Will a Creditor be able to recover monies from a Debtor by means of Judicial attachment of shares?
First, one needs to understand what a share legally means. A “share” is the proprietary interest that a person holds in a company, which is the incorporeal right of the holder. The holder of a share is referred to as a “shareholder” in a private company. The purpose of this article is to examine the ability of a creditor to perform an incorporeal attachment of the shareholders’ propriety interest in a private company and the legal parameters thereof.
It is important to note that a company determines the rights, preferences, limitations and even terms associated with a specific class of shares, i.e Shareholders Agreement and the Memorandum of Incorporation (“MOI”). This provides the company with the freedom to create the capital structure to suit its requirements. Shareholders holding different classes of shares in a private company may have different rights and responsibilities depending on the rights attaching to the specific class of shares.
In lieu of the company’s’ MOI and the provisions of the Companies Act 71 of 2008 (“Companies Act”), a shareholder has, amongst others, a broad array of rights and therefore enjoys a strong propriety interest in a company. As extensive as this incorporeal right may seem to be, it begs the question – how can this incorporeal right be physically limited and/or even taken away?
Like any other asset, someone’s shareholding in a company may be attached in execution by the appropriate sheriff and sold at an auction following due procedure. One can achieve this once judgment has been obtained against a debtor, the creditor (who then becomes known as the ‘judgment creditor’) can immediately apply for a writ of execution against the debtor’s property in order to cover the amount of the debt. This is known as the execution process.
The execution process is initiated by the judgement creditor who will accordingly instruct the sheriff to collect the judgment debt. The sheriff will approach the judgement debtor and request immediate payment. If the judgement debtor fails and/or neglects to pay, the sheriff will make a record of the movable property that he can physically identify or find that will satisfy the judgment debt.
The sheriff will then enquire from the judgement creditor what property on record must be attached or removed to sell on auction. Once the judgement creditor, confirms that he/she is satisfied with the attachment – the sheriff will then proceed.
The nature of an attachment of shares does not alter the execution process as mentioned above as the sheriff’s mandate is based on the warrant of execution, the notice of attachment and the instruction of the judgement creditor. Therefore, once judgement is obtained – the judgement creditor may proceed to issue a warrant to raise the judgement debtors’ shares in the relevant company and thereafter instruct the sheriff to attach same after the sheriff has requested immediate payment from the judgement debtor.
Therefore, the sheriff of the relevant court will only in the absence of specific instructions from the judgment creditor, go to the home, place of employment or place of business of the debtor to attach movable property.
Where an attachment is made for the payment of debt, Innes CJ pointed out that:
‘[T]he essential to be observed in all cases of the attachment of debts is that the debtor should receive due notice, so that he may be warned not to discharge his obligation to his original creditor, and so that he may have an opportunity of coming to the Court for relief in case he wishes to raise the question of the validity of the debt, or any lien, discharge or other matter which would operate in his favour.’
The above notice is a vital component for an incorporeal attachment, the reason for this is that not only must the Debtor be aware of the impending attachment but the appropriate authorities such as the Companies and Intellectual Property Commission (“CIPC”) as well as the relevant company secretary must be given notice. The reason for this is that the CIPC gives effect to the change in the company’s constituency and the company secretary holds the share register which contains the share certificates. Therefore, even though the right is incorporeal, some document or similar item representing the right has to be attached.
Rule 45(8) of the Uniform Rules of Court, governing procedure in the High Court, applied in the instance, indicates that attachment will only be complete once the Sheriff had given notice of the attachment in writing to all interested parties and has taken possession of the share certificates, or has certified that he could not locate them despite a diligent search. Furthermore, the attachment of incorporeal property requires the Sheriff to attach the document evidencing such rights – an incorporeal moveable asset cannot be attached merely by the intention or decision of the Sheriff.
Once the procedure has been followed and notice given, the sheriff may proceed with the sale in execution. The conditions of sale are read out immediately before the start of the sale and may be examined beforehand at the office of the sheriff. The official conducting the auction is not obliged to set minimum reserve prices. At the end of the sale, the costs and charges of execution are deducted from the proceeds, after which whatever remains of the proceeds are distributed according to the order set out in the Rules of Court. Any remainder is then paid to the judgment debtor.
Accordingly, regardless of any valuation provided by an auditor or an accountant of the value of the shares – the sheriff will proceed with auctioning the shares with no reserve.
Authored by: Michael Veltman
Michael is a candidate attorney
at Bosman Dyasi Inc.
