Commercial Law - Study Guide

Development team

Eesa FredericksMichelle Kelly-LouwAlvereen LeonardIzelde van Jaarsveld

Departmental reviewer

Jopie Pretorius

DEPARTMENT OF MERCANTILE LAWUNIVERSITY OF SOUTH AFRICA, PRETORIA

# 2005 University of South Africa

Revised edition 2009

All rights reserved

Printed and published by theUniversity of South AfricaMuckleneuk, Pretoria

CLA202W/1/2010±2012

98484184

3B2

COL Style

CONTENTS

SECTION 1Instruments of payment and other methods of payment 1

SECTION 2The law of trusts 83

SECTION 3The law of insolvency 99

SECTION 4The law of administration of estates 131

| contents iii

INTRODUCTION

The purpose of this study guide is to help and guide you through your prescribed

textbook for CLA202±W which forms part of the course, Commercial Law II

(CLA202±W). The study guide therefore deals with five specific chapters taken

from the prescribed book General Principles of Commercial Law by Peter

Havenga et al, 5th edition (2004) Juta, Cape Town. Please note that all references

in the study guide to the ``prescribed textbook'', the ``textbook'' or ``Havenga''

are references to this book.

The study guide has been divided into the following four sections:

Section Chapter in textbook Subject

1 Chapters 24 and 25 Negotiable instruments and other instruments

of payment

2 Chapter 26 Law of trusts

3 Chapter 27 Law of insolvency

4 Chapter 28 Administration of estates

Each section is again divided into a number of short study units each one of which

deals with part of a chapter.

In an effort to keep the text in this study guide as straightforward and

uncomplicated as possible, we have stuck to one gender in each particular

section, alternating between ``he'' and ``she''. Please note that unless we

specifically state that we are referring only to a particular gender or we state that

a provision applies only to a specific gender, the ``he'' will include ``she'' and vice

versa.

The structure of each study unitEach study unit starts with the prescribed reading material for that unit. The

relevant chapter in the textbook is given, as well as the number of the specific

section or sections from the chapter that you have to read for the particular unit.

A list of objectives or a short scenario (in a shaded block) then follows. The purpose

of both is the same, namely to give you an overview of what is going to be dealt

with in the particular study unit.

The contents of each study unit falls under numbered headings. Please note thatthese numbers do not in any way correspond with the numbering in the textbook.

The numbering of the various parts or sections of each study unit is aimed at

showing you how everything fits together by arranging the contents in a structured

and logical way. Under each heading you will find notes on the study material

relevant to that heading. These notes or comments are not meant to replace or

summarise what is contained in the textbook, but usually provide an explanation

or additional information to help you understand the material in the textbook

| introduction v

better and are part of the examination material. In the left-hand margin you willagain find a reference to the specific section of the textbook being dealt withunder that particular heading.

You will also find activities and feedback in each unit. The activities are meant toassist you in establishing whether you have understood the work on which they arebased, which you can do by comparing your answers to those given in the studyguide as feedback.

At the end of each study unit we have included a number of self-test questionswhich you can use to test your knowledge of the work. Please note that some ofthe questions in the examination are multiple-choice questions, while generallythe self-test questions are not. However, the knowledge required to answer theself-test questions is the same as that which is required to answer multiple-choicequestions, and therefore you can only benefit by testing yourself.

How to use the study guideStart each study unit by reading through the prescribed section of the textbook(given at the beginning of the study unit) to give yourself an overall impression ofwhat the study unit deals with. Then read the objectives or scenario whichemphasises the most important aspects of the material.

Now take the first heading in the study guide and read and study the prescribedmaterial from the textbook together with the notes in the study guide. Note thatthe comments in the study guide complement the textbook and they musttherefore be studied together with the textbook.

Do the activities as you get to them in the study guide, and try not to look at theanswers in the study guide before you have done them. The activities are animportant part of the study material and you are encouraged to do them. Theywill help you to understand and memorise the work.

After you have gone through all the material in a study unit and you are confidentthat you understand it, try to answer the self-test questions. To really test yourself,you should try to answer these questions under examination conditions, that is,without the help of your textbook, study guide or notes.

vi

SECTION 1:

INSTRUMENTS OF PAYMENT AND OTHER METHODS OFPAYMENT

SECTION 1:

INSTRUMENTS OF PAYMENT AND OTHER METHODS OFPAYMENT

CONTENTS

Study unit 1 Negotiable instruments and other methods of payment 2

Study unit 2 Cheques: definition, parties to, relationships on and elements of cheques 6

Study unit 3 Who can claim payment on a cheque? 12

Study unit 4 The functions of signatures on cheques 17

Study unit 5 Signatures on cheques on behalf of juristic persons 22

Study unit 6 Forged and unauthorised signatures 26

Study unit 7 Delivery 32

Study unit 8 The liability of the drawer and endorser on a cheque and discharge of theobligation to pay a cheque 37

Study unit 9 The nature of the relationship between the drawee bank and the drawer andthe different markings on a cheque 43

Study unit 10 The protection of the drawee bank 53

Study unit 11 The liability of the collecting bank 58

Study unit 12 Bills of exchange and promissory notes 63

Study unit 13 Other methods of payment: credit cards 66

Study unit 14 Travellers' cheques, stop orders and debit orders 71

Study unit 15 Letters of credit 78

Study unit 16 Electronic funds transfer 81

1S t u d y u n i t

Negotiable instruments and othermethods of payment

Prescribed reading material for this study unitHavenga chapter 24, sections 24.2.1±24.2.2; chapter 25, section 25.1

After completing this study unit you should be able to

. explain the function of instruments of payment

. distinguish between negotiable instruments and other methods of payment

. name the requirements for an instrument to qualify as a negotiable instrument

. discuss the concept of simplicity of transfer

1 The term ``negotiable instrument'' and other methodsof payment

Study HavengaStudy Havengachapter 24, sectionschapter 24, sections24.2.1±24.2.2;24.2.1±24.2.2;chapter 25, sectionchapter 25, section25.1.25.1.

Here you are introduced to some of the instruments of payment by way of whichpayment in commercial transactions may be made. Note that in chapter 24 onlythose instruments of payment which may be referred to as negotiable instrumentsare discussed. Further examples of instruments of payment, or as they are morecorrectly referred to, ``other methods of payment'', are discussed in chapter 25.As not all the methods of payment which are discussed qualify as instruments ofpayment (both stop and debit orders are methods, rather than instruments ofpayment, for example), it is more correct to refer to ``methods of payment'' whenreferring to those examples discussed in chapter 25.

A negotiable instrument, such as a cheque, a bill of exchange or a promissorynote, is in principle transferable from one person to another. However, otherinstruments or methods of payment, such as credit cards and stop and debitorders are generally not transferable from one person to another.

The Bills of Exchange Amendment Act 56 of 2000 applies only to certain types ofnegotiable instruments, namely bills of exchange, cheques (which are simply aparticular type of bill of exchange) and promissory notes. The Act therefore doesnot apply to other types of negotiable instruments and other methods ofpayment. (See however, the discussion of the travellers' cheque in study unit 14below.)

ExamplesBy way of an introduction here are some examples of a cheque, a bill ofexchange and a promissory note. Please remember that there are many differenttypes of cheques, bills of exchange and promissory notes, each with different

2

wording and different markings which may have different legal consequences.These examples are merely specimens of the basic types and outward forms ofthe various documents.

A cheque

A bill of exchange

A promissory note

R2 000,00 Cape Town2 September 2009

I promise to pay Lindsay Gorman or bearer, the sum of two thousand rand on2 March, 2009, for value received.

20

section 1 study unit 1 | negotiable instruments and other methods of payment 3

(1) Make a list of methods of payment other than payment in cash.(2) Make a list of negotiable instruments which are not also instruments of

payment.

Feedback(1) Bills of exchange, cheques, promissory notes, credit cards, travellers'

cheques, stop and debit orders, documentary letters of credit and electronictransfer of funds.

(2) Share warrants and certain bearer debentures (a debenture is a long-termbond that bears fixed interest and is usually unsecured).

2 Negotiable instruments as alternatives to cashStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.2.2.24.2.2.

Negotiable instruments are used as alternatives to cash in the payment of debtsas they are often more convenient and safer than cash. In order to be viablealternatives to cash, bills of exchange, cheques and promissory notes have tosatisfy the following three requirements:

. they have to be transferable without the need to comply with cumbersomeformalities

. the defences that can be raised against a person claiming payment should bekept to the minimum

. the legal title of a person who acquires such an instrument in good faith shouldbe open to dispute in exceptional circumstances only

All bills of exchange, cheques and promissory notes share two basiccharacteristics, namely simplicity of transfer and the possibility of transfer free fromequities.

(1) What is meant by the phrase ``simplicity of transfer''?(2) What is meant by the phrase ``transfer free from equities''?

Feedback(1) Apart from signing on the back of the instrument (ie in the case of order

instruments) and the delivery of the instrument, a negotiable instrument isgenerally transferable without the compliance of any (further) formalities. Forexample, the transfer of a negotiable instrument need not to beaccompanied by a separate document to provide proof of the holder's rightto transfer the instrument to another party.

(2) In terms of the general principle of our law, the recipient of an object cannotacquire a better title (ie a stronger right) in respect of the object than the titleof the person who transferred the object to the recipient. For example,although the lessor of a motor vehicle may validly sell the vehicle to a thirdparty, the lessor cannot transfer ownership of the motor vehicle to the thirdparty (buyer) since the lessor is not its owner. The lessor can only transferpossession (and not also ownership) of the motor vehicle. However, in thecase of negotiable instruments there is an exception. The recipient of a

Activity

Activity

4

negotiable instrument may in certain circumstances acquire a valid title to anegotiable instrument even though the person from whom he takes theinstrument has an invalid title to it, or even no title at all.

SELF-TEST QUESTIONS

If you were able to do the activities, you are already well prepared for theexamination as regards the work covered in this study unit. Therefore, there are noself-test question for this study unit.

section 1 study unit 1 | negotiable instruments and other methods of payment 5

2S t u d y u n i t

Cheques: definition, parties to,relationships on and elements ofcheques

Prescribed reading material for this study unit

Havenga chapter 24, sections 24.3.1±24.3.5.2.4.


. give a definition of the concept of a cheque

. list the essential and non-essential parties to a cheque

. name and discuss the different relationships on a cheque

. name and briefly explain the essential elements of a cheque

. complete a valid cheque

. name and briefly explain the non-essential elements of a cheque

. judge whether or not certain omissions on a cheque are detrimental to its validity

1 The definition of a cheque and the necessary partiesto it

Study HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.1, 24.3.2.24.3.1, 24.3.2.

Although this section contains a lot of information, the subject matter is rather

straightforward. A thorough understanding of the information contained in this

study unit will ensure a solid basis for the remainder of the study units on cheques.

It is of the utmost importance that you know the definition of a cheque off by

heart. By knowing the definition you will at once be able to tell who are the

necessary parties to a cheque, and also be able to list the essential elements of a

cheque.

The definition of a cheque may be divided into the following seven elements:

. it is an unconditional order

. in writing

. addressed by one person to a bank

. signed by the person giving it

. requiring the bank to which it is addressed to pay on demand

. a sum certain in money

. to a specified person or his order, or to bearer

The different elements or essentials of the cheque will be discussed in more detail

below.

6

From this definition it is clear that there are always three different parties (or more

correctly, three different capacities) to a cheque. Although the parties to a

cheque are often three different (and separate persons) this need not be the

case.

The three essential or necessary parties to a cheque are the following:

. The drawer Ð the person who has a current account (eg a cheque account)

with the drawee bank and who gives the order to the drawee bank to pay a

specified amount to the payee or bearer.

. The drawee bank Ð the bank which holds the current account of the drawer

and at which the drawer has either deposited an amount of money to be used

to pay out cheques, or with which the drawer has made an arrangement for

overdraft facilities (ie the drawer does not have sufficient funds of his own and

the bank therefore pays the amount of the cheque from its own funds).

. The payee Ð the person to whom payment must be made (the name of the

payee is usually clearly indicated in the space provided on the face of the

cheque. The drawer may decide not to name a specific payee but to make

the cheque payable to ``cash or bearer'').

Thus, although there must be a drawer, a drawee and a payee to a cheque, the

drawer and the payee, for example, may be one and the same person. This will be

the case where the drawer draws a cheque on his bank in favour of himself. This is,

of course, a way in which the holder of a cheque account may withdraw money

from the account for personal use.

2 Non-essential parties to a chequeStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.3.24.3.3.

The endorser and the endorsee are two non-essential parties to a cheque.

Havenga, section 24.3.3 describes the concepts of endorser and endorsee.

Name the three necessary parties to a cheque.

FeedbackThe drawer, the drawee bank and the payee.

3 The relationships between parties to a chequeStudy HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.4±24.3.4.3.24.3.4±24.3.4.3.

Three different relationships

There are always three different relationships to a cheque.

. First, there is the underlying relationship between the drawer and the payee.

This relationship represents the reason for A drawing a cheque in favour of the

payee. For example, the drawer may have promised in terms of a contract of

donation to pay the payee a sum of R500. Since the existence of the contract

of donation is not clear from the face of the cheque, it is referred to as the

underlying relationship.

Activity

section 1 study unit 2 | cheques: definition, parties to, relationships 7

. Secondly, there is the relationship which arises from the agreement to use the

cheque. This relationship represents the agreement between the parties to the

underlying relationship that the debt in terms of the underlying relationship will

be paid by way of a cheque. Without such previous implied or express

agreement between the parties, the debtor is not entitled to force the creditor

to accept payment of the debt by way of a cheque.

. Thirdly, there are the relationships on the cheque. Apart from the creditor's and

debtor's respective rights and duties in terms of the underlying relationship,

certain further rights and duties also come into existence when the drawer (ie

the debtor) draws a cheque in favour of the payee (ie the creditor). The

creditor (as payee) may sue the debtor (as drawer) in terms of the cheque.

Such right is not available to the creditor before the cheque has been drawn.

Name five examples of typical underlying relationships on a cheque.

FeedbackAny five of the following examples may constitute an underlying relationship on a

cheque (ie the reason why the drawer drew a cheque and gave it to the payee),

namely a contract of sale, lease, donation, work, mandate, service, or insurance,

or the payment of damages to the payee (ie the plaintiff) as a result of a delict

committed by the drawer (ie the wrongdoer). The number of examples of typical

underlying relationships on a cheque are, of course, unlimited.

4 The essential elements of a chequeStudy HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.5.1±24.3.5.1.8.24.3.5.1±24.3.5.1.8.

The essential elements of a cheque are those elements or characteristics which

have to be present before a document or instrument will be regarded as a

cheque. These elements are derived from the definition of a cheque as discussed

above. For the sake of completeness they are repeated hereunder.

The eight essential elements of a cheque are

(1) an order

(2) which is unconditional

(3) and in writing

(4) addressed by one person to a bank (ie the drawee bank)

(5) signed by the person giving it (ie the drawer)

(6) requiring the bank to whom it is addressed to pay on demand

(7) a sum certain in money

(8) to a specified person (ie the payee) or his order, or to bearer

It is important to note that the essential elements must all be present in order for

such document or instrument to qualify as a cheque. The presence of merely one

or some of these elements does not constitute a cheque. Likewise, if one of the

essential elements is absent, the document will not qualify as a cheque.

Fictitious payees

Please note section 24.3.5.1.8 in Havenga, seventh paragraph. Here it is stated

Activity

8

that where the payee of an order cheque is a fictitious person, the cheque maybe treated as a bearer cheque. The following principles are relevant:

(1) The intention of the drawer is pivotal in determining whether an order chequemay be treated as a bearer instrument.

(2) If the drawer had the intention of making payment to the payee, whether heis fictitious or not, the cheque will remain an order cheque.

(3) An order cheque will only be treated as a bearer instrument when the drawerdid not intend that payment be made to the payee.

(4) If an order cheque is treated as a bearer cheque, no valid signature isnecessary to effect negotiation and the person who receives such a chequemay become a holder of it. (A holder is a person who is in possession of abearer cheque. See section 24.3.6.1.1 in Havenga.)

Complete the following blank document by inserting all the essential elements ofa cheque so that the document qualifies as a valid cheque. Do not insert any ofthe non-essential elements of a cheque.

Feedback

Activity

20

P SmithOne hundred rands only 100=00

C Burger

20


5 The non-essential elements of a chequeStudy HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.5.2±24.3.5.2.4.24.3.5.2±24.3.5.2.4.

The non-essential elements of a cheque are those elements which often appear

on a cheque but whose presence or absence does not affect the validity of the

cheque. Havenga section 24.3.5.2 discusses the non-essential elements of a

cheque.

Complete the following blank document by inserting four non-essential elements

of a cheque on the face of it. Do not insert any of the essential elements of a

cheque on the document.

Feedback

SELF-TEST QUESTIONS

(1) Name the three different relationships on a cheque.(2) May an order cheque ever be treated as a bearer cheque?(3) What are the eight essential elements of a cheque?

Activity

20

Payable at: Hatfield Pretoria

Stamp:R1 Without recourse

2 July 0920

10

ANSWERS TO SELF-TEST QUESTIONS

(1) The relationship between the drawer and the payee, the relationship arisingfrom the agreement to use the cheque and the relationship on the chequeitself.

(2) Yes, when the payee of an order cheque is fictitious and the drawer did notintend that payment of the cheque be effected to him, the cheque may betreated as a bearer cheque.

(3) A cheque is an unconditional order in writing, addressed by one person to abank (ie the drawee bank), signed by the person giving it (ie the drawer)requiring the bank, to whom it is addressed, to pay on demand a sum certainin money to a specified person (ie the payee) or his order, or to bearer.


3S t u d y u n i t

Who can claim payment on a cheque?


Havenga chapter 24, sections 24.3.6±24.3.6.2.3.


. define the concept of a holder

. list the rights of a holder

. briefly discuss the duties of the holder

. advise someone on who can claim payment on a cheque

. define the concept of a holder in due course

. list the requirements for a holder to be a holder in due course

. explain the special position of a holder in due course

1 The concept of a holder

Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.6.1.1.24.3.6.1.1.

Holder

This is a difficult and important study unit. It contains basic definitions and

concepts. We therefore suggest that you first read through this study unit as a

whole before attempting to study the unit in detail.

It is of the utmost importance that you know the definition of a holder off by heart.

By knowing the definition you will at once be able to tell whether or not a

particular party qualifies as the holder of a cheque. The question whether or not

someone qualifies as a holder of a cheque has far-reaching consequences.

A holder is the payee or endorsee in possession of an order instrument or the

person in possession of a bearer cheque. This definition explains the following:

(1) The holder of a bearer cheque is anyone who is in possession of it. The bearer

of a bearer cheque is, by implication, in possession of the cheque. If

someone ``bears'' (literally: ``to carry'', ``to have'' or ``to possess'') the

cheque, it is implied that the person is in possession of the cheque since it is

not possible to ``bear'' a cheque without being in possession of it.

(2) The holder of an order cheque is the payee or indorsee in possession of the

cheque. (For a discussion of the concepts of ``payee'' and ``indorsee'', see

again study unit 2 above.) This means that to qualify as the holder of an order

cheque one has to be either the payee who is in possession of it, or the

endorsee who is in possession of it.

12

The question whether or not a party qualifies as the holder of the cheque is

important for a number of reasons:

(1) Discharge (ie valid payment) of the cheque can only be to a holder of the

cheque.

(2) Note that it is not necessary for the holder of the cheque to be in lawful

possession of the cheque or to be the owner of the cheque to qualify as a

holder. Thus, it is possible for a thief to be the holder of a cheque.

(3) Likewise is it possible for a non-owner of a bearer cheque, such as the agent

who receives it on behalf of his principal, to be its holder.

(4) Holdership implies possession of a cheque. If someone is not in possession of

the cheque, he cannot be the holder, even if he is its owner. However, mere

possession is not enough to qualify as the holder of an order cheque.

(5) ``Holder'' is a neutral concept. Being holder is thus not synonymous with

being owner or creditor: it merely gives one the power to sue on the cheque

without implying that one is entitled to the rights embodied in it.

(6) Finally, it is important to note that during the ``life'' of a cheque a number of

persons may qualify as the holder of it. However, as a matter of general

principle it can be stated that it is not possible for two or more parties to be

holder of the cheque simultaneously. A cheque may have only one holder at

any given time.

A draws a cheque on B Bank in favour of C or bearer. A delivers the cheque to C.

X steals the cheque from C. X presents the cheque for payment to B Bank. Will

payment by B Bank to X be payment in due course? Explain.

Feedback``Payment in due course'' means payment to the holder of the cheque. X is the

holder of the cheque notwithstanding the fact that he is not lawfully in possession

of it. Because this is a bearer cheque, any person in possession of it qualifies as

holder of it.

2 The rights and duties of a holderStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.6.1.2.24.3.6.1.2.

The holder of a cheque has certain rights and duties in respect of the cheque. The

duties which rest on the holder are not duties in the strict sense of the word but

concern certain steps and procedures which the holder must take to enforce his

right to payment on the cheque.

(1) List the four rights of a holder of a cheque.

(2) One of the so-called duties of a holder of a cheque is to present the cheque

for payment within a ``reasonable time''. What is regarded as a ``reasonable

time''?

Activity

Activity

section 1 study unit 3 | who can claim payment on a cheque? 13

Feedback(1) The holder of a cheque may sue on the cheque in his own name, he may

present the cheque for payment, he may make certain additions andalterations to a cheque and when a cheque is lost, a holder may ask thedrawer for a duplicate of the cheque.

(2) See section 24.3.6.1.3 (a) for the answer. Some of the duties of a holderinclude presenting the cheque for payment within a reasonable time andexercising his right of recourse against the drawer and endorser when acheque is dishonoured by non-payment.

3 The holder in due courseStudy HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.6.2±24.3.6.2.2.24.3.6.2±24.3.6.2.2.

The law of negotiable instruments acknowledges a special type of holder, namelya holder in due course. The Bills of Exchange Act 34 of 1964 has set strictrequirements before someone will qualify as a holder in due course. As a result, thelaw also confers certain privileges and rights on a holder in due course. (Thespecial position of the holder in due course is discussed below.) Generally theholder in due course becomes owner of the cheque if all the requirements forholdership in due course are met.

It is important to note that someone must comply with all the requirements forholdership in due course before he can qualify as one. You must know all eightrequirements for holdership in due course. It will not suffice to know only, forinstance, six or seven of the requirements as you will then not be able to tell withcertainty whether someone qualifies as a holder in due course.

List the eight requirements that a person should meet in order to qualify forholdership in due course.

FeedbackTo become a holder in due course a person must meet the followingrequirements:

. He must be a holder.

. The cheque must be negotiated to him.

. He must receive the cheque complete and regular on the face of it.

. He must take the cheque before its due date.

. He must take the cheque without knowing that it has been dishonoured in thepast.

. He must take the cheque in good faith.

. He must not know of any defect in the title of the person who transfers thecheque to him.

. He must take the cheque for value.

4 The special position of the holder in due courseStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.6.2.3.24.3.6.2.3.

The special position which the holder in due course enjoys can be summarised asfollows:

Activity

14

. The holder in due course holds the cheque free from equities. This means that

the rights of a holder in due course are not affected by any defect in the title of

the person from whom he has received the cheque. In other words, when

someone qualifies as a holder in due course, he has the peace of mind that he

is protected against defences which are not clear from the face of the

cheque. Thus, it is possible for a holder in due course to acquire ownership in

the cheque even where he acquires it from a non-owner. The concept of ``free

from equities'' was explained in study unit 1 above.

. As a result of the fact that the holder in due course holds the cheque ``free

from equities'' he may enforce payment of the cheque against all parties

liable on it.

. As a corollary of the principle that the holder in due course holds the cheque

``free from equities'', so-called relative defences cannot be raised against a

holder in due course. A relative defence is a defence that prior parties may

have among themselves.

SELF-TEST QUESTIONS

Discuss in each of the following cases whether Y is a holder in due course, a holder

or a mere possessor:

(1) Y receives an order cheque from his father as a birthday present. The cheque

was previously dishonoured but Y is unaware of this. You may assume that all

the other requirements for holdership in due course have been complied

with.

(2) A draws a cheque on B Bank in favour of C or order. C, without adding

anything to the cheque, gives it to Y, who gives value for the cheque. You

may assume that all the other requirements for holdership in due course have

been complied with.

(3) A draws a cheque on B Bank in favour of cash or bearer. A gives the cheque

to Y as payment for a motor vehicle in terms of a contract of sale. You may

assume that all the other requirements for holdership in due course have

been complied with.

(4) A draws a cash cheque on B Bank. A delivers the cheque to Y. The cheque is

neither dated, nor is the place of payment of the cheque indicated on it. You

may assume that all the other requirements for holdership in due course have

been complied with.

(5) A draws a cheque on B Bank in favour of Y or order. You may assume that all

the other requirements for holdership in due course have been complied

with.

(6) A draws a cheque on B Bank in favour of Y or bearer and delivers the cheque

to Y. Z steals the cheque from Y. You may assume that all the other

requirements for holdership in due course have been complied with.


(1) This question concerns the requirement that the holder in due course must

have given value for the cheque. The fact that Y received the cheque as a

gift means that Y did not give value for the cheque and that he will qualify

only as a holder (he is the payee in possession of an order cheque) and not

also as a holder in due course. The fact that the cheque was previously

dishonoured is irrelevant as Y was unaware of this.

section 1 study unit 3 | who can claim payment on a cheque? 15

(2) This question deals with the requirement that the holder in due course mustfirst of all be a holder. As Y is neither the payee (C is) nor the endorsee (thereis no endorsee) who is in possession of the order cheque, he is not the holderof it. Y is therefore neither the holder in due course nor the holder but a merepossessor.

(3) This question concerns the requirement that the holder in due course mustfirst of all be a holder. As this is a bearer cheque any person in possession of itqualifies as its holder. Y therefore qualifies as a holder in due course of thecheque.

(4) This question covers the requirement that the cheque must be complete andregular on the face of it. However, the elements which are omitted in thisquestion, namely the date and place of payment, are non-essentialelements and their omission does not affect Y's rights. Y qualifies as holder indue course.

(5) This question concerns the requirement that the cheque must be``negotiated'' to the holder in due course. In the case of an order cheque, itis said that the cheque is not ``negotiated'' to the payee, but that it is``issued'' to him. The issuing of a cheque is the first transfer by the drawer tothe payee of a cheque. Although Y is the payee of an order cheque he doesnot qualify as a holder in due course. However, Y does comply with therequirements for holdership.

(6) This question concerns the requirement that possession is the basis ofholdership. Because Y is no longer in possession of the cheque he is neitherholder in due course, nor holder, nor possessor of it.

16

4S t u d y u n i t

The functions of signatures on cheques


Havenga chapter 24, sections 24.3.7±24.3.7.1.1; 24.3.7.1.3


. list the two requirements before someone will be liable on a cheque

. define the concept of a ``signature''

. name the three possible functions which a signature may fulfil

. name the different functions which a drawer's signature may fulfil

. name the different functions which an indorser's signature may fulfil

1 The requirement of a signature to establish liability ona cheque

Study HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.7±24.3.7.1.124.3.7±24.3.7.1.1

The following two requirements must be satisfied before a party can become

liable on a cheque:

(1) He must sign the cheque (either as the drawer, the indorser or in any other

capacity which indicates his willingness to incur liability on the cheque).

(2) He must deliver the cheque. (The requirement of delivery will be discussed in

more detail in study unit 7 below.)

The basis to this study unit is the first requirement for liability, namely that no one

can be held liable on a cheque if his signature does not appear on the cheque.

Thus, as a matter of general principle it can be stated that the mere fact that

someone has handled a cheque or that his name appears on the cheque (eg as

payee of it) will not result in liability for that person on the cheque. The following

principles are applicable:

. In accordance with the general principles of the law of contract, the mere fact

that someone's signature appears on a cheque will not necessarily result in his

being liable on the cheque.

. In this regard you are referred to the principle that only persons who have the

necessary ``capacity to act'' may incur personal liability. The term ``capacity

to act'' refers to the capacity to perform juristic acts, to participate in legal

intercourse, to conclude valid contracts or to draw or sign a cheque. Only

natural persons (ie individuals like you and me) are potentially capable of

having capacity to act. Juristic persons (ie companies, closed corporations

and the like) can never be capable of performing juristic acts.

. Consequently a contract on behalf of a legal person must be entered into by a

natural person.

. However, not all natural persons have capacity to act. In certain

circumstances a person can be incapable of performing juristic acts, or his

section 1 study unit 4 | the functions of signatures on cheques 17

capacity can be limited, owing to various factors. These factors include age,

marriage and mental deficiency (see again Havenga chapter 5, sections 1±7).

(Please note that you are not expected to study Havenga chapter 5, sections 1±7

for examination purposes. You are merely referred to that section of the textbook

to refresh your memory on the topic of capacity to act.)

Of all these factors the effect of age on the capacity to act is the most important

for present purposes.

. A minor is anyone below the age of 18. As a matter of general principle it can

be stated that a contract entered into by a minor without the necessary

assistance of his guardian is not enforceable against the minor. However, such

contract is not necessarily void and without effect.

. With regard to a cheque it can be stated that a minor can draw a valid

cheque without the assistance of his guardian but that such cheque is not

enforceable against the minor but only against other parties provided, of

course, that they have signed it.

Discuss whether Y will be held liable on a cheque in the following circumstances:

(1) Y, the holder of a cheque account at Standard Bank gives one of his

standard cheque forms to Z in payment of Y's debt towards Z. X forgets to

sign the cheque but he nevertheless gives it to Z with the intention of making

Z the owner of it.

(2) A draws a cheque on B Bank in favour of Y or bearer. Y is A's minor daughter.

Y transfers the cheque to Z in the usual way in which this type of cheque is

transferred.

(3) A draws a cheque on B Bank in favour of Y or order. Y is A's minor daughter. Y

transfers the cheque to Z in the usual way in which this type of cheque is

transferred.

Feedback(1) The fact that Y's signature does not appear on the cheque means that he

will not be held liable on the cheque.

(2) A bearer cheque is transferred by mere delivery. As Y's signature is not

necessary for transfer in the usual way, we can assume that her signature

does not appear on the cheque and that she cannot be held liable on the

cheque.

(3) An order cheque is transferred by signature (indorsement) and delivery. As

Y's signature is necessary for transfer in the usual way, we can assume that

her signature does appear on the cheque. However, because Y is a minor

she cannot incur liability on the cheque.

2 The different functions of signatures on chequesStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.324.3.7.1.3

A signature on a cheque can fulfil the following three different functions:

(1) a constitutive function

(2) a guarantee function

(3) a transfer function

Activity

18

. The constitutive function of a signature refers to the placing of the drawer's

signature on a cheque to effect the cheque's creation. Without such signature

no cheque comes into being. Only the drawer's signature fulfils a constitutive

function.

. The guarantee function of a signature refers to the fact that in certain

circumstances the person who places his signature on the cheque undertakes

or guarantees to pay the holder of the cheque if the cheque is dishonoured

when presented for payment.

. The transfer function refers to the situation where the signature of a person is

necessary to effect the transfer from that person to the person to whom the

cheque is transferred. For example, an order cheque is transferred by an

indorsement (ie signature) by the holder of the cheque together with actual or

constructive delivery of the cheque. In other words, in order to transfer an order

cheque from one holder of the cheque to another validly, the first holder must

put his signature on the cheque and then give (ie deliver) it to the next person,

who will become holder of it.

3 The possible functions of the signatures of differentparties to a cheque

Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.324.3.7.1.3

A number of different parties may be involved during the lifetime of a cheque.

Some of the more frequently encountered parties to a cheque will be mentioned

here, followed by a short discussion of the possible functions which their signatures

may fulfil.

(1) The drawer. The drawer's signature fulfils a constitutive and a guaranteefunction. Solely the drawer's signature (and not also, eg, the indorser's

signature) can fulfil a constitutive function. (The term ``constitutive'' means

``to have the power of constituting'', that is, to have the power to make a

thing what it is. In other words, without the signature of the drawer there can

be no cheque.)

MinorAlthough the drawer must deliver the cheque to the payee for the

lastmentioned to become the holder of the cheque, that does not mean

that the signature of the drawer fulfils a transfer function. As a minor cannot,

as a matter of general principle, be held liable on a cheque, the signature of

a minor drawer fulfils only a constitutive function and not also a guaranteefunction.

Remember that although a drawer who is a major is allowed to add the

words ``sans recourse'' to the cheque, it is unlikely that the payee will accept

such a cheque as he will not be able to sue the drawer successfully on the

cheque. (The words ``sans recourse'' mean ``without recourse''. The purpose

of these words on a cheque is to protect the person who adds them to the

cheque from liability to subsequent holders.)

If the major drawer adds the words ``sans recourse'' to the cheque, his

signature fulfils only a constitutive function and not also a guarantee

function. In the case of a minor, the law provides for an exception to the rule

as the law generally protects the interests of minors. A minor need not add

the words ``sans recourse'' to a cheque to enjoy the protection of the law.

Such protection is granted automatically. Any person who takes a cheque

which was drawn by a minor should be aware that he will not be able to sue

the minor successfully on the cheque.


(2) The payee. The payee becomes liable on the cheque only if he puts his

signature on it. If the payee (as holder) wants to transfer an order cheque to

another person, the payee must put his signature on the cheque and deliver

it to the other person. The payee then becomes known as the indorser. The

signature of such payee (indorser) fulfils a guarantee and a transfer function.

In the case of an indorser, the words ``sans recourse'' can be added to a

cheque. Such words will then protect the indorser against claims from

subsequent holders of the cheque. The signature of the indorser who has

added the words ``sans recourse'' to the cheque fulfils only a transfer

function.

As a bearer cheque is transferred by mere delivery it is not necessary for the

holder of it to put his signature on it to effect transfer. However, if the holder

decides to put his signature on a bearer cheque (which is in itself not a very

clever thing to do because the holder thereby unnecessarily becomes

personally liable on the cheque) his signature will fulfil only a guaranteefunction and not also a transfer function.

(3) The endorsee. The endorsee is the holder of the cheque who has received it

from a previous holder. For example, if the payee of an order cheque has

signed the cheque (ie endorsed it specifically to X) and has delivered it to X,

X is known as the indorsee. If X wants to transfer the cheque to another

person, he in turn, must put his signature on the cheque.

. The signature of the endorsee fulfils a guarantee and a transfer function.

Remember that by putting his signature on the cheque the indorsee

becomes the (or rather, another) indorser of the cheque.

. From this it follows that an indorsee may also add the words ``sans

recourse'' to a cheque as the endorsee becomes merely another endorser

of it. The signature of the endorsee cum endorser who has added the

words ``sans recourse'' to the cheque fulfils only a transfer function.

(4) The drawee bank and collecting bank. As banks do not, as a matter of

general principle, put their signatures on their client's cheques, they therefore

do not incur any liability on their client's cheques. (This is with the exception of

the situation where the client obtains a bank-guaranteed cheque from his

bank, which is explained elsewhere.)

SELF-TEST QUESTIONS

Here you are provided with two lists. The first list contains a number of functions of

the different signatures which may appear on a cheque. The second list contains

a description of the different parties to a cheque. Rearrange each option in the

second list to correspond with the option in the first list which best describes it. Each

option from the second list may be used only once.

List 1

(1) Constitutive function.

(2) Transfer function.

(3) Guarantee function.

(4) Constitutive and guarantee function.

(5) Transfer and guarantee function.

20

List 2

(a) The signature of a drawer who is a major.(b) The signature of an indorser of an order cheque.(c) The signature of an indorser of a bearer cheque.(d) The signature of a drawer who is twenty years old.(e) The signature of an indorser of an order cheque which is accompanied by

the words ``sans recourse''.


(1) Ð (d)

(2) Ð (e)

(3) Ð (c)

(4) Ð (a)

(5) Ð (b)


5S t u d y u n i t

Signatures on cheques on behalf ofjuristic persons

Prescribed reading material for this study unitHavenga chapter 24, section 24.3.7.1.2.


. distinguish between, on the one hand, natural persons and, on the other hand, juristic

persons

. name the requirements before a juristic person will be liable on a cheque

. describe in two sentences what is meant by the term ``composite signature''

. distinguish, with reference to different practical examples from the case law, when a

natural person will incur liability on a company cheque

1 Signatures on behalf of juristic personsStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.2.24.3.7.1.2.

It was explained in study unit 4 above that only natural persons (ie any individual)are potentially capable of having capacity to act. Juristic persons such ascompanies and closed corporations can never be capable of performing juristicacts. (For the remainder of the discussion in this study unit any reference to acompany includes a closed corporation, except where indicated otherwise.) Inthe present context, juristic acts include the drawing of a cheque. Consequently acheque on behalf of a company or closed corporation must be drawn or signedby a natural person. The directors of a company or the members of a closedcorporation usually draw or sign a cheque on behalf of the juristic person.

2 Composite signaturesStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.2.24.3.7.1.2.

The signature on behalf of a company is usually a composite signature. Acomposite signature usually comprises a stamped impression of the name of thecompany coupled with the signature of a director. The requirement that thedirector must sign the cheque in conjunction with the impression of the company'sname is usually found in its memorandum and articles of association.

If the memorandum and articles of association of the company provides for acomposite signature, the signature consists of the stamp impression as well as thesignature of the director. If either one of these two elements is missing, thesignature will be incomplete and neither the company nor the director will beliable on the cheque.

It is important to note that the signature of the director forms an integral part of the

22

company's composite signature. This means that, as a matter of general principle,

the director will not incur personal liability if he signs the cheque on behalf of thecompany. However, there are exceptions to the rule. We will now take a look atfour different scenarios regarding possible liability on a company's cheque.

First, the company alone may be liable. This will be the case when the followingtwo requirements are met:

(1) The company must have the capacity to incur liability on a cheque.

(2) The person who signs on behalf of the company must have the authority todo so.

Secondly, the company as well as the director may be liable. In this case, if acompany cannot pay its debts, the plaintiff will be forced to have recourse to the

director whose signature appears on the cheque. It must be remembered that ifthe director indicates that he is signing in a representative capacity he alone willusually not be held liable. Where the director fails to indicate that he is signing in arepresentative capacity only, he will be liable. Practical examples of this scenario

are discussed in more detail below.

Thirdly, it is possible that only the director may be liable. For example, where the

company's memorandum and articles of association provide that its chequesmust be signed by the managing director, and one of the ordinary directorsknowingly and with the intention to deceive the third party signs one of thecompany's cheques in his own name, the company will not be liable. However,

the ordinary director will be liable.

Fourthly, it is possible that neither the company nor the director may be liable. This

will be the case where, for example, the amount of the cheque exceeds themaximum amount which the memorandum and articles of association of thecompany authorise the particular director to sign for.

You should keep in mind that the liability which a director may incur applies also toindorsements made on behalf of the company. This is a very important principle,especially in the light of the Bills of Exchange Amendment Act of 2000 that is

discussed below.

3 Practical guidelines from the case lawStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.2.24.3.7.1.2.

The circumstances in which the director will be held personally liable where he

puts his signature on a company cheque, are subject to much debate. A numberof court cases dealing with this issue are referred to in section 24.3.7.1.2 of thetextbook. From these cases it is clear that there are no fixed principles in this

regard. However, what becomes evident from these examples is the fact that it issafest for a director to sign a cheque on behalf of a company by clearlyindicating next to his signature that he is signing in a representative capacity only.In this regard he may make use of terms such as ``per'', `òn behalf of'', or ``for''.

From the examples to which you are referred in section 24.3.7.1.2 it is clear that ifthe words ``per'' or `òn behalf of'' appear next to only one of several signatures,those directors whose signatures are not clearly qualified may nevertheless incur

personal liability.

The Bills of Exchange Amendment Act of 2000 has changed the above situation incases where the signatory signs as drawer on behalf of a principal. Section 24 has

been amended and now reads: `Ìf a person signs a bill as drawer, acceptor or

section 1 study unit 5 | signatures on cheques on behalf of juristic persons 23

indorser and adds words to his signature indicating that he signs for or on behalf of

a principal, or in a representative capacity, or if he signs as drawer and the nameof the principal appears with his signature, he is not personally liable thereon''. The

words in bold have been inserted and it is now clear that it is no longer necessary

for the drawer of a bill to indicate that he is signing in a representative capacity if

the name of his principal appears ``with'' his signature. It should not matter if the

name of the principal was printed (or even pre-printed) on the cheque before the

representative signs the cheque as drawer as long as the name of the principal

appears ``with'' the name of the drawer. However, it is important to note that the

amendment applies only to instances where the signatory signs the cheque as

drawer and not in cases where, for example, he signs as indorser or acceptor.

Where the signatory in a representative capacity signs, for example, as indorser,

he must still indicate that he is signing on behalf of a principal if he wants to avoid

personal liability on the instrument.

Both an authorised and an unauthorsed agent alike can be held personally liable

on an instrument: the authorised agent will be liable if the name of the principal

does not appear ``with'' his signature as drawer on the cheque; and the

unauthorised ``agent'' will be liable in terms of the proviso to section 24(1) by

reason of the absence of authority. This proviso reads: ``Provided that if such

person had in fact no authority to sign for or on behalf of the person indicated as

principal, or in a representative capacity, he shall be personally liable on the said

bill.''

The potential personal liability of the signatory in a representative capacity will in

future be determined by how a reasonable person will interpret the cheque,

taking into account everything that appears on the face of the cheque.

SELF-TEST QUESTIONS

The company is XYZ (Pty) Ltd. The directors of the company are R Solomon and P

Banda. Indicate in each of the following cases how the directors must sign the

cheque as indorser on behalf of the company to avoid personal liability.

(1) The composite signature of the company consists of a stamp impression with

two blank spaces forming part of the stamp.

XYZ (Pty) Ltd

.......................................................................................................................................

.......................................................................................................................................



XYZ (Pty) Ltd

.......................................................................................................................................

.......................................................................................................................................



XYZ (Pty) Ltd

............................................................................................................ (Director no 1)

............................................................................................................ (Director no 2)

24

per R Solomon

per R Solomon

R Solomon

per P Banda

per P Banda

P Banda


(1) XYZ (Pty) Ltd

.......................................................................................................................................

.......................................................................................................................................

(2) XYZ (Pty) Ltd

................................................................. .................................................................

(3) XYZ (Pty) Ltd

............................................................................................................ (Director no 1)

............................................................................................................ (Director no 2)

section 1 study unit 5 | signatures on cheques on behalf of juristic persons 25

6S t u d y u n i t

Forged and unauthorised signatures

Prescribed reading material for this study unitHavenga chapter 24, section 24.3.7.1.4±24.3.7.1.5.


. distinguish between, on the one hand, a forged signature and, on the other

hand, an unauthorised signature

. explain the legal consequences of a forged signature on a cheque

. explain the legal consequences of an unauthorised signature on a cheque

. define the term ``estoppel'' in your own words

. describe in two sentences what is meant by the term ``holder by estoppel''

. write a short explanatory note on the protection provided by section 53(2)(b)

of the Bills of Exchange Act to a ``holder in due course''

1 Forged signaturesStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.4.24.3.7.1.4.

Please note that the discussion of forged signatures in this study unit covers theforging of the signature of the drawer as well as the signature of the endorser.

Forged signatureForged signature A forged signature on a cheque is any fraudulent imitation of a signature with theobject of deceiving another person or persons.

. It is therefore clear that if a thief steals a cheque and puts his own signature onthe cheque it will not amount to a forgery. However, in the vast majority ofcases where a cheque is stolen the thief will not put his own signature on thecheque, but he will forge the signature of the person from whom he has stolenthe cheque. This will be the case where the signature of the true owner (ie theperson who is entitled to possession of the cheque and from whom the chequewas stolen) is necessary to effect the valid transfer of the cheque (ie in the caseof an order cheque).

. It is important to note that a forged signature is wholly inoperative and cannever be ratified. In other words, the person whose signature has been forgedcannot afterwards ratify (ie give formal approval or consent to) the forgery.

1.1 THE LEGAL CONSEQUENCES OF A FORGED SIGNATURE

Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.4.24.3.7.1.4.

Section 53(2)(b)

The discussion on the legal consequences of forged signatures involves two issues:

. There is the principle that a forged signature is wholly inoperative and

26

. There is the exception to the first principle which is provided for in section

53(2)(b) of the Bills of Exchange Act.

In terms of the Bills of Exchange Act, a forged signature is wholly inoperative. This

means that no right to retain or give discharge for the cheque or to enforce

payment of it against any party can be acquired through the forged signature. In

other words, a forged signature is worthless, but the cheque stays valid although

no rights can be conferred or transferred.

Two examples will suffice to explain the general rule.

(1) If the drawer's signature is forged neither the payee nor any subsequent

holder will be able to obtain payment on the cheque from the drawer or any

subsequent party who has put his signature on the cheque.

(2) If the signature (endorsement) of the payee or any subsequent holder is

forged, any person who obtains such cheque subsequent to the forging will

acquire no rights on it against any previous party.

However, section 53(2)(b) of the Bills of Exchange Act provides for an important

exception to the general rule that a forged signature is wholly inoperative. The

working of section 53(2)(b) may be explained on the basis of the following

example:

Say John draws a cheque on Standard Bank payable to Yvonne or order and

issues the cheque to Yvonne. Pete, a thief, steals the cheque from Yvonne, forges

her signature on its back and delivers it to Don who takes it in good faith and for

value. Don changes the forged ``endorsement'' to an endorsement in his name,

signs the cheque and delivers it to Ezra who also takes it in good faith and for

value.

Ezra's position is as follows:

. In terms of the general principle which provides that a forged signature is

wholly inoperative, Ezra will not be able to claim payment from any of the

previous parties to the cheque (ie not from John as Ezra is not the holder of the

cheque, not from the Standard Bank because Ezra is not the holder and also

because the Standard Bank did not sign the cheque [see again study unit 4

above], not from Yvonne as she did not sign the cheque, and not from Don as

the forged signature by the thief renders the cheque [subsequent to the forged

indorsement] wholly inoperative).

. Ezra's only remedy will be to claim from the thief (Pete). Such claim will be

based on delict and not on the cheque itself because Pete was never a party

(in his own name) on the cheque (he never put his signature on the cheque).

The exception and protection provided for by section 53(2)(b) to parties which are

in a position like that of Ezra's, is as follows:

. It provides that the endorser of a cheque (ie Don), by indorsing it, ``is precluded

from denying to a holder in due course the genuineness and regularity in all

respects of the drawer's signature and all previous endorsements''.

. In other words, section 53(2)(b) provides that if Don indorses the cheque and

delivers it to Ezra, Don will not be allowed to rely on the principle that the forged

signature of the thief renders the cheque wholly inoperative. In terms of the

provisions of section 53(2)(b), Ezra will therefore be able to claim the amount of

the cheque from Don (but not from any of the earlier parties to the cheque).

section 1 study unit 6 | forged and unauthorised signatures 27

Section 53(2)(b) merits a few comments:

. First, you must remember that the general principle provides that no one can

become a holder of a cheque after a forged signature has been made on the

cheque.

. This also means that no person can become an indorser, or a holder, or a

holder in due course of such a cheque.

. Section 53(2)(b) provides that notwithstanding this general principle, Don will

be regarded as an `èndorser by estoppel'' and Ezra will be regarded as a

``holder in due course by estoppel''. Section 53(2)(b) neither makes Don a

(true) indorser nor Ezra a (true) holder in due course, but they are regarded as

such for purposes of section 53(2)(b).

In passing, something on the meaning of the term `èstoppel''. You must

remember that estoppel is a defence in the hands of someone who has been

misled by the conduct of another person. The term `èstoppel'' means that a

person who has negligently (or intentionally) created an incorrect impression will

be held to that impression where another person has acted on the impression to

his prejudice. The practical consequences of estoppel may be explained on the

basis of the following example:

Say that Jane is the owner of a computer business. One day she decides to hold a

sale. She puts sale stickers on all the computers in her shop. She mistakenly also

puts a sticker on her own computer which she uses for private purposes but which

stood next to some of the other computers in the shop.

In the course of the day, she sells her private computer to Marks without realising

that it is her private computer. At the end of the day, she realises her mistake and

informs Marks that she wants her computer back. Marks is not interested in

returning it as he bought it at a good price and there are no more computers left

on sale.

Jane will not be able to claim the computer from Marks because although it was

not her intention to sell it, she negligently created the impression that it was for sale

and she negligently sold it to Marks. Marks acted to his prejudice on the impression

created by Jane in that he could have bought one of the other computers had

he been aware of the fact that the computer was Jane's private property. Jane

will therefore be held to the impression that she created, namely that she wanted

to (and did in fact) sell her computer in terms of the contract of sale to Marks.

Estoppel will therefore be a defence in the hands of Marks if Jane wants to claim

her computer from him.

For more on the term `èstoppel'', see again section 24.3.7.1.4 of your textbook.

. Secondly, and closely allied to the first comment, although Ezra will be entitled

to rely on the protection provided for in section 53(2)(b) only if he satisfies all the

requirements for holdership in due course (see again study unit 3 above),

section 53(2)(b) excuses Ezra from the requirement that he must be a holder.

(Remember that although Ezra is in possession of the cheque, he does not

qualify as a holder as he does not fulfil the requirements for holdership.

Although at first glance he appears to be the indorsee of the cheque, he is not.

Owing to the forged indorsement there can be no valid endorsee.)

. This is the basis of section 53(2)(b).

. Thirdly, section 53(2)(b) provides protection to a subsequent ``holder in due

course'' (ie Ezra) only against previous `ìndorsers'' (ie Don) and not also

against, for example, the drawer (ie John).

28

. Finally, you must keep in mind that, as a matter of general principle, section

53(2)(b) applies only to order cheques since bearer cheques are transferred by

mere delivery and it will usually not be necessary for the thief to endorse a

bearer cheque (ie forging the signature of the holder from whom he has stolen

the cheque) to transfer it to a third party.

Read the scenario below and answer the questions given. Your answers should

include an explanation.

A draws a cheque on Z Bank in favour of B or order. A delivers the cheque to B. C

steals the cheque from B and forges B's signature on the back of it. C adds the

words ``Payable to D'' on the back of the cheque and delivers it to D, who takes it

in good faith and for value. D, in turn, signs the cheque and add the words

``payable to E'' on the back of it and renders it to E, who takes the cheque in

good faith and for value. Finally, E signs the cheque and delivers the cheque to F,

who takes the cheque in good faith and for value.

Questions(1) Will A be liable towards F?

(2) Will B be liable towards F?

(3) Will C be liable towards F?

(4) Will D be liable towards F?

(5) Will E be liable towards F?

(6) Will Z Bank be liable towards F?

Feedback(1) No. Because of the forged signature the cheque is wholly inoperative and F is

not a holder for purposes of payment of the cheque. Remember that section

53(2)(b) gives F a right against previous `èndorsers'' and not also against the

drawer.

(2) No. For the same reason as in (1).

(3) No, not on the cheque, because C is not a party to the cheque (he did not

put his signature on the cheque). However, F can claim from C on delict.

(4) Yes. D is an `ìndorser'' as provided for in section 53(2)(b).

(5) Yes. E is an `ìndorser'' as provided for in section 53(2)(b).

(6) No. First, because the forged signature is wholly inoperative against parties

who dealt with the cheque prior to the forgery. Secondly, Z Bank did not sign

the cheque.

2 Unauthorised signaturesStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.5.24.3.7.1.5.UnauthorisedUnauthorisedsignaturesignature

An unauthorised signature is the authentic signature of the person who places his

signature on the cheque but without the necessary authority to sign the cheque.

For example, if the memorandum and articles of association of a company

provide that the company's cheques must be signed by the directors, a typist's

signature on a company cheque will be an unauthorised signature.

Activity


An unauthorised signature differs from a forged signature in the following respects:

. First, an unauthorised signature is the actual signature of the person who places

the signature on the cheque.

. In the case of a forged signature it is not the signature of the person who signs

the cheque but a fraudulent imitation of another person's signature.

. Secondly, an unauthorised signature can be ratified by the principal (ie the

person on whose behalf the unauthorised signature was made). A forged

signature cannot be ratified or approved by the person whose signature was

forged.

2.1 THE LEGAL CONSEQUENCES OF AN UNAUTHORISED SIGNATURE

Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.1.5.24.3.7.1.5.UnauthorisedUnauthorisedsignaturesignature

The first consequence of an unauthorised signature is that it is wholly inoperative.This means that any person who receives a cheque after an unauthorised

signature has been placed on it, will acquire no rights on the cheque.

You are referred again to the provisions of section 53(2)(b) which apply with equal

force to an unauthorised ``endorsement''.

Secondly, a person who signs a cheque but who has no authority to sign, will be

personally liable on it. You will remember that in the example given under the

discussion of the consequences of forged signatures, the thief was not liable on

the cheque because his signature did not appear on the cheque. In the case of

an unauthorised signature, the person who signs but who has no authority to sign

will be personally liable because his signature appears on the cheque. If an

unauthorised signature is ratified by the principal the person who has placed his

signature on the cheque will no longer be personally liable.

SELF-TEST QUESTIONS

X is a twenty-two-year-old cashier working in her father's cafeÂ .

Answer the following questions by choosing the correct option.

(1) If X imitates her father's signature on one of his cheques the cheque will

be ................................................

(a) valid

(b) wholly inoperative

(2) If X puts her own signature on one of her father's cheques without his

permission the cheque will be

(a) valid

(b) wholly inoperative

(3) If X indorses one of her father's cheques which was given to him by a

customer without his permission, ...................................... will be personally

liable on the cheque.

(a) X's father

(b) X and her father

(c) X

30

(4) If X puts her signature on one of her father's cheques without his permissionbut he ratifies her signature at a later stage, .......................................... will bepersonally liable on the cheque.

(a) X's father(b) X and her father(c) X

(5) If X endorses one of her father's cheques which was given to him by acustomer by imitating his signature but he ``ratifies'' the signature at a laterstage, will be personally liable on the cheque.

(a) X's father(b) X and her father(c) X


(1) Ð (b)(2) Ð (b)(3) Ð (c)(4) Ð (a)(5) Ð (c)


7S t u d y u n i t

Delivery

Prescribed reading material for this study unitHavenga chapter 24, section 24.3.7.2 [the whole section].


. explain the basic importance of delivery

. explain how delivery takes place

. explain the different functions of delivery

. apply the presumptions relating to delivery, to factual problems

. distinguish between delivery and issue

. distinguish between transfer and negotiation

. list the requirements for a valid endorsement and explain the other important

provisions of the Act relating to endorsements which do not affect the validity

of the endorsement

. distinguish between the different types of endorsement

1 The basic importance of deliveryStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.724.3.7

Study units 4±6 were devoted to a discussion of a signature on a cheque as arequirement for liability on a cheque. In study unit 4, however, we mentioned thata signature on its own is not enough to make a person liable on a cheque. Oneother requirement, namely delivery of the cheque, must also take place beforeanyone who signed the cheque can be liable.

The basic importance of delivery of a cheque is, therefore, that it is a prerequisitefor liability on a cheque.

2 How delivery takes placeStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.1.24.3.7.2.1.

In Havenga we mention briefly the following:

. The term ``delivery'' means the ``transfer of possession'' of the cheque.

. This includes the ``actual handing over of the cheque with the intention oftransferring ownership'' as well as constructive delivery

. The term ``constructive delivery'' includes situations where the cheque isalready in the possession of the transferee who, after ``delivery'', now keeps itfor himself, or those instances where the cheque is in the possession of a thirdparty who, after ``delivery'', now holds it on behalf of the transferee.

32

3 The different functions of deliveryStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.2.24.3.7.2.2.

As is the case of a signature on a cheque (see study unit 4), delivery can fulfil anyone of three different functions, that is, it can have a

. constitutive,

. transfer or

. guarantee function.

Please note and make sure you understand why we say that delivery can fulfil atmost two of these functions at the same time and not all three. The two functionswhich are mutually exclusive (ie they cannot be present at the same time) are theconstitutive and transfer functions. At the same time, the only functions which maybe present on their own are the constitutive and transfer functions (as in case of aminor who signs and delivers a cheque where there is no guarantee function).

4 The presumptions relating to deliveryStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.324.3.7.2.3

. In order to understand this part of the work properly, it is crucial that you knowthe definitions of, and distinctions between, an ordinary holder and a holder indue course.

. The gist of this part of the work is that, whether a person is a holder or a holder indue course in possession of a cheque, it is presumed that there was a valid andunconditional delivery of the cheque.

. If, however, the person in possession is only a holder, the person who signed thecheque may rebut this presumption Ð that is he may lead evidence showingthat despite the presumption, he in fact never actually validly and/orunconditionally delivered the cheque.

. In contrast, if the cheque is in possession of a holder in due course, thepresumption is irrebuttable Ð this means that even though the person whosigned the cheque never delivered the cheque or delivered the chequeconditionally (and who therefore cannot be liable on the general principle thatdelivery is a prerequisite for liability), that person is held to the fiction that a validdelivery took place.

When you study the example in Havenga, remember that the thief of a bearercheque can be a holder of the cheque, even though he stole the cheque. Asholder, the thief is entitled to sue (the first right of a holder of a cheque is to instituteaction on the cheque in his own name). This should be distinguished from thequestion whether the thief will be successful in his action.

5 The distinction between delivery and issueStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.4.24.3.7.2.4.Issue and deliveryIssue and delivery

Read the scenario below and answer the questions given. Your answers shouldinclude an explanation.

Charlie Brown's wife, Lucy, is on her way to do her monthly grocery shopping atthe Checkers store just up their street. Because Lucy has no income (she is a

Activity

section 1 study unit 7 | delivery 33

housewife) and does not know how much the groceries will cost, she asks Charlie

to sign a blank cheque which she takes with her. At the supermarket she fills in thedate, the name of the payee (Checkers or order) and the amount in words and

figures and hands the cheque to the teller as payment.

(1) Who issued the cheque to whom?(2) If one applies the ordinary principles of liability on cheques, is Charlie Brown

liable on the cheque?

Feedback(1) Lucy issued the cheque to Checkers. A cheque can only be issued once it is

complete in form (ie after Lucy filled in the missing details) and delivered(handed over by Lucy to the teller) to someone who takes it as holder(Checkers, being the payee in possession of an order cheque).

(2) Yes. Charlie Brown signed the cheque and it was delivered (remember thatissue is the first delivery of a cheque) to Checkers by Lucy on his behalf.

Point to ponderLook at the above example again. How would your answer have differed had

Lucy, contrary to the agreement with Charlie, used the cheque to pay for clothesat Edgars and filled in the cheque payable to Edgars or bearer? Assume further

that Charlie found out about this and stopped the cheque (it is more correct to

speak of a countermand of payment). To assist you Ð we do not tell you this in theprescribed book Ð you have to bear in mind that Charlie Brown will be able to use

the absence of authority on Lucy's part against a claim by a holder, but not aholder in due course.

FeedbackThe payee of a bearer cheque may well be the holder in due course of that

cheque (in contrast to the payee of an order cheque). As holder (remember, aholder in due course is, in the first instance, also a holder) he has the right to

institute action on a dishonoured cheque (as is the case here with thecountermanded cheque) in his own name against a party who meets the basic

requirements for liability, such as Charlie Brown (who signed as the drawer). Thecheque was also delivered to the payee. It is, however, clear that Lucy acted

beyond the scope of her authority by using the cheque for a purpose other than

the one authorised by Charlie Brown. However, because Edgars is the holder indue course, Charlie will not be able to use this as a defence.

6 The distinction between transfer and negotiationStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.5.24.3.7.2.5.

To understand this part of the discussion properly, one has to bear in mind the

nature of a cheque as a negotiable instrument, that is, it is a piece of paper whichembodies certain rights which may be transferred simply by transferring the piece

of paper. Most of us who use cheques, simply use them to pay for things as wewould with cash, and as far as we are concerned, only two parties (the drawer

and payee) are involved. However, nothing (except, of course, a nontransferablecheque) prevents the payee from transferring the cheque to a creditor, for

example, to pay off his debt.

34

In order to clarify certain parts of the work, we have decided to give particular

meanings to the words ``transfer'' and ``negotiation'', although these meanings

may not be entirely consistent with the definitions in the Act. In terms of our

definitions we can say the following:

. ``Negotiation'' is a narrower term than ``transfer''.

. Negotiation is, in fact, a special kind of transfer which leads to the recipient of

the cheque being a holder in due course. Please keep this distinction in mind,

especially once we get to the discussion on the different types of crossings on

cheques and their effects. Havenga touches on this where a cheque crossed

with the words ``not transferable'' and a cheque crossed with the words ``not

negotiable'' are discussed.

. These crossings are discussed in more detail in study unit 9.

As mentioned in Havenga, a bearer cheque is transferred through mere delivery

and an order cheque is transferred through endorsement plus delivery.

7 Endorsement Ð requirements for validityStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.5.24.3.7.2.5.

The requirements for a valid endorsement are the following:

(1) It must be in writing on the cheque and must be an endorsement of the

whole cheque.

(2) A signature is sufficient (see the discussion of a blank endorsement below).

(3) Everyone named as payee or endorsee (other than partners) must endorse

the cheque.

(4) If, as payee or endorsee, the endorser's name is misspelt (remember that the

endorser will receive the cheque either as payee or endorsee), the cheque must

be endorsed as wrongly indicated and the proper signature must be added.

(Other provisions of the Act which relate to endorsements but which do not affect

the validity of an endorsement, are listed in Havenga. Make sure you know them.)

8 The different types of endorsementStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.7.2.5.24.3.7.2.5.

There are the following three types of endorsement, namely:

. an endorsement in blank

. a special endorsement

. a restrictive endorsement are discussed in Havenga

The distinction between the three types of endorsement is best made with

reference to form and effect.

An endorsement in blank consists of a signature (nothing more) and changes an

order cheque to a bearer cheque.

A special endorsement consists of a signature coupled with a direction to ``pay X''

or ``pay X or order'' and ensures that an order cheque remains an order cheque.

A restrictive endorsement comes in two forms, both of which affect the cheque's

transferability as follows:

section 1 study unit 7 | delivery 35

(1) The cheque may be made completely nontransferable by adding to thesignature the words ``pay X only''.

(2) The other form of a restrictive endorsement gives the endorsee the power todeal with the cheque as indicated thereon but not to transfer the cheque(unless otherwise indicated). This second form of restrictive endorsementcould, for example, consist in the addition of the words ``pay X for collection''to the signature.

Also note the remark in Havenga that should the restrictive endorsement allow forfurther transfer of the cheque, the endorsee will only acquire the title which theendorser had Ð this means a transfer subject to equities, which, in turn, impliesthat nobody can be a holder in due course of that cheque.

The following remarks on the example in Havenga might prove useful:

. Many students, when asked whether a bearer cheque can be converted to anorder cheque answer ``yes'' based on the example of someone changing anendorsement in blank (a bearer cheque) to a special endorsement (an ordercheque).

. The example in Havenga relates to a cheque originally drawn payable to orderwhich is then, through an endorsement in blank, changed to a chequepayable to bearer and subsequently, through changing the endorsement inblank to a special endorsement, changed back to an order cheque.

. This should be distinguished from a cheque which is originally drawn payable tobearer.

. Such a cheque cannot be changed to a cheque payable to order.

SELF-TEST QUESTIONS

(1) Name the three functions of delivery.(2) What is ``issue''?(3) Distinguish between issue and negotiation.(4) Why is the distinction between issue and negotiation important?(5) Name three different kinds of endorsements.


(1) The constitutive function, the guarantee function and the transfer function.(2) Issue is the first delivery of a cheque to a person who takes it as a holder.(3) Issue takes place only where the drawer delivers a cheque to the first payee

thereof. Negotiation refers to any further transfer of a cheque from atransferor to a recipient. The recipient of the cheque may also become aholder in due course if all the other requirements for holder in due course aremet.

(4) Negotiation is one of the requirements which must be met before a personmay become a holder in due course of a cheque. Only the payee of abearer cheque may become a holder in due course through mere issuing.The payee of an order cheque will never become a holder in due coursesince there is no endorsement on the cheque.

(5) Endorsement in blank, special endorsement and a restrictive endorsement.Make sure that you understand the difference between these three types ofendorsement.

36

8S t u d y u n i t

The liability of the drawer andendorser on a cheque and discharge ofthe obligation to pay a cheque


Havenga chapter 24, sections 24.3.7.3 and 24.3.8.


. explain the liability of the drawer on a cheque

. explain the liability of an endorser on a cheque

. explain the concept of discharge

. list the requirements for a payment in due course

. list the three most important exceptions to the definition of payment in

due course

1 The basic liability of the drawer and endorser of acheque

Study HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.7.3.1 and24.3.7.3.1 and24.3.7.3.224.3.7.3.2

From the discussion on signature and delivery as prerequisites for liability on a

cheque, it should be clear that the drawer's signature on a cheque will (almost

always) simultaneously fulfil a constitutive and a guarantee function, while that of

the endorser will fulfil a transfer and guarantee function. The question which now

arises is what exactly does this guarantee function entail?

There are the following two aspects to the guarantee function fulfilled by the

signature of the drawer:

(1) The bottom line is that the drawer's signature guarantees that if the cheque is

properly presented, it will be paid. Although we do not discuss the rules on

how a cheque must be presented for payment in detail, the Act contains

fairly detailed prescriptions on how this must be done. Suffice it to say, for

present purposes, that the essence of proper presentment is the physical

presentment of the cheque, within a reasonable time after issue, at the

branch of the drawee bank on which the cheque was drawn.

(2) In a negative sense, this guarantee means that if, on proper presentment, the

cheque is dishonoured because of, for example, a countermand of

payment or a lack of funds, the holder, or an endorser who is forced to pay,

can sue the drawer for the amount of the cheque.

The basic liability of the endorser is much the same as that of the drawer Ð the

endorser also guarantees that the cheque will be paid on proper presentment

section 1 study unit 8 | the liability of the drawer and indorser on a cheque 37

and, if the cheque is dishonoured (ie it is not paid on proper presentment), the

endorser will compensate the holder or a later endorser who has to pay the

amount of the cheque.

ExampleStudy the set of facts below as a typical example of the chain of events in the

case of a cheque being dishonoured.

John Smith draws a cheque in favour of one of his suppliers, Dick Evans. The

cheque is drawn on the Lynnwood Road branch of ABSA Bank (the drawee bank)

and it is made payable to ``Dick Evans or order'' for the amount of R1 000. It is also

signed by John Smith and delivered to Dick Evans. Dick Evans, however, owes

Peter Johnson R1 200 for a surfboard he recently purchased. Dick signs the

cheque on the back and gives it to Peter along with R200 in cash. Peter pays the

cheque into his account at the Brooklyn branch of Standard Bank (which we refer

to as the collecting bank). Standard Bank provisionally credits Peter's account

with the R1 000 and thereafter presents the cheque on behalf of Peter for

payment at ABSA Bank (assume proper presentment took place). The cheque is

dishonoured, however, because John Smith has no funds to his credit in his

account and no overdraft facility. The cheque is sent back to Peter (via Standard

Bank) with the words ``refer to drawer'' on it. Standard Bank reverses the earlier

provisional credit to Peter's account.

DiscussionIt is clear from the facts that Peter Johnson will be the unhappy party Ð he has

sold a surfboard and is yet to receive part (R1 000) of the purchase price. What he

does have, however, is a dishonoured cheque for R1 000 signed by both John

Smith (as drawer) and Dick Evans (as endorser). Furthermore, we know that Peter is

the holder of the cheque (he is the endorsee in possession of an order cheque)

and that as the holder, he is entitled to institute action (to sue) on the cheque in his

own name.

. The first choice Peter has to make is whether to sue in terms of the underlyingcontract of sale with Dick Evans or whether to base his action on the cheque.

. If we assume that Peter decides to sue on the cheque, the next choice he has

to make is whether to sue John Smith (as drawer who signed and delivered the

cheque) or Dick Evans (as endorser who signed and delivered the cheque).

This decision will be influenced by the following two factors:

(1) Which of the two (John or Dick) has the most money.

(2) The fact that Peter and John are remote parties may mean that if Peter is a

holder in due course, the defences available to John against a claim by

Peter will be very limited (only the absolute defences will be available).

Because Dick and Peter are immediate parties, Dick will be able to use any

defence (absolute or relative) against Peter's claim (irrespective of

whether Peter is a holder or a holder in due course).

If Peter decides to sue John (as drawer), John will have to pay the amount of the

cheque to Peter (unless John can raise a successful defence against Peter's

claim).

38

If Peter decides to sue Dick (as endorser), Dick will have to pay the amount of the

cheque to Peter, but in this case John will have to compensate Dick (look at the

principles set out earlier).

If we assume that Peter also endorsed the cheque in favour of Austin Martin, and

that after the cheque was dishonoured, Austin decided to sue Peter, Peter will

have the right to look to either John or Dick for compensation. If Peter looks to

Dick, Dick has the right to look to John for compensation.

TIPAs you will see from the above set of facts, things can become fairly complicated

in cheque law. The best way to deal with this is always to make a schematicrepresentation of the facts for yourself in which you indicate the sequence in

which the parties are involved and their respective capacities.

2 Presumptions relating to the liability of the drawer andendorser

Study HavengaStudy Havengachapter 24, sectionschapter 24, sections24.3.7.3.1 and24.3.7.3.1 and24.3.7.3.224.3.7.3.2

So far we have concentrated on the basic liability of the drawer and endorser on

a cheque. However, things are not all that easy. Sometimes, even though it might

look as if someone is liable on a cheque (because that person signed the

cheque), he might have a good defence to negate his liability. Earlier on, we

discussed the concepts of ``relative'' and ``absolute'' defences. You mightremember (if you don't, go back and review that part of the work) that absolute

defences are available against all claims on a cheque, even those of a holder in

due course. The most important examples of absolute defences are

. lack of contractual capacity

. forgery

EXAMPLE OF CONTRACTUAL INCAPACITY

Peter Bacela draws a cheque in favour of Trevor Quirk (Jnr) or order. Trevor Quirk

(Jnr), who is a minor, endorses the cheque (without any assistance) in favour of

Edwill van Aarde. In the meantime, Peter finds out that the amount of the cheque

is much more than his actual debt to Trevor Quirk (Jnr), and he countermands

payment of the cheque.

Edwill clearly is the holder of the cheque (he is the endorsee in possession of an

order cheque Ð remember that a minor's signature does fulfil a transfer function)

and, if he meets with all the other requirements for holdership in due course, he willqualify as the holder in due course.

As such he may sue either Peter Bacela or Trevor Quirk (Jnr). His action against

Trevor Quirk (Jnr) will be unsuccessful, however, because Trevor can raise the

absolute defence that he does not have contractual capacity.

EXAMPLE OF FORGERY

Peter Bacela draws a cheque in favour of Trevor Quirk (Snr) or his order. A thief,

who owes money to attorney, Roger Fixit, for services rendered, steals the cheque


from Trevor and writes on the back of the cheque ``Pay Roger Fixit''. Below these

words the thief forges Trevor's signature. Roger Fixit, who owes his ex-wife alimony

writes on the back of the cheque ``Pay Cruella Fixit'' and signs his name below

these words.

In the meantime, Trevor has informed Peter of the theft and Peter countermands

payment. Cruella presents the cheque for payment, but the cheque is

dishonoured because of the countermand of payment.

In this case, Cruella is not a holder, let alone a holder in due course Ð remember

the principle that no title is transferred through a forgery.

Should Cruella want to sue any other party to the cheque, the basis of the

defence would be that there was a forgery, that this means that she has no title

(as holder) and that this, in turn, means that she does not have the right to sue

anybody on the cheque.

The above examples serve to illustrate how the two main absolute defences Ð

lack of contractual capacity and forgery of a signature Ð operate to negate

liability. The Act, however, contains important provisions which limit the

application of these defences (these principles are also mentioned in Havenga).

Let us consider these provisions with reference to our examples, as follows:

. As far as the defence of a lack of contractual capacity is concerned, there is a

specific provision which holds that the drawer may not use a payee's lack of

capacity as a defence against the holder in due course.

Ð In our first example, this means that Peter may not use the lack of capacity

of Trevor (Jnr) as a defence against Edwill's claim.

Ð If the payee's signature is forged, however, then the drawer may use this as

a defence against a later person who would have qualified as a holder in

due course, had it not been for the forgery.

Ð In the second example, therefore, Peter will be able to use the forgery as a

defence against Cruella.

. The endorser is in a somewhat more tricky situation when it comes to the effect

of a forged signature.

Ð The Act provides that an endorser cannot deny to a holder in due course

that his (the endorser's) title is invalid or that the signature of the drawer or

any one of the previous endorsers was forged.

Ð This issue was also discussed earlier on when we focused on forged

endorsements (see study unit 6).

Ð In the second example, this means that Roger cannot use the forgery of

Trevor's signature to escape liability as against Cruella. If you are not sure

why we say this, go back and study unit 6 again.

3 Discharge of the obligation to pay a chequeStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.824.3.8

Although this topic is discussed for scarcely half a page in Havenga, we cannotoveremphasise the importance of a proper understanding of the crucial role the

concepts ``discharge'' and, more particularly, ``payment in due course'' as one

of the ways through which discharge is effected, play in cheque law.

As far as discharge is concerned, you need to know the following four things:

40

(1) The effect of discharge is that in law the cheque, and the underlying

obligation on which it is based, is regarded as having been fulfilled and,

consequently, extinguished. This means that nobody can be held liable on

the cheque or on the underlying obligation for which the cheque was

tendered.

(2) Discharge can be effected in a number of ways but the most, and for your

purposes, the only important way is through payment in due course.

(3) The definition of payment in due course is crucially important and you need

to know it off by heart.

(4) One of the requirements for payment in due course is that payment must be

made to the holder of the cheque (do you remember the definition of the

term ``holder''?). Although you are not expected to know all the details at

this stage (the topic is covered in detail in study unit 10), you should already

take note that there are three important exceptions to the requirement that

payment in due course may be made only to a holder of a cheque. These

relate to

(a) forged endorsements (s 58 of the Act)

(b) crossed cheques paid to another bank (s 79 of the Act)

(c) absence or irregularity of endorsements (s 83 of the Act)

Does the bank make a payment in due course in each of the instances listed

below?

(1) A draws a cheque on B Bank in favour of C or order. C presents the cheque

for payment to B Bank and B Bank pays C in good faith.

(2) The same as in (1) except C endorses the cheque in favour of D or order and

D is paid by B Bank.

(3) The same as in (2), except C endorses the cheque in blank and gives it D,

who gives it to E and E receives payment from B bank.

(4) The same as in (2), except C's signature is forged by X.

(5) The same as in (2), except C is a minor.

FeedbackIn all these cases, except (4), the bank makes a payment in due course because it

pays to a holder and in good faith (on the assumption that all the other

requirements for a payment in due course have been met).

. In (1) C is the holder as the payee in possession of an order cheque.

. In (2) D is the holder as the endorsee in possession of an order cheque.

. In (3) E is the bearer and holder of a bearer cheque (the endorsement in blank

changed the order cheque to a cheque payable to bearer).

. In (4) D has no title to the cheque because of the forgery, which means B bank

will not pay the holder. Therefore, in principle, this is not a payment in due

course.

. This statement should, however, be seen in light of the discussion of the

extended protection of the drawee bank where it pays the wrong person (a

non-holder) as a result of a forged endorsement Ð see study unit 10 below.

. The minor's signature (in (5)) does fulfil a transfer function Ð this means that the

endorsement by C is valid as far as the transfer of a title is concerned Ð this

Activity


means that D is the holder (as the endorsee in possession) and thereforeentitled to payment.

SELF-TEST QUESTIONS

Please see the questions at the end of study unit 11.

42

9S t u d y u n i t

The nature of the relationship betweenthe drawee bank and the drawer andthe different markings on a cheque

Prescribed reading material for this study unitHavenga chapter 24, sections 24.3.9.1 to 24.3.9.2.


. explain the contractual nature of the relationship between the drawee bank

and the drawer

. explain the function of a cheque within this contractual relationship

. name five instances in which the drawee bank is not, as a rule, entitled to debit

its client's account after paying a cheque or where there is no duty on the drawee bank

to pay a cheque

. explain the rules governing the forgery of the drawer's signature

. explain the basis of the liability, if any, of the drawee bank as against a third

party (other than the drawer)

. distinguish between general and special crossings on cheques by giving

examples of each

. name the parties who may cross a cheque

. explain the effect of a crossing on a cheque

. explain the effect of the words ``not negotiable'' on a cheque

. explain the effect of the words ``not transferable'' on a cheque

. explain the effect of the words ``account payee only'' on a cheque

PLEASE NOTE THAT THIS IS QUITE A LONG STUDY UNIT WHICH, FOR YOUR BENEFIT, HASBEEN SUBDIVIDED INTO A NUMBER OF SMALLER TOPICS WHICH DO NOTNECESSARILY CORRESPOND WITH THE HEADINGS IN THE TEXTBOOK. BRACEYOURSELF!

1 The contractual nature of the relationship betweenthe drawee bank and the drawer

Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.124.3.9.1

One of most misunderstood principles of cheque law relates to the relationship

between the drawee bank and the drawer. As explained in the textbook, this

relationship is, in the first instance, contractual by nature, which means the terms

and conditions of the relationship are determined by the parties themselves. The

basis of this relationship, however, revolves around the simultaneous presence of

two types of contracts (the details of which may differ), namely a contract of loan

for consumption (similar to a savings account) as well as a contract of mandate.

section 1 study unit 9 | the nature of the relationship between the drawee bank 43

In other words, the drawee bank agrees to accept money on deposit from a client

and to repay it on demand and according to the instructions given by the client,

usually in the form of a cheque (but which also could be in the form of, for

example, a debit order).

2 The function of a cheque within the framework of thecontractual relationship between the drawee bankand the drawer


A cheque is the way in which the client (drawer) gives an instruction to the

drawee bank to pay the named payee, or his order, or bearer. In terms of the

contract with its client, the bank must comply with this instruction, if properly given.

As long as the drawee bank complies with the instruction as contained in the

cheque, the drawee bank is entitled, after payment of the cheque, to debit its

customer's account. Please note that the right to debit the customer's account

arises only if the bank carries out the instructions of the client Ð the drawer.

However, sometimes the bank pays where in fact it never had a mandate to do so

or where if it did, the mandate had been terminated before payment.

At the same time, there is a duty on the drawer to give his instructions properly. A

more correct way of putting this would be to say that if the drawer does not give

his instructions properly, and the bank reacts to the wrong instructions, the drawer

will not be able to hold the bank liable for damages.

In a real case which took place some 40 years ago, the drawer of a cheque was

asked by his wife to write out a cheque for R1,00 to two strangers as a deposit for

part payment for certain articles of clothing. The strangers did not want to accept

cash. When asked to write out the cheque, the drawer was busy installing a pump

in his dairy and, because of his greasy hands, he asked the strangers to fill out the

cheque so that he could merely sign it. This they did as follows: the cheque was

made payable to bearer and between the words ``one'' and ``rand'' they left a

space of about two centimetres on the cheque form. Between the ``1'' and the

``,00'' they also left a space of about two centimetres. The drawer signed the

cheque. Thereafter, the strangers then added the word ``thousand'' between

``one'' and ``rand'' and also filled in three noughts. The drawee bank paid the

cheque and debited the account of the drawer. The drawer then sought a

declaratory order that the drawee bank had not been entitled to debit his

account with the difference between R1,00 (the amount which correctly

reflected his instruction) and R1 000,00, that is, R999,00. How would you solve this

problem?

FeedbackAs a general rule, we can say that if a drawer negligently draws a cheque in such

a way as to facilitate fraud (as in this case) and the drawee bank pays the

incorrect amount as a result of such fraud, it is the drawer's loss and the bank will

be entitled to debit the account of the drawer with the higher amount.

Interestingly, however, the court found on the facts that although the drawer was

negligent, so too was the drawee bank. Furthermore, the negligence of the

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drawee bank (and not the negligence of the drawer) was the cause of thecheque being paid for the higher amount. This finding by the court was based ona combination of the following facts:

(1) The cheque was for a large amount (40 years ago R1 000,00 was quitesomething!) and presented for payment by a total stranger.

(2) The cheque was payable to cash or bearer.(3) By paying the cheque, the bank was allowing its client (the drawer) to

exceed the limit on his overdraft substantially. This should have raisedsuspicion on the part of the bank and it should have made some queries.

(4) The word ``thousand'' was written in thinner ink than the words `òne'' and``rand'' and it was compressed to fit in between the other two words.

3 Absence or termination of the mandate of thedrawee bank to pay a cheque


For our purposes, the most important instance where a drawee bank has in fact nomandate to pay a cheque, is where the drawer's signature has been forged. Veryoften students are misled by the fact that a forgery is very well executed. Justremember that as long as the drawer's actual signature does not appear on thecheque, there simply is no mandate to the bank to pay. In other words, if thedrawee bank does pay the cheque, it cannot debit the client's account. Theexception to this rule is where the drawer knows or suspects that his signature hasbeen forged, but fails to notify the bank.

There are three ways in which the mandate to pay a cheque is terminated. Theseare countermand of payment by the drawer, the death of the drawer or theinsolvency of the drawer. Please note that countermand of payment should becarried out at the branch of the drawee bank where the account is held. Usuallythis is done in writing by filling out a form at the branch of the drawee bank.Beware of the fine print, however. Often these forms provide that `ìn the event ofthe bank inadvertently paying out the cheque, despite the countermand ofpayment, the bank will still be entitled to debit the client's account''. Alsoremember that if you stop a cheque, this does not mean that you havedischarged all your obligations. That cheque will be dishonoured by nonpayment,and will be sent back to the person who presented it for payment. That person (ifhe is the holder) will be entitled to sue on the cheque.

If a bank pays a cheque in the absence, or after the termination, of its mandate, itcannot debit its client's account.

Also note that if a client has no funds in his current account and no overdraftfacility, or if he will exceed the limits of his overdraft should a cheque be honoured,the bank is under no duty to honour the cheque.

4 The liability of the drawee bankStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.124.3.9.1

You will remember our earlier discussion where we explained that a party to acheque can be liable only if he signed the cheque and if such signature wasfollowed by a valid delivery. Also bear in mind that, as a rule, cheques are notaccepted, which is one of the main differences between cheques and bills ofexchange. `Àcceptance'' is the legal act of the drawee of a bill by which hesignifies his assent with the order of the drawer by signing the bill and delivering it


to the person who presented it for acceptance. As such (by signing the bill), the

acceptor (previously the drawee) becomes liable on the bill itself and, in case of

the bill being dishonoured, can be sued on the bill. In contrast, in the case of

cheques, the drawee bank never signs the cheque (note, however, the example

below) and as such can never be held liable on the cheque by strangers.

Liability of the drawee bank can arise only through breach of contract (usually

against the drawer) or in delict (by negligently causing damages) or through the

special provisions of the Act, for damages for failure to pay a cheque according

to the way it was crossed (see below).

ExampleAlanis Morrisette draws a cheque in favour of Janet Jackson. The cheque is drawn

on the Arcadia branch of Nedbank. Janet indorses the cheque in favour of Cheryl

Crow. In the meantime, Alanis finds out that she never actually owed Janet

anything. She therefore countermands payment. The cheque is sent back to

Cheryl marked ``payment stopped''. Who can Cheryl sue on the cheque?

FeedbackShe can (not necessarily successfully) sue Alanis and Janet, who both signed and

delivered the cheque, as drawer and indorser respectively. She cannot sue

Nedbank because the bank never signed the cheque.

Can you think of an example where a cheque is accepted or, where it can be

said that a cheque is accepted?

FeedbackSection 72A, which was inserted by section 29 of the Bills of Exchange Amendment

Act of 2000, now seeks to deal with certified cheques. This section defines a

certified cheque as one in which the ``drawee signs it and adds words to the

cheque that indicate that the cheque will be paid or that funds are available for

its payment'' (s 72A(1)). The section also deals with the liability of the drawee who

certifies a cheque: in terms of section 72A(2), the drawee who certifies a cheque

undertakes that he will pay the holder, or the drawer or an indorser who has been

compelled to pay the cheque according to the tenor of his certification.

This undertaking is similar to that of an acceptor of a bill in terms of section 52(a).

The drawee that certifies a cheque is, like an acceptor of a bill (s 52(b)),

precluded from denying to a holder in due course the existence of the drawer, the

genuineness of his signature, and his capacity and authority to draw the cheque

(s 72A(b)(i)), as well as the existence of the payee and his then capacity to

indorse (s 72A(b)(ii)).

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5 General and special crossings on chequesStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.2.124.3.9.2.1

The Act distinguishes between general and special crossings. The differencebetween these kinds of crossings is to be found, not only in the form that they take,but also in their effect, which is discussed in 7 below.

As to form, the following are examples of general crossings:

(1) two parallel transverse lines(2) two parallel transverse lines with the words ``not negotiable'' (as to the

meaning of the words ``not negotiable'' see 8 below)

(Please note that the Bills of Exchange Amendment Act of 2000 now only makesprovision for the above two possibilities and not the four mentioned in thetextbook.)

In the case of a special crossing, the name of a bank is written on the face of acheque. Please note that this does not have to be accompanied by any words orlines, but may be combined with a general crossing.

6 The parties who may cross a chequeStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.2.124.3.9.2.1

In the textbook we mention three parties who may cross a cheque Ð the drawer(who may add any kind of crossing), the holder (who may cross it in any manner)and the collecting bank (which may, if the cheque contains no crossing or ageneral crossing, cross the cheque to itself or, if the cheque already contains aspecial crossing, add a second special crossing for collection in terms of which asecond bank is named to collect the cheque on the first bank's behalf). The Bills ofExchange Amendment Act of 2000 now provides that a collecting bank maycross a cheque generally or specially.

When you deposit a cheque in your account, the bank always stamps thecheque with a stamp containing the name of the bank. Do you think this stampconstitutes a special crossing?

FeedbackThere does not seem to be any good reason why this stamp should not beregarded as a special crossing.

7 The effect of a crossing on a chequeStudy HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.2.124.3.9.2.1

The principles relevant to this heading are deceptively simple:

. If a cheque is crossed generally, the drawee bank must pay the cheque toanother bank.

. If the cheque is crossed specially, the drawee bank must pay the cheque tothe bank named in the special crossing.

. If the drawee bank does not comply with the above requirements and the true

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owner of the cheque suffers a loss as a result of this failure on the part of thedrawee bank, the drawee bank is liable for such damages.

Four remarks need to be made about the above principles:

(1) If a cheque is crossed, there must always be two banks involved Ð thedrawee bank on which the cheque is drawn by the drawer and which has topay the cheque, and the collecting bank with whom the cheque wasdeposited by one of its clients (the payee or indorsee) and which presentsthe cheque for payment to the drawee bank on behalf of that client. Thisprocess of collection is followed whenever a cheque is deposited in a bankaccount.

(2) The fact that the drawee bank pays a crossed cheque over the counter doesnot necessarily mean that the drawee bank will be liable Ð only if the bank'sfailure leads to loss on the part of the true owner of the cheque.

(3) The principles in (1) and (2) above tell only half the story and should be seenin conjunction with the provisions of section 79 of the Act. This section, whichis discussed in detail in study unit 10, turns around the requirement ofpayment of a crossed cheque to another bank by providing, in simplifiedterms, that if a bank does pay a crossed cheque to another bank in goodfaith and without negligence, the drawee bank (and sometimes the drawer)will be protected, notwithstanding the fact that the drawee bank pays to abank which is collecting on behalf of the wrong person.

(4) This is also the first time you have come across the concept of a true owner,who, depending on the circumstances, may or may not be the same personas the holder. This concept is discussed in more detail in 8 below.

8 The effect of the words ``not negotiable'' on acheque


As mentioned in the textbook, the words ``not negotiable'' affect a cheque in thefolllowing two ways.

(1) The cheque is no longer transferable free from equities Ð this means aperson cannot transfer a better title to the cheque than the title he has. Inpractical terms this means that a holder can only make the next person aholder and not a holder in due course.

ExampleDon King draws a cheque in favour of ``Mike Tyson or order''. The cheque iscrossed and marked ``not negotiable''. Mike indorses the cheque in favour ofLennox Lewis. The question now is whether Lennox is a holder or holder in duecourse. As the indorsee in possession of an order cheque, we know that Lennox is,at least, a holder. He cannot, however, be a holder in due course because as thepayee of an order cheque, Mike was only the holder of the cheque while he wasin possession of the cheque. Mike, however, was not a holder in due course. Youwill remember that in order to be a holder in due course, the cheque must beindorsed and delivered to that person. Since a cheque is not indorsed anddelivered, but is merely issued to the payee of an order cheque, he (Mike) cannotbe the holder in due course of that cheque. Moreover, the fact that the words``not negotiable'' appear on the cheque, means that Mike cannot transfer morerights to Lennox than those he (Mike) had. This means that Mike can only make

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Lennox a holder of the cheque. Therefore, in effect, there can never be a holder indue course of a crossed cheque payable to order on which the words ``notnegotiable'' appear. This also explains why one adds these words to a chequewhen one draws the cheque Ð they prevent anybody from being a holder in duecourse, which means that one will be able to use both relative and absolutedefences against remote parties, because, at best, any remote party will merelybe an ordinary holder of the cheque.

(2) The further consequence of the words ``not negotiable'' on a cheque lies inthe relief afforded the true owner of a cheque. The requirements for theoperation of section 81 of the Act are discussed in Havenga and will not berepeated here. What we will consider is an example of the application ofsection 81.

ExampleNeil Tovey draws a cheque on the Divided Bank in favour of ``Andre Arendse ororder'' in payment of a pair of secondhand soccer boots. Neil crosses the chequeand marks the cheque ``not negotiable'' and delivers the cheque to Andre. Athief steals the cheque from Andre and forges Andre's signature on the back ofthe cheque (in other words, it looks as if Andre indorsed the cheque in blank tomake the cheque a bearer cheque). The thief then uses the cheque to pay along-standing debt owed to a friend, one Shifty McClean. Shifty, who is in direneed of wheels, uses the cheque to buy a bicycle from a shop belonging to MrJustice Upright. Justice gives the cheque to his assistant, Poppie Nongena, todeposit in his account at the Second Provincial Bank. This Poppie does. SecondProvincial presents the cheque on behalf of Justice for payment at the DividedBank. The Divided Bank pays Second Provincial in good faith and withoutnegligence. Thereafter, the Divided Bank debits Neil's account and SecondProvincial credits Justice's account.

DiscussionIn order to understand the workings of section 81, it is necessary to jump the gun abit by stating that because section 79 affords the drawee bank (Divided Bank)and the drawer (Neil) protection, in the above set of facts it will be deemed thatproper payment was made by Neil to Andre (see the discussion in study unit 10).This means that not only will the cheque and the underlying obligation betweenNeil and Andre be discharged, but that Andre will be out of pocket. If section 81does apply, however, Andre will be able to sue either Shifty or Justice. Let us applythe requirements for section 81, which, of course, must all be presentsimultaneously as follows:

(1) The cheque must be crossed and marked ``not negotiable''. This is evidentfrom the facts we gave you.

(2) The cheque must have been stolen or lost while it was crossed and marked``not negotiable''. This also appears from the facts we gave you.

(3) The drawee bank should have paid the cheque in accordance with thecrossing to another bank. We told you that the Divided Bank paid thecheque to the Second Provincial Bank in good faith and without negligence.

(4) The plaintiff (Andre) should be the true owner of the cheque. Remember thatNeil delivered the cheque to Andre. What would the position have been hadNeil posted the cheque to Andre and the cheque had been lost or stolenwhile in the post? Then the agreement, or the absence of agreement


between Neil and Andre to use the post, would have determined who wouldhave to bear the risk. If Andre had agreed to the cheque being posted,delivery would have been regarded as having been made (and Andrewould have become the true owner) the moment the cheque had been putin the post by Neil. If there was no agreement to use the post, Neil wouldhave remained the true owner until the cheque was actually delivered toAndre. Despite these rules regulating the passing of risk in the case ofcheques sent by post, remember that the drawer (Neil) always has a duty todraw a cheque properly, that is by

. naming the payee correctly

. making the cheque payable to order

. crossing the cheque

In our example, Neil did all of this. If Neil neglected to do this (by, for example,posting a cheque payable to bearer), and Andre suffered damages as aresult, Andre would be able to hold Neil liable, despite the fact that Andrehad become the true owner and the bearer of risk related to the chequesent by post.

(5) The plaintiff (Andre) must show that he suffered loss as a result of the theft orloss. As mentioned earlier, the debt owed by Neil to Andre is discharged, andAndre still has no money. He therefore did suffer a loss.

(6) The defendant must have been in possession of the cheque after its theft or loss.This means that, potentially, Andre will be able to hold Shifty, Justice, Poppieand the Second Provincial Bank liable. For the reasons mentioned in (7) below,these possible defendants are, however, limited to Shifty and Justice.

(7) The defendant (either Shifty or Justice) should have ``given considerationfor'' the cheque or must have received it as a gift. In our case, both Shiftyand Justice gave consideration for the cheque Ð in Shifty's case, the debtowed by the thief was extinguished (which is regarded as consideration) andin Justice's case, the cheque was used to pay for the bicycle. Poppie did notgive any consideration, as she was merely acting on behalf of Justice. Notethe discussion in Havenga in connection with the collecting bank, which inour case is the Second Provincial Bank. Andre will not be able to sue theSecond Provincial Bank as a possessor of the cheque merely because theSecond Provincial Bank credited Justice's account with the amount of thecheque. Also note that should Andre ask anybody (including Poppie and theSecond Provincial Bank) to give him information about the cheque, and thatperson fails to do so, that person will be liable in terms of section 81,irrespective of the fact that person did not, in fact, give consideration for thecheque and provided, of course, that the other requirements for section 81are met. If, for example, the cheque was crossed but the words ``notnegotiable'' did not appear on the cheque, section 81 simply cannot apply.

Remember that the effect of section 81 should not be studied in isolation, but inconjunction with the discussion of section 79 (protection of the drawee bank in thecase of a crossed cheque).

9 The effect of the words ``not transferable'' on acheque


A cheque may be made nontransferable in any one of a number of ways. The

effect of words prohibiting transfer, or indicating the intention that the cheque

should not be transferable, can be explained by using the following example:

50

ExampleLeo Trotsky draws a cheque in favour of Vladimir Lenin. Leo deletes the words `òrbearer'' printed on the cheque form, and writes the word `ònly'' after Lenin'ssurname. Leo also crosses the cheque and writes the words ``not transferable''between the lines (this can be done next to the lines as well). Lenin now indorsesthe cheque by writing on the back of the cheque, ``Pay Gregory Rasputin'' andsigning below these words. Lenin then delivers the cheque to Rasputin. It is clearthat, while in possession, Lenin was the holder of the cheque (as the payee inpossession). The cheque, however, is not transferable which means that it cannotvalidly be indorsed and delivered so as to constitute Rasputin the holder (as theindorsee in possession). Should the cheque be dishonoured when Rasputinpresents it for payment, Rasputin will not be able to sue Leo or Lenin on thecheque, because he (Rasputin) has no standing to sue (he is not the holder, andonly holders have standing to sue on a cheque).

The Bills of Exchange Amendment Act of 2000 introduced another type of ``nontransferable'' cheque. Section 75A(1) now provides that where `à cheque bearsboldly across its face the words ``not transferable'' or ``non transferable'' eitherwith or without the word ònly' after the payee's name'' the cheque shall not betransferable but shall be valid as between the parties thereto. The subsection alsoprovides that such a cheque shall be deemed to be crossed generally, unless it iscrossed specially and that the words ``not transferable'' or ``non transferable''may not be cancelled and that any purported cancellation shall be of no effect.

Section 75A deals only with a specific type of not transferable cheque, namely anon transferable cheque that complies with the requirements of the section. Thisdoes not exclude the possibility that there could indeed be `òther'' cheques thatcannot be transferred. If, for example, a crossed cheque is made payable to anamed payee `ònly'', such a cheque by itself would without doubt be a chequethat is not transferable because it contains words indicating an intention toprohibit transfer. Section 75A does not change or alter the other provisions of theBills of Exchange Act.

The provisions of the new section 75A(2)(b) may also be important. This subsectionprovides that a bank shall not be negligent ``by reason only'' of its failure to``concern'' itself with ``words prohibiting transfer, or indicating an intention that itshall not be transferable, other than in the manner provided for'' in section 75A.

10 The effect of the words `àccount payee only'' on acheque


Look at the example under (9) above. Suppose the cheque was crossed, thewords `òr bearer'' were deleted, there was nothing added after the payee'sname and instead of the words ``not transferable'' the words `àccount payeeonly'' appeared between the two lines of the crossing. In this case, Rasputin wouldbe a holder because, despite the words `àccount payee only'', the chequewould remain transferable. In fact, Rasputin might even be a holder in due courseif all the requirements were met.


SELF-TEST QUESTIONS


52

10S t u d y u n i t

The protection of the drawee bank

Prescribed reading material for this study unitHavenga chapter 24, paragraph 24.3.9.3

After completing this study unit, you should be able to

. name the three instances in which a drawee bank is protected even though

it does not necessarily pay the holder of a cheque

. name the requirements for protection by section 58 of the Act

. apply section 58 to a set of facts

. name the requirements for protection by section 79 of the Act

. apply section 79 to a set of facts

. explain the difference between sections 58 and 79

. name the requirements for protection by section 83 of the Act (indorsement

of cheques deposited in a banking account)

1 The point of departure: the extended protection ofthe drawee bank

In study unit 8 we discussed the concept of ``discharge''. In that unit we explained

that the most frequently encountered method of discharge is ``payment in duecourse''. One of the requirements for payment in due course is that payment must

be made to the holder of a cheque. The general principle then is that the drawee

bank, in order to be entitled to debit the account of the drawer, must pay thecheque to its holder (ie the payee or indorsee of an order cheque who presents

the cheque for payment, or the bearer of a bearer cheque who presents it for

payment). This principle would, if applied rigorously, be extremely unfair to thedrawee bank, basically for the following two reasons:

(1) As we know by now, no title is transferred in the case of a forged indorsement

of a cheque, and one cannot expect the drawee bank to authenticate the

validity of every signature on every cheque.(2) Cheques are not often presented for payment to the drawee bank directly

by the holder or purported holder (in the case of a forgery). This person

usually deposits the cheque in his account at his bank (the collecting bank).The collecting bank then presents the cheque on behalf of the depositor to

the drawee bank for payment. This means that the drawee bank has no ideaon whose behalf the collecting bank is presenting the cheque for payment.

In such circumstances, it would be difficult to penalise the drawee bank for

making an incorrect payment (to a non-holder), unless the dangers wereclearly apparent from the cheque itself.

To address these situations, the Act provides for three instances of extended

section 1 study unit 10 | the protection of the drawee bank 53

protection to the drawee bank where the bank makes a payment in due course/

a payment which discharges the cheque irrespective of the question whether the

drawee bank actually paid to a holder. These are

(1) section 58 which provides protection in the case of forged or unauthorised

indorsements on order cheques

(2) section 79 which provides protection in the case of crossed cheques paid to

another bank

(3) section 83 which provides protection in the case of the absence of an

indorsement or in the case of the presence of an irregular indorsement on a

cheque

You should study and understand these sections (especially the first two) on two

levels. Firstly, you should know the requirements for the application of each section

by heart. This, however, is not enough. Secondly, you should ensure that you are

able to apply this knowledge, in a practical way, to a given set of facts.

2 Section 58Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.3.124.3.9.3.1

In Havenga we name and briefly discuss all the requirements that must be present

simultaneously before a drawee bank which pays to a non-holder will nevertheless

be protected by section 58 in that the drawee bank will be deemed to have

made a payment in due course. Consider the following example:

ExampleJohn Kennedy draws a cheque in favour of ``George W Bush or order'' and

delivers the cheque to George W in payment of a course ``Let your charisma shine

through'' presented by George W and attended by John. The cheque is

uncrossed and drawn on the Sunnyside branch of First National Bank. Adolf Hitler

steals the cheque from George W. While lazing next to his pool, Adolf forges

George's W signature on the back of the cheque (he writes ``George W Bush'' on

the back of the cheque). Adolf then takes the cheque to the Sunnyside branch of

First National Bank where he obtains payment over the counter. In the meantime,

George W approaches John for a new cheque in settlement of his (John's) debt

to George W. John informs him that he has consulted a lawyer who has advised

him that the underlying debt owed by John to George W (ie the fee for the

course) was extinguished (discharged) by the payment made by First National

Bank to Adolf and that George W should stop bothering him. George W is also a

client of First National Bank, but at the Menlyn branch.

FeedbackAs a general principle, payment by First National Bank to Adolf (or any of Adolf's

successors) will not be payment in due course, for the simple reason that nobody

can be the holder of the cheque that has been forged, and payment in due

course must be made to the holder of a cheque (see study unit 8). If, however, the

requirements of section 58 are met, then the payment by First National Bank will be

deemed (regarded) to be a payment in due course notwithstanding the fact that

payment was made to a non-holder. To determine this, we have to consider all

the requirements of section 58 in view of the given facts, as follows:

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(1) It must be an order cheque, which also implies that the cheque must be

transferable. This we tell you in the set of facts.

(2) It does not matter whether the cheque is uncrossed, the section still applies.

Remember that the section also applies to crossed cheques. If a cheque is

crossed, you always have to look at section 79 first. If the bank is not

protected by section 79 (because, for example, it paid a crossed cheque

over the counter) it cannot rely on section 58.

(3) There must be a forged or unauthorised indorsement on the cheque. In this

case we tell you that Adolf forges George W's signature at home. This means

that by the time Adolf gets to the bank, the signature is already on the back

of the cheque. This, in turn, means that Adolf presents himself to the bank as

the holder of a cheque which had become a bearer cheque through

George W's blank indorsement. We are therefore dealing with a forged

indorsement and consequently this requirement of section 58 is met.

Compare this with the situation where Adolf simply steals the cheque, takes it

to First National Bank to obtain payment over the counter and is then asked

by the teller to sign the cheque at the back as proof of his identity as George

W. In this case the forged signature does not purport to be an indorsement,

but serves an identification function to convince the teller that the person

presenting the cheque for payment is indeed George W. In this case section

58 will not apply.

(4) The bank must pay the cheque in the ordinary course of business and in good

faith. This you may assume in the absence of any indications to the contrary.

Remember that ``good faith'' has a very precise meaning which is set out in

the Act. Study the definition of good faith in Havenga and remember that

the term is also of crucial importance in determining who the holder in due

course of a cheque is.

(5) The person whose indorsement was forged must not be a client of the branch

of the bank on which the cheque was drawn. In our example, where the

cheque was drawn on the Sunnyside branch of First National Bank, this

requirement means that the person whose indorsement was forged (George

W) cannot be a client of the Sunnyside branch of First National Bank. If he is,

the bank will not be protected because section 58 will not apply. However,

we tell you that George W is a client of the Menlyn branch of First National

Bank (which is not the branch on which the cheque was drawn). This means

that the requirement currently under discussion is complied with.

Taking all of the above into account, the payment by First National Bank to Adolf

meets with all the requirements of section 58 which means that the payment will

be deemed to be a payment in due course. As a result, First National Bank will be

entitled to debit John's account, and the underlying debt between John and

George W will be regarded as discharged. George W will have no alternative but

to find Adolf and get his money from him.

3 Section 79Study HavengaStudy Havengachapter 24, sectionchapter 24, section24.3.9.3.224.3.9.3.2

The second section which affords extended protection to the drawee bank is

section 79. Because Havenga contains an example of the operation of section 79,

only the following main principles contained in this section need repeating here:

(1) Section 79 applies only to crossed cheques. If a cheque is uncrossed (as in

the case of the example used to explain s 58 of the Act), section 79 simply


cannot apply. Remember, when faced with a problem, always try to

determine whether the cheque is crossed or not.

(2) As far as the actual payment by the drawee bank is concerned, the

following three further requirements must be met:

(a) The drawee bank must pay to another bank (any bank in the case of a

general crossing; and the bank named in the crossing in the case of a

special crossing).

(b) The bank must pay in good faith.

(c) The bank must pay without negligence.

(3) If payment is made according to the principles in (2) above after the cheque

has come into the hands of the payee, then the drawer is protected as is the

drawee bank. Usually, delivery of the cheque to the payee will determine this

question. As far as cheques sent by post are concerned, the same principles

are applicable as in the case of the determination of true ownership of a

cheque, which was discussed in study unit 9.

On looking at these requirements, the differences between sections 58 and 79

become apparent.

(1) Section 79 requires the absence of negligence on the part of the bank (this is

not so in case of s 58 which requires only good faith Ð remember that one

can be negligent and still be in good faith).

(2) Section 79 does not require that the forged signature may not be that of a

client of the branch of the drawee bank, but section 58 does.

In Havenga the reason why the banks have decided not to accept uncrossed

nontransferable cheques for collection is discussed. You should be able to follow

the explanation in the textbook. Always bear in mind the effect of sections 58 and

79 Ð they protect the drawee bank by deeming certain payments made by the

drawee bank to be payments in due course (even though, strictly speaking, these

payments do not conform with the general definition of payments in due course).

Study the example in Havenga carefully as an illustration of how section 79 works

in practice. Sometimes, we set problems based on the examples in the textbook,

but with one or two changes.

For example, what would have been the position if the cheque had been posted

to C and stolen while it was in the post? Clearly this will depend on the

arrangement between A and C. If there had been an agreement to use the post,

delivery will be deemed to have taken place the moment the cheque was put in

the post by A and any payment by the drawee bank after that moment and in

accordance with section 79 will protect not only the drawee bank but also the

drawer. In the absence of an agreement to use the post, no delivery to the payee

will take place until the cheque actually reaches him. Should the cheque be

stolen in the post, payment by the drawee bank will be for the account of the

drawer while the payee will be entitled to ask the drawer for payment of the

underlying debt.

Another variation of the basic example in Havenga is that the cheque is not only

crossed, but also marked ``not negotiable''. This means that you will have to

consider the application and effect not only of section 79, but also of section 80

(one cannot transfer a better title than your own where the words ``not

negotiable'' are written on a crossed cheque) and, more importantly, section 81

(in terms of which the true owner has a right of action against a later possessor of

56

the cheque, provided all the requirements for that section are met). In theexample in Havenga, and on the assumption that the words ``not negotiable''appear on the cheque and that all the requirements for section 81 have beenmet, C (as true owner) will be able to hold D (as the later possessor) liable.Remember that A (as drawer) and B Bank (as drawee bank) are still protected bysection 79.

4 Section 83 (indorsement of cheques deposited in anaccount)


In Havenga you will find a discussion of the protection afforded the drawee bankwhich pays a cheque which has not been indorsed, or which has been irregularlyindorsed, and which has been deposited in a banking account. Make sure youknow the requirements of this section and that you understand the examplesgiven in the text. Note that this section only covers cheques deposited in anaccount (not those paid over the counter).

SELF-TEST QUESTIONS



11S t u d y u n i t

The liability of the collecting bank

Prescribed reading material for this study unitHavenga chapter 24, paragraph 24.3.10.


. explain why sometimes it is fair to hold the collecting bank liable

. explain the principles on which one would be able to hold the collecting

bank liable

. identify different situations in which one would be able to say that the

collecting bank was negligent

Although this study unit is short, it should be said at the outset that it requires athorough knowledge of all the principles discussed in the run-up to it. This is not astudy unit which you can merely learn off by heart; you must understand it.

1 Why is it sometimes fair to hold the collecting bankliable?

If one looks at the examples discussed earlier on relating to the working of sections79 and 81, we always stated that, as a general rule, the collecting bank will not beliable to the true owner of the cheque, for the following two reasons:

(1) Usually the collecting bank acts in good faith.(2) In the case of cheques crossed and marked ``not negotiable'', the

collecting bank is afforded special protection by section 81, in that althoughit possessed the cheque while collecting payment, it is deemed not to havegiven value for the cheque merely because it credited its client's account.

According to these principles, the only times when the collecting bank will beliable are where

(1) in general, the collecting bank intentionally collects payment on behalf ofthe wrong person

(2) in the case of cheques marked ``not negotiable'', the collecting bank eithergives value for the cheque (by, for example, allowing the depositorimmediately to draw against the cheque) or is deemed to have given valuefor the cheque (by, for example, refusing to give information about thecheque to the true owner) Ð see study unit 9

These are very limited circumstances. At the same time, the drawee bank (andsometimes the drawer) enjoys the extended protection of sections 58 and 79 ofthe Act. This is of cold comfort to the true owner of a cheque Ð he is very seldom

58

in a position to sue someone for his loss on a cheque and even if he is, the person

he sues (the thief) might well not have money to pay him. At the same time, some

cheques should, by their very nature (the way they look), raise the alarm on the

part of the collecting bank which is in the best position to judge whether

everything is in order.

Example(1) Daryll Cullinan draws a cheque on B Bank in favour of ``Shane Warne or

order'' as payment for a pair of flippers. The cheque is deposited in the

account of Cyril Mitchley at Z Bank without any indorsement on the cheque.

From the cheque itself it is clear that Cyril cannot be the holder of the

cheque (he is not the payee or the indorsee of the cheque). A simple

inspection (ie just by looking at it) by Z Bank Ð the collecting bank Ð should

ring the alarm bells and reveal that they will not be collecting the cheque on

behalf of the correct person.

(2) Gary Bailey draws a cheque on B Bank in favour of ``Terry Paine only''. The

cheque is deposited in the account of Errol Sweeney at Z Bank. Here we are

dealing with a nontransferable cheque where only the named payee (Terry)

may receive payment. Collection (by Z Bank) on behalf of anybody other

than the named payee will also clearly be wrong and, more importantly,

easily ascertainable by Z Bank.

In cases such as these and for the reasons discussed earlier, the courts have now

established the principle that the true owner can hold the collecting bank liable.

2 The principles underlying the liability of the collectingbank

It is important to understand that the collecting bank is not liable on the cheque

itself (as, for example, the drawer who signed and delivered the cheque would

be) but is liable in delict. For a collecting bank to be liable in delict, the following

five requirements must be met:

(1) There must have been an act or omission (the presentment of the cheque by

the collecting bank and the receipt of payment).

(2) The act or omission must have been unlawful (in law there is a duty on a

collecting bank not to collect cheques negligently).

(3) There must have been intent or negligence on the part of the person

committing the act or omission (see the discussion below).

(4) Damages must have been caused (usually in the amount of the cheque).

(5) There must have been causality (a link) between the act or omission and the

damages caused. (Usually, should section 79 apply, payment by the drawee

bank will have discharged the drawee bank and the drawer, with the true

owner remaining out of pocket.)

All these requirements are present in the (a) to (c) list of what the true owner must

prove to hold the collecting bank liable, as discussed in Havenga.

section 1 study unit 11 | liability of the collecting bank 59

3 Different situations indicating liability on the part of thecollecting bank

In the discussion of why it is sometimes fair to hold the collecting bank liable, weidentified two situations where, on the face of it, one would be able to say that thecollecting bank will probably be found to have been negligent in collecting acheque, namely the collection of an unindorsed order cheque on behalf ofsomeone other than the payee or the collection of a nontransferable cheque onbehalf of someone other than the payee.

But what about the following situations?

(1) Sigrid Undset draws a crossed cheque on B Bank in favour of ``Boris Pasternakor order''. A thief steals the cheque from Boris, forges Boris's signature on theback of it and delivers it to Scott Fitzgerald. Scott deposits the cheque in hisaccount at Z Bank.

(2) John Steinbeck draws a crossed cheque in favour of ``Patrick WhiteInvestments or order''. The cheque is also marked ``not negotiable''. Thecheque is stolen from Patrick White Investments by a thief who stamps theback of it with ``PW Investments''. The cheque is then given to WilliamGolding who deposits it in his account at Z Bank.

FeedbackAs mentioned in Havenga it is much more difficult to find negligence on the partof the collecting bank where the cheque is transferable, as in both the cases here.In judging the conduct of the collecting bank, one must not be fooled by the factthat the indorsement was forged. One must think of how the cheque actuallylooks when it is handed to the collecting bank for collection Ð in other words, allone must take into account is the fact that there is a signature on the back of thecheque which, as far as the collecting bank is concerned, is a valid indorsement. Itis safe to say that in both cases, the collecting bank will not be negligent. Notethat in the second example, Patrick White Investments (as the true owner of thecheque) will be able to hold William liable in terms of section 81, provided all theother requirements (apart from the fact that the cheque must be crossed andmarked ``not negotiable'') for the application of the section are met. However, ZBank will not be liable in terms of section 81 (provided it merely credited William'saccount and did not give value for the cheque Ð you will remember that thecollecting bank is protected by s 81).

SELF-TEST QUESTIONS

At this point you have worked through all the principles as they relate to cheques.To test yourself consider the following set of facts and then try to answer thefollowing questions:

Bjorn Borg draws a cheque on B Bank in favour of ``John McEnroe or order'' insettlement of a debt owed by Bjorn to John. The cheque is crossed and marked``not negotiable, account payee only''. The cheque is delivered to John. A thief

Activity

60

steals the cheque from John and forges John's signature on the back of it. The

thief then delivers the cheque to Pat Cash in settlement of a debt owed by the

thief to Pat. Pat gives the cheque to Stefan Edberg as payment for a practice

session. Stefan then gives the cheque to his business manager, Pete Sampras. Pete

gives the cheque to a messenger, Jim Courier, who deposits the cheque in

Stefan's account at Z Bank. Z Bank presents the cheque for payment to B Bank. B

Bank pays the amount of the cheque to Z Bank in good faith and without

negligence. B Bank debits Bjorn's account and Z Bank credits Stefan's account.

(1) While John was in possession of the cheque, what was his title to the cheque?

(2) Is the cheque nontransferable?

(3) Is Stefan the holder of the cheque?

(4) On the assumption that John did in fact indorse the cheque (there was no

forgery), how would your answer to (3) differ?

(5) Were the cheque and the underlying debt between Bjorn and John

discharged by the payment by B Bank to Z Bank?

(6) Who is the true owner of the cheque?

(7) How would your answer to (6) differ had the cheque been posted by Bjorn to

John?

(8) Will the person identified in (6) have any right of recourse against any of the

following parties:

Ð Pat Cash

Ð Stefan Edberg

Ð Pete Sampras

Ð Jim Courier

Ð Z Bank

(9) How would your answer to (8) differ if the cheque had the words ``not

negotiable, not transferable'' written on it?

(10) How would your answer differ if the cheque had the words ``not

transferable'' on it, but the cheque was not crossed?


(1) As a payee of an order cheque who is in possession of the cheque, John

qualifies to be at least the holder of the cheque. He cannot be the holder in

due course of the cheque, because the cheque is not indorsed and

delivered to him (it is not negotiated in the formal sense, which is one of the

requirements for holdership in due course).

(2) No. The cheque is still transferable despite the wording on the cheque (see

study unit 9).

(3) No. No title to a cheque can be transferred through a forgery (see study unit

6).

(4) In that case, Stefan would be the holder of the cheque because, on the

assumption that the indorsement is a blank indorsement, the cheque

changed to a bearer cheque and Stefan, as the bearer of a bearer cheque,

would be the holder of the cheque. He would not, however, be the holder in

due course because of the effect of section 80 of the Act (see study unit 9)

which holds that if a cheque is crossed and marked ``not negotiable'', one

cannot transfer a better title than one's own. Because John was only a holder

(see (1) above), everybody after him can, at best, only be holders.

(5) Yes. Although payment by B Bank was not made to the holder of the

cheque, which is one of the requirements for payment in due course, the

drawee bank (B Bank) and the drawer (Bjorn) are protected by section 79. In

terms of this section, payment will be regarded as having in fact been made

section 1 study unit 11 | liability of the collecting bank 61

to the true owner of the cheque (this has the same effect as a payment indue course) if the bank pays a crossed cheque to another bank (in the caseof a general crossing, as is the case here), in good faith and withoutnegligence (this we tell you in the set of facts). The drawer (Bjorn) is protectedbecause the drawee bank paid the cheque after the cheque had comeinto the hands of the payee (John). B Bank (the drawee bank) is thereforeentitled to debit Bjorn's (the drawer's) account. John does not have the rightto ask Bjorn for a second cheque because the debt owed by Bjorn to Johnhas been extinguished by B Bank's payment.

(6) John is the true owner of the cheque. Remember that you do not have to bein possession of the cheque to be the true owner. It is only in the case ofholdership that you have to be in possession of the cheque.

(7) That would depend on whether an agreement (express or implied) to postthe cheque existed between Bjorn and John. Had there been an agreement,John would become true owner the moment the cheque was put in the post,otherwise Bjorn would remain the true owner until the cheque actuallyreached John.

(8) Pat Cash and Stefan Edberg are both potentially liable to the true owner(John McEnroe) in terms of section 81, provided all the requirements for thatsection are met. Pete Sampras and Jim Courier are not possessors who havegiven value for the cheque, they merely acted on behalf of Stefan Edberg,and therefore they will not be liable in terms of section 81 (in fact, they will notbe liable at all). They will, of course, be liable should John request informationabout the cheque from them and they then refuse to furnish this information.As far as the collecting bank (Z Bank) is concerned, the bank will not be liablein terms of section 81, because it merely collected payment on behalf ofStefan and credited Stefan's account. As such, it did not give value for thecheque nor receive the cheque as a gift. Neither will the bank be liable indelict. We are dealing with a transferable cheque on which one wouldexpect indorsements to appear. In these circumstances it would be verydifficult to prove negligence on the part of the collecting bank.

(9) In this case, the true owner will not only be protected by the provisions ofsection 81, but the cheque will also be nontransferable. Unlike in (8) above, inthis case a strong argument can be made that the collecting bank wasnegligent. The warning bells should ring for a bank if it sees a nontransferablecheque with an indorsement on it deposited on behalf of someone otherthan the named payee.

(10) Strictly speaking, in accordance with the decision by commercial banks notto accept uncrossed nontransferable cheques for collection, Z Bank willrefuse to present the cheque for payment on Stefan's behalf. (If you areuncertain why this decision was taken, go through study unit 10 again.) Had itdone so notwithstanding this decision, the drawee bank (B Bank) and thedrawer would not have been protected by section 79 (because this sectionapplies only to crossed cheques). Nor can section 58 protect the draweebank, because this section does not apply to nontransferable cheques.Furthermore, by paying the amount of the cheque to Stefan, the draweebank will not have carried out the instruction of the drawer and will not havemade a payment in due course which discharges the underlying debtbetween Bjorn and John. This means that the drawee bank cannot debitBjorn's account and John will be able to approach Bjorn for payment of theunderlying debt. The drawee bank will have to try and recover the moneyfrom Stefan, perhaps on the grounds of enrichment.

62

12S t u d y u n i t

Bills of exchange and promissory notes

Prescribed reading material for this study unitHavenga chapter 24, sections 24.5 and 24.6.


. define a bill of exchange

. name the differences between a bill of exchange and a cheque

. list the six different ways to fix the date of payment of a bill of exchange

. name the reasons why it is important to establish the due date of a bill of

exchange

. explain the concept of acceptance

. define a promissory note

. indicate the differences between a promissory note on the one hand, and

cheques and bills of exchange on the other

You should recognise the definition of a bill of exchange in Havenga Ð after all, it

is very close to the definition of a cheque. If you compare these two definitions,

the following three differences between bills and cheques become clear:

(1) In the case of a cheque, the drawee is always a bank. Although a bill may be

drawn on a bank, this need not be so as in the case of a cheque.

(2) A cheque is always payable on demand. A bill may be payable on demand,

but may also be payable at a fixed or determinable future date. Study the

different ways in which the due date of a bill may be determined, as well as

the reasons why it is so important to determine the due date. Most of these

reasons should, and hopefully are, old news by now. The only aspect in this

discussion which may cause some problems is the `àfter sight'' bill (ie where

the order to pay says ``Pay to XYZ the amount of R1 000 30 (thirty) days after

sight)''. It should be clear from the discussion of this type of bill that you have

to understand the concept of `àcceptance'' to understand how the due

date of the `àfter sight'' bill is determined.

(3) In our discussion of the relationship between the drawee bank and the

drawer of a cheque (see study unit 9), we mentioned that the drawee bank

pays the drawer's cheques because there is a contractual relationship, in

terms of which the bank undertakes to honour future cheques, between the

bank and the drawer. In the absence of such a contractual relationship, it is

surely unfair to expect a bank, or any person for that matter, on whom a bill is

drawn, to pay the bill simply because the bank or other person was chosen

and named in the bill as drawee. Furthermore, in the absence of a person's

signature and delivery, he cannot be liable on the bill.

This means that for the drawee to be liable on a bill, the drawee must, when the

section 1 study unit 12 | bills of exchange and promissory notes 63

bill is presented to it for acceptance, `àccept'' the bill by signing the bill anddelivering it back to the person who presented the bill for acceptance. In otherwords, `àcceptance'' is merely the legal act whereby the drawee named on abill indicates that it is prepared to pay the bill if it is presented to it for payment andthus becomes liable on the bill as acceptor.

ExampleJT Publishing draws a bill on the XXX Bank in favour of `Èmsie Trichardt or order'' asan advance payment for Emsie's new book on etiquette. The bill is payable ``30days after sight''. On 2 January 1997 Emsie presents the bill for acceptance to theXXX Bank. The XXX Bank signs the bill, dates it 2 January 1997, and delivers it backto Emsie.

By accepting the bill, the XXX bank (which was previously the drawee and which isnow the acceptor of the bill) has become liable on the bill for payment on or afterthe due date of the bill, which due date has now been fixed at 30 days after 2January 1997. After a lapse of 30 days, the bill is then presented for payment to theXXX bank which has to pay.

Also note the discussion about the fact that cheques are not accepted and thatnot all the provisions of the Act (the most important of which are those sectionsprotecting the drawee bank Ð ss 58, 79 and 83) apply to bills.

When studying the definition of a promissory note, you will notice that in the caseof a note, and because we are dealing with a promise to pay and not an order,there are only two parties Ð the drawer (who in the case of a promissory note isknown as the ``maker'') and the payee. Therefore there is no drawee or acceptorinvolved.

IMPORTANT: ALTHOUGH FOR THE MOST PART, THE GENERAL PRINCIPLES RELATING TOCHEQUES ALSO APPLY TO BILLS AND PROMISSORY NOTES, AND IT WILL NOT MATTERWHETHER WE USE A CHEQUE, BILL OR NOTE IN SETTING A QUESTION ON THIS WORK,SOMETIMES IT DOES MAKE A BIG DIFFERENCE.

ExampleKarel Poborsky draws a cheque/bill on B Bank/B in favour of ``Patrick Bergen ororder''. Mr X steals the cheque/bill from Patrick and writes on the back of thecheque/bill ``Pay Andy Cole or order'' and forges Patrick's signature below thesewords. Andy Cole writes on the back of the cheque/bill ``Pay Stan Collymore'',signs below it and gives the cheque/bill to Stan.

DiscussionWe may all agree that Stan is not the holder of the cheque/bill because Patrick'ssignature has been forged and the fact is that no title can be transferred througha forgery. This is where there is a parting of the way between bills and cheques,however.

Had this been a bill, payment by B to Stan would not have been payment in duecourse (it is not made to a holder) and neither Karel nor Patrick would have been

64

liable on the bill (in both cases because Stan is not a holder and, in Patrick's case,also because he never actually signed the bill). Stan would, however, have beenable to hold Andy liable on the bill because, as a prior indorser, Andy would nothave been able to deny the validity of earlier indorsements (see the discussion of s53(2)(b) in study unit 6.)

Had this been a cheque, however, we might well have been faced with asituation where, even though payment had not been made to a holder of thecheque, payment by B Bank to Stan might well have been regarded as paymentin due course (in terms of ss 58, and/or 83) and then it would have been up to thetrue owner (Patrick) to try and recoup his loss.

SELF-TEST QUESTIONS

There are no questions set on this study unit. Please make sure you understand theprescribed work and the examples in the text.

section 1 study unit 12 | bills of exchange and promissory notes 65

13S t u d y u n i t

Other methods of payment:credit cards


Havenga chapter 25, sections 25.1±25.2.


. explain in you own words what a credit card is

. explain the difference between, on the one hand, a cheque and, on the

other hand, a credit card

. name two types of credit card

. explain in your own words how payment is effected when payment takes

place by way of a three-party credit card

. list the four economic functions of a credit card

. name and describe the three different relationships in terms of a three-party

credit card agreement

. explain the legal consequences flowing from the unauthorised use of a credit

card

1 The credit card as a method of paymentStudy HavengaStudy Havengachapter 25, sectionchapter 25, section25.2.1.25.2.1.

The credit card is one of the more modern methods of payment. Whereas the

methods of payment which are discussed in chapter 24 of your textbook (ie the

cheque, the bill of exchange and the promissory note) are all examples of

negotiable instruments (ie they can be transferred from one person to another),

the credit card cannot be transferred and therefore does not qualify as a

negotiable instrument.

The credit card is a convenient and relatively safe method of payment. It has

certain advantages for the cardholder (ie the debtor) if compared with, for

example, cash or cheques. Some of these advantages are the following: it is a

relatively safe method of payment for both the debtor and creditor, it provides

credit for a certain period to the cardholder, and if the supplier has agreed with

the card issuer to accept the credit card as a method of payment, the cardholder

can insist on the credit card being accepted by the supplier as a method of

payment.

However, it also has certain disadvantages. First, it is not always a very safe

method of payment when paying for goods which are ordered by telephone.

Secondly, the credit card is not a negotiable instrument and therefore cannot be

transferred from one person to another. (For further advantages and

disadvantages, see section 2.1 of your textbook.)

66

1.1 DIFFERENT TYPES OF CREDIT CARDS

Study HavengaStudy Havengachapter 25, sectionchapter 25, section25.2.2.25.2.2.

There are generally two types of credit cards, namely two-party credit cards andthree-party credit cards. Their names are self-explanatory. In the case of a two-party credit card, there are only two parties involved, namely the card issuer whois also the supplier, and the cardholder. Previously two-party credit cards in SouthAfrica were mainly issued by filling stations to clients who wanted to purchase fuelon credit. Nowadays a number of other types of suppliers, for examplehypermarkets and departmental stores also issue two-party credit cards to theirclients.

In the case of three-party credit cards, there are three parties involved, namelythe card issuer (which is usually a bank), the cardholder and the supplier. Presentlythere are considerably more three-party credit cards in circulation than two-partycredit cards. For purposes of this course the three-party credit card is thereforeregarded as more important than the two-party credit card.

For a discussion of the operation of two-party credit cards and three-party creditcards, study section 25.2.2 of the textbook.

An example of a three-party credit card

This is a typical example a three-party credit card. In this example Standard Bank isthe card issuer and WG Schulze is the cardholder. Since a three-party credit card isused by the cardholder to buy merchandise from a number of different suppliers,the names of the different suppliers do not appear on it.

A two-party credit card differs very little in outward appearance from a three-party credit card. The only obvious difference is that in the case of a two-partycredit card the card issuer (whose name invariably appears on the credit card) isnot a bank or other financial institution, but perhaps a hypermarket ordepartmental store. In the case of a two-party credit card, the card issuer isinvariably also the supplier. In that sense the name of the supplier appears on atwo-party credit card.

section 1 study unit 13 | other methods of payment: credit cards 67

An example of a sales slip


Standard Bank issues a Master Card to Patsy, one of their customers. StandardBank also concludes an agreement with MacDonalds Ltd, a fast food chain, thatthe latter will accept all Master Cards issued by the former, as valid payment forpurchases made at MacDonalds. Patsy buys fast foods to the value of R110,00from MacDonalds and pays for it with her Master Card.

(a) Which type of credit card is the Master Card in this set of facts?(b) Which party is the card issuer?(c) Which party is the cardholder?(d) Which party is the supplier?(e) Can MacDonalds refuse to accept Patsy's Master Card as payment?

Feedback(a) A three-party credit card.(b) Standard Bank.(c) Patsy.(d) MacDonalds.(e) No, except if the credit card is no longer valid.


Pick and Pay Hypermarket issues a Pick and Pay Credit Card to Terry, one of theircustomers. In terms of the agreement between Pick and Pay Hypermarket andTerry, Terry is entitled to buy merchandise on credit with his Pick and Pay CreditCard from any Pick and Pay outlet.

(a) Which type of credit card is the Pick and Pay Credit Card in this set of facts?(b) Which party is the card issuer?(c) Which party is the cardholder?(d) Which party is the supplier?

Activity

Activity

68

Feedback(a) A two-party credit card.

(b) Pick and Pay Hypermarket.(c) Terry.

(d) Any outlet of Pick and Pay Hypermarket.

1.2 THE ECONOMIC FUNCTIONS OF A CREDIT CARD


The four economic functions of a credit card are

. payment

. credit

. cash withdrawal

. cashing of cheques

See the discussion in sections 25.2.4.1±25.2.4.4 of your textbook. For your purposes

the most important function of a credit card is that it is first and foremost a methodof payment.

1.3 THE LEGAL RELATIONSHIPS IN TERMS OF A THREE-PARTY CREDIT CARDAGREEMENT


Because there are three parties involved in respect of a three-party credit card,there are also three different sets of legal relationships flowing from the three-party

credit card agreement. The three sets of relationship are explained in section25.2.4 of your textbook and nothing needs to be added here.

1.4 THE UNAUTHORISED USE OF CREDIT CARDS


The unauthorised use of a credit card occurs when the credit card is used without

the permission of the cardholder. The question that remains is who is responsible forpaying where the credit card is used by a thief or some other person who has by

chance come into possession of the credit card. The standard contractsconcluded between supplier, issuer and cardholder usually contain provisions in

respect of such losses. These standard provisions are discussed in section 25.2.6 ofyour textbook.

SELF-TEST QUESTIONS

Study the following set of facts.

Standard Bank issues a Master Card on 1 March 1997 to Tanya, one of its clients.

Standard Bank concludes agreements with the following food stores to accept allMaster Cards issued by Standard Bank as a valid method of payment for goods

bought from them: Pick and Pay; Hyperama and OK Bazaars. The different

relationships between the parties are governed by standard contracts.

In 1997 Tanya buys groceries from the following stores on the following dates: on 20

March from Pick and Pay; on 25 March from Checkers Shoprite; on 3 April fromHyperama. On 19 April Tanya realises that her credit card has been stolen. After

she discovers the loss of her card the thief uses her credit card on the following

section 1 study unit 13 | other methods of payment: credit cards 69

dates to buy groceries from the following stores: on 20 April from OK Bazaars; on 29April from Woolworths Food Hall; on 5 May from Pick and Pay; and on 9 May fromHyperama. Tanya notifies Standard Bank of the loss of her credit card on 30 April.Standard Bank notifies all the suppliers of the loss of the credit card on 6 May. Onall the abovementioned occasions the credit card is accepted as valid paymentby the different stores.

Which party will be liable to the food stores for the purchases made on thefollowing dates? Give reasons for your answers. (You may accept that the thiefhas disappeared.)

(1) 20 March(2) 25 March(3) 3 April(4) 20 April(5) 29 April(6) 6 May(7) 9 May


(1) Standard Bank is liable in terms of the relationship between the card issuerand the supplier.

(2) Checkers Shoprite must bear the loss (or sue Tanya for the money) as it didnot conclude an agreement with Standard Bank.

(3) Standard Bank is liable in terms of the relationship between the card issuerand the supplier.

(4) Tanya, as the cardholder, bears the risk from the loss of the card until she hasnotified the issuer of this loss.

(5) Woolworths Food Hall must bear the loss (or try to claim the money from thethief) as it did not conclude an agreement with Standard Bank.

(6) Standard Bank, as the issuer, bears the risk from the moment it receivesnotification of the loss until it notifies the suppliers of this loss.

(7) Hyperama, as the supplier, must refuse to accept purchases made against acard which it has received notification of as being lost.

70

14S t u d y u n i t

Travellers' cheques, stop orders anddebit orders

Prescribed reading material for this study unitHavenga chapter 25, sections 25.3±25.5.


. explain in your own words what a travellers' cheque, a debit order and a stop order are

. explain the operation of a travellers' cheque, a debit order and a stop order

. put forward arguments whether or not the Bills of Exchange Act applies to travellers'

cheques

. explain the differences between, on the one hand, a stop order, and on the other hand,

a debit order

. discuss whether or not a creditor derives rights from a stop order and a debit order

. discuss whether or not the acceptance of a debit order by the creditor as a method of

payment amounts to payment of the debt

1 Travellers' chequesStudy HavengaStudy Havengachapter 25, sectionchapter 25, section25.3.25.3.

In view of the fact that travellers' cheques are obtainable at a variety of different

foreign exchanges and that they are accepted worldwide, they are highly suited

as a method of payment when travelling abroad.

It is a vexed question whether a travellers' cheque amounts to a bill of exchange,

cheque or a promissory note as described in the Bills of Exchange Act. The

question whether a travellers' cheque amounts to, for example, a bill of

exchange, is important for the following reason. If a document qualifies as a bill of

exchange or promissory note as defined in the Bills of Exchange Act, the provisions

of the Act will regulate the relationships on the document. However, if a

document does not satisfy the definition of a bill of exchange or a promissory note,

the parties to the document cannot rely on the provisions of the Act.

It is argued in section 25.3.2 of the textbook that some types of travellers' cheques

fall within the ambit of the Bills of Exchange Act. A distinction is drawn between, on

the one hand, those travellers' cheques in terms of which payment by the issuer of

the travellers' cheque is made conditional on countersignature by the traveller,

and on the other hand, those travellers' cheques in terms of which payment by

the issuer of the travellers' cheque is not made conditional on countersignature by

the traveller.

In the case of the former, it does not conform to the essential element of

unconditionality as required by the Act. You will remember that one of the

essentials of a valid cheque is that the order to the drawee bank to pay must be

unconditional (see again study unit 2 above). If payment of the travellers' cheque

section 1 study unit 14 | travellers' cheques, stop orders and debit orders 71

by its issuer is subject to the condition that it must be countersigned by the

traveller, it is not unconditional as envisaged in the Act.

In the case of those travellers' cheques in terms of which payment by the issuer of

the travellers' cheque is not conditional on countersignature by the traveller, it

would appear that it conforms to the requirements of a bill of exchange (which

includes a cheque) as envisaged in the Act.

It must be added that the vast majority of travellers' cheques belong to the former

type of travellers' cheque.

An example of a travellers' cheque

This is a typical example of a travellers' cheque that does not qualify as a cheque

(or bill of exchange) in terms of the Act since payment by the issuer is conditional

upon countersignature by the traveller.

The parties to the travellers' cheque are as follows:

The issuer is Thomas Cook.

The traveller is P Banda.

The payee/holder is the person who was paid by P Banda.

Read the scenario below and answer the question given. Your answer should

include an explanation.

World-Wide Cash is a British company which issues travellers' cheques. The

following words appear on their travellers' cheques: ``World-Wide Cash promises

to pay an amount of �100 to the bearer of this document provided that it is

presented for payment within 90 days of date''. No place for payment is indicated

on the travellers' cheque.

Does the Bills of Exchange Act apply to this document?

Activity

12 April 98P Banda

P Banda

72

FeedbackYes. There is nothing in the set of facts which indicates that this travellers' chequedoes not conform to all the requirements of a promissory note. As the place ofpayment is not an essential of a bill of exchange (or a promissory note) it does notaffect the validity of the document. (See again study unit 2 above.)

2 Stop ordersStudy HavengaStudy Havengachapter 25, sectionchapter 25, section25.4.25.4.

The stop order is not an instrument of payment but rather a method of payment.Furthermore the stop order is not a negotiable instrument as it cannot betransferred from one person to another.

A stop order is typically used to pay weekly or monthly debts of a fixed amountsuch as an insurance premium, property tax payable to a metropolitan sub-structure (or municipality) or rent. Two important legal principles apply to a stoporder.

The first principle is that the creditor does not derive any rights from the stop order.The stop order is an instruction by the debtor to his bank to pay a specified thirdparty a fixed amount of money on a regular basis. The debtor signs the stop orderand hands it to his bank where he holds a current cheque, credit card or savingsaccount.

The creditor obtains no rights in terms of the stop order against the bank or thedebtor (ie account holder) since the stop order results only in an obligationbetween the bank and the account holder. As a result, the creditor receivespayment at the will of the debtor and his bank and the creditor can thereforenever be ensured of payment at a specific date. Thus, if the debtor revokespayment without notifying the creditor, the latter cannot sue the debtor or thebank on the stop order.

In the case of a cheque, the creditor (payee) also obtains no rights against thedrawee bank on the cheque but a cheque does result in an obligation betweenthe drawer (ie the account holder) and the creditor. Thus, the creditor may, as amatter of general principle, sue the drawer on the cheque if the latter hascountermanded payment of it. (See the discussion in section 25.4.1.1 of thetextbook.)

The second principle is that the underlying relationship between the debtor andcreditor is not terminated by the debtor's giving the stop order to the creditor.When a debtor gives a stop order (literally: an order to pay) to his bank nocollateral (ie ancillary or substitute) agreement comes into existence between thedebtor (account holder) and the creditor. In the case of a cheque, a collateralagreement does come into existence between the drawer (debtor) and thepayee (creditor). (See the discussion in section 25.4.1.2 of the textbook.)

These two principles therefore illustrate two important differences between stoporders and cheques.


An example of a stop order

74

3 Debit ordersStudy HavengaStudy Havengachapter 25, sectionchapter 25, section25.5.25.5.

The debit order is an authorisation by the debtor to his creditor to request anamount from the debtor's bank, and includes an authorisation to the bank to paythe amount to the creditor. The amount which is requested by the creditor mayvary and the bank will, as a matter of general principle, pay the amount which isrequested by the creditor. It is obvious that a debtor must sign and hand over adebit order only to a creditor who can be trusted.

A debit order is typically used to pay weekly or monthly debts of a fixed or varyingamount such as a telephone account, a bond payment, a water and electricityaccount or any other regular payment which may or may not be subject to aregular increase, such as a life insurance premium which is linked to an increaseclause to combat the effect of inflation.

Although there are similarities between stop orders and debit orders, there are alsoimportant differences between these two methods of payment. The similarities arethe following:

(1) Both are methods of payment.(2) Both contain an instruction to the bank where the debtor is an account

holder to pay a certain sum to the creditor.(3) Neither of them result in a collateral agreement between the debtor and the

creditor. Thus, the creditor cannot sue the debtor on the stop or debit order ifthe creditor does not receive payment from the bank.

(4) Neither of them is a negotiable instrument.

The differences between stop and debit orders are as follows:

(1) The stop order is a mandate from the account holder to his bank to pay fromhis account while the debit order is not only a mandate to the bank to paybut also an authorisation to the creditor to request payment from the bank.

(2) Closely allied to the first difference is the fact that the stop order is nevergiven to the creditor while the debit order is handed over to creditor and theduty to request punctual payment rests on the creditor.

(3) The stop order can only be used to provide for a deduction of a fixed amountfrom the account of the debtor. The debit order, in contrast, may provide fora varying amount to be deducted from the account of the debtor.

(4) The use of a stop order does not suspend the creditor's right to claimpayment directly from the debtor, while the creditor's right to claim paymentfrom the debtor is suspended when the creditor accepts a debit order fromthe debtor. The creditor's right to payment from the debtor is suspended untilhe has made the necessary request from the debtor's bank.

(See further the discussion in sections 25.5.1±25.5.2 of the textbook.)


An example of a debit order

76

SELF-TEST QUESTIONS

Here you are provided with two lists. The first list contains a number of differenttypes of debt. The second list contains a number of different methods of payment.Rearrange each option in the second list to correspond with the option in the firstlist which is the most suitable method of effecting payment of the type of debtdescribed. Each option from the second list may only be used once.

List one

(1) A telephone account(2) The fixed premium in terms of a life insurance policy(3) A hotel account in London where the guest is a Zimbabwean tourist(4) A loaf of bread at the corner cafeÂ

(5) Goods which were advertised on television, ordered by telephone

List two

(a) Cash

(b) Credit card

(c) Stop order

(d) Debit order

(e) Travellers' cheque


(1) ± (d)

(2) ± (c)

(3) ± (e)

(4) ± (a)

(5) ± (b)


15S t u d y u n i t

Letters of credit

Prescribed reading material for this study unitHavenga chapter 25, section 25.6.


. describe, in the correct sequence, the steps involved in payment by means

of a letter of credit in an international transaction

. describe the parties involved in effecting a letter of credit and the role these

parties play

Provided you give yourself enough time and you put in the necessary effort, the

discussion in the textbook of the process involved in effecting a letter of credit

should not pose too many problems. Perhaps the best way of elaborating on the

text is to give an example of what one could expect to encounter in practice.

ExampleGrabanostrich (Pty) Ltd is a company which runs a number of farms in the

Oudtshoorn district. The main part of their business is the marketing of ostrich

related products on the international market. Recently, they have managed to

woo the representatives of a German firm, Velikelezzer AG, successfully. As a

result, Grabanostrich and Velikelezzer have concluded an agreement in terms of

which Grabanostrich will export four consignments of grade 1 ostrich skins, each

consignment consisting of 1 000 skins, to Germany. Payment will be made in South

African rands at R500 000 per consignment. Velikelezzer is adamant that the

consignments may not reach them any later than 1 March, 1 June, 1 September

and 1 December, respectively.

FeedbackIt is clear that at this point, a number of potential problems have not been

addressed. One of these is that Grabanostrich is not keen to load a consignment

onto a container in Port Elizabeth harbour without knowing whether Velikelezzer

will be able to pay for the consignment, and will in fact do so. At the same time,

Velikelezzer does not want to pay for the goods unless they can be sure that

Grabanostrich will in fact deliver the order and that the order will be up to

standard. It is exactly to address these fears that letters of credit are used as a

means of effecting payment across international boundaries (they may, of course,

operate domestically as well). As a result, Velikelezzer requests on a standard

application form that its German bank, the Deutsche Bank, open a letter of credit

in favour of Grabanostrich and inform Grabanostrich

78

Example of a letter of credit

section 1 study unit 15 | letters of credit 79

(1) of the letter of credit being opened(2) that payment will be effected on receipt of the following documentation:

(a) a bill of lading(b) an insurance policy(c) a certificate of quality from Mr I Checkskins

The onus is then on Grabanostrich to arrange for the inspection and completion ofthe necessary documentation on shipping the goods. Thereafter, thedocumentation will be submitted to the bank and, should the bank be satisfiedwith the documents, it will pay Grabanostrich. Once Velikelezzer refunds its bank,the bank will give the documentation to Velikelezzer which will enable Velikelezzerto take possession of the consignment on arrival in Germany.

As discussed in the textbook, there are often other banks involved in a letter ofcredit. Most often, the issuing bank (in our example, the Deutsche Bank) willapproach a bank in South Africa (eg, First National) to act as a confirming bank.First National will then assume the duties of the Deutsche Bank (the issuing bank)by paying Grabanostrich after presentation of the documents. First National willthen send the documents to the Deutsche Bank and the last-mentioned, aftersatisfying itself that First National paid correctly, will then pay First National. Makesure, by using the above set of facts, that you understand the roles that otherbanks can play in the process.

SELF-TEST QUESTIONS

If you know the prescribed section of Havenga and understand the aboveexample, you should be able to answer any question on letters of credit.

80

16S t u d y u n i t

Electronic funds transfer



. define an electronic funds transfer

. distinguish between paper-based transfers and electronic funds transfers

. distinguish between the two main types of electronic funds transfers

. name the three most common types of customer activated systems of

electronic funds transfers

. describe the functioning of each of the three main types of customer

activated electronic funds transfer systems

. describe the legal relationships involved in the different types of customer

activated electronic funds transfer systems

. describe the risks and regulation of the unauthorised use of each of these

systems

Quite a number of pages are devoted to the topic of electronic funds transfer in

the textbook. Having said that, and on a thorough reading of the textbook, it

should be apparent to you that not all that many hard and fast principles are

evident from the discussion. In what follows we shall attempt to guide you through

this part of the work by concentrating more on the structure of the discussion than

on all the detail.

Subsections 25.7.1 to 25.7.3 of the textbook are devoted to an explanation of the

following:

. what is meant by electronic funds transfers (section 25.7.1).

. the distinction between paper-based transfers and electronic transfers (this

distinction is to be found in the permanency of the instruction to the bank to

pay) and, importantly (it is somewhat hidden in the text Ð see the first

sentence of section 25.7.3)

. the distinction between bank activated systems (the ACB) and customer

activated systems (ATM's, EFTPOS and Home Banking)

The rest of the section is devoted to a discussion of each of the types of customer

activated electronic funds transfer systems. In each case the functioning of the

system is described, followed by a discussion of the legal relationships and

principles involved, with the emphasis on the risks in the case of the unauthorised

use of each system. These risks are mainly regulated by the contract between the

bank and customer.

As the text covering this part of the work in the textbook is largely self-explanatory,

section 1 study unit 16 | electronic funds transfer 81

we use this opportunity simply to urge you to ensure that you know this part of thework. The fact that we do not spend pages and pages repeating the text does notmean that it is unimportant.

SELF-TEST QUESTIONS

(1) What is an electronic fund transfer?(2) Into which two groups can fund transfers be divided?(3) Name two main electronic funds transfer systems.(4) Name three main electronic funds transfer systems which can be activated

by customers.(5) What is EFTPOS?(6) Name three important interdependent contracts in an EFTPOS transaction.(7) What are the differences between an off-line system and an on-line system?(8) What is home banking?(9) What are the advantages of home banking?

(10) What are the risks associated with home banking?

ANSWERS TO THE SELF-TEST QUESTIONS

(1) An electronic fund transfer can be described as a funds transfer which iseffected largely or completely by electronic techniques. It works just like acheque in that an instruction is given by the customer to the bank for thetransfer of money to another account.

(2) Fund transfers can be divided into credit and debit transfers. See section25.7.1 in Havenga and make sure that you know what the differencesbetween these two groups are.

(3) Electronic fund transfer systems can be divided into customer activatedsystems and systems which are activated by banks to facilitate electronicfunds transfers between banks.

(4) ATM, EFTPOS and home banking.(5) EFTPOS is an acronym for electronic funds transfer at point of sale, a system

which makes it possible to make an electronic payment in a shop with acredit or debit card.

(6) The customer/merchant contract, the contract between the customer orEFTPOS cardholder and his bank and the contract between the merchantand the bank. Make sure that you are able to discuss each of thesecontracts.

(7) The answer can be found in section 25.7.5.2 of Havenga.(8) Home banking gives a customer the opportunity to make use of several

financial services from the privacy of the home by using a telephone,videotex services and the internet.

(9) It is possible to check balances, ask for statements, transfer funds betweenaccounts, stop payment of cheques, order cheque books, obtain financialinformation and correspond with the bank manager.

(10) See section 25.7.6.1 for the answer to this question.

82

SECTION 2:THE LAW OF TRUSTSSECTION 2:THE LAW OF TRUSTS

CONTENTS

Study unit 1 The creation of a trust 84

Study unit 2 The office of trustee 89

Study unit 3 The administration of a trust 93

Study unit 4 The trust beneficiary and revocation, variation and termination of a trust 96

1S t u d y u n i t

The creation of a trust


Havenga chapter 26, sections 26.1, 26.2, 26.3, 26.4 and 26.5.

Lindiwe has two children under the age of four. She is not very healthy and fears

that she may not live long enough to provide for the children's education. At the

moment she has quite a large estate consisting of property and shares in various

companies. How can Lindiwe ensure that there will be funds to provide for her

children's education? In this study unit we will consider the creation of a trust as

one way in which Lindiwe may provide for her children's education.

1 IntroductionStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.1.26.1.

This section needs no further explanation.

2 The basic features of a trustStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.2.26.2.

The basic features of a trust are that the control of trust property is transferred to

the trustee to be administered for the benefit of the beneficiary. The person who

transfers the property is referred to as the founder and she may be a co-trustee but

not the sole trustee. From our example above: if a trust is created by Lindiwe, she

will be the founder and the children will be the beneficiaries.

Name the recognised methods for transferring ownership of movable or

immovable property.

FeedbackA distinction is made between original methods of acquiring ownership (eg

occupation or prescription) and derivative methods of acquiring ownership (eg

delivery of movable property or transfer and registration of immovable property).

You must note that a trust may either be an ownership trust or a bewind trust.

Distinguish between an ownership trust and a bewind trust.

Activity

Activity

84

FeedbackAn ownership trust is one in which ownership of the trust property is transferred to

the trustee. A bewind trust, on the other hand, is one in which the beneficiaryacquires ownership of the trust property but control of such property vests in the

trustee.

See section 26.2.1 of the textbook

3 The Trust Property Control Act 57 of 1988Study HavengaStudy Havengachapter 26, sectionchapter 26, section26.3.26.3.

In our discussion of the law of trusts we concentrate on trusts which are created in

terms of this Act. Trusts may also be created orally but they will not be subject to

the Act. In this regard the definition of trust instrument is important. The Act

provides that a trust instrument is a written agreement, testamentary writing or a

court order. Only trusts created in one of these three ways are subject to the Act.

A key concept of the Trust Property Control Act 57 of 1988 is ``trust instrument''.

Indicate the INCORRECT statement:

(1) A trust created orally is valid.

(2) A trust instrument is a written agreement, testamentary writing or court order

that creates a trust.

(3) A trust created orally and reduced to writing is deemed to be a trust

instrument.

(4) Trusts created by way of a trust instrument are subject to the provisions of the

Act.

(5) All trusts are subject to the provisions of the Act.

Feedback(1) is correct. Such a trust is valid but not subject to the provisions of the Act.

(2) is correct. This is the definition of a trust instrument contained in the Act.

(3) is correct. Such a trust will also be subject to the provisions of the Act.

(4) is correct. Only trusts created by way of a trust instrument are subject to the

provisions of the Act.

(5) is incorrect. Not all trusts are subject to the provisions of the Act. For example,

an oral trust will not be subject to the provisions of the Act.

4 The essential requirements for the creation of a validtrust

Study HavengaStudy Havengachapter 26, sectionchapter 26, section26.4.26.4.

It must be emphasised that a valid trust can be created only if all the essential

requirements are present. These requirements are once again listed here as

follows:

(1) The founder must intend to create a trust.

(2) The founder must express her intention in such a manner as to create a

binding obligation.

(3) The trust property must be defined with reasonable clarity.

Activity

section 2 study unit 1 | the creation of a trust 85

(4) The trust object, which may be personal or impersonal, must be defined withreasonable certainty.

(5) The trust object must be lawful.

A testator, in his will executed in 1899, bequeathed to his son the residue of hisestate ``in trust to be applied to the founding and maintaining (of) a home fordestitute children''. In consequence of this bequest in trust, the testator's sonestablished a memorial home. Answer the following questions:

(1) How was the trust created?(2) Can the trust object be defined with reasonable certainty?

Feedback(1) The trust was created in a testament. Such a trust is called a trust mortis causa

(literally ``as a result of death''). This trust only became effective at the timeof the testator's death.

(2) Yes. In the example above the trust object is impersonal. It is valid since it hasa charitable object. Although there eventually may be specific beneficiaries,the purpose of this trust is to benefit the community. You must also note thatthe cy preÁs rule applies to trusts with charitable objects. Such trusts areaccordingly benevolently construed.

5 Factors which are not essential for the creation of atrust


No further explanation is required.

Indicate whether the following statement is right or wrong and give reasons foryour answer:

Authorisation by the state is required for the creation of a trust since the Actprovides that a person may only act as trustee after she has been authorisedthereto in writing by the Master.

FeedbackThis statement is incorrect. The Act contains provisions directed at the trustee of atrust created by a trust instrument, but these provisions do not mean that there hasto be authorisation by the state for the creation of a trust. Failure to comply withthe provisions of the Act also do not invalidate the trust.

For greater detail, see Havenga section 26.5.3

Activity

Activity

86

SELF-TEST QUESTIONS

(1) What are the basic features of a trust?(2) What is a bewind trust?(3) Are all trusts subject to the Trust Property Control Act 57 of 1988? Give reasons

for your answer.(4) What are the essential requirements for the creation of a valid trust?(5) How would you create a trust mortis causa? And a trust inter vivos?(6) A trust may be created by concluding a contract for the benefit of a third

party. Explain.(7) Name all the elements which distinguish a trust mortis causa from a trust inter

vivos.(8) What is discretionary trust? And a protective discretionary trust?(9) Is authorisation by the state required for the creation of a trust?


(1) The basic features of a trust are that the control of trust property is transferredto the trustee to be administered for the benefit of the beneficiary.

(2) In a bewind trust the beneficiaries have ownership of the trust property whilethe trustee only administers the trust property.

(3) No, a trust created orally is valid but it is not subject to the Act. Only trustswhich are created by a written agreement, testamentary writing or a courtorder are subject to the Act.

(4) The essential requirements for the creation of a valid trust are

. the founder must intend to create a trust

. the founder must express her intention in such a manner as to create abinding obligation

. the trust property must be defined with reasonable clarity

. the trust object, which may be personal or impersonal, must be definedwith reasonable certainty

. the trust object must be lawful

(5) A trust mortis causa is created in a will. A trust inter vivos is created by meansof a contract entered into between living persons. This contract is usually acontract for the benefit of a third party but this is not necessarily the case.

(6) The trust founder and the trustee may conclude a contract whereby thelatter undertakes to control the trust property subject to the provisions of thetrust and for the benefit of the beneficiaries. The beneficiary may accept thebenefit.

(7)

Trust mortis causa Trust inter vivos

Created by making a will. Created by concluding a contract

Comes into existence on the death ofthe trust founder

Comes into existence during the life ofthe trust founder

The trust founder is dead and cannotbe a co-trustee

The trust founder may be co-trustee

(8) A discretionary trust is a trust in which the trustee has the power to appoint

section 2 study unit 1 | the creation of a trust 87

the beneficiaries. A protective discretionary trust is used to protect abeneficiary against herself, especially in the case of insolvency.

See section 4.4.1 for a discussion of these trusts.(9) No, authorisation by the state is not needed for the creation of a trust.

88

2S t u d y u n i t

The office of trustee


Havenga chapter 26, section 26.6.

Lindiwe decides to create a trust to provide for her children's education. She asks you to

advise her how she must appoint the trustee. After you have completed this study unit you

should be able to advise her on the appointment of trustees. You should also know the

circumstances in which a trustee may vacate, resign or be removed from office.

1 IntroductionIn your studies you may have encountered a number of references to the Master.

In this regard you are referred to the discussion in Havenga chapter 1 section 1.3.5.

There it is pointed out that the Master is an officer of a superior court (``High

Court''). The Master has various functions, including the duty to ensure that trusts

are properly administered. The Act therefore gives the Master extensive

supervisory powers over the office of the trustee.

Office of trustee = lawful appointment + qualification + acceptance + authorisationby the Master

2 Appointment must be lawfulStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.1.26.6.1.

The trust instrument usually provides an indication of who has the power to appoint

a trustee. This may either be the founder, the other trustee or trustees, the

beneficiaries, the Master, some other person, or the court.

Match the following concepts with their corresponding distinctive meanings:

(1) Power of assumption (a) The power to remove and replace other trustees

(2) Power of subrogation (b) The power to appoint the beneficiaries

(3) Power of substitution (c) The power a trustee has to appoint another in

her place when she resigns

(d) The power to appoint the beneficiaries

(e) The power of appointing additional trustees

Feedback(1) (e) The power of appointing additional trustees

Activity

section 2 study unit 2 | the office of trustee 89

(2) (c) The power a trustee has to appoint another in her place when she resigns

(3) (a) The power to remove and replace other trustees

For additional information, see section 26.6.1.2 of the textbook.

3 Qualifications of a trusteeStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.2.26.6.2.

It is important to note that a juristic person, such as a company or a close

corporation, may also be a trustee.

The following categories of persons are disqualified from acting as trustee:

. a person or his/her spouse who has written or witnessed the will in which such

person has been appointed trustee

. persons of unsound mind, owing to their incapacity to contract

. persons who do not meet the qualifications prescribed by the trust instrument.

4 Acceptance by the trusteeStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.3.26.6.3.

Nobody can become a trustee without her consent. This applies to both a trust

inter vivos and a trust mortis causa.

5 Written authorisation by the MasterStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.4.26.6.4.


A person who is appointed as a trustee of a trust created by a trust instrument may

act in that capacity only if authorised thereto in writing by the Master. Which ONE

of the following statements is CORRECT?

(1) The Master may not dispense with security if a court ordered that security

must be provided.

(2) The Master grants authority to act as trustee only if the trustee has furnished

security.

(3) A trustee may take possession of the trust property before she is authorised by

the Master to act as trustee.

(4) The Master grants authority to act as trustee only if the trustee has been

exempted from giving security.

(5) A trust is not created before the Master authorises the trustee to act in that

capacity.

Feedback(1) is correct. The Master has a wide discretion with regard to the furnishing of

security but may not dispense with security if a court ordered that security

must be provided.

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(2) is not entirely correct. The trustee may be exempted from providing security

and then the Master will still grant authority to act as trustee.

(3) is incorrect. A trustee who has not been authorised by the Master cannot

deal with the trust property.

(4) is not entirely correct. The Master may also grant a person authority to act as

trustee if she has provided security.

(5) is incorrect. A trust is created even though the trustee has not been

designated.

6 Number of trusteesStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.5.26.6.5.

This section does not require further explanation.

7 Loss of office by the trusteeStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.6.6.26.6.6.

Note that a trustee may either vacate, resign or be removed from office. Different

circumstances would cause a trustee to vacate, resign or be removed from office.

Indicate whether a trustee vacates, resigns or is removed from office in each of

the following instances:

(1) The trustee is placed under judicial management.

(2) The trust is terminated.

(3) The trustee dies.

(4) The trustee fails to give security to the satisfaction of the Master within two

months after being requested to do so.

Feedback(1) The Master may remove the trustee from office.

(2) The trustee vacates her office.

(3) The trustee vacates her office.

(4) The Master may remove the trustee from office.

SELF-TEST QUESTIONS

(1) Can the beneficiaries of a trust appoint the trustee? Explain.

(2) Can a juristic person be a trustee? Substantiate.

(3) How many trustees must be appointed?

(4) Can a trustee resign from her office?

(5) When may the Master remove a trustee from her office?


(1) The founder may give the beneficiaries of a trust the power to appoint the

trustee.

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section 2 study unit 2 | the office of trustee 91

(2) Yes, any natural or juristic person who meets the qualifications prescribed bythe trust instrument may be a trustee.

(3) There is no provision in our law which prescribes the number of trustees for atrust. One is sufficient, but more than one is permissible.

(4) Yes, a trustee is entitled to resign from office.(5) The Master may remove a trustee from office if the

. trustee has been convicted in the Republic or elsewhere of an offence ofwhich dishonesty is an element or any other offence for which she hasbeen sentenced to imprisonment without the option of a fine

. trustee fails to give security to the satisfaction of the Master within twomonths after being requested to do so

. trustee has been declared mentally ill or incapable of managing her ownaffairs

. trustee's estate is sequestrated or liquidated or placed under judicialmanagement

. trustee fails to perform satisfactorily any duty imposed by the Act, or tocomply with any lawful request of the Master

See section 26.6.6.3 of the textbook.

92

3S t u d y u n i t

The administration of a trust



Lindiwe creates a trust and appoints Nomsa as a trustee. Nomsa accepts the appointment

and furnishes the Master with the required security. This is the first time that Nomsa has been

appointed as a trustee. She approaches you to ask you what she must do. After you have

completed this study unit you should be able to explain to Nomsa what her duties and rights

are. You will also be able to explain to her how her insolvency will affect the trust.

1 IntroductionStudy HavengaStudy Havenga

chapter 26, sectionchapter 26, section

26.7.26.7.

In the previous study unit we concentrated on the office of trustee. The trustee

fulfils an important role since she is also the officer who is responsible for the proper

administration of the trust. A trustee has certain duties and she also has certain

rights.

2 Duties of the trusteeStudy HavengaStudy Havenga


26.7.1.26.7.1.

The duties of a trustee can be divided into those duties that arise before the

administration of the trust can commence and those duties that arise during the

administration period.

Susan is appointed as a trustee under Peter's will. The trust is for the benefit of

Peter's wife, Anne, and their two minor children. The trust property consists of a

number of seaside cottages which Peter let to holiday makers. The trust instrument

stipulates that the income derived from the rent of the cottages must be paid to

Anne to provide for her and the children's upkeep. Anne discovers that Susan has

been letting the cottages to her friends at very favourable rates. These rates are

fifty percent less than those charged by other letting agents at the same seaside

resort where the cottages are situated. Furthermore, it appears that Susan has

used the cottages without paying any rent. Advise Anne whether she may institute

an action against Susan.

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section 2 study unit 3 | the administration of a trust 93

FeedbackThe answer is to be found in sections 26.7.1.2 and 26.7.1.3 of the textbook. It is clear

that Susan committed a breach of trust. In the first place, she let the cottages for a

substantially lower rent than she could have asked. Secondly, Susan's use of the

cottages without paying rent amounts to a conflict of interest between her duties

as trustee and her private interests. A number of possible consequences flow from

the breach of trust, such as removal from office by the Master. Susan will

furthermore be personally liable for any loss suffered by Anne and the children as

a result of her personal use of the cottages.

3 Powers and rights of the trusteeStudy HavengaStudy Havengachapter 26, sectionschapter 26, sections26.7.2 and 26.7.3.26.7.2 and 26.7.3.

The powers of the trustee are comprised mainly in the trust instrument. A trustee

has a specific power only if granted to him or her by the trust instrument, or if the

court is willing to supplement the trustinstrument.

List some of the powers that are useful to a trustee in the administration of trust

assets.

FeedbackThese include the power to

. sell, mortgage or let trust property

. realise investments and reinvest them

. carry on a business

. give loans to beneficiaries

. borrow money on behalf of a beneficiary

These sections do not require further explanation.

4 Insolvency of the trusteeStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.7.4.26.7.4.

It is important to note the distinction between bare ownership and beneficial

ownership. A trustee merely has bare ownership. Consequently, the trust property

will not form part of a trustee's insolvent estate except in so far as the trustee is

entitled to trust property as a beneficiary.

Tito and his wife, Mary, create a trust and transfer shares in various companies to

the trust. Tito and Mary are appointed as trustees. Clause 5 of the trust instrument

provides that the income derived from the dividends paid on the shares will

accrue to Mary until she dies. Clause 6 provides that at Mary's death the shares

will be divided equally between their three children provided that the youngest

child has reached the age of twenty-five. Mary's estate is declared insolvent. The

Activity

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trustee of the insolvent estate claims that the shares and the dividends form part ofMary's insolvent estate. Tito approaches you for advice.

FeedbackMary is a co-trustee and a beneficiary of the trust. However, she is merely anincome beneficiary and not a capital beneficiary (see section 26.2.3). The trusteeof her insolvent estate will only be able to lay claim to the dividends which arepaid on the shares and not the shares themselves. The children are capitalbeneficiaries and the shares will eventually belong to them. The shares will notform part of Mary's insolvent estate except in so far as she is entitled to thedividends on the shares in her capacity as a beneficiary.

SELF-TEST QUESTIONS

(1) How must the trustee exercise her duties and powers?(2) A trustee has a right of indemnity and a right to remuneration. Discuss.(3) What are the consequences for a trustee if she fails to comply with her

duties?(4) Does trust property form part of the insolvent estate of the trustee? Explain.


(1) The trustee must, in the performance of her duties, act with the necessarycare and skill which can reasonably be expected from a person in herposition.

(2) The right to indemnity

The trustee is entitled to be indemnified from the trust property for expensesproperly incurred in the course of her administration. The trustee isindemnified from expenses such as rates, taxes, the cost of repair andmaintenance of trust property, and the cost of experts.

Right to remuneration

The trustee is entitled to remuneration for services rendered. The trustinstrument may prescribe the fee, or the founder and the trustee maynegotiate a fee. If the remuneration is not provided for in the trust instrumentand the parties do not agree on a fee, the trustee will be entitled toreasonable remuneration. If the parties are unable to agree on whatreasonable remuneration is, the Master will determine the remuneration.

For additional information, see section 26.7.3 of the textbook.

(3) There are basically the following three consequences:

. The Master or any person having an interest in the trust property mayapply for a court order directing the trustee to perform the duty.

. The Master may remove the trustee from office.

. The trustee will commit a breach of trust and may be personally liable.

(4) As a general rule, a trustee has bare ownership and trust property will notform part of her insolvent estate. However, if the trustee is also a beneficiary,trust property will form part of her insolvent estate.

section 2 study unit 3 | the administration of a trust 95

4S t u d y u n i t

The trust beneficiary and revocation,variation and termination of a trust

Prescribed reading material for this study unitHavenga chapter 26, sections 26.8, 26.9 and 26.10.

Lindiwe creates a trust inter vivos to provide for her children, Thabo and Thandi's,education. The trust instrument provides that the beneficiaries will be incomebeneficiaries. May Lindiwe revoke the trust and can Thabo and Thandi preventher from doing so? May the provisions of the trust be varied to include Zinsi, whowas born after the trust was created, as a beneficiary? After you have completedthis study unit you should be able to answer these questions.

1 IntroductionStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.8.26.8.

The vesting of the beneficiary's right will vary depending on whether the trust is atrust inter vivos or a trust mortis causa.

Draw up two columns in which you list the difference between the vesting of rightsof a trust inter vivos and a trust mortis causa. Now add to these lists the effect ofthe repudiation of the benefit by the beneficiary.

Feedback

TRUST MORTIS CAUSAVesting of rights

TRUST INTER VIVOSVesting of rights

The beneficiary need not accept thebenefits in order for the rights to vest.

The beneficiary must accept thebenefits in order for the rights to vest.

Effect of repudiation Effect of repudiation

If the beneficiary was an incomebeneficiary, the benefit may accrueto another income beneficiary or theclaim of a capital beneficiary will beaccelerated.

The trust property will be returned tothe founder.

If the founder cannot be found, thetrust property will be declared bonavacantia and accrue to the state.

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If the beneficiary was a capitalbeneficiary, the income beneficiaryacquires the benefit if her interest wasfiduciary in nature. If the interest wasnot fiduciary in nature, the residualprovisions of the trust instrument apply.

In the absence of residual provisions,the rules of intestacy will apply in thecase of a testamentary trust.

(Bona vacantia literally means thatthe property belongs to nobody.)

2 The beneficiary's rightsStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.8.1.26.8.1.


3 Revocation, variation and termination of a trustStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.9.26.9.

You must distinguish between revocation, variation and termination of a trustbecause the consequences attached to each of these processes differ. Forexample, after a trust has been revoked or terminated it ceases to exist. In thecase of variation, the trust continues to exist but the provisions of the trustinstrument differ.

In his will executed in 1899, the testator bequeathed to his son the residue of hisestate ``in trust to be applied to the founding and maintaining (of) a home fordestitute white children''. In consequence of this bequest in trust, the testator's sonestablished the Marsh Memorial Homes in Cape Town. However, as a result ofchanges in socio-economic circumstances the number of ``destitute whitechildren'' began to decline and the number of children accommodated in theMarsh Memorial Homes dropped from 120 to 60. The trustees, the MethodistChurch of South Africa, approach you for advice. Advise them whether theparticular provision of the trust can be varied. If so, what would they have toprove?

The above facts are based on the decision in Ex Parte President of the Conferenceof the Methodist Church of Southern Africa NO: In Re William Marsh Will Trust 1993(2) SA 697 (C).

FeedbackThe provisions of the trust can be varied. In this case, the trust founder is dead and,therefore, cannot vary the provisions of the trust. The trustees will have toapproach the court for an order to vary the provisions of the trust. The trustees willhave to prove to the satisfaction of the court that the provisions of the trustinstrument have brought about consequences which the founder of the trust did

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section 2 study unit 4 | the trust beneficiary and revocation, variation 97

not foresee. The court will furthermore have to be convinced that the provisionshave consequences which

(1) obstruct the objects of the founder, OR(2) prejudice the interest of the beneficiaries, OR(3) are in conflict with the public interest.If the court is convinced of the above it may delete or alter a provision or make anorder in respect thereof which the court deems just.

4 Trusts and other legal instrumentsStudy HavengaStudy Havengachapter 26, sectionchapter 26, section26.10.26.10.


SELF-TEST QUESTIONS

(1) When can a trust inter vivos be revoked?(2) When will a trust terminate?(3) What is a foundation?


(1) The founder may revoke the trust if she has reserved for herself the right torevoke the trust during her lifetime and if neither the trustee nor thebeneficiary has accepted either to act as trustee or a benefit in terms of thetrust. If either the trustee or the beneficiary has accepted, the trust may onlybe revoked with their cooperation and consent.

(2) A trust will terminate when

. the object of the trust is realised, or the trust has run its course and theprescribed scheme of distribution has been completed

. the trust property is destroyed without fault on the part of the trustee andnothing replaces the destroyed property

. no beneficiaries have been appointed

. acceleration of benefits of the capital beneficiary has taken place, afterrenunciation or repudiation of the benefit by the income beneficiary

. the court orders the cancellation of the trust

See section 26.9.3 of your textbook.(3) A foundation is a legal person consisting of a collection of assets for a

defined purpose and managed by administrators.

98

SECTION 3:THE LAW OF INSOLVENCYSECTION 3:THE LAW OF INSOLVENCY

CONTENTS

Study unit 1 Voluntary surrender and compulsory sequestration 100

Study unit 2 Effect of sequestration on the person and property of the insolvent and onuncompleted contracts 107

Study unit 3 Sequestration on property of the solvent spouse 115

Study unit 4 Impeachable dispositions 118

Study unit 5 Administration of the insolvent estate 122

Study unit 6 Composition and rehabilitation 125

Study unit 7 The winding-up of companies and close corporations 127

1S t u d y u n i t

Voluntary surrender and compulsorysequestration


Havenga chapter 27, sections 27.1, 27.2 and 27.3.

Mr A receives a letter from Mr B telling him that he is unable to pay Mr A the R5 000 he owes

him and will need at least two months extension because, as he states in the letter, he is

having difficulties at the moment in meeting all his obligations. Mr A hears that some of Mr

B's creditors have already issued summonses against B. Should Mr A do the same and see

who wins the race to get paid from whatever assets Mr B might have or are there other and

better options open to him? This is the type of question that we will answer in this study unit.

1 Introduction

1.1 THE PURPOSE OF A SEQUESTRATION ORDER


The word ``insolvent'' is used in two ways: firstly, a person whose liabilities exceed

his assets, is said to be insolvent even though his estate has not been sequestrated.

In the second instance, the term ``insolvent'' is used when referring to someone

whose estate has in fact been sequestrated by an order of court in terms of the

Insolvency Act 24 of 1936. It is important to remember that the consequences of

the Insolvency Act arise only after the debtor's estate has been sequestrated. No

change in the status of the debtor occurs until his estate is placed under

sequestration by order of court.

When a debtor's liabilities exceed his assets, one or two of his creditors who act

promptly will perhaps recover the full amount owing to them by taking judgment

against the debtor and having a warrant for execution issued. Their claims can

then be paid from the proceeds of a sale in execution of the debtor's assets. The

remaining creditors will find few or no assets in the estate for payment of their

claims.

The sequestration procedure is therefore in the first place aimed at achieving a fair

distribution of the available assets among competing creditors and preventing a

situation where one vigilant creditor gets paid in full because he was the quickest

to act against the debtor, while the other (more tardy) creditors get paid nothing

or barely anything at all.

As regards the debtor, he will never be able to extricate himself from his financial

difficulties as long as his unpaid creditors continue to harass him to pay them any

of the salary or income which he earns. Insolvency is not regarded as a crime and

sequestration as its punishment, and through sequestration the insolvent is given

100

the opportunity to eventually build up a new estate to which the creditors in his

insolvent estate cannot lay claim.

1.2 HOW TO OBTAIN A SEQUESTRATION ORDER

Only a High Court has jurisdiction to grant a sequestration order as it affects the

status of the insolvent debtor. The application for a sequestration order can be

brought by the debtor himself (application for voluntary surrender), or by one or

more of his creditors (application for compulsory sequestration).

1.3 WHICH ESTATES CAN BE SEQUESTRATED?

The Insolvency Act 24 of 1936 provides for the sequestration of the estates of

insolvent debtors. The process of sequestration is applicable only in the case of the

estates of natural persons and associations which do not enjoy legal personality,

such as partnerships and trusts. Companies and close corporations, which are

legal or juristic persons, are not regarded as debtors within the Insolvency Act and

have to be wound up or liquidated under the Companies Act 61 of 1973 or the

Close Corporation Act 69 of 1984. The winding-up of companies and close

corporations will be discussed below in study unit 7.

This exercise will assist you in understanding which estates are subject to

sequestration in terms of the Insolvency Act.

Indicate which of the following can be sequestrated in terms of the Insolvency

Act:

(1) The joint estate of spouses married in community of property. Yes/No

(2) A business owned by a single trader. Yes/No

(3) A trust. Yes/No

(4) A foundation. Yes/No

(5) A deceased estate. Yes/No

(6) A partnership. Yes/No

FeedbackWhere spouses are married in community of property, there is only one joint estate

and this joint estate must be sequestrated. In this case, both spouses will be

insolvents and will be affected in the same way by sequestration.

A business which is owned by a single trader forms part of the assets of such trader

and will be sequestrated as part of his estate in case of insolvency. Such a

business, which is not run in the form of a company or close corporation, is not a

separate legal person and thus is not subject to liquidation.

A trust does not enjoy legal personality in terms of our law, and the estate of a trust

must therefore be sequestrated.

A foundation, on the other hand, is a separate juristic person, and may not be

sequestrated, but must be liquidated.

A deceased estate which is found to be insolvent, may be sequestrated on

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section 3 study unit 1 | voluntary surrender and compulsory sequestration 101

application by the executor (voluntary surrender) or a creditor (compulsory

sequestration).

A partnership is not regarded as a legal person and therefore the estate of a

partnership can be sequestrated. In terms of the Insolvency Act, the estates of all

the partners must also be sequestrated simultaneously with the partnership estate.

2 Voluntary surrenderStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.2.27.2.

Owing to the fact that it is the insolvent debtor himself who applies for the

voluntary surrender of his estate, there are strict requirements that he has to

comply with before the court can accept the surrender. This is to prevent the

debtor from abusing the process for his own benefit. Paragraphs 2.1, 2.2, 2.3 and

2.4 indicate all the requirements that need to be complied with before a court

may accept an application for voluntary surrender.

2.1 FORMALITIES

As many creditors as possible must be made aware of the debtor's intention to

apply for the voluntary surrender of his estate because it will fundamentally affect

their claims if the court accepts the surrender. For this reason the Insolvency Act

requires the debtor to publish a notice of his intended application in the

Government Gazette and a local newspaper. He must also send a copy of this

notice to every creditor whose address is known to him. He must furthermore draw

up a statement of affairs in the prescribed form, containing particulars of all his

assets and his liabilities, which creditors can inspect before the date of the

application.

2.2 INSOLVENCY

The insolvent has to prove that he is in fact insolvent. The statement of affairs

mentioned above, will usually prove this, but the court may also accept other

evidence which proves actual insolvency.

2.3 TO THE ADVANTAGE OF CREDITORS

This is a very important requirement as the court will refuse the voluntary surrender

unless satisfied that sequestration will be to the advantage of the creditors as a

group. This is to prevent a debtor from simply using sequestration to rid himself of his

debts.

This is meant to show you how the requirement that sequestration must be to the

advantage of creditors is interpreted in practice.

A debtor applies for the voluntary surrender of his estate. The application is

opposed by one of his creditors, because the wife of the debtor, to whom he is

married out of community of property, has been making monthly payments to

creditors from her own salary. If the estate is sequestrated, she will stop making

these payments, and it is contended by the creditor that sequestration is thus not

to the advantage of creditors. What do you think would be the court's opinion on

this point?

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FeedbackIn an actual case resembling the above facts, the court held that the wife cannotbe forced to work and make payments to her husband's creditors. If she stoppedworking for reasons of ill-health, for example, the payments would stop. The court

therefore accepted the voluntary surrender of the debtor's estate, as it would beto the advantage of the creditors because of other reasons.

2.4 SUFFICIENT ASSETS TO COVER COSTS

This requirement is linked to the previous one, as there could obviously be no

advantage to creditors if there are not even enough assets to cover costs. Even ifthe costs can be covered, there should be enough assets left to pay a dividend tocreditors. Costs will include items such as Master's fees, trustee's fees, costs formaintaining and selling assets, et cetera.

3 Compulsory sequestrationStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.3.27.3.

In this case, the debtor's creditor or creditors are the applicants and because theydo not have at their disposal all the information which the debtor has, the burdenof proof resting on the applicant or applicants is generally lighter than in the case

of voluntary surrender. The following three paragraphs indicate the requirementsthat need to be complied with by the applicant creditor when he applies for thecompulsory sequestration of the debtor's estate.

3.1 LIQUIDATED CLAIM

A creditor with a liquidated claim of at least R100, or two or more creditors whotogether have liquidated claims of at least R200 against the insolvent, may bringsuch an application. A claim is liquidated if its amount has been ascertainedeither by way of agreement or through a judgment of the court. An example of a

liquidated claim would be the purchase price payable in terms of an agreementof sale; in other words, it is a definite and specific amount. A claim for damages,however, is not a liquidated claim, as it will only be ascertained after a specificsum has been awarded to the claimant in terms of a court order or agreement

between the parties. Thus, the applicant creditor must prove that he has thenecessary liquidated claim.

3.2 INSOLVENCY OR AN ACT OF INSOLVENCY

The applicant creditor must also prove that the insolvent (debtor) is indeedinsolvent, or that he has committed one or more of the act of insolvency. The actsof insolvency are fully discussed in paragraph 27.3.1 of Havenga.

Two acts of insolvency are actually contained in paragraph 27.3.1(b). The first one

is where the sheriff finds the debtor, requests him to satisfy the judgment orindicate sufficient disposable property to satisfy the judgment and the debtor failsto comply with any of the two requests. The second possibility arises only if the

sheriff cannot find the debtor at the address given in the warrant of execution. Inthis case the sheriff must try to find sufficient disposable property, and if he doesnot find anything, or enough to satisfy the judgment, this constitutes an act ofinsolvency as well.

The difference between the acts of insolvency described in paragraphs 27.3.1(e)


and 27.3.1(g) is that in the latter case the debtor must state clearly and in writing,

that he is unable to pay his debts or any one of his debts. Although an agreement

or offer will only constitute an act of insolvency in terms of 27.3.1(e), if it is an

indication of the debtor's inability to pay the full debt, and not mere unwillingness,

it need not be in writing and there does not have to be a specific statement that

he is unable to pay his debts.

This activity is intended to illustrate how certain acts of insolvency can come

about in practice and what the requirements are for some of them.

Which of the following would be regarded as an act of insolvency?

(1) The debtor leaves the country to visit his sister in England, without paying his

accounts which are due.

(2) The sheriff declares in his return that he could not find any disposable

property of the debtor to satisfy a judgment.

(3) The debtor advertises his property for sale at a price which is only about 60

percent of its real market value.

(4) The debtor meets one of his creditors in the supermarket, and suggests that

they should arrange a meeting to talk about the amount that the debtor

owes this creditor because the debtor is having financial difficulties at the

moment and would like to pay smaller monthly instalments.

Feedback(1) In itself, this is not an act of insolvency because the debtor's intention to

evade payment of his debts by his absence must be proved. More evidence

will be needed to infer such an intention.

(2) This is not sufficient for an act of insolvency, as the sheriff has to state that he

could not find the debtor at the stated address, and thereafter could not find

enough disposable property.

(3) Even an attempt by the debtor to dispose of his property which would have

the effect of prejudicing creditors, is sufficient to constitute an act of

insolvency.

(4) This is not an act of insolvency as the debtor has neither made a written

statement that he is unable to pay his debts, nor has he suggested any

release from his debts.

3.3 TO THE ADVANTAGE OF CREDITORS

The applicant creditor must also prove that there is reason to believe that the

sequestration will be to the advantage of the debtor's creditors. The lighter burden

of proof on the applicant is clear when looking at this requirement. When a debtor

applies for the voluntary surrender of his estate, he has to prove that it will be to the

advantage of his creditors. In the case of an application for compulsory

sequestration, however, the applicant need only prove that there is reason tobelieve that it will be to their advantage.

This activity is intended to draw your attention to the important differences

between voluntary surrender and compulsory sequestration.

Activity

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Complete the following table by summarising the requirements of each process asregards the aspects listed on the left.

(One has been completed for you as an example.)

Voluntarysurrender

Compulsory sequestration

Prior formalities

Applicant Debtor himself Creditor(s) Ð liq claim of R100 (R200)

Insolvency

Advantage tocreditors

Final order

FeedbackIn the case of voluntary surrender, the applicant, being the debtor himself, has tocomply with a whole range of prescribed formalities before he can approach thecourt, while the applicant for compulsory sequestration has virtually no priorformalities to comply with. If the court is satisfied that a voluntary surrender shouldbe accepted, a final order is granted immediately. Where the application is for acompulsory sequestration however, the court first grants a provisionalsequestration order which is served on the debtor, and a final order is only grantedon the return day.

SELF-TEST QUESTIONS

(1) What are the two main aims of sequestration?(2) Name the two ways in which a sequestration order can be obtained.(3) What requirements must be met before the court can accept an application

for voluntary surrender of an estate?(4) Who may apply to court for a compulsory sequestration order?(5) How does the requirement of ``advantage to creditors'' in the case of an

application for compulsory sequestration differ from that required for anapplication for voluntary surrender?

(6) Name the eight acts of insolvency and the elements of each that have to beproven.

(7) How can a notice of intention to apply for voluntary surrender of an estate bewithdrawn?


(1) The two main aims are to achieve a fair distribution of the available assetsamong creditors of the insolvent and to give the insolvent the opportunity toextricate himself from his financial difficulties and make a fresh start.

(2) The two ways are voluntary surrender and compulsory sequestration.(3) The applicant must prove that he has complied with the necessary


formalities, that he is indeed insolvent, that sequestration will be to theadvantage of his creditors and that there are sufficient assets to cover thecosts of sequestration.

(4) A creditor with a liquidated claim of at least R100,00 or two or more creditorswho together have liquidated claims of at least R200,00 against the insolvent.

(5) The burden of proof is lighter in the case of an application for compulsorysequestration, as the applicant need only prove that there is reason tobelieve that sequestration will be to the advantage of creditors. Theapplicant for voluntary surrender has to prove that it will be to the advantageof creditors.

(6) The answer to this is in section 27.3.1 of the textbook. Note the differencebetween acts of insolvency where intention has to be proved, and thosewhere effect is important.

(7) Such notice may only be withdrawn with the written consent of the Master.

106

2S t u d y u n i t

Effect of sequestration on the personand property of the insolvent and onuncompleted contracts


Mr B's estate has now been sequestrated and he has many questions. How will he support

his family; can he keep his present employment; what happens to his house and his car? Mr

C wants to know whether he can take back the freezer Mr B bought from him but has not as

yet paid for and Mr D needs to know if the contract between himself and Mr B whereby Mr B

bought an agricultural holding from him, has now been automatically terminated. This study

unit will answer these questions.

1 The legal position of the insolvent

1.1 HOLDING OFFICE


The disabilities imposed on an insolvent by the Insolvency Act itself and various

other statutes, are not intended as a punishment but rather as a way of protecting

the interests of members of the general public who are entitled to the assurance

that those who hold offices of responsibility are persons of stability and integrity.

An unrehabilitated insolvent is therefore not capable of being a member of the

National Assembly or a provincial legislature and may not be appointed as trusteein an insolvent estate or continue to act as one. Strangely enough, however, an

unrehabilitated insolvent may be appointed as executor of a deceased estate,

although the Master may, and surely will, require that security be furnished by the

nominated executor in such a case.

Furthermore, an unrehabilitated insolvent may not be the director of a company

or participate in the management of a close corporation unless the court

authorises such appointment.

1.2 EARNING A LIVELIHOOD

An insolvent may follow any profession or occupation or enter into any

employment, but he may not, without the consent in writing of his trustee, either

carry on or be employed in the business of a trader who is a general dealer or a

manufacturer. This prohibition is somewhat of an anachronism because it means

that an insolvent may be employed as a bank manager or do business as a

pawnbroker or auctioneer without the consent of his trustee, but would require

section 3 study unit 2 | effect of sequestration on the person and property 107

permission to be employed as a shop assistant in a large department store

(= general dealer) or to be a dressmaker (= manufacturer).

The aim here is to help you identify employment which is prohibited by the

Insolvency Act.

Indicate whether the insolvent may engage in the following types of employment

without the consent of his trustee:

(1) Act as a clown at children's parties Yes/No

(2) Farm Yes/No

(3) Work as an estate agent Yes/No

(4) Manage a garage Yes/No

(5) Work in a cafeÂ Yes/No

(6) Run a butchery Yes/No

FeedbackThe insolvent may engage in the activities in (1), (2), (3), (4) and (6) without the

consent of his trustee because he will not be a general dealer, but as a variety of

items are sold in a cafeÂ and not just goods of a particular type or kind, he will need

the consent of the trustee to work in or manage a cafeÂ .

1.3 OBLIGATIONS RELATING TO THE SEQUESTRATION PROCESS

In general, the insolvent has to do whatever is necessary to assist in the

administration of his insolvent estate. This includes the obligation to attend the

meetings of creditors, keep the trustee informed of his residential and postal

address, furnish full particulars of property which he has disposed of and, should he

be required to do so by his trustee, give a true and clear explanation of his

insolvency and why his liabilities exceed his assets.

1.4 CONTRACTUAL CAPACITY

No further explanation is required here.

2 The property of the insolvent

2.1 VESTING OF THE ESTATE IN THE TRUSTEE


The main object of the sequestration process is to liquidate the insolvent's estate

and to distribute the proceeds among his creditors. For this reason a sequestration

order immediately results in the insolvent losing ownership of his estate. The estate

vests in the Master of the High Court until a trustee is appointed, after which it vests

in the trustee. The estate remains vested in the trustee unless the insolvent is

revested therewith as a result of a composition which provides that the insolvent's

property will be restored to him (more about this in study unit 6). Even after

rehabilitation, the insolvent is not revested with his estate, and those assets which

vested in the trustee at the time of rehabilitation, remain vested in him to be

realised for the benefit of the creditors of the insolvent estate.

Activity

108

2.2 PROPERTY WHICH FALLS INTO THE ESTATE

Remember that not only those assets which the insolvent owns at the time of

sequestration will vest in the trustee. All other assets, except those specifically

excluded by law, which the insolvent may acquire during sequestration, that is

until rehabilitation (which could be a period of as long as ten years) also vest in the

trustee. Examples of such assets would include an inheritance or a donation

received during sequestration. As explained previously, sequestration of the joint

estate of spouses married in community of property results in the insolvency of

both spouses and the entire estate vests in the trustee, except of course those

assets specifically excluded by statute.

2.3 PROPERTY WHICH DOES NOT FALL INTO THE ESTATE

Study HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.2(a)±(f).27.4.2(a)±(f).

Certain property of the insolvent does not form part of the insolvent estate

because it is specifically excluded by the Insolvency Act or another Act, and will

therefore not vest in the trustee. This enables an insolvent to start accumulating a

new estate almost immediately after sequestration.

As far as remuneration for work done by the insolvent after sequestration is

concerned, the basic principle as stated in the Insolvency Act is that the insolvent

is entitled to such remuneration or salary. The trustee only becomes entitled to

money which the insolvent has received or will receive in the course of his

profession, occupation or employment after the Master has determined which

portion of such remuneration is not needed by the insolvent for the maintenance

of himself and his dependants. The trustee has to approach the Master and apply

for such a determination; if he does not, the insolvent remains entitled to his full

salary.

This activity should help you to recognise those categories of assets which an

insolvent may retain after sequestration of his estate.

The estate of Mr Jones is sequestrated on 10 January 1996. Which of the following

assets in his estate will vest in the trustee?

(1) The compensation he received in February 1996 for injuries sustained in a car

accident in April 1995.

(2) Wood carving tools (he does wood carving as a hobby).

(3) Two antique chairs he inherited from his father in March 1996.

(4) A life insurance policy valued at R80 000 which he took out on his own life in

1989 and one he took out in 1992 valued at R20 000.

FeedbackMr Jones will be able to keep the compensation he received as a result of the car

accident because he received payment after sequestration, although the

accident took place before sequestration. He can also keep R50 000 of the total

value of the life insurance policies, because they were taken out more than three

years before sequestration, but R50 000 will go to the insolvent estate. The wood

carving tools are not essential to earn his livelihood and will also vest in the

insolvent estate. It is unlikely that he will be allowed to keep the antique chairs as

they are not essential pieces of furniture and could be worth a substantial amount

of money.

Activity


3 Legal proceedings not yet finalisedStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.3.27.4.3.

As a general rule, civil proceedings instituted by or against an insolvent are stayed

on the sequestration of the estate until the appointment of a trustee. This would

include any sale in execution by the sheriff as a result of judgment taken againstthe insolvent before sequestration. The insolvent may, however, sue or be sued in

his own name and without reference to his trustee in the case of certain specified

matters, such as divorce or in matters dealing with assets excluded from theinsolvent estate, such as a claim for compensation for loss or damage as a result of

personal injury or defamation, or for remuneration or pension.

4 Uncompleted contracts

4.1 GENERAL PRINCIPLES


The effect of sequestration of the estate of one of the parties to an uncompleted

contract is governed by the principles of the common law, unless specificstatutory provision has been made for that type of contract. By ``uncompleted''

we mean a valid contract where one or both of the parties to the agreement still

have to deliver or fulfil performance.

In general, a contract is not automatically terminated if the estate of one of the

parties is sequestrated. One important exception to this rule is the contract of

mandatum where the insolvent has given instructions to someone like an attorney,architect or auditor to render professional services to him. Such a contract will

automatically terminate if the estate of the principal (the person who gave the

instructions) is sequestrated.

The trustee has the power to repudiate a contract; in other words, he may decide

not to perform in terms of that agreement. In this regard he must act in the best

interests of the creditors and they may give him instructions on whether he shouldperform or repudiate. Repudiation by the trustee will still be breach of contract,

but, contrary to other cases of breach of contract, the other party does not have

the right to claim specific performance from the trustee of an insolvent estate, butcan only claim damages. In most cases this will only be a concurrent claim.

Three possibilities exist regarding uncompleted contracts: where the insolvent has

performed but the other party has not, where neither party has as yet performedand where only the other party has already performed. These are dealt with in

sufficient detail in the textbook.

4.2 CONTRACTS FOR WHICH SPECIFIC RULES APPLY

4.2.1 Contracts of employmentStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.4.1.27.4.4.1.

No further explanation is necessary.

4.2.2 Instalment sale transactionsStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.4.2.27.4.4.2.

For this section to be applicable, the contract has to meet with the following three

requirements:

(1) It must be for a sale of movable property, such as a car or furniture.

(2) The purchase price must be payable in part or in full in instalments.

110

(3) It must be stipulated that ownership will not pass to the buyer on delivery to

him of the sold goods, but only after the full purchase price has been paid by

him to the seller.

(Remember that only the situation where the estate of the purchaser is

sequestrated, is regulated by the Insolvency Act.)

4.2.3 Sale of movable property for cashStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.4.3.27.4.4.3.

The reason for this provision in the Insolvency Act is the principle that a cash buyer

of movables does not become the owner of the sold goods on delivery unless he

has paid the purchase price. The best example of a situation where this section

would be applicable is where the purchaser pays by cheque, and the bank then

refuses to honour the cheque owing to a lack of funds in the account of the

purchaser. Note that the seller only has ten days after delivery to reclaim the

goods and not ten days after sequestration. After the ten-day period he loses his

claim, and will be left with only a concurrent claim for damages.

This activity is intended to show you how the various rules regarding uncompleted

contracts operate in real life.

Mr A sells a bull to Mr B for R60 000 by way of an oral agreement of sale. In terms of

the agreement, Mr B pays R30 000 on delivery of the bull to him, and he

undertakes to pay the balance of the purchase price at the end of the next

month. A week after the bull has been delivered to Mr B, his estate is sequestrated.

Can Mr A reclaim the bull because the full purchase price has not as yet been

paid, or does he have a secured claim for the balance of the purchase price?

FeedbackAlthough less than ten days have elapsed since delivery of the bull, Mr A cannot

reclaim the bull since this is not a cash sale as only half of the purchase price was

payable immediately, while credit was given for the other half. This agreement

therefore does not fall within the ambit of the special protection discussed in 4.2.3

above. Furthermore, this is not an instalment sale transaction, as no mention is

made of a reservation of ownership by the seller until the full purchase price has

been paid. This means that Mr A only has a concurrent claim for the amount still

owing to him by Mr B and the insolvent estate remains the legal owner of the bull.

4.2.4 Sale of immovable propertyStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.4.4.27.4.4.4.

The protection afforded to the purchaser of immovable property by the Alienation

of Land Act in the case of insolvency of the seller, only applies if the following

conditions are met:

(1) The purchase price must be payable in more than two instalments.

(2) It must be payable over a period exceeding one year.

(3) The property must be registrable land which is intended mainly for residential

purposes; in other words, not a farm or an agricultural holding.

Activity


In such a case, protection of the purchaser who has not as yet received transfer

from the insolvent seller, takes two forms: the purchaser may take transfer or, if he

prefers not to do so, he has a secured claim for repayment of the amount he has

already paid on the purchase price. The second form of protection, however, is

only available to the purchaser if the contract of sale has been recorded against

the title deeds of the property.

4.2.5 Contracts of leaseStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.4.4.5.27.4.4.5.

In principle, the trustee selling immovable property from the insolvent estate must

sell it subject to any contract of lease which is still valid. The reason for this is the

common law rule of ``huur gaat voor koop''. However, this protection is not

absolute. Where the property in question is subject to a mortgage bond which

was passed prior to the lease, the trustee should in the first instance put it up for

sale provisionally subject to the lease. If the highest offer he receives is not

sufficient to cover the amount of the mortgage bond, then the property must be

put up for sale free of the lease.

SELF-TEST QUESTIONS

(1) Name three offices which an unrehabilitated insolvent may not hold.

(2) May an unrehabilitated insolvent be appointed as a director of a company?

(3) What are the restrictions on an insolvent as regards the occupation or

profession he may follow?

(4) How is the insolvent's capacity to conclude contracts affected by

sequestration of his estate?

(5) List the five main categories of assets which are excluded from the insolvent

estate.

(6) What are the general principles which apply when establishing the effect of

sequestration on uncompleted contracts?

(7) Name two contracts that lapse automatically on sequestration.

(8) Define an instalment sale transaction.

(9) What effect does sequestration of the estate of the purchaser have on an

instalment sale transaction?

(10) Under what circumstances will the purchaser of immovable property enjoy

special protection if the estate of the seller is sequestrated? What is the

nature of this protection?

(11) What is the effect of sequestration of the lessor's estate on a contract of

lease of immovable property? Is the effect the same where movable

property is concerned?


(1) He may not be a member of the National Assembly or a provincial legislature

and may not be a trustee of an insolvent estate.

(2) Only if authorised thereto by the court.

(3) He may not carry on or be employed in the business of a trader who is a

general dealer or a manufacturer unless he has the written consent of his

trustee.

(4) The insolvent may not dispose of any property of the estate and must have

the written consent of his trustee to conclude any contract which might

adversely affect his estate or any contribution he has to make to the insolvent

112

estate. (This contribution refers to those cases where the Master has made a

determination that part of the salary of the insolvent must be paid into the

insolvent estate.) Apart from these limitations, he has normal contractual

capacity.

(5) Assets which are excluded from the estate are

(a) clothes, bedding and essential furniture, tools and other means of

subsistence

(b) remuneration for work done after sequestration

(c) pension for services rendered by the insolvent

(d) compensation for loss suffered by the insolvent in his personal capacity

and paid to him after sequestration

(e) part of the value of certain life insurance policies

(6) Sequestration does not as a rule automatically terminate contracts to which

the insolvent is a party. The trustee has the choice, guided by the wishes of

the creditors and the best interests of the insolvent estate, whether to

repudiate an uncompleted contract or whether to proceed with its

execution.

If the insolvent has already performed but the other party has not, the trustee

will claim performance from the other party.

If the other party has performed, but the insolvent has not, the trustee may

uphold the contract or repudiate it. If he decides to repudiate, the other

party will only have a concurrent claim for the return of his performance as

well as for damages.

If none of the parties has performed as yet, the trustee can claim

performance from the other party, but then has to tender full performance of

the obligations of the insolvent estate. If he decides to repudiate, the other

party will have a concurrent claim for damages against the insolvent estate.

The other party does not have the right to specific performance by the

insolvent estate.

(7) A contract of employment where the insolvent is the employer, and a

contract of mandatum where the insolvent is the mandator.

(8) An instalment sale transaction is a contract for the sale of movables where

the purchase price is partly or fully payable in instalments and the contract

contains a stipulation that ownership will not pass to the purchaser on

delivery of the goods but only after he has paid the full purchase price.

(9) Sequestration of the purchaser's estate causes ownership of the sold goods

to pass to the insolvent estate and the seller obtains a secured claim for the

balance of the purchase price still owing to him. His security is in the form of a

hypothec over the sold goods.

(10) Protection is given to the purchaser of immovable property by the Alienation

of Land Act under the following circumstances:

(a) The purchase price must be payable in more than two instalments.

(b) Over a period exceeding one year.

(c) The property must be registrable land intended mainly for residential

purposes.

The purchaser may take transfer of the property against payment of transfer

costs and the balance of the purchase price or certain specified

administration costs, whichever is the greater of the two. If he does not want

to take transfer, he will have a secured claim against the insolvent estate for

the amount already paid by him, on condition that the contract was

registered against the title deeds of the property.


(11) The lessee of immovable property enjoys limited protection because of thecommon-law rule of ``huur gaat voor koop''. This means that the trustee hasto sell the property subject to the lease. If, however, there is a bond over theproperty which was registered before the lease, and the trustee cannot getan offer for the property which is enough to cover the amount of the bond,he can put it up for sale again, this time without the lease.

The above rule does not apply to movables, and in due course the trustee willrepudiate the lease to enable him to sell any movable asset subject to alease. The lessee will have a concurrent claim for damages.

114

3S t u d y u n i t

Sequestration on property of thesolvent spouse



Mrs B runs a small business from home. To her dismay she discovers that the sequestration of

the estate of her husband, to whom she is married out of community of property, will have a

serious effect on her estate as well. Can she continue with her business and what can she

do to protect her interests? You must be able to answer this question at the end of the unit.

1 IntroductionThe reason why this provision was originally introduced into the Insolvency Act was

to assist the trustee in getting hold of assets which really belonged to the insolvent

estate, but which were fraudulently transferred to the solvent spouse in an

attempt to keep these assets outside the insolvent estate. The burden of proof

now rests on the solvent spouse, who obviously has the necessary information and

documentation, to prove that he is entitled to the assets, instead of the trustee

having to prove that they really belong to the insolvent estate.

This provision was particularly effective when the common-law prohibition against

donations between spouses still existed and such donations did not give the

beneficiary of the donation a valid title to the gift. The prohibition was revoked by

legislation in 1984, however, and the section has since lost much of its usefulness.

2 Assets that have to be releasedThese categories are explained quite clearly in the textbook (see the (a)±(d) list, as

discussed in Havenga) and need no further explanation here.

This activity is intended to show you how the various assets of the solvent spouse

can be classified for purposes of their release from the insolvent estate.

Which of the following assets of the solvent spouse will have to be released by the

trustee, and why? (For purposes of this activity we will assume that the parties were

married in December 1990 and the estate of the husband was sequestrated in

June 1996.)

(1) R50 000 which she inherited from her grandmother in February 1996.

Activity

section 3 study unit 3 | sequestration on property of the solvent spouse 115

(2) A car which she bought in February 1992 by trading in her husband's old car

as a deposit, and paying the monthly instalments from her own salary.

(3) A life insurance policy valued at R500 000 taken out by her husband in 1988

and ceded to her in May 1996.

(4) The family home registered in her name although her husband made the

monthly repayments to the bank.

(5) Furniture she bought with her pension money which was repaid to her when

she resigned from her job just before getting married.

Feedback(1) The solvent spouse will be able to keep the inheritance as she holds it by valid

title.

(2) The deposit can be regarded as a valid donation from her husband, and as

she paid the instalments from her own salary, she also holds the car by valid

title.

(3) Although the donation of a life insurance policy is legally possible, the fact

that he held the policy in his own name for many years, ceding it only one

month before sequestration, makes it clear that this was not a true donation,

but an attempt to remove it from the control of the trustee. The trustee will

have every reason to refuse release of the policy.

(4) This is also a donation from her husband, and will have to be released on the

grounds that she holds it by title valid as against the creditors of the insolvent

estate.

(5) This will have to be released as she was the owner of these assets before her

marriage to the insolvent.

SELF-TEST QUESTIONS

(1) Which persons qualify as spouses in terms of the Insolvency Act?

(2) Name the four categories of property of the solvent spouse that have to be

released by the trustee of the estate of the insolvent spouse.

(3) Name three ways in which a solvent spouse can acquire property during the

course of the marriage which will give him valid title against the creditors of

the insolvent spouse.

(4) What happens to property of the solvent spouse which is not released by the

trustee?

(5) What special provision has been made for a solvent spouse carrying on a

business?


(1) The term has been given an extended meaning in the Act and includes not

only spouses married according to any law or custom, but also a man and

woman who are not legally married but who live together as husband and

wife.

(2) Property which belonged to the solvent spouse immediately before the

marriage, property which was acquired in terms of an antenuptual contract,

property which was acquired during the course of the marriage with title

valid against the creditors of the insolvent spouse and the proceeds of

property which would have been released or assets acquired with such

proceeds.

116

(3) Donation, inheritance or own income.(4) The trustee has to sell it but the proceeds must be used to pay the creditors of

the solvent spouse first. Only if there is any balance of the proceeds of theseassets left after such payment, can it be used to pay creditors of the insolventspouse.

(5) Such spouse can obtain an urgent court order to postpone the vesting of allor some of his assets in the Master or trustee, on condition that security isgiven to the insolvent estate for the value of such assets. This gives the solventspouse the opportunity to prove that he is entitled to the release of theproperty, in which case it will not vest in the insolvent estate.

section 3 study unit 3 | sequestration on property of the solvent spouse 117

4S t u d y u n i t

Impeachable dispositions


The trustee of Mr B's estate discovers that Mr B gave a valuable painting to his brother two

months before sequestration as payment for an amount that he owed him and could not

repay. Six months before sequestration Mr B also registered a bond over his home as security

for an amount he borrowed from a friend more than a year ago. These creditors are

obviously much better off now than Mr B's other creditors, which does not seem fair. Can

the trustee or creditors do something about it?

1 IntroductionStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.6, introductory27.6, introductoryparagraphs.paragraphs.

The term ``disposition'' is defined in the Insolvency Act and has been given a very

wide meaning to include any transfer or abandonment of rights to property by the

insolvent before sequestration. Examples of dispositions which would fall under the

definition include sales, leases, mortgages, pledges, deliveries, payments,

releases, compromises, donations and suretyships. A disposition made in

compliance with an order of court is specifically excluded, because the debtor

does not make the disposition voluntarily. He is compelled to make the disposition

and has no choice in the matter.

The reason why the trustee is conferred with the power to apply to court to have

certain dispositions made by the insolvent before sequestration set aside, is to

restore the balance between creditors which has been adversely affected by

these dispositions. You will notice that the trustee always has to prove that

creditors have been unfairly prejudiced or that one or more creditors have been

preferred above the others, that is, that they have received a benefit which the

others have not.

If the application of the trustee is successful, the recipient of the disposition has to

return the asset or its value to the insolvent estate. One exception here is in the

case where the recipient acted in good faith and gave up any property, security

or right in return for the disposition. The trustee's right to have the disposition set

aside in such a case, is not affected, but he cannot compel the recipient to return

the benefit until he has given the recipient an indemnity.

This activity is intended to show you how the exception discussed in the previous

paragraph would come into effect.

Mr B owes Mr F an amount of R2 000. As security for this debt, Mr B gives Mr F two

Krugerrands in pledge. Five months before sequestration, Mr B repays Mr F and Mr

Activity

118

F returns the Krugerrands to Mr B. He is unaware of the fact that Mr B is insolvent.

The trustee succeeds in having this payment set aside as a voidable preference.

Will Mr F have to return the payment and become a mere concurrent creditor?

FeedbackIf Mr F was in good faith and unaware of Mr B's insolvency, he can rely on the fact

that he gave up his security, namely the Krugerrands which he held in pledge, in

return for the payment. He will therefore not be obliged to return the payment

unless the trustee indemnifies him for the loss of his right of pledge. In effect this will

mean that the trustee will either have to return the Krugerrands in pledge to Mr F or

he will have to allow Mr F to keep the repayment.

2 Dispositions not made for valueStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.6.1.27.6.1.

The question of how long before sequestration the disposition was made is

important. Although there is no time limit, a distinction is made between

dispositions that took place more than two years prior to sequestration, and those

that took place within the two years prior to sequestration. In the case where the

disposition took place more than two years, the trustee has to prove that the

insolvent's liabilities exceeded his assets immediately after the disposition was

made. If the disposition took place within two years prior to sequestration,

however, the onus is on the beneficiary of the disposition, if he opposes the setting

aside thereof, to prove that the insolvent's assets exceeded his liabilities

immediately after the disposition.

3 Voidable preferencesStudy Havenga chapterStudy Havenga chapter27, section 27.6.2.27, section 27.6.2.

This is explained in sufficient detail in the textbook.

4 Undue preferencesStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.6.3.27.6.3.

The intention to prefer, which must be proven by the trustee, pertains to the motiveor state of mind of the insolvent, and is based on a subjective test. The trustee can

do no more than prove surrounding circumstances which would point to such an

intention. One example would be where the trustee can prove that the insolvent

really knew at the time of making the disposition that his situation was hopeless

and that sequestration was inevitable. On the other hand, should it appear that

the insolvent had other and stronger motives for making the disposition, such as his

desire to escape criminal prosecution or to gain time in which to extricate himself

from his financial difficulties, an intention to prefer will not be proven.

5 Collusive dispositionsStudy Havenga chapterStudy Havenga chapter27, section 27.6.4.27, section 27.6.4.

Two things distinguish collusive dispositions from undue preferences:

section 3 study unit 4 | impeachable dispositions 119

Firstly, not only the insolvent but also the other party to the collusion must have theintention to prefer or prejudice creditors. This means that the debtor and the otherparty must have known that the debtor was insolvent and that the dispositionwould have this effect.

Secondly, the collusion does not have to take place between the insolvent and acreditor of the estate, but may be between the insolvent and any other person orparty. An insolvent and a member of his family or a friend could, for example,come to an agreement that an asset of the estate should be sold to this particularperson in order to put it out of reach of the creditors.

The aim of this activity is to assist you in identifying the distinguishing features ofeach of the abovementioned impeachable dispositions. You merely need to fill inthe table below.

The first aspect of each type of disposition refers to the period of time beforesequestration within which the disposition must have taken place; the secondaspect refers to the point in time at which the liabilities of the debtor making thedisposition must have exceeded his assets; the third aspect would cover the effector intention which is required in each case and the fourth aspect would bewhether the beneficiary can raise any defence to avoid the setting aside of thedisposition.

Without value Voidable pref Undue pref Collusion

Period beforesequestration

six months

When insolvent Immediatelyafter disposition

Specialcharacteristic

Intention toprefer creditor

Defence none

FeedbackRemember that although there is no time limit in the case of a disposition withoutvalue, the burden of proof is affected by the question whether the disposition tookplace more than two years before sequestration or not.

6 Voidable transfer of a businessStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.6.5.27.6.5.

You will remember that one of the acts of insolvency listed in section 27.3.1(h) ofthe textbook was where a trader had given notice of the intended transfer of hisbusiness and was unable to pay his debts. This notice refers to the one which isrequired by the Insolvency Act when a trader transfers his business to somebodyelse in terms of a contract. Creditors have to be informed of the transfer before ittakes place. Note that the notice must be published by any trader transferring hisbusiness, and not merely a trader who is insolvent or in any financial difficulty. A``trader'' is very widely defined in the Insolvency Act, and includes any person

Activity

120

who buys or sells anything, is involved in building operations or publicentertainment, is a hotel or boarding-house keeper and even an estate agent.Farmers selling their own produce are specifically excluded from the definition.

SELF-TEST QUESTIONS

(1) Name five examples of transactions which would fall under the definition of adisposition in terms of the Insolvency Act.

(2) What are the requirements for a successful defence of ``immediate benefit''against an application for setting aside a disposition without value?

(3) Compare the requirement of preference to creditors in the case of voidablepreferences and undue preferences.

(4) What are the penalties for a creditor of the insolvent estate who is a party toa collusive disposition?

(5) Under what circumstances, for how long and against whom will the transferof the business of a trader be void?


(1) Any of the following: a sale, registration of a bond, payment, donation, lease,pledge, delivery, release, compromise and suretyship.

(2) The benefit must have been conferred

Ð by a husband to his wife or a child born of the marriageÐ within three months after conclusion of the marriageÐ in terms of a duly registered antenuptial contractÐ and the estate of the husband must not be sequestrated within two years

after registration of the antenuptial contract

(3) One of the requirements for proving a voidable preference is that thedisposition must have had the effect or result of preferring one of the debtor'screditors above another. No such intention on the part of the debtor needsto be proven although the lack of such an intention is part of the defencethat can be raised by the beneficiary. In the case of an undue preference,however, the trustee must prove that the debtor intended to prefer one of hiscreditors above another.

(4) The creditor has to return the benefit to the insolvent estate, compensate theestate for any loss which the disposition caused, and may be ordered to paya penalty to the estate as determined by the court, but not exceeding theamount by which the disposition would have benefitted him had it not beenset aside.

(5) If a trader has transferred his business in terms of a contract and has notpublished the required notice, the transfer will be void as against his creditorsfor a period of six months after the transfer. If the estate of the trader issequestrated within this six-month period, the transfer will be void as againstthe trustee of the insolvent estate, which means that the trustee will be ableto reclaim the business for the insolvent estate. The only two exceptions to thisare made where the transfer of the business took place within the ordinarycourse of that business or in order to give security for the payment of a debt.

section 3 study unit 4 | impeachable dispositions 121

5S t u d y u n i t

Administration of the insolvent estate

Prescribed reading material for this study unitHavenga chapter 27, sections 27.7, 27.8, 27.9 and 27.10.

In this study unit we will look at the actual administration of the insolvent estate after a final

sequestration order has been granted. Who administers the estate and how are the

creditors involved? Are all creditors equal or who gets paid first?

1 The trusteeStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.727.7

Nothing needs to be added to the textbook.

2 Meetings of creditorsStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.827.8


3 Proof of claims by creditors and realisation anddivision of the estate

Study HavengaStudy Havengachapter 27, sectionschapter 27, sections27.9 and 27.1027.9 and 27.10

Creditors are classified or ranked into one of the following three groups: secured,preferent and concurrent creditors.

3.1 SECURED CREDITORS

A secured creditor is a creditor who holds security for his claim, that is, the right tobe paid first out of the proceeds of the property over which he holds security afterpayment of certain expenses. One asset can serve as security for more than oneclaim, in which case one will rank before the other depending on the type ofsecurity and the date on which it was given. Assets which are subject to securityare called encumbered assets in contradistinction to unencumbered assets whichare not subject to any such rights, and form the free residue of the estate.

The Insolvency Act gives a precise list of the different types of security which willmake a creditor a secured creditor in the case of insolvency of the debtor. Theseare

(1) a special mortgage which could be a mortgage bond over immovableproperty or a notarial bond over specially described movable property

(2) a landlord's legal hypothec for rent owing to him, over the movable propertyof the tenant on the leased premises

122

(3) the hypothec that the seller of movable property under an instalment sale

transaction acquires over that property on sequestration of the estate of the

purchaser, for the amount still payable in terms of the contract

(4) a pledge, which comes into effect when the debtor delivers movable

property to the creditor which the latter is entitled to hold until the debt has

been paid

(5) a right of retention or lien which can be defined as a right conferred by

operation of law on a person who is in possession of someone else's property,

to retain possession of that property until he has been paid for work he has

done on that property, or expenses he has incurred in respect of the property

3.2 PREFERENT CREDITORS

The term ``preferent creditors'' can be used in its wide sense to include all creditors

who have the right to receive payment of their claims before others, and this

would then include secured creditors. In the narrower sense, preferent creditors

are those creditors who do not hold any security for their claims but are entitled to

be paid before concurrent creditors, although after secured creditors.

3.3 CONCURRENT CREDITORS

These are the creditors who hold no security for their claims and do not enjoy any

preferential right to payment. Apart from being last in line for payment of their

claims, they might even be required to make a contribution towards the costs of

sequestration instead of receiving any payment on their claims. For this reason

creditors without security or any preferent right to payment, very often decide not

to risk proving a claim against the estate.

This activity is intended to assist you in recognising the various types of claims.

Indicate what type of claim arises from each of the following and, in the case of

secured claims, on what grounds:

(1) general bond over movable property

(2) amount owing to seller of movables under an instalment sale agreement

(3) special bond over immovable property

(4) funeral expenses of the insolvent's wife

(5) contributions payable by an insolvent employer to the Compensation

Commissioner

(6) instalments paid by purchaser in terms of an instalment sale transaction in the

case of insolvency of the seller

FeedbackThe claims are

(1) the last preferent claim in the line-up

(2) a secured claim based on hypothec

(3) a secured claim based on a special bond

(4) a preferent claim up to an amount of R300 and a concurrent claim for the

balance of the funeral expenses

(5) a preferent claim

Activity

section 3 study unit 5 | administration of the insolvent estate 123

(6) a concurrent claim as no provision is made in the Insolvency Act forinsolvency of the seller

SELF-TEST QUESTIONS

(1) When and by whom is a provisional trustee appointed? And a trustee?(2) What are the main purposes of the first and second meeting of creditors

respectively?(3) What is an encumbered asset?(4) Name the five types of security that would give a creditor a secured claim

against the insolvent estate.(5) Explain what the free residue is and the order in which it has to be applied to

pay creditors of the insolvent estate.(6) How is the dividend payable to concurrent creditors calculated?


(1) The Master may appoint a provisional trustee as soon as an estate has beenprovisionally or finally sequestrated. A trustee is elected at the first meeting ofcreditors by those creditors who have proved their claims against the estate.His election must be confirmed by the Master.

(2) The first meeting of creditors is held to enable creditors to prove their claimsagainst the estate and for the election of a trustee. The second meeting isalso held for the proof of claims, but another important reason for it is that thecreditors have the opportunity to instruct the trustee about the administrationof the estate.

(3) An encumbered asset is an asset which serves as security for a claim againstthe insolvent estate.

(4) Special bond over movable or immovable property, landlord's hypothec,instalment sale hypothec of seller, pledge and right of retention or lien.

(5) The answer to this can be found in section 27.10 of chapter 27 of thetextbook.

(6) If there is any free residue left for distribution to concurrent creditors, the totalamount available is divided by the total amount of concurrent claims toobtain a dividend payable to each concurrent creditor. For example, R1 000free residue to pay claims totaling R5 000 would give a dividend of 20 centsfor each rand claimed.

124

6S t u d y u n i t 6

Composition and rehabilitation


Havenga chapter 27, sections 27.11 and 27.12.

After the sequestration of his estate, Mr B is quite discouraged. Will he always be subject to

the present controls and limitations, or will he be allowed to make a fresh start at some

stage?

1 CompositionStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.11.27.11.

Note that if an offer of composition has been accepted by the required creditors

in number and value, all creditors are bound except in so far as their claims aresecured or otherwise preferent. This basically means that only concurrent creditors

are bound, and for this reason the votes of secured creditors are only taken into

account for that part of their claim that is unsecured. Preferent creditors, however,

have the full amount of their claims taken into account for voting purposes.

An insolvent is not entitled to apply for rehabilitation after any composition has

been reached, but only if he is paying his concurrent creditors at least fifty cents in

the rand. Even in such a case, the insolvent may not prescribe as a condition of

the composition that he is to receive his rehabilitation, as the question of

rehabilitation must be judged by the court.

It may be made a condition of the composition that the property of the insolvent

estate must be returned to the insolvent, even if no rehabilitation takes place. This

is very often the reason why an offer of composition is made in the first place,

when funds for the composition are made available to the insolvent estate by

friends or family of the insolvent for the specific purpose of having him revested

with his assets.

Our courts have the power to set aside an acceptance of an offer of composition

if it was induced by an improper motive, even a well-meaning one such as a

feeling of pity for the insolvent. The composition should be to the benefit of the

creditors, in that they will receive a larger dividend on their claims, or be paid

sooner than would be the case if the sequestration process runs its course, or

something similar.

2 RehabilitationStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.12.27.12.

Remember that although it is the insolvent's estate that is sequestrated, it is the

insolvent person who is rehabilitated.

section 3 study unit 6 | composition and rehabilitation 125

SELF-TEST QUESTIONS

(1) What are the two main differences between a common-law compositionand a composition in terms of the Insolvency Act?

(2) Which creditors are entitled to vote on an offer of composition?(3) What effect does a composition have on the rehabilitation of the insolvent?(4) What is the effect of a composition on the assets in the insolvent estate?(5) Name the two ways in which an insolvent can be rehabilitated.(6) Name four factors which would influence the period of time that has to

elapse between sequestration and an application for rehabilitation.


(1) A common-law composition has to be reached before sequestration andmust be accepted by all creditors in order to serve any real purpose as it isonly binding on those creditors who have accepted the offer. A compositionin terms of the Insolvency Act can only be reached after the first meeting ofcreditors has taken place and only three-quarters in number and value of thecreditors have to accept the offer to make it binding on all concurrentcreditors.

(2) All creditors are entitled to vote, but a secured creditor is only entitled to votein respect of the amount by which his claim exceeds the value of his security.

(3) A composition that provides for payment of a dividend of at least fifty centsin every rand entitles the insolvent to a certificate to that effect from theMaster, and on the strength of this he can immediately apply to court for arehabilitation order.

(4) It can be made a condition of the composition that the insolvent shall berevested with his property or part thereof, and if the composition is accepted,the trustee is bound to return such assets to the insolvent.

(5) Automatically after ten years or by order of court within the ten-year period.(6) Whether or not all claims have been paid in full; no claims were proved

against the insolvent estate; this was the first time the insolvent's estate hasbeen sequestrated; whether the insolvent has committed any offencesrelating to his insolvency.

126

7S t u d y u n i t

The winding-up of companies andclose corporations


After completing this unit you should be able to

. describe the different modes of winding-up of a company and a close corporation and

explain when each one is used

. explain which parties may apply to court for winding-up

. know when a company or a close corporation will be deemed to be unable to pay its

debts

. set out the consequences of a winding-up order

. explain when directors, officials or other persons of a company may be held personally

liable by the liquidator

. explain when members or other persons of a close corporation may be held personally

liable by the liquidator

. distinguish between a compromise a company concludes with its creditors and a

composition a close corporation concludes with its creditors

1 IntroductionStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.13, the27.13, theintroductionintroductionparagraph.paragraph.

In study unit 1 (see paragraph 1.3 in study unit 1) of this section it was alreadyindicated that companies and close corporations are not regarded as debtors forpurposes of the Insolvency Act and therefore cannot be sequestrated.Companies and close corporations that have become insolvent can, dependingon the case, be wound up under the Companies Act or the Close CorporationsAct. However, it is important to remember that winding-up or liquidation can alsotake place for reasons other than insolvency, for example because the companyor close corporation failed to commence business within one year after itsregistration, or because it suspended its business for a whole year. For purposes ofthis study unit we will only concentrate on insolvent companies and closecorporations.

2 Modes of winding-upStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.13.1.27.13.1.

A company or a close corporation may either be wound up

. by way of a special resolution of the members of a company or a written

section 3 study unit 7 | the winding-up of companies 127

resolution of all the members of a close corporation (called a voluntary winding-up); or

. by way of a court order (called a compulsory winding up).

2.1 VOLUNTARY WINDING-UP

Study HavengaStudy Havengachapter 27, sectionchapter 27, section27.13.1.1.27.13.1.1.

A voluntary winding-up can either be

. a members' voluntary winding-up; or

. a creditors' voluntary winding-up.

In the case of a winding-up by the court (see paragraph 2.2 below), it is the courtthat decides whether or not the company will be placed in liquidation. In the caseof a voluntary winding-up, the court is not involved at all. Both forms of voluntaryliquidations are initiated in the same way, namely by registration of the resolutionof members. A voluntary winding-up commences when the resolution is properlyregistered at the Registrar of Companies or of Close Corporations.

In the case of a member's voluntary winding-up, the creditors really have nointerest in the liquidation process, since security for the full payment of their claimsagainst the company would have been provided for. Accordingly, a member'svoluntary winding-up takes place under the control of the members, and acreditor's voluntary winding-up under the control of the creditors.

When you study this part of Havenga you must make sure that you understandwhat the difference is between a member's voluntary winding-up and a creditor'svoluntary winding-up.

2.2 COMPULSORY WINDING-UP (WINDING-UP BY THE COURT)

Study HavengaStudy Havengachapter 27, sectionchapter 27, section27.13.1.2.27.13.1.2.

It is important to remember that once a final winding-up order is made by thecourt, the winding-up will be deemed to have commenced on the date when theapplication was first presented to the court.

It is important for you to know the circumstances in which a company or closecorporation will be deemed to be unable to pay its debts.


3 Consequences of winding-upStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.13.227.13.2..

Make sure you know what effect winding-up has on the status of a company orclose corporation, its property, civil legal proceedings instituted by or against it, aswell as the position of directors of the company.


4 The liquidatorStudy HavengaStudy Havengachapter 27, sectionchapter 27, section27.13.3.27.13.3.


128

5 Meetings and proof of claimsStudy chapter 27,Study chapter 27,section 27.13.4.section 27.13.4.


6 Liability of directors, officers and membersStudy Havenga chapterStudy Havenga chapter27, section 27.13.5.27, section 27.13.5.

The liquidator of a company or a corporation has a duty to investigate whetherany person may be personally liable for the way in which the affairs were beingcarried on.


7 Composition and compromiseStudy Havenga chapterStudy Havenga chapter27, section 27.13.6.27, section 27.13.6.


SELF-TEST QUESTIONS

(1) In what circumstances may a member's voluntary winding-up take place?(2) When is a company deemed unable to pay its debts?(3) What effect does a winding-up order have on the company's property and

on dispositions of property?


(1) A member's voluntary winding-up may take place only if the company orclose corporation is able to pay its debts. Before the resolution by membersmay be registered (and the winding-up may therefore commence), thecompany must either provide security for payment of its debts within twelvemonths after winding-up or declare in a certificate that it has no creditors.

(2) A company is deemed unable to pay its debts if

(a) a creditor having a claim of at least R100 which is already due leaves ademand at the company's registered office, and the company fails forthree weeks after that to pay the claim, to give security for it or tocompromise to the satisfaction of the creditor, or

(b) a warrant of execution or other process issued on a judgment againstthe company has been returned by the sheriff with an endorsementthat he did not find disposable property sufficient to satisfy the judgmentor that the disposable property he found did not, upon sale, satisfy theprocess, or

(c) it is proved to the satisfaction of the court that the company is unable topay its debts.

(3) Unlike the case of natural persons, a company does not lose its ownership(the assets do not vest in the liquidator). The property merely falls under thecontrol of the Master and after that the liquidator. If the company cannotpay its debts, the court's permission is required for every disposition ofcompany assets which takes place after the commencement of thewinding-up.

section 3 study unit 7 | the winding-up of companies 129

SECTION 4:THE LAW OF ADMINISTRATION OF ESTATESSECTION 4:THE LAW OF ADMINISTRATION OF ESTATES

CONTENTS

Study unit 1 The Master and the executor 132

Study unit 2 The rights, powers and duties of the executor 136

Study unit 3 The removal/discharge of the executor and the administration of specialtypes of estate 139

1S t u d y u n i t

The master and the executor

Prescribed reading material for this study unitHavenga chapter 28, sections 28.1, 28.2, 28.3, 28.4, 28.5, 28.6 and 28.7.

1 Introduction

During their lives most people acquire an estate. When an owner of the estate dies, the

estate has to be administered so that creditors are paid and the remaining assets are

transferred to the heirs and legatees. The person responsible for the process of administering

the deceased estate is the executor under supervision of the Master. In this study unit we will

concentrate on the position of the Master and that of the executor.

2 The MasterStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.2.28.2.

In our study of the law of trusts we already referred to the Master. Another duty ofthe Master is to supervise the administration of deceased estates.

How does one determine which Master's office will have jurisdiction over thedeceased estate?

FeedbackThe general rule is that the Master of the area in which the deceased wasordinarily resident will have jurisdiction. If the deceased was not ordinarily residentin the Republic, but has property within the Republic, the Master who was firstapproached for letters of executorship has jurisdiction.

3 The executorStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.3.28.3.

The executor must not be confused with the trustee. The executor is responsible foradministering a deceased estate and the trustee administers a trust. In both casesthe Master ensures that the administration is properly done.

Three questions may be asked when the position of the executor is discussed:

. Who may be an executor?

. How is the executor appointed?

. What does the Master require before appointing an executor?

Activity

132

When answering these questions, you must note that there are certain exceptionsto the general rule.

WHO? Ð ANY NATURAL PERSON WITH FULL CAPACITY

EXCEPTIONS

. PERSONS PROHIBITED BY LEGISLATION

. MINORS, PRODIGALS AND MENTALLY DISTURBED PERSONS

. INSOLVENT PERSON Ð ONLY AFTER LODGING SECURITY

. JURISTIC PERSON Ð A NOMINEE OF SUCH JURISTIC PERSON

HOW? Ð THE DECEASED CAN NOMINATE AN EXECUTOR IN HER WILL AND THEMASTER MAY APPOINT AT HIS DISCRETION

EXCEPTIONS

. A PERSON WHO WITNESSED THE WILL OR TOOK IT DOWN IN WRITING ISDISQUALIFIED UNLESS THE COURT DECLARES SUCH A PERSON TO BE COMPETENT

. IF THE DECEASED DIED INTESTATE OR DID NOT NOMINATE AN EXECUTOR, OR THEEXECUTOR CANNOT BE TRACED OR DOES NOT ACCEPT THE APPOINTMENT, THEMASTER APPOINTS AN ``EXECUTOR DATIVE''

WHAT? Ð WHAT DOES THE MASTER REQUIRE BEFORE APPOINTING AN EXECUTOR

. DEATH NOTICE

. WILL, IF THERE IS ONE

. PRELIMINARY INVENTORY

. LETTER OF ACCEPTANCE BY THE EXECUTOR

. BOND OF SECURITY, IF SECURITY IS NECESSARY

Indicate the correct statement(s):

(1) The executor supervises the administration of estates.(2) A juristic person may not be appointed as the executor of a deceased

estate.(3) There is a Master's office in the capital of each one of the provinces of South

Africa.(4) An executor dative may be appointed where the executor appointed in the

will cannot be traced.

Feedback(1) is incorrect. The Master supervises the administration of deceased estates.(2) is incorrect. A juristic person may be appointed as an executor.(3) is incorrect. There is a Master's office in some High Courts.(4) is correct.

Activity

section 4 study unit 1 | the master and the executor 133

4 Documents required by the Master before appointingan executor

Study HavengaStudy Havenga


28.4.28.4.

In paragraph 3 above the documents required by the Master before he will

appoint an executor were listed. You must note that a will is only required if there is

one. A person may also die intestate, that is without having made a will or where

the will is not valid. Since there is no will the Master cannot insist that such a

document must be lodged.

You should be able to distinguish between the different documents, the contents

of the documents and the persons who are responsible for submitting or compiling

the documents. Also note that an executor may be exempted from furnishing

security under certain circumstances.

Supply the missing words in the following columns:

THE DEATH NOTICE

Duty to report to Master by surviving ........... or nearest .............. living in ............ or

person ............ within .......... days after ...........

THE PRELIMINARY INVENTORY

Must be submitted to Master by surviving ........... or nearest ........... living in ...........

within ........... days of .............

FeedbackThe duty to report rests on the surviving spouse or the nearest relative of the

deceased living in the district where the death took place or the person in control

of the premises where the death took place within fourteen days after becoming

aware of it.

The preliminary inventory must be submitted to the Master by the surviving spouse

or the nearest relative living in the district where the deceased was ordinarily

resident within fourteen days of becoming aware of the death.

SELF-TEST QUESTIONS

(1) Who supervises the administration of deceased estates?

(2) Who may and who may not be appointed as an executor?

(3) What documents must be lodged with the Master before he will issue letters

of executorship?

(4) What must be included in the preliminary inventory and what is its purpose?

(5) In what cases is an executor exempt from furnishing security and under what

circumstances can the Master still require security from these persons?

Activity

134


(1) The Master supervises the administration of deceased estates.(2) You will find the answer in section 28.3.1 of your textbook and see also

paragraph 3 above.(3) See section 28.4 of your textbook and see also paragraph above.(4) All immovable and movable property of the deceased as well as claims in

favour of the estate must be included in the preliminary inventory. Thepurpose of the preliminary inventory is to give the Master an indication of thevalue of the estate and thus to determine the method whereby the estatemust be administered.

(5) An executor is obliged to furnish security for the proper completion of his orher work except where the executor is

. a parent, child or surviving spouse of the deceased

. exempted from it in the will

. exempted from it by the court.Even if the executor is exempted from furnishing security for any of thereasons stated above, the Master may still require security if

. the executor is insolvent or has committed an act of insolvency

. the executor lives outside the Republic

. there is any other good reason for requiring security.


section 4 study unit 1 | the master and the executor 135

2S t u d y u n i t

The rights, powers and duties of theexecutor


In the previous study unit we discussed the appointment of an executor. In this study unit we

will concentrate on the rights, powers and duties of the executor. In other words, what the

executor must do to ensure the proper administration of the estate and how this must be

done.

1 IntroductionStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.5.128.5.1

The executor stands in a fiduciary relationship towards the creditors and thebeneficiaries. This means that there is a relationship of trust between the executorand the creditors and beneficiaries of the deceased estate. The executor mustaccordingly act with care and good faith. If she is guilty of maladministration ofthe estate, or is negligent in administering it, she may be personally liable fordamage suffered by the creditors and the beneficiaries.

Joan is appointed as the executor of Grant's estate. Grant was a collector ofvintage cars and one of the cars, the only of its kind in the world, is in an extremelydilapidated state. Joan sells the car to her son for R500 who repairs it and in turnsells it for R100 000. The heirs to Grant's estate finds out about the sale to Joan's sonand approach you for advice. Advise them.

FeedbackJoan may be guilty of maladministration of the estate since she sold the car to herson seemingly without the permission of the Master of the court. If this is indeed thecase, Joan will be personally liable for the loss suffered by the estate.

2 Duties of the executorStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.5.2±28.5.12.28.5.2±28.5.12.

It should be clear to you that the duties of the executor are numerous andonerous. The duties arise from the moment that the executor takes custody of theassets of the deceased estate until she makes payment to the creditors and thebeneficiaries and complies with any further requirements set by the Master.

Activity

136

Which one of the following statements is correct?

(1) The executor must always open a banking account in the name of the

estate.

(2) The executor of a deceased estate may pay the creditors of that estate

before the Master's approval of the liquidation and distribution account.

(3) The executor's inventory of a deceased estate must be submitted to the

Master within 30 days of the death of the owner of that estate.

FeedbackThe correct statement is (2) because an executor may pay the creditors ahead of

time although she then runs the risk of incurring liability for any losses which may

result. The other statements are all incorrect: (1) because the banking account

need only be opened if the executor holds cash of more than R1 000; and (3)

because the executor's inventory must be submitted within 30 days of that

executor's appointment.

SELF-TEST QUESTIONS

(1) What does the executor's fiduciary relationship entail?

(2) How must the executor deal with cash in the estate?

(3) Describe the procedure that must be followed if an executor disputes a

creditor's claim.

(4) Explain the difference between a legatee and an heir.

(5) Name the various methods of liquidation which can be used by an executor.


(1) The fiduciary relationship means that the executor must act with care and

good faith. Consequently, if the executor is guilty of maladministration of the

estate, or is negligent in administering it, she may be personally liable for

damage suffered by the creditors and the beneficiaries.

(2) As soon as the executor holds cash of more than R1 000 on behalf of the

estate, she must open a banking account in the name of the estate. All

moneys of the estate which the executor receives must be deposited in this

account.

(3) If the executor disputes a claim of the creditor, the creditor may be

requested in writing to lodge an affidavit in support of the claim. With the

consent of the Master, the executor may require any person with information

about the claim, to present evidence under oath before the Master or a

magistrate.

If the executor disallows a claim, the executor has to inform the creditor in

writing (by registered post) and provide reasons for the decision. The creditor

may then approach the court to decide on the validity of the claim.

See section 28.5.6 of the textbook.

(4) A legatee is the beneficiary of a legacy, that is, a specific testamentary

bequest of goods or money. An heir is a person who receives the remainder

Activity

section 4 study unit 2 | the rights, powers and duties of the executor 137

of an estate after payment to creditors and legatees. For example, I leavemy car to my daughter and the remainder of the estate to my husband. Mydaughter is a legatee and my husband is my heir.

(5) The various forms of liquidation are

. making over in specie,

. partial sell-out,

. total sell-out,

. taking over by the surviving spouse in terms of section 38 of theAdministration of Estates Act,

. redistribution in terms of an agreement between the heirs, and

. the administration of insolvent deceased estates in terms of section 34 ofthe Administration of Estates Act.

138

3S t u d y u n i t

The removal/discharge of the executorand the administration of specialtypes of estate

Prescribed reading material for this study unitHavenga chapter 28, section 28.3.3, 28.6 and 28.7.


. name and discuss when the Master can remove an executor

. name and discuss when the court can remove an executor

. discuss the administration of special types of estate

1 Removal and discharge of executorsStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.3.3.28.3.3.

It is important to make a distinction between those instances where the Mastercan remove an executor and those where the court can remove an executor.

Supply the missing word in the following sentences:

(1) The .......... can remove an executor from office if she has been appointed asan executor dative and it later appears that an executor testamentary hasbeen nominated.

(2) The ............. can remove an executor from office if she is a party to anagreement whereby she undertakes, in her capacity as executor, to grant anheir a benefit to which he is not entitled.

(3) The ........... can remove an executor from office if she fails to draw up andlodge the liquidation and distribution account.

(4) The ............ can remove an executor from office if she is a minor at the time ofher appointment.

(5) The ............. can remove an executor from office if she bribed the Master toappoint her.

(6) The .......... can remove an executor from office if she failed to liquidate theestate in the manner approved by the Master.

FeedbackThe missing word in (1), (3), (4) and (6) is Master. In (2) and (5) the missing word iscourt.

Activity

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2 The administration of special types of estateStudy HavengaStudy Havengachapter 28, sectionchapter 28, section28.6 and 28.7.28.6 and 28.7.

The Administration of Estates Act specifically provides for the administration of

some deceased estates and certain other estates. Deceased estates which are

administered in a specific way are

. estates under R125 000 in value

. the joint estate of persons who were married in community of property

. an insolvent deceased estate

. massed estates

The Act also provides for the administration of the estates of persons who are

unable to exercise control over their own estates, such as

. absent persons

. minors

. mentally disturbed persons

Discuss the administration of an insolvent deceased estate.

FeedbackThe executor has to realise the assets in the manner approved of by the Master.

The creditors also have to be notified of the way in which the sale will take place

and they may lodge objections to it with the Master who may then decide to

amend his instructions. The sale will then take place. The executor draws up a

distribution account according to the order of preference prescribed for

sequestrated estates under the Insolvency Act. The account has to lie for

inspection and then be confirmed.


SELF-TEST QUESTIONS

(1) When is the executor discharged?

(2) Name a few examples of assets of the surviving spouse which do not form

part of the joint estate.

(3) What is a massed estate?

(4) How does a guardian or curator vacate her office?


(1) The executor receives her discharge from the Master as soon as the estate

has been finalised.

(2) The assets which do not form part of the joint estate are:

. limited interests in property in favour of the surviving spouse

. assets donated or bequeathed to the surviving spouse on condition that

they do not form part of the joint estate.

Activity

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See section 28.6.2 of the textbook.(3) A massed estate entails that the estate or part of the estate of a survivor is

joined with the estate of the deceased and distributed amongst thebeneficiaries as if the whole of the massed estate belonged to thedeceased. In exchange the survivor has to receive a limited interest in theproperty, for example a usufruct.

(4) A guardian or curator can be discharged on completion of theadministration or she may be removed from office by the Master if she is not acompetent person.

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Commercial Law - Study Guide

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Transcript of Commercial Law - Study Guide