Reservation of ownership

business rescue 1 scaled
22 Nov 2021

There is often a misconception that if a creditor sells goods on credit, in terms of an instalment agreement, to a company in which agreement the creditor reserves ownership of the goods, then upon liquidation of the company the creditor is entitled to the return of the goods.

An instalment agreement is defined in Section 1, paragraph a, b and c (1) of the National Credit Act 34 of 2005 as follows:

The sale of movable property in terms of which:-

  • all or part of the price is deferred and needs to be paid by periodic payments;
  • possession and use of the property is transferred to the company;
  • ownership of the property passes to the company only when the agreement is fully complied with.

Section 84 of the Insolvency Act 24 of 1936 (the Insolvency Act) creates a hypothec over the goods in favour of the party who sold the goods in terms of an instalment agreement to the company in liquidation whereby the amount still due under the transaction is secured. Ownership of the goods passes to the liquidator and the creditor becomes a secured creditor.

Thus the wording of “reservation of ownership” over goods sold in terms of an instalment agreement to a company that later goes into liquidation is misleading as the goods are not returnable but provides the creditor with a secured claim in the liquidated estate. The procedure is as follows:

In order to show reservation of ownership, the goods need to be identifiable.

Section 83 of the Insolvency Act deals with the realisation of the security that is held in respect of the goods sold.

In terms of this section, the creditor would have to, before the second meeting of creditors of the liquidated estate, give notice in writing to the Master and to the liquidator, if one has been appointed, that the creditor holds the rights in respect of the goods in question.

The liquidator, within 7 days from receipt of the abovementioned notice or within 7 days from the date which a certificate is issued by the Master, whichever is the later, may take over the goods from the creditor at a value agreed or at the full amount of the creditor’s claim.

If the liquidator does not take over the goods, the creditor may, after expiration of the said period but before the second meeting of creditors, realise the goods by way of public auction after affording the liquidator a reasonable opportunity to inspect the goods and after giving such notice of the time and place of the sale as the liquidator had directed.

If the goods are sold by public auction the proceeds thereof must be paid over to the liquidator, after which the creditor is entitled to receive a dividend subject to the creditor having proved a claim in the liquidated estate. Please be aware that the costs of realising the goods by way of public auction are paid by the creditor.

The creditor must be aware that the realisation of the goods is a lengthy process and reservation of ownership while providing security does not provide for immediate payment.

Therefore, while a creditor will not be entitled to the return of the goods sold to the company that is being placed into liquidation, it is important to have the reservation of ownership clause as a term in the instalment agreement as this will allow the creditor to be a secured creditor should the company be placed into liquidation.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

Insolvency & Business Rescue Updates articles on GoLegal