Consumer credit:
• credit is extended: creditor lends money to the debtor — agree that repayment of the resulting
debt will occur at a future time
• Financial inclusion: all persons have timely and fair access to appropriate, fair, and affordable
financial products and services
• National Credit Act 34 of 2005 (NCA) (original legislation)
◦ fully in force since 1 June 2007
◦ NCA only applies to CONSUMER credit agreements
◦ 7 NCA aims:
‣ development of accessible and safe credit market
‣ promote responsible borrowing to avoid over-indebtedness
‣ prevent reckless lending
‣ balance the rights/duties of consumers and credit providers
‣ address imbalances of power between consumers/credit providers
‣ improve access to information
‣ promote better dispute resolution
◦ National credit regulations = delegated legislation
• who is a consumer under the NCA: (3 requirements)
◦ all natural persons who borrow money under a credit agreement
◦ juristic person:
‣ NAV and annual turnover separately must both be below R1 million
◦ the state or an organ of state is never a consumer
• who is a credit provider (CP) under the NCA: (5 requirements)
◦ anyone who lends to a 'consumer' in a 'credit agreement' is a credit provider in terms of the
NCA
◦ CP does not need to lend in the ordinary course of business
◦ CP does not need to be a registered credit provider for the NCA to apply to it
◦ CP must register with the national credit regulator (NCR)
‣ if they want to charge interest or other fees for their credit
‣ if not registered, renders the credit agreement unlawful — therefore VOID
‣ the above only applies when lending to consumers in credit agreements which are
subject to the NCA
◦ if CP is the reserve bank, NCA does not apply
• what is a credit agreement under the NCA: (3 requirements)
◦ a loan to a consumer
◦ at arm's length
◦ where there is a cost of credit
• when does the NCA apply to a credit agreement? (5 requirements)
◦ REMEMBER: T-P-C-A-T
‣ Time factor:
◦ if credit agreement was entered into before 1 June 2007, NCA does not apply
‣ Parties:
◦ for NCA to apply, parties must meet the definition of 'consumer' and 'CP'
‣ Credit agreement:
◦ contract must meet the definition of 'credit agreement'
‣ Arm's length:
◦ the following are not arm's length relationships:
◦ a loan between family members where there is a relationship of
dependence
◦ a loan from a company to a shareholder
◦ a loan by any juristic person to someone who is able to control
that juristic person (and vice versa)
◦ a loan by a shareholder to a company
◦ (CATCH-ALL PROVISION: both parties must look after their own
interests and there must be no control of a party by the other
‣ Territoriality:
◦ NCA applies to agreements either: made in SA; or has an effect within SA
• exceptions where NCA will not apply: (5 requirements)
◦ insurance policies + credit extended by insurer solely to maintain payment of premiums
◦ leases of immovable property
◦ transaction between a Stokvel and its member
◦ deferment of payment to a utility supplier
◦ NB: a loan to a juristic person which is classified as a large agreement:
• amount is more than R250 000
• the loan is secured by a mortgage bond over immovable property
• unlawful credit agreements:
◦ circumstances where the ENTIRE agreement is unlawful:
‣ the credit provider is not registered with NCR
‣ consumer is un-emancipated minor not assisted by a guardian
‣ consumer has been declared mentally unfit
‣ when the credit provider has been notified not to offer credit to the public and does so
anyway
‣ if the agreement is unlawful:
• declare it void
• make any additional order which is just and equitable
◦ circumstances where provisions are unlawful:
‣ a provision in the agreement defeats the purpose of the NCA
‣ a provision that requires the consumer to renounce their rights under the NCA
‣ a provision intended to deceive or expose to fraud
‣ if a provision is unlawful:
• remove that provision — if the agreement will work without it
• declare the entire agreement void — if it won't work without the provision
• court may also make any order which is just and equitable
Types of credit agreements under the NCA:
• Credit facility:
◦ an agreement where the credit provider supplies goods or services to the consumer, OR pays
money to the consumer, OR pays money to a third party as directed by the consumer
◦ AND:
‣ payment for the above is deferred
‣ there is a cost in the form of interest, fees, or charges
◦ eg: credit cards, woolies card
• credit transaction:
◦ pawn transaction:
‣ money is lent to a consumer by a pawnbroker, who takes a consumer's moveable
property as security. Property is returned when the loan is repaid, or sold if it is not
‣ pawn transaction is always a SMALL transaction, irrespective of the amount
‣ pawn dealer is entitled to the entire proceeds from the sale of consumer's item, even if
the consumer owes less than the amount that the item was sold for
◦ discount transaction:
‣ goods/services are provided over a period of time, and a discount is offered if payment is
received before a certain date
‣ if no interest is charged: not an NCA agreement
‣ if consumer pays on the earlier date (lower price): not an NCA agreement
‣ if consumer pays on the later date (higher price): NCA agreement because there is a cost
to credit
◦ incidental credit agreement:
‣ similar to discount transaction, but the consumer receives an amount from the credit
provider
‣ if payment is not received on specified date, then interest/fees/charges become payable
• differing factor!
‣ eg: cellphone contract
‣ very similar to discount transaction
‣ come into being twenty days after settlement date has passed without payment by
debtor
• eg: account is due on 31 august, only becomes an incidental credit agreement by 20
sept (but interest will accrue from 1 sept)
◦ instalment agreement:
‣ MOVABLE property is sold to a consumer and the price is paid over instalments over a
period of time
‣ interest/fees/charges are added to these instalments
‣ sometimes the consumer only owns the item once the price is paid in full (not always the
case) to provide security
‣ eg: vehicle finance
‣ similar to hire-purchase agreement
◦ mortgage agreement:
‣ consumer borrows money from CP and there is a mortgage bond registered over
IMMOVABLE property
‣ interest/fees/charges are added as part of the agreement
‣ eg: home loan
◦ secured loan:
‣ consumer borrows money from CP (interest/fees/charges apply)
‣ credit provider takes security over some moveable property of the consumer
◦ lease:
‣ MOVABLE property is rented to the consumer who pays rent in instalments over time
‣ at the end of the lease, ownership passes to the consumer
‣ interest/fees/charges apply
‣ NB: lease of IMMOVABLE property is excluded under the NCA
◦ other agreements with credit + fee/charge/interest
‣ a catch-all provision is intended to capture these types of agreement
• credit guarantee:
◦ consumer undertakes to settle an obligation owing to a credit provider by another consumer
in terms of a credit agreement
◦ NB: both the original debtor and the guaranteeing party must be consumers AND the debt
must be in terms of NCA
• size classifications:
◦ small:
‣ R15 000 or less
‣ ALL pawn transactions
◦ intermediate:
‣ R15 000 - R250 000
◦ large:
‣ R250 000+
‣ ALL mortgages
other NCA actors:
• NCR:
◦ independent juristic person
◦ regulates the consumer credit industry
◦ maintains a register of credit bureaux, CP, and debt counsellors
◦ investigates breaches of NCA and issues compliance orders
• credit bureaux:
◦ independent repositories of consumer credit information
◦ must register with NCR
◦ juristic person
• debt counsellors:
◦ natural persons registered with the NCR
◦ assess consumers for over-indebtedness
◦ assess whether credit was extended recklessly to the consumer
• mag courts:
◦ both mag courts and high courts can hear NCA matters
◦ normal monetary limits do not apply to mag court's jurisdiction when dealing with NCA
matters
• NCT: national consumer tribunal
◦ administrative tribunal, adjudicative function
◦ adjudicates consumer complaints
◦ NCT orders = high court orders
◦ NCT cannot deal with enforcement of debt
◦ NCT cannot deal with repo of property
reckless credit:
• occurs when:
◦ credit provider fails to conduct affordability assessment
◦ cp fails to make sure consumer understands the risks, costs and obligations
◦ cp contracts with a consumer despite evidence that this will cause the consumer to become
over-indebted
• credit agreements that are excluded:
◦ student loan
◦ pawn transaction
◦ incidental credit card agreement
◦ any agreement where the consumer is a juristic person
• credit provider must assess:
◦ consumer's understanding of risks and costs
◦ understanding of the contract's rights and duties
◦ ability to afford the credit
◦ debt repayment history
◦ prospects of success of the business (if a business loan)
• affordability assessment:
◦ either:
‣ 3 months bank statements
‣ 3 months payslip
‣ 3 months proof of income
‣ proof of discretionary income
◦ discretionary income =
• gross income less:
• statutory deductions
• living expenses
• existing credit agreements
• maintenance payments
• consumer must answer assessment truthfully: deceit is a valid defence open to the credit provider
if there is an allegation of reckless lending
• if the court finds that an agreement was reckless:
◦ obligations of consumer may be set aside if just and reasonable
◦ consumer's obligations may be suspended (during this time, no interest//fees may be charged
and debt is unenforceable)
◦ court may (at the same time) rule on whether the consumer is over-indebted and make an
order to restructure debt
debt review
◦ DOES NOT APPLY TO JURISTIC PERSONS
◦ if total monthly repayments > (net income less monthly living expenses)
• process:
◦ debtor must initiate debt review (on own accord OR by court order) by seeing a debt
counsellor
◦ all credit providers are notified by debt counsellor that review has commenced
◦ cp must participate in good faith
◦ debt counsellor must conduct initial assessment within 30 days
◦ after initial assessment, 3 options
‣ if consumer is not over-indebted: reject application
‣ if consumer not over indebted but likely to experience difficulty paying: debt counsellor
should attempt to negotiate on consumer's behalf with cp for voluntary restructuring
‣ if consumer is over indebted: refer matter to mag court for a possible restructuring order
• at this time the court may also find reckless lending
◦ if no over indebtedness is found, consumer can still refer the matter to a court themselves
• effect of debt review process:
◦ during debt review process:
‣ consumer may not enter into any new credit agreements or use a credit facility
‣ credit provider may not attempt to enforce a debt against the consumer through the
courts
• termination of debt review process by cp:
◦ if:
‣ consumer is in default with cp AND
‣ 60 business days have passed since consumer first approached debt counsellor AND
‣ consumer is not waiting for a hearing in mag court to restructure debts
◦ then:
‣ cp may terminate debt review by sending a notice to:
‣ consumer
‣ debt counsellor
‣ NCR
◦ after notice has been sent, cp may proceed to enforce debt
◦ cp must wait 10 business days after sending the notice before approaching a court to serve a
summons
• termination of debt review process by consumer:
◦ consumer will not be freed from debt review until all short-term debts are paid off AND
◦ can demonstrate financial ability to repay existing long-term loans
◦ once these 2 are satisfied, can apply for certificate of clearance from debt counsellor
◦ can continue entering into new credit agreements
◦ debt counsellor must file clearance certificate with credit bureaux
◦ debtor's negative credit history must then be deleted
◦ NB: THERE IS NO EXIT FROM DEBT REVIEW UNLESS DEBTS CAN BE REPAID IN FULL
• debt intervention: (lower income consumers)
◦ consumers who earn less than R7500 per month AND
◦ have less than R50 000 of unsecured debt
◦ process is similar to debt review
◦ assessment is done by NCR and not debt counsellor
◦ NCR then refers consumer to approach NCT for an appropriate order
◦ tribunal may order either:
‣ consumer's debts to be rearranged for payment within 5 years (NORMAL
RESTRUCTURING)
‣ debt intervention (12 months suspension of repayment of credit agreements
‣ may also order financial literacy training for consumer
◦ if debt intervention order is granted:
‣ financial position must be reassesed by NCR after 8 months
‣ if debts can be repaid within 5 years then refer to NCT for restructuring order
‣ if not possible, NCR must refer consumer to NCT for an extension of debt intervention
‣ process is repeated after another 8 months
‣ if the consumer still cannot repay debts within 5 years:
• NCR refers consumer to NCT for extinguishment of some/all debt
‣ if extinguishment order is granted, NCT may limit ability to enter into new credit
agreements for 6-12 months
debt enforcement:
• enforcement procedure:
◦ cp has the right to uphold credit agreement and claim repayment
◦ cp may cancel the agreement and claim return of goods + damages
• cp must first deliver S129(1)(a) notice:
◦ draws attention to default on credit agreement
◦ proposes that the consumer approach debt counsellor OR
◦ uses NCA's alternative dispute mechanisms (see below) to resolve any disputes about debt
OR
◦ develop a repayment plan
◦ advises the consumer that if the matter proceeds to court and the creditor obtains a
judgement against the consumer then some of the consumer's assets may be taken and sold
to pay the debt
◦ once 10 business days have passed since the notice has been delivered:
‣ creditor may approach the court to enforce debt against consumer
‣ summons will be served on the consumer by the sheriff of the court
◦ even after 10 business days:
‣ cp may only approach court if consumer has ALSO been in default for at least 20
business days
• enforcement and debt review:
◦ if a consumer is in debt review, cp cannot enforce the debt
◦ once a 129(1)(a) notice has been sent, consumer cannot enter debt review for that agreement
• delivery of notice:
◦ either:
◦ sent through registered post
◦ hand-delivered to an adult at the address which the consumer has stipulated
• alternative dispute mechanisms:
◦ these people cannot say the person is indebted
◦ cannot execute any property
◦ ADR agent:
‣ alternative dispute resolution agent
‣ try resolve the issue without going to court
‣ either mediation or arbitration
‣ arbitration = private court
‣ order of the arbitrator is binding
◦ consumer court:
‣ more informal
‣ deals with consumer matters (NCA, CPA)
◦ ombudsman:
‣ independent person who tries to mediate disputes
stokvels and financial inclusion:
• financial inclusion: access to mainstream financial services
• stokvel: (NOT A JURISTIC PERSON)
◦ informal organisation rotating financial scheme which—
‣ has 2 or more voluntary members, pledging mutual support
‣ establishes continuous pool of capital by subscription of members
‣ grants credit to/on behalf of members
‣ provides for members to share in profits, and nominate management of the scheme
‣ relies on self-imposed regulation to protect its interests
• types of stokvel:
◦ rotating savings and credit associations (ROSCAs)
‣ regular contributions by members, with the savings pot going to a member in each period
‣ provide saving facility as well as interest-free loan
◦ accumulated savings and credit associations (ASCRAs)
‣ regular contributions into a common fund
‣ each member's portion is paid out at the agreed maturity date
‣ pool of capital for loans to members
◦ burial societies
‣ regular contributions saved by the club in order to pay for funeral expenses of a person
named by the saving member
• stokvels and NCA:
◦ a transaction between the stokvel and its member is NOT a credit agreement
◦ therefore certain NCA rules are dodged:
‣ affordability assessment
‣ debt enforcement procedures
‣ need for registration with NCR
• stokvels and financial inclusion:
◦ stokvels provide access to credit for those who are financially excluded
Insolvency:
• governed by Insolvency act 24 of 1936 and common law
• insolvency is for the benefit of creditors
• legal status assigned to natural and juristic persons
• when liabilities exceed assets or when they are unable to pay debts
• not legally insolvent until declared by court order
• objectives of insolvency law:
◦ allow creditors to be paid in order of preference
◦ maximise assets for distribution
‣ by minimising legal costs incurred if each creditor sued individually
◦ prevent further diminishing of the debtor's estate
• sequestration:
◦ estate of a debtor is wound up
◦ terminated by rehabilitation
• debtor:
◦ natural person, partnership, or trust
• when declared insolvent:
◦ divested of assets
◦ assets placed in the hands of trustee
◦ trustee winds up estate to creditors' benefit
• liquidation:
◦ juristic persons are wound up if declared insolvent
◦ assets from the company are placed in the hands of a liquidator
◦ once company is dissolved, it ceases to exist
• concursus creditorum (VERY IMPORTANT)
◦ position of each creditor is frozen at the date of sequestration or liquidation
◦ creditors have a set order of ranking (order of preference)
◦ order of preference:
‣ secured claim
‣ preferent claim
‣ concurrent creditors
manner of sequestration (individuals, partnerships, trusts)
• only the HC can make sequestration orders
• two methods:
• voluntary surrender
◦ debtor himself applies for sequestration
‣ why?
• debtor is absolved of any debts incurred before sequestration
• once sequestrated, cannot be sued personally, can only put a claim against the
insolvent estate
‣ substantive requirements for voluntary surrender:
• debtor is in fact insolvent
• enough realisable assets in the estate to cover costs of sequestration
• sequestration WILL BE to the advantage of creditors
◦ receive a non-negligible dividend
• If list of creditors includes NCA agreements, sequestration must be more
advantageous than debt review
• all procedural requirements have been met
‣ if all requirements are met, court MAY grant the order
‣ one procedural requirement:
• publish notice of surrender in newspaper/gazette
• compulsory sequestration:
◦ creditors apply for sequestration of the debtor's estate
◦ BOP lies on the creditor
◦ requirements:
‣ creditor must be entitled to make the application:
• each creditor must show that there is a claim for more than R100
‣ debtor is insolvent or has committed an act of insolvency (SEE BELOW)
‣ reason to believe that the sequestration will be to the advantage of creditors
• same requirement as voluntary surrender, but BOP is slightly lighter
• (reason to believe vs will be)
‣ all procedural requirements have been complied with
‣ if all requirements are met, court may grant a provisional order
‣ provisional order will have a return date
‣ if at the return date no parties raise any objections, then the court makes final order
• an act of insolvency:
◦ if the debtor:
◦ leaves his home or the country to avoid paying a debt
◦ fails to pay a judgement debt
◦ makes/attempts a disposal of property that prejudices his creditors or prefers one creditor
over the other
◦ removes/attempts property with the intention to prejudice or prefer creditors
◦ makes an offer of arrangement
◦ fails to timeously make the application for voluntary surrender
◦ written notice of inability to pay (MUST KNOW SECTION 8G)
◦ unable to pay debts after publishing notice of sale of business
• friendly sequestration:
◦ application for compulsory sequestration made by a creditor on the debtor's behalf and with
the debtor's cooperation
◦ assist the debtor to escape financial problems
◦ advantages:
‣ avoids procedural requirements for voluntary surrender
‣ BOP is lighter in the case of compulsory sequestration
‣ easier to prove than voluntary surrender
◦ can be abuse of court process:
‣ collusion
‣ false evidence, may not be insolvent
‣ may not be an advantage to creditors
‣ may not even be a genuine creditor
Manner of liquidation (juristic persons)
• can be liquidated if unable to pay debts
• OR:
◦ deadlock in management
◦ deadlock amongst shareholders
◦ just and equitable to wind up the company
◦ members no longer wish to continue the business
• winding up by the court:
◦ application can be brought by creditors or the company itself
◦ any one of the following can be used as basis for winding up:
‣ statutory demand has not been met:
• creditor owed R100 or more has left a letter of demand at the company's office, and
has not been paid for 3 weeks, or failed to secure payment
• failed to pay without a valid reason
‣ nulla bona return:
• company has not paid the money it has been ordered to pay
• does not have enough assets which can be sold to cover the debt
‣ actual inability to pay debts
• aka commercial insolvency
◦ if one of 3 have been met, court may issue the order
• voluntary winding up:
◦ initiated by the members
◦ pass a special resolution to wind up the company
◦ no court application
◦ special resolution is registered with CIPC
effects of insolvency:
• all effects on natural persons last until sequestration is terminated by rehabilitation
• effects can last maximum 10 years
• absolution from debts:
◦ debtor is absolved from any debts incurred before sequestration
◦ creditors cannot sue insolvent directly, must make a claim against insolvent estate
◦ trustee will distribute assets in accordance with concurus creditorum
◦ once this has been done, debts are extinguished forever (even if they were not paid in full)
• effect on property: (natural persons)
◦ insolvent no longer has ownership of assets
◦ assets fall into insolvent estate to be sold, proceeds are distributed among creditors
‣ all property belonging to the insolvent at date of sequestration
‣ all property acquired by insolvent during sequestration
• exceptions that do not fall into insolvent estate:
◦ remuneration
‣ any money received for work done, to the extent that the money is needed for the
reasonable support of insolvent and dependents
◦ money received from litigation for defamation/personal injury
◦ means of subsistence
◦ pensions and insurance
‣ proceeds from the following policies do not fall into insolvent estate as long as policy was
taken out more than 3 years before sequestration:
• life insurance for insolvent or spouse
• disability insurance
• health insurance
• funeral cover
• credit life insurance
‣ on death of insolvent, proceeds from the following will not fall into insolvent estate if they
are survived by spouse or step/child as long as policy was taken out >3 years before
sequestration:
• life insurance
• funeral cover
• life annuities
• credit life insurance
‣ any assets acquired with proceeds of these policies are protected as long as they were
acquired within a period of 5 years from date of insurance payout
◦ property acquired through use of money that is lawfully theirs
• effect on solvent spouse: (natural persons)
◦ married OCOP or OCOP accrual
◦ also co-habites who are romantically involved
◦ section 21 (KNOW THIS) — all property of solvent spouse shall vest automatically in the
insolvent spouse's trustee
◦ property that must be released back to the solvent spouse by the trustee:
‣ property owned by the solvent spouse before the marriage
‣ property acquired under ANC
‣ property acquired by solvent spouse with their own funds during marriage, and gifts from
their friends/family
‣ property acquired with proceeds from any of the above
• effect on personal status and contractual capacity: (natural persons)
◦ earning a livelihood:
‣ insolvent cannot do the following without trustee's written consent:
• carry on the business of a general dealer or manufacturer
• be employed by a general dealer or manufacturer
◦ holding office:
‣ cannot be a director without the permission of the court
‣ may not practice as an attorney
‣ may not practice as a CA
◦ contractual capacity:
‣ may enter into a valid contract without assistance of trustee
‣ exceptions:
• a contract that purports to dispose of any property of the insolvent estate
• enter into a contract that adversely affects the estate
‣ if these contracts are entered into, voidable at the instance of the trustee
Effect on uncompleted contracts: (natural and juristic persons)
• contracts that were entered into by the insolvent before sequestration/liquidation
• incomplete at date of sequestration/liquidation
• 2 categories:
◦ common law:
‣ partnership is terminated by the insolvency of one of the partners
• solvent partners are allowed to form a new partnership without the insolvent partner
‣ agency is terminated on the insolvency of the principal
‣ all other contracts:
• continue, but the trustee/liquidator cannot be compelled to perform
• can elect whether or not to perform
• if performance is chosen:
◦ other party has a preferent claim for any money due under the contract
• if repudiation is chosen:
◦ considered a breach, other party will be able to remedy this as usual
◦ cannot claim specific performance
◦ claim for contractual damages is a concurrent claim, unless there is security
◦ statute:
‣ cash sale of immovable property where the purchaser is insolvent:
• eg: sequestration between signing of contract of sale and registration of transfer into
the insolvent's name
• trustee/liquidator of purchaser's estate can choose to abide/rescind
• must make election within 6 weeks of being requested to do so
• seller can still hold estate liable for damages as a CONCURRENT CLAIM
• trustee cannot rescind if it will leave the insolvent homeless
‣ cash sales of movable property where purchaser is insolvent:
• if insolvent has failed to pay all/part of the purchase price for goods delivered
• seller can reclaim property from insolvent estate
◦ if, WITHIN 10 DAYS of delivery he has given notice of his intention to do so
‣ contracts of lease where tenant is insolvent:
• trustee/liquidator can abide or rescind
• if trustee/liquidator does not notify landlord within 3 months of appointment as
trustee/liquidator then it is deemed to have terminated the lease
‣ lease where landlord is insolvent:
• "huur gat voor koop"
◦ removes trustee/liquidator's right to repudiate contract of lease
◦ therefore the next owner cannot evict tenant
• trustee must sell property with the tenant in it
• HOWEVER:
• if an existing mortgage bond predates the lease and he cannot sell subject to the
lease then he can sell property free of the lease (evict the tenant)
‣ contracts of employment where employer is insolvent:
• all contracts of employment are suspended
• employees do not have to work, and trustee/liquidator is not obliged to pay them
• contracts may be terminated only after:
◦ consulting with trade unions and affected employees in order to reach
consensus on measures taken to save some/all of the business
◦ only after nothing more can be done to save the business, then contracts can
be terminated
• when contracts are terminated, employee can claim from the insolvent estate:
◦ severance pay — PREFERENT CLAIM up to 12 000
◦ arrear wages — PREFERENT CLAIM up to 12 000
◦ leave pay — PREFERENT CLAIM up to 4000
◦ outstanding balance = concurrent claim
winding up: juristic persons
• assets are sold, debts are paid according to concursus creditorum
• if any money is left over, paid to shareholders
• company is dissolved and ceases to exist forever
impeachable transactions: (natural and juristic persons)
• know ALL section numbers for this section
• dangers:
◦ before liq/seq the insolvent may try to put assets beyond the reach of creditors
◦ or attempt to uspet concursus creditorum
• disposition without value — s26 insolvency act
◦ natural and juristic persons
◦ in order to recover assets back into the estate, must prove the following:
‣ disposition of property by the debtor
‣ disposition must be made without value:
• nominal value = no value at all
• inadequate value = value
‣ L>A
• if disposition was made LESS than 2 years before seq/liq, then in order not to have
disposition set aside: onus is on the BENEFITTING PARTY to show that immediately
after transaction, A > L
• if disposition made MORE than 2 years before seq/liq then in order not to have
disposition set aside: onus is on TRUSTEE to prove that immediately after
transaction, A>L
• dispositions under ANC — s27 insolvency act
◦ natural persons only
◦ no immediate benefit given in terms of ANC in good faith shall be set aside as a disposition
without value UNLESS seq within 2 years of ANC
◦ ALL of the following must be met for a disposition to be protected under s27
‣ immediate benefit (benefit given under ANC completed less than 3 months after
marriage)
‣ disposition must be made in good faith
‣ ANC must be registered at least 2 years before seq
• voidable preferences — s29 insolvency act
◦ disposition may be set aside if trustee/liq can prove ALL of the following:
‣ disposition of property by the debtor
‣ disposition was within 6 months of seq
‣ effect of disposition was to prefer one of the creditors
‣ immediately after disposition was made, insolvent L>A
◦ exception to s29:
‣ court cannot set aside disposition under s29 if the benefitting party can prove:
• disposition done in the ordinary course of business
• AND disposition not intended to prefer one creditor above another
• undue preferences — s30 insolvency act
◦ if a debtor makes a disposition of property at a time when L>A with the intention of preferring
one creditor above another, and they are later seq/liq, court may set aside disposition
◦ ALL requirements must be met to set aside dispositon
• s29 vs s30:
◦ time limit:
‣ s29: disposition must occur less than 6 months before seq
‣ s30: no time limit
◦ time when L>A
‣ s29: disposition set aside if immediately after, L>A
‣ s30: disposition set aside if it was made at a time when L>A
◦ intention:
‣ s29: effect of disposition must be proved by trustee/liq that it had the effect of preferring
one creditor over another
‣ s30: the intention to prefer one over another must be proved
◦ proviso:
‣ s29: beneficiary can rely on not having the intention to prefer one over another to avoid
disposition set aside
‣ s30: no such proviso
• collusive dealings — s31 insolvency act
◦ prove all of the following in order to set aside dispositon:
‣ debtor made disposition of property before seq/liq
‣ disposition made in collusion with another
‣ effect of preferring one above another or prejudicing creditors
◦ effect of s31:
◦ if collusion is proven:
‣ beneficiary must return asset
‣ beneficiary must pay damages to estate
‣ beneficiary must pay a penalty
‣ if beneficiary is a creditor, his claim against the estate is forfeited
• acito pauliana — common law
◦ set aside collusive disposition that prefers one above another or prejudices creditors
◦ no penalty provision or claim forfeiture
• voidable sale of a business — s34 insolvency act
◦ s34 applies to SOLVENT traders as well
◦ if a trader transfers:
‣ any business belonging to him
‣ any goods/property not in the ordinary course of business
‣ goodwill of the business
◦ without advertising transfer in gazette, transfer shall be void against:
◦ creditors for a period of 6 months after the transfer OR
◦ trustee/liq of trader's insolvent estate if seq/liq within 6 months after transfer
Realisation and distribution of assets (natural and juristic persons)
• appointment of a trustee/liq:
◦ voted in on a majority
• meetings of creditors:
◦ first meeting: elect and appoint trustee/liq
◦ second meeting: creditos put in their claims and receive report on the affairs of the estate/
company
• proof of claims:
◦ affidavit
◦ once creditors have proved claims:
‣ trustee/liq must draw up liquidation and distribution account
‣ liq account will set out each asset and what it realised
‣ distribution account will set out who gets paid and the ranking of creditors
‣ if proceeds are not sufficient to cover costs of liq/seq then trustee/liq must draw up plan
of contribution
• different classes of creditors:
◦ first ranking — preferred creditors
‣ secured creditors
• hold security for their claim
• paid out of the proceeds of the sale of the asset constituting their security
• the remainder of the estate after secured creditors are paid = free residue
‣ preferent creditors
• entitled to be paid out of the free residue before concurrent creditors
• ranking order of preferent creditors to be paid:
◦ funeral/deathbed expenses of insolvent/spouse/minor child (maximum of R300)
◦ costs of seq (apart from what must be covered by secured creditors)
‣ ranking of costs of seq:
• sheriff of HC fees
• master of HC fees
• costs of seq / trustees fees / accountant's fees / etc.
◦ arrear salary of former employees
◦ money owed in terms of statutory provisions (customs, excise, VAT)
◦ SARS
◦ general notorial bond
◦ second ranking — concurrent creditors:
‣ do not have any security for their claim
‣ paid pro rata out of what remains of free residue after preferent creditors are paid
‣ if a secured claim is not paid in full from proceeds of sale over the secured asset, they
can put in a concurrent claim for the balance
composition and compromise:
• composition applies only to natural persons
• at any point after first creditors' meeting, insolvent may submit offer of composition to trustee
• offer where insolvent undertakes to pay all debts in part/full over extended period of time
• if accepted by creditors, becomes binding (may lead to early rehabilitation)
• must be accepted by 75% of creditors representing 75% of the value of claims
• compromise applies to juristic persons, can bring about the same effect (end liq)
rehabilitation:
• only applies to natural persons
• ends seq and all its effects
• 2 ways to end rehab:
◦ automatically after 10 years
◦ application to court before expiry:
‣ first case: acceptance of creditors of composition of not less than 50c on the rand for
every concurrent creditor
• payment has been made or security given for payment
‣ second case: lapse of prescribed time after confirmation of first account
• apply for rehabilitaiton after 12 months have passed from confirmation of master of
first L&D account subject to certain requirements:
◦ if insolvent's estate has been seq before, then must wait 3 years from date of
confirmation of L&D
◦ if insolvent has been convicted of a fraudulent offence in any seq then can only
apply for rehab 5 years after date of conviction
◦ may not apply for rehab less than 4 years after seq unless recommendation
from master
‣ third case: no claims proved after 6 months
• can apply for rehab 6 months from date of seq if all of the following are met:
◦ at the time of applying for rehab, no claim has been proved against estate
◦ not convicted of any fraudulent offence
◦ not previously seq
‣ fourth case: full payment of claims:
• apply for rehab any time after a plan of distribution providing for full claims and costs
has been approved by the master
effects of rehabilitation:
• puts an end to seq
• puts an end to debts which arose before seq
◦ debtor is absolved from all debts
• relieves of all disability that comes from seq
• property vested in the trustee remains there for the benefit of creditors
◦ exceptions:
‣ composition agreement provides it will be placed back into the hands of the insolvent
‣ basis of rehab is third case (mentioned above)
business rescue:
• try to prevent a company from being liq so that jobs and the company can be saved
• financial distress:
◦ reasonably unlikely that company will be able to pay all its debts within 6 months
◦ reasonably likely that company will be insolvent in next 6 months
• business rescue:
◦ proceedings to rescue a company that is financially distressed:
‣ temporary supervision of company and its affairs by a business rescue practitioner
• directors remain in position, under supervision
‣ temporary suspension of any claims against company and its property
• creditors cannot sue for money or performance
‣ devt and implementation of business rescue plan that restructures affairs in a manner
that maximises likelihood of company continuing and being solvent
• if not possible, then a plan that results in a better return for creditors/shareholders
• initiation of business rescue:
◦ voluntary:
‣ BoD may pass resolution to begin business rescue proceedings if they believe that
company is financially distressed, and reasonable prospect of rescue
‣ must be filed with CIPC
‣ company then appoints BR practitioner
‣ not possible to pass resolution if liq proceedings have already been initiated
‣ resolution must be published to every affected person
• affected person have right to apply to court for an order to set BR aside, or set aside
the appointment of the BR practitioner if they do not think BR practitoner is not
appropriately skilled/independent
◦ court order:
‣ affected person may apply to court for BR order
‣ copy of application must be served on CIPC, company itself, and other affected persons
must be notified
‣ court may grant order if it is satisfied that:
• company is financially distressed OR
• failed to pay amount owed in respect of employment matters OR
• just and equitable
• AND
• reasonable prospect of rescue
‣ court order can be brought by an affected person even if liq proceedings have been
brought against company
• commencement of BR:
◦ BRP investigates affairs to see if there is a reasonable prospect of company being rescued
‣ if no reasonable prospect then they must inform the court, the company and all affected
persons and apply for liq court order
◦ practitioner will then meet with employees and creditors who will prove their claims
◦ practitioner develops BR plan
◦ practitioner must call a meeting to approve plan
‣ creditors, shareholders and employees are entitled to be present at the meeting
‣ creditors must approve plan by 75% vote
‣ if plan is adopted, it is binding on the company itself, creditors and shareholders
• termination of BR
◦ BR is unsuccessful:
‣ court converts BR proceedings to liq proceedings
‣ BR plan rejected
◦ BR is successful:
‣ BR plan adopted and practitioner has filed notice of implementation of the plan
‣ company is no longer financially distressed
security:
benefits of security:
• offers protection to creditors
• necessary if a secured claim on insolvency is wanted
Real and personal security:
• personal security:
◦ someone other than debtor undertakes to pay debt if debtor does not pay
• real security:
◦ asset belonging to debtor is given as security for payment of debt
◦ creditor has limited real right in that property
◦ if debtor cannot pay, creditor can foreclose
special mortgage over immovable property:
• mortgagor: debtor
• mortgagee: person to whom security is given
• essential requirements:
◦ valid underlying or principal obligation
‣ principal obligation = contract
‣ accessory obligation = mortgage contract
‣ therefore:
• if underlying loan contract is void/able, then accessory contract will be void/able
◦ property of another:
‣ mortgagee has limited real right in the property of another person
‣ property must be immovable
‣ person granting the mortgage must own the property
◦ creation of a limited real right:
‣ where creditor is a natural person, mortgage/bond must comply with NCA
‣ two steps:
• step 1: signing of written mortgage agreement between parties
◦ at this stage, mortagee simply has a personal right
• step 2: registration of mortgage agreement at the deeds registry
◦ only once mortgage has been registered, limited real right on the property is
created
effects of mortgage:
• all effects apply where debtor has not been declared insolvent (except for last one)
• all mortgages have acceleration clause for breach
• parate executie:
◦ clause in the bond: on default by the debtor, mortgagee can execute against the property
without going through courts
◦ therefore no due process
◦ these clauses are not allowed as it can lead to abuse of debtor
• pactum commissorium:
◦ clause in bond: if debtor defaults, creditor becomes owner of the property
◦ not allowed, but parties can agree mortgagee can buy property at fair valuation
• effect 1: limited real right and foreclosure:
◦ creditor does not become owner of property, only have a limited real right
◦ if debtor defaults on principal obligation, mortgagee can get court order to pay outstanding
amount
◦ if they still don't pay, mortgagee can execute against the property
◦ before foreclosure, must consider:
‣ if NCA will apply (if debtor is natural person)
• before the mortgagee can sue on the debt, all NCA requirements must be met
‣ is property the primary residence of debtor
• everyone has the right to ADEQUATE housing
◦ if debtor thinks foreclosure will infringe that right then it must be argued
• AND court must consider alternative means of satisfying the debt other than
execution against primary residence
• AND court must consider all relevant circumstances before executing of primary
residence
‣ Prevention of illegal eviction:
• protects occupiers of residential property
• PIE states that court can only evict if it is just and equitable
• effect 2: mortgagor not to deal with property in any way that infringes on the rights on the
mortgagee
◦ consent of mortgagee is required before property can be sold/transferred
• effect 3: mortgagee's preference
◦ Example:
◦ X owes Y and Z some money.
◦ Y has no security for the loan (i.e. he is unsecured), but Z has a mortgage over X’s house.
◦ If X fails to pay Y his money, then Y will sue X and if X can’t pay, then Y may want to execute
against the house to settle the debt.
◦ Y can do this, BUT he will first have to notify Z who is preferent to Y because of the mortgage.
◦ Then, the proceeds of the sale must first be applied to settle any amount owing to Z, and only
after that, if there is anything left over, will Y be paid.
• insolvency of debtor:
◦ the bond will offer no security (no secured claim) if:
‣ the debt was incurred more than 2 months before registration of bond AND
‣ debt was not previously secured AND
‣ estate of mortgagor is seq within 6 months of registering the bond
◦ aimed at debtor who tries to upset concursus creditorum
ranking of mortage bonds:
• possible for the same property to be subject of more than one mortgage bond
• in this case, rank in order of preference according to date of registration
termination of mortgage bonds:
• mortgage can be terminated in the following ways:
◦ payment of the underlying obligation
◦ alienation of the property
‣ in this case, mortgagee must consent to sale/transfer
‣ mortgage will be cancelled and any balance owing is paid to the mortgagee
◦ merger: mortgagee becomes owner of mortgaged property
evaluation of mortgage as a form of security:
• benefits for debtor:
◦ debtor is able to be granted loan
• benefits for creditor:
◦ security against insolvency
pledge:
• real security, used for tangible moveable goods
• pledgee = creditor
• pledgor = debtor
essential requirements:
• valid underlying obligation
• property of another
◦ pledgee has limited real right in the property of another person
◦ property must be moveable and tangible
• creation of limited real right:
◦ 2 steps:
◦ step 1:
‣ agreement between parties to pledge item
‣ depending on who the debtor is, pledge may be governed by NCA
◦ step 2:
‣ delivery of asset pledged to the pledgee in order to place them in possession of the asset
‣ possession is the key to a pledge: once delivery has taken place and possession is
transferred there is a limited real right
‣ limited real right ≠ ownership
◦ possession has 2 elements:
‣ intention: intention of the pledgee must be to hold item as security
‣ physical control
effects of pledge:
• limited real right:
◦ pledgee is not entitled to use of the product
◦ required to care for property, any expenses incurred can be recovered from pledgor and are
secured in terms of the pledge
• debtor defaulting:
◦ if debtor defaults on underlying obligation, pledgee must go to court and get judgement
against debtor
◦ then can execute to settle outstanding amount
◦ note:
‣ if governed by NCA, then requirements apply
‣ parate executie
‣ pactum commissorium
• pledgee's preference in general:
◦ same as mortgage
insolvency of debtor:
• pledgee becomes secured creditor, if proceeds from execution are insufficient, can put in a
concurrent claim
• termination of pledge:
◦ loss of possession
◦ destruction of property
◦ payment of underlying obligation
• evaluation of pledge as form of security:
◦ pledge is not practical in commercial practice if the debtor needs to use the item
cession in securitatem debiti (cession)
• cessionary: debtor
• cedent: creditor
• form of real security
• pledge over intangible moveable assets
• intangible assets ceded as security for underlying obligation = personal rights:
◦ right to payment on an insurance policy
◦ right to shares and the dividends on them
◦ right to IP
◦ right to payment of debt
◦ right to payment of rent
• eg: A lends B R5000 = principal debt/ underlying obligation
◦ C owes B R5000 = B has a personal right against C for payment of this debt.
◦ B cedes his right to claim payment of C’s debt to A as security for the principal debt = cession
in securitatem debiti
◦ A is the cessionary and the creditor B is the cedent and the principal debtor (not to be
confused with C who is just a debtor)
◦ Note B could have ceded his right to payment on an insurance policy/ shares etc. Same
would apply.
• essential requirements:
◦ valid underlying obligation
‣ cession = accessory obligation, therefore there is no existence without principal
obligation
◦ property of another:
‣ cessionary has limited real right in the property of another person
‣ property must be moveable and intangible
◦ creation of limited real right:
‣ 2 steps:
• agreement between parties to cede the right (can be governed by NCA)
• as the item is intangible, no delivery is needed
• 3rd party debtor should be informed
• effects of cession in securitatem debiti
◦ cedent cannot enforce the ceded right:
‣ while in existence, cedent cannot enforce ceded right
◦ default of principal debtor (cedent)
‣ cessionary has 2 options:
• foreclose:
◦ if governed by NCA, 129(1)(a) notice delivered
◦ parate executie, valid in cession so long as it is not against public policy
◦ pactum commissorium, not allowed but parties can agree cessionary will take
over property at a fair valuation
• claim performance in terms of the ceded right:
◦ eg debt: instead of foreclosing, cessionary gets court order and claims debt
directly from 3rd party
◦ cessionary's preference in general:
‣ if ceded right is attached in execution by another creditor, the cessionary is entitled to be
notified and paid first from the proceeds of the sale
◦ default of the cedent (principal debtor)
‣ if seq/liq then cessionary will have secured claim for amount owed in terms of principal
obligation
‣ if proceeds of intangible asset are insufficient, put in a concurrent claim
• termination of cession in securitatem debiti:
◦ once principal debt is paid, cessionary's right terminates
• evaluation of cession in securitatem debiti:
◦ one of the most common types of security
special notarial bonds:
• form of real security
• security over moveable property (tangible or intangible)
• property does not actually have to be delivered to creditor
• 2 types:
◦ special and general
• special notarial bonds:
◦ governed by Security by Means of Movable Property Act 1993 (SMPA)
◦ if they comply with that act they are a form of real security
◦ offers security over specific property
• bondholder = creditor
• essential requirements:
◦ valid underlying obligation
◦ property of another:
‣ limited real right in the property of another person
‣ property must be moveable and tangible
◦ creation of a limited real right
‣ 2 steps:
• signing of written agreement between parties (may be governed by NCA)
◦ bond must be executed before a notary and 2 witnesses
◦ at this stage, bondholder simply has a personal right
• registration of notarial bond at Deeds registry
◦ only once registration has occurred does it create a limited real right
◦ registration also serves as public notification
◦ limited real right only created on registration if:
‣ bond is over tangible moveable assets
‣ property is described in a manner that renders it easily recognisable
• effect of special notarial bond:
◦ once special notarial bond is registered, effects are similar to pledge
◦ debtor defaulting and foreclosure:
‣ if debtor defaults, bondholder must get a judgement against debtor and then can execute
against the property
‣ NCA regulations ( eg. s129(1)(a)) may need to be followed
‣ parate executie: not allowed in special notorial bond
‣ pactum commissorium: not allowed, however bondholder can take over property at fair
value
◦ bondholder's preference in general:
‣ if hypothecated asset is attached in execution by another creditor, bondholder is entitled
to be notified and paid first from proceeds
◦ insolvency of debtor:
‣ bondholder has a secured claim
‣ if proceeds are insufficient, can place a concurrent claim
• ranking of special notarial bonds:
◦ bonds rank in order of preference according to date of registration
• termination:
◦ payment or discharge of the principal obligation
◦ destruction of property
• evaluation of special notorial bonds as security:
◦ good form of security for debtor because they can still use asset
◦ good form of security for creditor because they can foreclose and have general preference
general notarial bonds:
• registered over all moveable property of the debtor (tangible and intangible)
• does not create limited real right in property
• offers no real security
• nature of general notarial bond:
◦ valid underlying obligation
◦ property of another
• general notarial bond:
◦ signed in front of notary public and 2 witnesses
◦ registered at deeds registry
• effects of general notarial bond:
◦ insolvency of debtor:
‣ does not create a limited real right
‣ therefore, creditor only has a preferent claim
‣ ranks the lowest of all preferent claims
◦ no general preference
‣ because it does not create a real right, bondholder will have no preference if items are
attached in execution by another unsecured creditor
◦ debtor defaulting:
‣ if debtor defaults on principal obligation, bondholder must get a judgement against
debtor and then can execute property hypothecated to settle amount outstanding
‣ NCA requirements apply
‣ parate executie: not allowed
‣ pactum commissorium: not allowed, but bondholder can can take over property at fair
valuation
• termination:
◦ payment of principal obligation
◦ destruction of property
• evaluation of general notarial bonds as a form of security:
◦ not good for creditor, no real security
◦ good for debtor, can still use assets
credit grantor's hypothec:
• right conferred in the property of another person by operation of law, NOT in terms of security
agreement
• certain forms of security arise by operation of law without an agreement
• law provides that because of certain circumstances, one person automatically has security over
another's assets
• someone buys something in terms of a credit agreement governed by NCA
• where credit is structured in such a way that the buyer does not become the owner of the property
until the last instalment is paid
• then S84 of insolvency act applies
• S84:
◦ if a buyer is seq/liq, seller will have a hypothec over that property
◦ any amount owing to the credit provider is secured
◦ ie: seller will have a secured claim for the amount owed
• person cannot have a hypothec over his own property
• therefore on insolvency of the buyer, seller/credit provider loses ownership and that right is
replaced with the hypothec
ranking of securities in the event of insolvency:
• immovable property:
◦ mortgage bond, as well as enrichment lien and/or debtor/creditor lien over the same property
◦ ie: secured creditors are competing for proceeds of the same immovable asset over which
they all have security
◦ order of preference amongst secured creditors:
‣ enrichment lienholder takes first
‣ mortgagee (if more than one, preference in order of date)
‣ debtor/creditor lienholder
• moveable property:
◦ order of preference amongst secured creditors over the same assets:
‣ enrichment lien
‣ pledge/cession
‣ special notarial bonds
‣ credit grantor's hypothec
‣ landlord's tacit hypothec
‣ debtor/creditor lien
◦ never have all these types of security competing because phyical control is required fro lien/
pledge
suretyship:
• personal security
• binds a person, not property, to the creditor
• suretyship is an accessory obligation
• formation and effect of suretyship contract:
◦ suretyship contract is between surety and creditor, principal debtor is not a party to the
contract
◦ suretyship must be in writing and signed by/on behalf of the surety
◦ must also comply with NCA if that is applicable
• defences available to surety against creditor:
◦ defences connected with the principal obligation:
‣ principal obligation is void due to illegality or mistake
‣ principal obligation is voidable due to duress, undue influence, misrep
‣ in this case, suretyship by accessory would be void/able
◦ benefit of excussion:
‣ creditor must exhaust all legal remedies against the debtor/ principal debtor before suing
the surety
‣ will not be available if:
• surety has renounced the benefit of excussion when signing the contract
• surety has bound themselves as surety and co-principal debtor
• principal debtor has been seq/liq or has left the country and cannot be found
◦ benefit of division:
‣ sometimes more than one surety for principal debt
‣ co-sureties will set out in the contract which portion of the debt they will be liable for
‣ if there is no settlement, they can insist that each will be liable for no more than a pro-rata
share of the debt (50/50)
‣ benefit of division not available if:
• surety has renounced benefit of division in contract
• surety has bound themselves as surety and co-principal debtor
• recovery from a co-surety would be almost impossible
rights of the surety on payment of the principal debt:
• surety will have a right of recourse against the debtor (can claim repayment from principal debtor)
• will have right of recourse against other co-sureties for their proportionate share if the surety has
paid the full debt
termination:
• payment of principal debt by debtor or surety
• expiration of time if a time limit was specified in the contract
• NB: death does not terminate suretyship contract
evaluation of suretyship as a form of security:
• often used as an additional form of security in addition to real security
• if surety is seq, then creditor is left with no security
• with regards to surety, places a burden on them to settle another person's debt
insurance:
• contract agrees to pay a premium to the insurer, insurer undertakes to pay out a sum of money (or
its equivalent) in the event of a specified uncertain future event happening• insurance based on:
◦ common law
◦ insurance act 2017
◦ regulations passed in terms of insurance act 2017
◦ short term insurance act
◦ long term insurance act
types of insurance:
• indemnity insurance: non-life insurance
◦ insured is compensated by the actual value of what he has lost
• non-indemnity insurance: life insurance
◦ insurer undertakes to pay a specified amount to the insured on the happening of an uncertain
future event (risk)
◦ amount may bear no relation to the actual loss
◦ eg: life insurance/disability cover etc.
◦ medical aid = non indemnity insurance
elements of an insurance contract:
• 2 parties:
◦ insured: party paying the premiums
◦ insurer: party who undertakes to pay out when risk occurs
• insured's obligation to pay premium:
◦ to qualify as an insurance contract, there must be an agreement to pay a premium
◦ the first premium does not actually have to be paid before the contract becomes valid
‣ but insurance may put a clause to say that obligation to perform is subject to payment of
the first premium
◦ if the insured fails to pay premiums, the contract does not necessarily terminate
• insurer's obligation:
◦ indemnity contract: insurer must place the insured in the position he was in before the
occurrence of the insured event (paid the actual amount of his loss)
‣ terms of contract may provide certain limits to the compensation
◦ non-indemnity contract: amount is predetermined in the contract
• risk:
◦ insurer will only perform on the occurrence of the specified uncertain event (risk or harm)
◦ must be either:
‣ uncertain as to whether the risk will happen at all (fire, theft, disability)
‣ uncertain as to when the risk will happen (death, funeral)
◦ risk and asset must be properly described in the contract
◦ promissory warranties:
‣ clauses that limit the insurer's exposure to risk, and provide for a certain undertaking by
the insured
‣ eg:
• car must be parked in a garage at a particular address
• jewellery must be kept in a safe
‣ if the insured does not comply, the insurer will not have to pay out if the risk occurs
• insurable interest:
◦ for the contract to be enforceable, the insured must have an insurable interest
◦ indemnity insurance: insured must have a financial interest in preventing the risk insured
against (whether the insured will incur monetary loss/fail to derive monetary benefit if the risk
will occur)
‣ eg: financial loss if car gets stolen
‣ the insurable interest must exist when the risk happens
◦ non-indemnity insurance: insured must have a justifiable interst in the life or health of the
person concerned
‣ eg: insurable interest in a business partner's life, life of a spouse
‣ the insurable interest must exist only when the contract is taken out, not when the risk
occurs
conclusion and contents of an insurance contract:
• intermediaries:
◦ not actually parties to the contract, involved in the negotiation process
◦ 2 types:
‣ brokers: middleman betweeen insured and insurer, do not work for a specific company
• usually acts as an agent for the insured
‣ canvassing agents: work for a specific insurance company
• find clients and get them to apply for an insurance contract with the specific
company
• duties of good faith and disclosure:
◦ non-disclosure and misrep:
‣ insured has duty of good faith towards insurer
• full and accurate disclosure of all material facts relating to insurance contract
• answering all questions honestly and accurately
‣ if misrep/non-disclosure is material, contract is voidable at the instance of insurer
‣ if insurer elects to rescind, they do not have to pay out on a claim regardless of the cause
of the risk
‣ test: if the information not disclosed/misrepresented was reasonable relevant to the risk
and assessment of premiums.
‣ in terms of PPR rules: insurer has a duty to:
• inform the insured of his obligation to disclose material facts
• ensure that the insured knows the consequences of a failure to do so
• ensure that the insured knows what must be disclosed
• duration of duty of good faith and disclosure:
◦ lasts for the negotiation period, ends when the contract is signed
◦ indemnity insurance: duty is revived at the renewal of contract (usually annually)
◦ non-indemnity insurance: does not get renewed, it is a continuing contract
‣ therefore duty is not revived unless contract specifically provides for it
• affirmative warranties:
◦ eg: “I, Mr X, the insured, confirm that all the questions asked of me in the proposal form have
been answered truthfully/ all the information given by me is true and correct.”
◦ clauses often state that lack of disclosure/good faith gives insurer right to terminate contract
◦ BUT: no contract may be invalidated unless misrep was material
• agents and brokers:
◦ canvassing agents:
‣ courts apply the doctrine of constructive notice to this kind of scenario
◦ brokers:
‣ The broker is the agent of the insured and if he does not disclose information or makes a
misrepresentation, then it is the same as if the insured himself had not disclosed or made
the misrepresentation.
‣ So the insurer would be able to set the contract aside and could avoid paying out on a
claim.
performance and termination:
• performance:
◦ normal course of events: insurer settles any claims submitted by insured
◦ may refuse to settle claims:
‣ submitted false or fraudulent claim
• insured may exaggerate extent of loss
• if this happens, insurer can terminate policy
‣ material misrep/non-disclosure
‣ failed to honour obligations under contract:
• eg: when insured is in breach of promissory warrantee
• termination:
◦ expiry period of insurance
◦ when insured no longer has insurable interest in the object
◦ cancellation by one of the parties