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Kustingsbrief and selling company property – two tough issues

MAIN IMAGE: Simei Verster, candidate attorney, Neumann Attorneys

Simei Verster

This week Simei Verster, candidate attorney at Neumann Attorneys, addresses two tough issues in the real estate legal world – the Kustingsbrief and selling company property.

If a company wishes to sell an asset that forms the biggest part of its assets, there are certain formalities that need to be met.

Section 112 and 115 of the Companies Act 71 2008 finds application. According to section 112(2) a company may not dispose of all or the greater part of its assets unless:

  • the disposal has been approved by a special resolution of the shareholders (with a 25% voting rights exercised in favour of the transaction)
  • such a disposal is not prohibited by the Memorandum of Incorporation
  • prescribed notice must begin to shareholders which details the terms of the transaction
  • after the disposal of assets, the company must pass the solvency and liquidity test.

If a company wishes to sell such an asset, the company needs to comply with the above, however the Act is silent regarding the effect of non-compliance, but the inference can be made that such transaction is voidable for two reasons:

  1. The obligatory wording of section 112(2) stating that a company “may not” dispose of such greater part of its assets without meeting the requirements and;
  2. The fact that section 112(5) states that such special resolution may ratify the transaction.

It seems only fair that should the resolution not be ratified, that the third party has a claim for damages against the said company in line with the Turquand Rule – which effectively states that third parties contracting with a company can assume that all the internal and external requirements have been met to authorise the transaction, unless it would be unreasonable to assume so.

Regarding the sale of immovable property, it is important to note that the special resolution together with proof of compliance in terms of Section 112 and 115 are lodged as supporting documents to effect transfer in the Deed’s Office, and transfer of such immovable property will not be effected unless there has been compliance with above-mentioned.

Purchasing property through a Kustingsbrief

What happens if you find yourself in the situation where you have enough money to pay for the deposit of the purchase of property, but not the balance of the purchase price.

On top of that, you are struggling to get bond approval. But you happen to have a wealthy seller who is willing to loan you the balance?

A Kustingsbrief is a mortgage in favour of the seller of land as security for the unpaid balance of the purchase price. The word Kustingsbrief comes from the Dutch term Kustingsbrieven that, literally translated means kissing letter. What this has to do with purchasing property is unknown. The most common sphere of property transfers where this is found is in the purchase of agricultural land.

By way of example: Mr A wishes to buy Mrs B’s property. The purchase piece is R1 200 000-00. Mr A has R500 000-00 to pay as a deposit, but he cannot obtain a loan from a bank for the balance on the purchase price.

He is however in good financial standing. Mrs B requires Mr A to register a mortgaged bond in favour of Mrs B wherein the instalments on the repayment of the bond are representative of the balance of the purchase price paid in instalments. As security for repayment of the bond, the property is mortgaged in favour of Mrs B.

The pros of this method of financing:

  • A person who does not receives bond approval from a financial institution can still purchase property.
  • The interest rate can be negotiated. It is however important to remember that if there is interest payable, the seller (Mrs B) must register as a credit provider – which could delay the process.
  • The seller has a preferent claim if the purchaser’s estate is sequestrated.
  • Section 88 of the Insolvency Act states that a mortgage bond intended to secure a debt which was incurred more than two months before lodgement at the Deeds Registry does not give the mortgagee a preferential claim if the estate of the mortgagor is sequestrated within six months after the date of lodgement, provided that a bond is not deemed to have been lodged if it is withdrawn from registration. A Kustingsbrief is however exempt from the operation of Section 88.
  • A Kustingsbrief always has preference over subsequently registered mortgages, because it is always registered along with the deed of sale and, therefore, prior to any other mortgages.

The cons:

  • Very few Sellers are in the financial position to accommodate this method of financing.
  • The process of obtaining the full purchase price might be one to lengthy for the Seller to endure.
  • A Kustingsbrief is a viable option for purchasing property if you are lucky enough to find a seller who is willing to assist you in this manner.

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