Liquidation may leave you homeless

It is common, and probably necessary for people to work towards purchasing property to live in, as the proverbial ‘roof over their heads’. It is also common for people to have ownership of the property registered in the name of a company or a trust, and for the shareholder or trust beneficiary to live in the property with his or her family as their family home. The company or trust is seen as a ‘safe haven’ that provides protection against the individual’s creditors. However, what if the ‘safe haven’ company becomes insolvent and is eventually liquidated? 

9 Feb 2022 3 min read Business Rescue, Restructuring & Insolvency Newsletter Article

At a glance

  • Property ownership: It is common for individuals to own property through a company or trust for protection against creditors, but this can pose risks if the company becomes insolvent and is liquidated.
  • Sale of primary residence: Judicial oversight is typically required for the execution and sale of someone's primary residence, but this protection does not apply when the property is owned by a company and the shareholder is the beneficial owner.
  • Risks in liquidation: Liquidation is a creditor-driven process, and if a property is registered in the name of an insolvent company, it may be sold by the liquidator, potentially leading to eviction and homelessness for those residing in the property.

When a company is liquidated, the Master of High Court must appoint a liquidator for the insolvent company. The liquidator must then take control and custody of all assets of the company, and may eventually sell them and distribute the proceeds of the sale amongst the company’s creditors in accordance with their ranking. The property, which is seen as the family home, would form part of the company’s assets and may be sold by the liquidator for the benefit of the company’s creditors.

Ordinarily, the execution and sale of an immovable property that is someone’s primary residence must be done with ‘judicial oversight’. Essentially, this means there must be a court order authorising the execution, with a reserve price set by the court. The court may not authorise the execution against a primary residence unless the court has considered that the execution is warranted. This is to ensure that those living in the property are not arbitrarily deprived of their constitutional right to have access to adequate housing.

The protection which ordinarily exists in the execution and sale of a primary residence does not apply when the property in question is owned by a company, and happens to be the primary residence of its director or shareholder. In Segalo v Botha N.O. and Others; Botha N.O. and Another v Segalo and Others (2020/11582; 2019/44572) [2021] ZAGPJHC 770 (6 December 2021), the sole shareholder and director of Blue Flame Advertising and Marketing (Pty) Ltd – which was already in liquidation – sought an order declaring that failure to provide judicial oversight over sales of residential immovable properties of liquidated companies is unconstitutional and invalid. There was also an order sought declaring it unconstitutional for the Master of the High Court to authorise the sale of immovable property to the extent that this permits the sale of a home of a person. 

The court held that the protection of the right to have access to adequate housing is aimed at poor people who own and occupy property sought to be executed without proper consideration of their circumstances.  No judicial oversight is required when the property belongs to a company.  Where the property is owned by a company and the shareholder is the beneficial owner of the property, the protection is not applicable. Juristic persons, such as companies, do not have a right to have access to adequate housing.

Liquidation is a creditor-driven and creditor-friendly process, with a liquidator whose primary function is to liquidate the assets of the insolvent company and pay creditors. Should those assets include a property registered in the name of the insolvent company, then that property may also be sold as part of the liquidation of the assets of the company. Whoever lives in that property faces the risk of being evicted and becoming homeless as the liquidator attempts to sell the property, and give undisturbed occupation of the property to the buyer.

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