An owner whose property is in the possession of another without consent can recover possession by way of vindication (rei vindicatio). But what happens if the person in possession is legally permitted to sell those goods?
In EnergyDrive Systems (Pty) Ltd v Tin Can Man (Pty) Ltd the Johannesburg High Court heard a matter dealing with the sale of leased movable assets in the possession of a lessee which was in business rescue. The lessee’s business rescue practitioner sold the lessee’s business including the leased assets. The lease agreement contained a reservation of ownership clause in favour of the lessor (applicant). The owner sought to recover its asset from the purchaser.
Section 134(3) of the Companies Act 2008 allows a company in business rescue to dispose of ‘any property over which another person has any security or title interest’. If the company wishes to dispose of the property it must obtain the prior consent of that other person, unless the proceeds of the disposal are sufficient to fully discharge the indebtedness protected by the other person’s security or title interest. The company must also promptly pay over to the holder of the security or title interest, the sales proceeds up to the amount of the company’s indebtedness. Alternatively, the company must put up security for the amount of those proceeds.
The court interpreted the reservation of ownership clause in the lease to be a ‘title interest’ in section 134(3) of the Companies Act, although the court could not find authority explaining the meaning of the phrase in South African law. The court reasoned that title interest meant something other than security. Both concepts of security and title interest used in section 134(3) however serve to safeguard the payment due to the creditor concerned.
The court therefore found that the leased assets were capable of being sold by the company pursuant to section 134(3), despite the reservation of ownership in favour of the lessor. In addition the consent of the lessor was not required because the proceeds of the disposal were sufficient to fully discharge the indebtedness due by the lessee to the lessor.
The business rescue practitioner however did not promptly pay over the sale proceeds to the lessor, nor did he put up security for the payment of those proceeds. The court regarded these conditions as immutable in determining the practitioner’s authority to sell the leased assets. These conditions are a requirement for the valid transfer of ownership in a disposal under section 134(3) which is undertaken without the consent of the creditor concerned. As the business rescue practitioner did not comply with these conditions the court ordered the return of the leased assets to the owner/lessor.
The holder of title interest may suffer prejudice in the value of the sale.
Section 134(3) limits the company’s obligation to only pay over to the holder of security or title interest so much of the sale proceeds as equals the amount of the indebtedness owed by the company to that person. This highlights a difficulty in interpreting title interest in section 134(3) too broadly. If the indebtedness safeguarded by a reservation of ownership is substantially less than the value of the asset concerned, then the holder of title interest may suffer prejudice in the value of the sale.
In a lease, the lease rentals may not be intended to equate to the value of the asset. Any sale of the leased asset that only realises an amount sufficient to cover lease-outstandings risks prejudicing the lessor who would lose an asset of greater value than the debt owed to it in respect of the lease of that asset.
Given this unbusinesslike outcome it seems that the reference to title interest in section 134(3) ought not to extend to assets which are leased. More practically, the reference to title interest works well in respect of the seller’s rights under an instalment sale agreement, where reservation of ownership clauses are common. Their instalment sale price would also typically be equal to or greater than the value of the asset. In those instances the instalment seller would conceivably not mind being repaid all of the outstanding instalments in full if the asset was sold.
As a caution, a lessor may need to reserve ownership in the lease. It remains owner and a lease generally never intends to transfer the ownership of the leased assets. In this case, the sale agreement entered into by the business rescue practitioner should have clarified that it sold only those assets which the company in business rescue owned or could validly transfer ownership of. It could not do so in respect of the leased assets and they should not have been included in the sale.