10 November 2021 Business Rescue, Restructuring & Insolvency

Parties may seek rectification of agreements after liquidation, but beware

and preferably signed by all parties. This is mainly because the so-called ‘gentlemen’s agreement’ by a handshake and the ‘my word is my bond’ agreements are generally difficult to prove, as the terms of such agreements are usually verbal, and not recorded in writing. Written agreements tend to give the parties comfort that all the commercial terms of the transaction have been condensed to writing, and all parties will comply with their obligations. However, what happens when there is an error in the written agreement, and that error is only picked once one of the parties is in liquidation?  

Usually, parties to an agreement will regard the effective date of the agreement as the date on which the written agreement is signed, or some other date as decided between the parties. It is from the effective date that parties will render services or deliver goods to each other, and make payments in accordance with the agreement. Should one of the parties go into liquidation, and it turns out that the written agreement had an error in it, the written agreement would need to be rectified by a court. Rectification is a correction of a document by the court, in order for the document to reflect the true common intention of the parties.

When the other party to the agreement is in liquidation, there is an extra hurdle in obtaining a rectification court order. That hurdle is the laws of insolvency, which must be applied in addition to the principles of the law of contract. Specifically, it is the principle of “concursus creditorium”. This principle effectively means that once a company is in liquidation, no creditor may exercise its rights as against the company in liquidation to the prejudice of other creditors. All creditors’ contractual rights are “frozen” and are to be dealt with in terms of the laws of insolvency. 

In Voltex (Pty) Limited v First Strut (RF) Limited (In Liquidation) and Others (43914/17) [2021] ZAGPPHC 662 (5 October 2021), the court highlighted the principle that during liquidation, rectification is still allowed but only to the extent that the rectification will not give the party seeking rectification more rights than it had prior to liquidation. Since the court does not deal with the terms of the agreement but rather the document evidencing the agreement, rectification may be allowed in order for a written agreement to reflect the common intention of the parties.

The important ‘take away’ is that parties should ensure that written agreements correctly reflect every detail of the transaction, including names of the parties, registration numbers and the commercial terms of the agreement. To the extent that an error on the agreement is picked up during liquidation, then rectification may be sought but only to the extent that such rectification will not lead to a party acquiring more rights than it had prior to liquidation.

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