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s 228 of Companies Act - opinions II

26 June 2008

I am not convinced that Mr West's opinion published in the GhostDigest Conveyancing News on 29 May 2008 is correct that, when registering a mortgage bond, the resolution required in terms of s 228 is not peremptory.

I take cognizance of Henochsberg on the Companies Act (pages 442 and 442(1)) in which it is submitted that "dispose of" does not include a mortgage bond. However, the effect of the required resolution not being registered is that such a transaction is void, with dire consequences to the banks if it should transpire that "dispose of" indeed included bond registration.

In Cohen NO and Others v SAPHI (Proprietary) Limited (103/94) [1995] ZASCA 122 (29 September 1995) the definition of "disposition" in terms of the Insolvency Act of 1936 was considered. This Act was signed by the Governor General in Afrikaans during 1936 in terms of which the definition of "vervreemding" or "vervreem" included a mortgage bond.

Section 2 of Act 27 of 1987 which amended the Insolvency Act, amended only the English version of the Insolvency Act, substituting the words "disposes of" and "disposition" in subsections (1) and (3) of section 34 of the Act for "alienates" and alienation".

In the Afrikaans version of the Insolvency Act, which is the signed one, the words "vervreem" and "vervreemding" are used. These words are defined in terms identical with the definition of the word "disposition" whereas the words "alienates" and "alienation" are not defined at all. In terms of section 34(1) of the Act "disposition" is defined in section 2 of the Act as "any transfer or abandonment of rights to property and includes a sale, lease, mortgage, pledge, ..."

Who carries the risk of loss should the mortgagor company by reason of being unable to pay its debts be liquidated after registration of the bond? As this will then be a disposition in terms of the Insolvency Act the registration of the bond without the required section 228 resolution will most definitely be set aside by the liquidators for lack of compliance with the provisions of section 228 as interpreted by Mr West.

Apart from what the effect will be in cases of insolvency, I also foresee problems with the loan application and registration of a bond if section 228 is not adhered to. When a bond is registered, although there has not been a "disposition" as such, an abandonment of rights takes place. A real right is granted. It appears accordingly that, even if one does not necessarily require the resolution required in terms of s 228 for registration of the bond, it should definitely at least be required in respect of the loan application by the company in respect of the funds.

The purpose of a number of provisions of the Companies Act, including section 228, is to protect minority shareholders. Hypothecating the company's sole or major asset should definitely be a matter of concern to minority shareholders.

I, as a conveyancer acting on behalf of banks, am therefore cautious to just accept the opinion of Mr. West when there is a real danger of the words "dispose of" being assessed by a Court and found to indeed include a mortgage bond. I would rather err on the side of caution than take such a risk.

The banks' and conveyancers' views on this would be appreciated - Editor

Amorie le Roux

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