INS311

2023
WEEK 7 Professor Michel Koekemoer

Uncompleted contracts
This Photo by Unknown Author is licensed
under CC BY-SA

Note: Parts of these notes are an adaptation of:

AD Smith ‘Hockley’s Law of Insolvency” (2022) Cape Town, Juta
These notes contain simplifications for better understanding. For more
detail, refer to original text.
The graphics were obtained online and the URL where it was obtained is included with each graphic.
 OUTCOMES FOR THIS WEEK
Discuss the general rule which applies when a contract is
only carried out by the insolvent, but not the other party at
the time of sequestration.
Understand the consequences attached to the trustee’s
decision to either repudiate or to abide by a specific
contract.
Discuss the nature of the employee’s claim against the
insolvent estate of his former employer.
Clarify how sequestration will effect a contract of mandate.
 OUTCOMES FOR THIS WEEK
Understand how sequestration will effect a contract for the sale
of movable property, both on cash and on credit.
Discuss how the doctrine “huur gaat voor koop” protects the
lessee of immovable property when the lessor’s estate is
sequestrated.
Explain the operation of the statutory hypothec created in terms
of section 84 of the Insolvency Act.
Explain how Sarrahwitz v Maritz NO and Another 2015 (4) SA
491 (CC) changed the legal position of a vulnerable purchaser
paying cash when purchasing an immovable property.
 Contract carried out by the
insolvent, but not the other party
This is where the insolvent carried out his contractual obligation, but the
other contracting party failed to contractually perform.
The trustee would then enforce that the other party perform a contractual
obligation, which can be.
– A right to payment, trustee can ask for payment; or
– Another form of performance, which the trustee can sell that right for the
performance to flow to the estate.

What if another contracting party continues to directly pay the insolvent, not
the trustee?
– Unlawful, accept if performed in good faith and without knowledge that the debtor’s
estate was sequestrated.
 Contracts not completed by
insolvent
Starting point: general rule is that sequestration does not suspend or
put an end to the contract:

Unless an exception or qualification, under common law or legislation,

applies.
3 factors for determining how to deal with a specific contract:
1. Type of contract.
2. Which contracting party is insolvent and who did not perform its
contractual obligations.
3. Application of relevant facts to the law.
 Contracts not completed by
insolvent
Exceptions to common law: mandate and partnerships
Mandate
Agreement to perform a service.
Insolvency of principle: Depends on whether it is a matter the principal
can act without the trustee’s concurrence.
Insolvency of agent: Voet suggests that the authority terminates
agency. However, current position is that the legal relationship is
between the mandator (person giving the mandate) and the other
person (not the agent).
This Photo by Unknown Author is

Partnerships
licensed under CC BY-SA

A partnership is terminated when the partnership estate is sequestrated.

 Contracts not completed by
insolvent
At common law, the trustee has a choice whether to perform
[abiding] or not [repudiating] in terms of a contract.
It is not terminating the contract, but rather excluding the other
party to ask for specific performance.
The trustee’s power is to the benefit of concursus creditorum.
Must reach a decision within a reasonable time, otherwise
assumed he is not going to perform under the contract.
–The other contracting party would then be able to cancel the
contract.
 Contracts not completed by
insolvent: repudiated
The other party may exercise any contractual remedy, EXCLUDING
specific performance.
If the other contracting decides not to accept the trustee’s
repudiation, and that party contractually performed, he would have to
prove a concurrent claim against the insolvent estate.
When the contracting party decides to cancel the contract (after
repudiation):
–Recover any property he handed over when performing under the contract;
–He must make restitution to the insolvent estate; and
–Concurrent claim for any loss and for payments made to the debtor.
 Contracts not completed by
insolvent: abiding by contract
If the trustee decides to continue and complete the contract (abiding),
he steps into the shoes of the debtor.
This means he must render the performance the debtor had to
render.
Nothing changes, the full performance must be rendered.
If the trustee does not render full performance, but asks the other
party to fully perform, that party can raise the exception non adimpleti
contractus.
The trustee also takes over any defects in the rights of the debtor.
 Specific contracts and effect
of sequestration
Purchase and sale of immovable property: Purchaser’s estate sequestrated
The trustee can decide: uphold or repudiate. Ownership of immovable
property transferred upon
Legislation provides requirements on ‘how’. transfer.
Section 35 of the Insolvency Act (immovable property not transferred yet): if the seller requests
whether the trustee is upholding or repudiating the contract, the trustee must give his answer within 6
weeks after receiving the request.
– No election made: the other party can cancel the contract and would have a concurrent claim against
the insolvent estate for loss due to non-fulfilment.
– Trust decides to continue: the seller can sue for payment of purchase price and the tustee must
transfer title (the transfer in the deeds office).
Remember that the provisional trustee asks for directions from the Master first.
What if the contract relates to the sale of both movable and immovable property? The question is
whether the contract is substantially one for the acquisition of immovable property (most of the
acquired property is immovable).
What if immovable property was transferred before sequestration?
– Seller has a personal right for claim for damages for breach of contract (concurrent claim).
 Specific contracts and effect of
sequestration
Purchase and sale of immovable property: Seller’s estate
sequestrated
Depends whether this is: (1) a sale on instalments or (2) whether this is a vulnerable
purchaser under constitutional grounds.
Otherwise, common law applies.

Sec 20 of the Insolvency Act and common law (general position)

Immovable property not transferred yet at sequestration, passed to insolvent estate
of the seller.
Under common law, the trustee can decide to abide or repudiate the contract.
Depending on what is to the best interest of the creditors.
If the trustee repudiates, the buyer has a concurrent claim for the purchase price
already paid.
 Specific contracts and effect of
sequestration
Purchase and sale of immovable property: Seller’s estate
sequestrated
Sale of land on instalments under the Alienation of Land Act 68 of 1981
Please read through Hockley as this is self-study.

Vulnerable purchaser under constitutional grounds

 Sarrahwitz v Maritz NO and Another 2015 (4) SA 491 (CC) relates to a vulnerable purchaser who bought land
and paid cash.
 The provisions did not protect a vulnerable purchaser from being left homeless (in this case where there was
a cash sale).
 The court proceeded to read in certain provisions into the Alienation of Land Act.
 Specific contracts and effect of
sequestration
Vulnerable purchaser under constitutional grounds
Sarrahwitz v Maritz NO and Another 2015 (4) SA 491 (CC)
 The court said: ‘The impugned provisions need a surgical operation.’(para 69). How this was done,
see paras 70-77.
 Read into the definition of a contract in section 1(a)
– “including residential property paid for in full within one year of the contract, by a vulnerable purchaser”
 Adding to the definitions (section 1) ‘vulnerable purchaser’ to mean a purchaser who runs the risk of being
rendered homeless by a seller’s insolvency.
 The words “on instalments” in the title of chapter II of the Alienation of Land Act are severed, and section 4 reads
as follows:
“(1) This Chapter shall not apply in respect of a contract in terms of which the State, the Community Development
Board established by section 2 of the Community Development Act, 1966 (Act 3 of 1966), the National Housing
Commission mentioned in section 5 of the Housing Act, 1966 (Act 4 of 1966), or a local authority is the seller.
(2) Sections 21(2) and 22 shall, however, apply, with the necessary changes, to a deed of alienation in terms of which
a vulnerable purchaser of a residential property paid the full purchase price within one year of the contract, before the
seller’s insolvency.’’
 This was only applicable when the seller’s insolvent estate was not yet finalised.(para 69)
 Specific contracts and effect of
sequestration
Purchase and sale of immovable property: Seller’s estate
sequestrated This Photo
by

Sarrahwitz v Maritz NO and Another 2015 (4) SA 491 (CC)

Unknown
Author is
licensed
under

Class activity in preparation for a tutorial activity.

CC BY

Read this case. How did the aspect of transformative constitutionalism affect the provisions of the Alienation
of Land Act 68 of 1981?
 What were the protected constitutional rights relied on?
 How was the protection different for instalment buyers under ss 21 and 22 of the Alienation of and Act
compared to a cash buyer?
 What was the position under common law in case of a buyer to paid cash for immovable property, but the
seller was subsequently sequestrated?
– Pay attention to the reluctance of the court of first instance to attempt the development of common law.
 Did the court find that the protection afforded must extend to any cash buyer? To whom specifically?
 How would the outcome be different if the category of ‘vulnerable purchasers’ was now included along with
the provisions concerning the cash payment of the purchase price?
 Who would be a vulnerable purchaser within this context? (para 75)
 Specific contracts and effect of
sequestration
This Photo by Unknown Author is licensed under CC BY-NC

Instalment agreement regarding movable property: Buyer

Section 84(1) brings an interesting consequence for an instalment agreement
as defined under the National Credit Act.
The passing of ownership is reserved (it remains with the seller) until the full
purchase price is paid.
All or part of the purchase price is deferred, so paid back periodically to the
seller;
Possession and use are transferred to the buyer; and
Ownership pass to the buyer when all contractual obligations is fulfilled (until
then ownership remains with the seller).
What then if the buyer becomes insolvent? The seller looses ownership and
receives a statutory hyphothec. The seller now becomes a secured creditor.
 Specific contracts and effect of
sequestration
Instalment agreement regarding movable property: seller
There is no provision if the seller becomes insolvent.
The trustee steps into the shoes of the seller and can abide or
repudiate the contract.
If the contract is repudiated, the trustee can take possession of
the goods.
The buyer then has a concurrent claim against the insolvent
estate to recover the amount already paid to the seller.
 Specific contracts and effect of
sequestration
Sale of movable property where the contract is not an
instalment agreement
Cash sale
Ownership passes after full payment and delivery.
Sec 36(1) and (4) applicable to seller who delivered the property, but not paid,
cannot reclaim such property unless:
– The seller has 10 days after delivery to give notice to the debtor (or trustee or
Master) that he wants to reclaim the property; and
– When the trustee disputes the seller’s claim, the has 14 days to institute legal
proceedings.
If the seller fails to do the above, he has lost his right to reclaim the property.
– He will have a concurrent claim for the unpaid purchase price.
 Specific contracts and effect of
sequestration
Sale of movable property where the contract is not an
instalment agreement

Credit sale (not an instalment agreement)

Ownership already passed to buyer (this is the difference to a instalment
agreement), but he will pay later.
Seller’s estate sequestrated: his trustee can ask for payment of the
purchase price and compliance with other contractual obligations.
Buyer’s estate sequestrated: even if the full purchase price was not paid yet,
the buyer already has ownership. The seller has a concurrent claim for the
balance.
 Specific contracts and effect of
sequestration
Lease: sequestration of lessor’s estate
Movable property (for example, operating lease)
Common law will apply.
Sequestration does not automatically terminate the lease.
The trustee has the election: uphold or repudiate.
 Specific contracts and effect of This Photo by Unknown Author is licensed under CC BY-NC-ND

sequestration
Lease: sequestration of lessor’s estate
Immovable property
Huur gaat voor koop rule.
The trustee would not be able to cancel the lease. The property is sold with the
lease in place.
This rule also continues even if there was a subsequent mortgage bond was
registered. So the lease existed before the real right was created.
What if the real right was in place before the lease?
– Sale subject to lease, but if highest bid does not cover the amount due to the holder of
the real right-the property can be sold free of the lease.
– Crux: the property can only be sold free of the lease if it cannot be sold for a
higher price without first freeing it from the lease.
 Specific contracts and effect of
sequestration
Lease: sequestration of lessee’s estate
Section 37 applies to movable and immovable property.
The trustee decides: continue or repudiate?
The trustee must provide written notice that the lease must continue.
Where the trustee fails to provide such notice within 3 months after
his appointment, the lease is deemed to have been repudiated.
Exception?
You can have it in your contract that the lessor can cancel the lease if
the lessee is sequestrated.
Can also be cancelled due to non-payment of rent.
 Specific contracts and effect of
sequestration
Lease: sequestration of lessee’s estate
What is the nature of the lessor’s claim?
Preferential: for rent due from sequestration until termination.
Tacit hyphothec for rent owed at time of sequestration.
Concurrent claim for loss resulting from the non-performance of the
lease.
 Specific contracts and effect of
sequestration
Employment contract
This Photo by Unknown
Author is licensed under
CC BY-SA

Sequestration of employee: The only effect would come into play if sequestration disqualify a person
from doing their job (for example if that person is a trustee).
Sequestration of employer: In case of sequestration of the employer, the contract is immediately
suspended according to section 38.
– The employee cannot render services and he is not entitled to his salary (but he can recover loss resulting from
the suspension).
– The employee receives no employment benefits, but he can receive unemployment benefits from date of
suspension (eg, UIF).
The trustee must consult with the employee or a collective representative (workplace forum or trade
union).
Process for submitting written proposals to the trustee on measures that can be taken.
Where no measures are taken, the employment contract automatically terminates 45 days after
appointment date of trustee.
The claim of an employee is a preferential claim (we discuss what this type of claim means in the
coming weeks)
 Specific contracts and effect of
sequestration
Transactions on market infrastructure (not examinable)
Agreements providing for termination and netting (not
examinable)
Provisions designed to protect solvent party
This provision attempts to modify the legal consequences associated with
having a concursus creditorum.
Question to ask: Does a provision attempt to confer a power or preference
or allow for a distribution not allowed under insolvency?
If so, this provision will be void (unless specified otherwise). Can you
remember where we had such a provision?
 Specific contracts and effect of
sequestration
Provisions designed to protect solvent party
Reservation of ownership
Effective to prevent assets from vesting in debtor’s insolvent estate.

Clause providing cancellation upon insolvency

As the law stands, such a term is valid.

Clause providing vesting or continued use of insolvent’s property

Both invalid. It goes against: (1) the property having to vest in the
trustee; (2) that the trustee must take control of the insolvent’s assets.
 Specific contracts and effect of
sequestration
Provisions designed to protect solvent party
Clause providing for direct payment to subcontractors of
insolvent
Invalid as it gives subcontractors preference above other creditors.

Clause providing for set-off on insolvency

Not allowed. This allows other party to be paid before other concurrent
creditors.
 Legal proceedings commenced
before insolvency
Criminal proceedings not effected by sequestration.
Civil proceedings, not included under s23, instituted by or against
insolvent stayed until appointment of trustee.
If a party wants to continue with the stayed proceedings, they must:
–Within 3 weeks after 1st creditor’s meeting, give notice of such intention to
trustee; Effect of failure? Right lapses unless party can show reasonable
excuse for no notice.
–3 weeks after such notice, the person must prosecute the proceedings.
 Preparation for lecture and
tutorial after break
Chapters 10 and 11 are self-study.
Week 8 preparation for lectures:
– Read chapters 15 and 16.
– Read Joint Liquidators of Glen Anil Development Corporation Ltd (in Liquidation) v
Hill Samuel (SA) Ltd 1982 (1) SA 103 (A).
For you tutorials the first week after the break:
– Bring along your answer to the tutorial for week 4. It will be taken in as an
assessment. The answer to this tutorial will be provided in the form of a
podcast. I am attaching the shorter version of the tutorial activity to an
announcement with clear instructions for the assessment.
– Bring along your summary of the majority judgment in Harksen v Lane 1998 (1) SA
300 (CC) as the tutorial class will related to this judgment.
Thank You.

Questions?