Protecting preferent creditors: Setting a reserve or obtaining consent?

December 1st, 2013
x
Bookmark

By Rouan J Bouwer

In a recent unreported judgment of Terence Christopher Demetriou and Another v Sheriff of the Magistrate’s Court: Alberton and Others (GSJ) (unreported judgment no 2012/43269) (26-4-2013) the court was faced with a discrepancy in the method of executing against immovable property in terms of the provision of s 66(2) of the Magistrates’ Courts Act 32 of 1944 (the Act) as opposed to the provisions of r 46(5) of the rules regulating the conduct of the proceedings of the several provincial and local divisions of the Supreme Court of South Africa (the uniform rules of court of the Supreme Court).

The applicants purchased the immovable property at a public auction conducted by the first respondent (the sheriff, Alberton), pursuant to a magistrate’s court declaring the property specially executable.

The sheriff had previously given written notice in terms of s 66(2)(a) to the second respondent (Absa Bank Limited), a preferent creditor, in respect of the intended sale of the immovable property. The property was sold to the applicants, being the highest bidders, for the low amount of R 100 000. Absa was a preferent creditor with a debt owing to it of over R 650 000.

Subsequent to the purchase of the property, the applicants were informed by the attorneys, on the instructions of Absa, that they were in the process of registering transfer of the property into the name of a third party. The applicants unsuccessfully attempted to dissuade the transferring attorneys from continuing with such a transfer, which led to the applicants obtaining an interim interdict against all the respondents.

The applicants simultaneously launched an application to declare the conditions of sale constituting their purchase agreement in respect of the immovable property as valid, and directing the registrar of deeds and the sheriff to effect transfer of the immovable property in terms of the aforementioned conditions of sale.

The applicants contended that due notice of the sale in execution was given to Absa by the sheriff and, as a result of the Absa’s failure to react to such notice, they were not required to comply with the further requirements of s 66(2) of the Act. Furthermore, it was contended that Absa should be estopped from denying the validity and binding nature of the conditions of sale, in that Absa’s inaction entitled the applicants to purchase the property without acceptance of the conditions of sale by Absa.

Absa and the transferring attorneys contended that the failure by the applicants to meet all the requirements of s 66(2) of the Act rendered the conditions of sale null and void and asked for the dismissal of the applicants’ claim.

In argument, the applicants submitted that their interpretation of s 66(2) of the Act is supported by the equivalent codified in r 46(5) of the uniform rules of court. Rule 46(5) of the uniform rules of court provides as follows:

‘No immovable property which is subject to any claim preferent to that of the execution creditor shall be sold in execution unless –

(a)     the execution creditor has caused notice, in writing, of the intended sale to be served by registered post upon the preferent creditor, if his [or her] address is known and, if the property is rateable, upon the local authority concerned calling upon them to stipulate within ten days of a date to be stated a reasonable reserve price or to agree in writing to a sale without reserve; and has provided proof to the sheriff that the preferent creditor has so stipulated or agreed, or

(b)     the sheriff is satisfied that it is impossible to notify any preferent creditor, in terms of this rule, of the proposed sale, or such creditor, having been notified, has failed or neglected to stipulate a reserve price or to agree in writing to a sale without reserve as provided for in paragraph (a) of this subrule within the time stated in such notice.’

The applicants furthermore relied on the authority of McCreath v Wolmarans NO and Others 2009 (5) SA 451 (ECG) and submitted that in that matter the preferent judgment creditor could not set aside a sale in execution for failure to set a reserve price (in terms of the uniform rules of court), and that the sale was valid and binding between the sheriff and the purchaser.

Section 66(2) of the Act provides as follows:

‘No immovable property which is subject to any claim preferent to that of the judgment creditor shall be sold in execution unless –

(a)     the judgment creditor has caused such notice in writing of the intended sale in execution to be served personally upon the preferent creditor as may be prescribed by the rules; or

(b)     the magistrate or an additional or assistant magistrate of the district in which the property is situate has upon the application of the judgment creditor and after enquiry into the circumstances of the case, directed what steps shall be taken to bring the intended sale to the notice of the preferent creditor, and those steps have been carried out, and unless

(c)     the proceeds of the sale are sufficient to satisfy the claim of such preferent creditor, in full; or

(d)     the preferent creditor confirms the sale in writing, in which event he shall be deemed to have agreed to accept such proceeds in full settlement of his claim’ (my italics).

Rule 43(10) of the magistrates’ courts rules, as amended, provides that: ‘A sale in execution of immovable property shall be by public auction without reserve and the property shall, subject to the provisions of section 66(2) of the Act and to the other conditions of sale, be sold to the highest bidder’ (my italics).

One of the major contentious issues was the fact that the words ‘and unless’ was encapsulated in subs 66(2)(b), and not written separately, thus implying that subss 66(2)(c) and (d) were subsidiary and applicable only if the position contemplated in subs 66(2)(b) was applicable.

In the court’s judgment, it relied squarely on the judgment of First Rand Bank Ltd v Body Corporate of Geovy Villa 2004 (3) SA 362 (SCA) where it was held that ‘immovable property that was subject to any claim preferent to that of the judgment creditor should not be sold unless the requirements listed in section 66(2)(a)-(d) were met’.

It bears mentioning that the South African Law Reports, as relied on by the court does not contain the quoted judgment as set out above. However, it is contained in the All SA Law Reports iteration of the same judgment of FirstRand Bank Ltd v Body Corporate of Geovy Villa [2004] 1 All SA 259 (SCA).

The court’s reasons were that, on a simplified version, the provisions of s 66(2) are to the effect that, for a judgment creditor who attached immovable property that is subject to a preferent claim of another party to sell such property, he or she must:

  • Follow the steps in either s 66(2)(a) or (b) in notifying the preferent creditor of the intended sale; which was done in the current case.
  • Ensure that the property is sold for an amount out of which the debt owing to the preferent creditor will be paid in full.
  • Where, for whatever reason, the property cannot attract an amount that will settle the preferent creditor’s claim in full, the judgment creditor cannot sell the property without obtaining the written consent of the preferent creditor.

As the purchase consideration was not sufficient to cover the preferent creditor’s debt, the court held that the judgment creditor was obliged in terms of s 66(2) to seek the written consent of the Absa for the conditions of sale to be valid and binding. If such consent is refused, the property cannot be legally sold.

The failure to seek and obtain such consent from Absa rendered the sale of immovable property in terms of s 66(2) of the Act invalid. The application was accordingly dismissed.

Conclusion

From the authorities, as set out above, there appears to be a divergence in the manner in which immovable property is to be sold in execution, depending as to whether the property was to be sold pursuant to the uniform rules of court, or in terms of the Magistrates’ Courts Act.

The uniform rules of court place a stringent obligation on the preferent creditor to stipulate a reserve price, or to agree in writing to a sale without a reserve price as provided for in subr 46 (5)(a) within the time stated in such notice. Should the preferent creditor fail, or neglect to do so, the immovable property may be sold and the preferent creditor has only himself or herself to blame for not protecting his or her interests.

The Act, however, contemplates a different position to that of the uniform rules of court: Once the preferent creditor has been notified, there is no further obligation on him or her to respond to such a notice. The property may then not be sold by execution unless the proceeds would settle the debt due to the preferent creditor, or unless consent of the sale was obtained from the preferent creditor. If the proceeds of the sale are insufficient, and no consent is obtained from the preferent creditor, the sale is invalid.

Where an auction sale of an immovable property is concerned in terms of the Act, practitioners should take the necessary precautions to ensure that either a reserve price is obtained from a preferent creditor, if any, before a sale in execution is proceeded with; or that consent is obtained from the preferent creditor authorising a sale in execution at a price lower than the indebtedness owed to the relevant preferent creditor.

Failure to do so may lead to the preferent creditor setting the sale in execution aside for lack of compliance with the requirements of s 66(2) of the Act, which in turn could have dire cost implications incurred through the sale in execution already convened.

Rouan J Bouwer BCom Law LLB (UJ) is an advocate in Johannesburg. He appeared for the second and fourth respondents in the above case. He furthermore appeared and successfully opposed the application for leave to appeal.

This article was first published in De Rebus in 2013 (Dec) DR 20.