Introduction
In this article I look at what the law says on the protection of property rights during corporate rescue proceedings. It is very easy to go against the law on the disposal of a company property during insolvency proceedings. I am aware of practitioners who have been accused of disposing of assets improperly on the basis that they did not comply with the law.
Disposal of assets
Section 127 of the Insolvency Act (Chapter 6:07) (“the Insolvency Act” or “the Act”) applies. According to section 127(1) of the Act, during a company’s corporate rescue proceedings:
- The company may dispose, or agree to dispose, of property only (i) in the ordinary course of its business, or (ii) in a bona fide transaction at arm’s length for fair value approved in advance in writing by the practitioner or (iii) in a transaction contemplated within, and undertaken as part of the implementation of a corporate rescue plan that has been approved in terms of section 145.
To simplify the above, a company may dispose of its property in the following scenarios:
- In the ordinary course of its business, or
- In a bona fide arms’ length transaction approved by the corporate rescue practitioner, or
- If this is done as part of the implementation of an approved corporate rescue plan.
It is important for a practitioner to fully understand these situations to avoid being accused of acting without authority. It is usually prudent for a practitioner to seek necessary approvals before acting. This is usually through approval of a corporate rescue plan, meetings of affected persons such as creditors and members of the company.
Lawful possession of property where there is an agreement
According to section 127(1)(b) any person who, as a result of an agreement made in the ordinary course of the company’s business before the corporate rescue proceedings began, is in lawful possession of any property owned by the company may continue to exercise any right in respect of that property as contemplated in that agreement. This is subject to section 129, Effect of corporate rescue on employees and contracts.
It is clear that this subsection is pregnant with qualifiers. For example:
- The agreement should be made in the company’s ordinary course of business,
- Before commencement of corporate rescue proceedings,
- There has to be lawful possession of the property.
Also according to section 127(1)(c) despite any provision of an agreement to the contrary, no person may exercise any right in respect of any property in the lawful possession of the company, irrespective of whether the property is owned by the company unless the practitioner consents in writing.
Disposal of encumbered assets or with third party title interest
The Act also addresses disposal of a property in which another person has an interest. According to section 127(3) if, during a company’s corporate rescue proceedings, the company wishes to dispose of any property over which another person has any security or title interest the company must:
- Obtain prior consent of that 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 that other person or provide satisfactory security.
The mischief this subsection seeks to address is that a secured creditor should not be disadvantaged through disposal of the asset used as security.
Conclusion
The Insolvency Act has safeguards against unlawful disposal of the assets of a company which is under corporate rescue proceedings. Corporate rescue practitioners are advised to familiarise themselves with the requirements of the law and to always seek approvals where necessary.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Profile
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, registered tax accountant and advises on deal and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
