of a well-drafted security agreement. In the Voltex matter, rectification was granted because no formal requirements for the execution of the security existed and the common intention of the parties was not disputed by First Strut's liquidators. Had the document been one which required, for instance, registration in the Deeds Office and/or had the liquidators disputed the identity of the security provider, the outcome may very well have been different.
Security documents should be carefully considered in each instance to ensure that they accurately describe the parties, the subject of the security and the intention of the security giver and security taker. Considerations as to how the subject matter should be dealt with during the tenor of the security document should also be considered carefully by parties and appropriate contractual provisions included.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.