Commercial Law - Study Guide

Development team Eesa Fredericks Michelle Kelly-Louw Alvereen Leonard Izelde van Jaarsveld
Departmental reviewer Jopie Pretorius
DEPARTMENT OF MERCANTILE LAW UNIVERSITY OF SOUTH AFRICA, PRETORIA
# 2005 University of South Africa Revised edition 2009 All rights reserved Printed and published by the University of South Africa Muckleneuk, Pretoria CLA202W/1/20102012 98484184 3B2 COL Style
CONTENTS
SECTION 1
Instruments of payment and other methods of payment 1
SECTION 2
The law of trusts 83
SECTION 3
The law of insolvency 99
SECTION 4
The law of administration of estates 131
contents
iii
INTRODUCTION
The purpose of this study guide is to help and guide you through your prescribed textbook for CLA202W which forms part of the course, Commercial Law II (CLA202W). The study guide therefore deals with five specific chapters taken from the prescribed book General Principles of Commercial Law by Peter Havenga et al, 5th edition (2004) Juta, Cape Town. Please note that all references in the study guide to the ``prescribed textbook'', the ``textbook'' or ``Havenga'' are references to this book. The study guide has been divided into the following four sections: Section 1 2 3 4 Chapter in textbook Chapters 24 and 25 Chapter 26 Chapter 27 Chapter 28 Subject Negotiable instruments and other instruments of payment Law of trusts Law of insolvency Administration of estates
Each section is again divided into a number of short study units each one of which deals with part of a chapter. In an effort to keep the text in this study guide as straightforward and uncomplicated as possible, we have stuck to one gender in each particular section, alternating between ``he'' and ``she''. Please note that unless we specifically state that we are referring only to a particular gender or we state that a provision applies only to a specific gender, the ``he'' will include ``she'' and vice versa.
The structure of each study unit

Each study unit starts with the prescribed reading material for that unit. The relevant chapter in the textbook is given, as well as the number of the specific section or sections from the chapter that you have to read for the particular unit. A list of objectives or a short scenario (in a shaded block) then follows. The purpose of both is the same, namely to give you an overview of what is going to be dealt with in the particular study unit. The contents of each study unit falls under numbered headings. Please note that these numbers do not in any way correspond with the numbering in the textbook. The numbering of the various parts or sections of each study unit is aimed at showing you how everything fits together by arranging the contents in a structured and logical way. Under each heading you will find notes on the study material relevant to that heading. These notes or comments are not meant to replace or summarise what is contained in the textbook, but usually provide an explanation or additional information to help you understand the material in the textbook
introduction
better and are part of the examination material. In the left-hand margin you will again find a reference to the specific section of the textbook being dealt with under that particular heading. You will also find activities and feedback in each unit. The activities are meant to assist you in establishing whether you have understood the work on which they are based, which you can do by comparing your answers to those given in the study guide as feedback. At the end of each study unit we have included a number of self-test questions which you can use to test your knowledge of the work. Please note that some of the questions in the examination are multiple-choice questions, while generally the self-test questions are not. However, the knowledge required to answer the self-test questions is the same as that which is required to answer multiple-choice questions, and therefore you can only benefit by testing yourself.
How to use the study guide

Start each study unit by reading through the prescribed section of the textbook (given at the beginning of the study unit) to give yourself an overall impression of what the study unit deals with. Then read the objectives or scenario which emphasises the most important aspects of the material. Now take the first heading in the study guide and read and study the prescribed material from the textbook together with the notes in the study guide. Note that the comments in the study guide complement the textbook and they must therefore be studied together with the textbook. Do the activities as you get to them in the study guide, and try not to look at the answers in the study guide before you have done them. The activities are an important part of the study material and you are encouraged to do them. They will help you to understand and memorise the work. After you have gone through all the material in a study unit and you are confident that you understand it, try to answer the self-test questions. To really test yourself, you should try to answer these questions under examination conditions, that is, without the help of your textbook, study guide or notes.
vi
SECTION 1: INSTRUMENTS OF PAYMENT AND OTHER METHODS OF PAYMENT
CONTENTS Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit Study unit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Negotiable instruments and other methods of payment Cheques: definition, parties to, relationships on and elements of cheques Who can claim payment on a cheque? The functions of signatures on cheques Signatures on cheques on behalf of juristic persons Forged and unauthorised signatures Delivery 2 6 12 17 22 26 32
The liability of the drawer and endorser on a cheque and discharge of the obligation to pay a cheque 37 The nature of the relationship between the drawee bank and the drawer and the different markings on a cheque 43 The protection of the drawee bank The liability of the collecting bank Bills of exchange and promissory notes Other methods of payment: credit cards Travellers' cheques, stop orders and debit orders Letters of credit Electronic funds transfer 53 58 63 66 71 78 81
Negotiable instruments and other methods of payment

Prescribed reading material for this study unit Havenga chapter 24, sections 24.2.124.2.2; chapter 25, section 25.1
After completing this study unit you should be able to . . . . explain the function of instruments of payment distinguish between negotiable instruments and other methods of payment name the requirements for an instrument to qualify as a negotiable instrument discuss the concept of simplicity of transfer
1
Study Havenga chapter 24, sections 24.2.124.2.2; chapter 25, section 25.1.
The term ``negotiable instrument'' and other methods of payment
Here you are introduced to some of the instruments of payment by way of which payment in commercial transactions may be made. Note that in chapter 24 only those instruments of payment which may be referred to as negotiable instruments are discussed. Further examples of instruments of payment, or as they are more correctly referred to, `òther methods of payment'', are discussed in chapter 25. As not all the methods of payment which are discussed qualify as instruments of payment (both stop and debit orders are methods, rather than instruments of payment, for example), it is more correct to refer to ``methods of payment'' when referring to those examples discussed in chapter 25. A negotiable instrument, such as a cheque, a bill of exchange or a promissory note, is in principle transferable from one person to another. However, other instruments or methods of payment, such as credit cards and stop and debit orders are generally not transferable from one person to another. The Bills of Exchange Amendment Act 56 of 2000 applies only to certain types of negotiable instruments, namely bills of exchange, cheques (which are simply a particular type of bill of exchange) and promissory notes. The Act therefore does not apply to other types of negotiable instruments and other methods of payment. (See however, the discussion of the travellers' cheque in study unit 14 below.)
Examples
By way of an introduction here are some examples of a cheque, a bill of exchange and a promissory note. Please remember that there are many different types of cheques, bills of exchange and promissory notes, each with different
wording and different markings which may have different legal consequences. These examples are merely specimens of the basic types and outward forms of the various documents. A cheque
20
A bill of exchange
A promissory note
R2 000,00
Cape Town 2 September 2009
I promise to pay Lindsay Gorman or bearer, the sum of two thousand rand on 2 March, 2009, for value received.
section 1 study unit 1
negotiable instruments and other methods of payment
Activity
(1) (2) Make a list of methods of payment other than payment in cash. Make a list of negotiable instruments which are not also instruments of payment.
Feedback
(1) Bills of exchange, cheques, promissory notes, credit cards, travellers' cheques, stop and debit orders, documentary letters of credit and electronic transfer of funds. Share warrants and certain bearer debentures (a debenture is a long-term bond that bears fixed interest and is usually unsecured).
(2)
2
Study Havenga chapter 24, section 24.2.2.
Negotiable instruments as alternatives to cash
Negotiable instruments are used as alternatives to cash in the payment of debts as they are often more convenient and safer than cash. In order to be viable alternatives to cash, bills of exchange, cheques and promissory notes have to satisfy the following three requirements: . they have to be transferable without the need to comply with cumbersome formalities . the defences that can be raised against a person claiming payment should be kept to the minimum . the legal title of a person who acquires such an instrument in good faith should be open to dispute in exceptional circumstances only All bills of exchange, cheques and promissory notes share two basic characteristics, namely simplicity of transfer and the possibility of transfer free from equities.
Activity
(1) (2) What is meant by the phrase ``simplicity of transfer''? What is meant by the phrase ``transfer free from equities''?
Feedback
(1) Apart from signing on the back of the instrument (ie in the case of order instruments) and the delivery of the instrument, a negotiable instrument is generally transferable without the compliance of any (further) formalities. For example, the transfer of a negotiable instrument need not to be accompanied by a separate document to provide proof of the holder's right to transfer the instrument to another party. In terms of the general principle of our law, the recipient of an object cannot acquire a better title (ie a stronger right) in respect of the object than the title of the person who transferred the object to the recipient. For example, although the lessor of a motor vehicle may validly sell the vehicle to a third party, the lessor cannot transfer ownership of the motor vehicle to the third party (buyer) since the lessor is not its owner. The lessor can only transfer possession (and not also ownership) of the motor vehicle. However, in the case of negotiable instruments there is an exception. The recipient of a
(2)
negotiable instrument may in certain circumstances acquire a valid title to a negotiable instrument even though the person from whom he takes the instrument has an invalid title to it, or even no title at all.
SELF-TEST QUESTIONS
If you were able to do the activities, you are already well prepared for the examination as regards the work covered in this study unit. Therefore, there are no self-test question for this study unit.
negotiable instruments and other methods of payment
Cheques: definition, parties to, relationships on and elements of cheques

Prescribed reading material for this study unit Havenga chapter 24, sections 24.3.124.3.5.2.4.
After completing this study unit you should be able to . . . . . . . give a definition of the concept of a cheque list the essential and non-essential parties to a cheque name and discuss the different relationships on a cheque name and briefly explain the essential elements of a cheque complete a valid cheque name and briefly explain the non-essential elements of a cheque judge whether or not certain omissions on a cheque are detrimental to its validity
1
Study Havenga chapter 24, sections 24.3.1, 24.3.2.
The definition of a cheque and the necessary parties to it
Although this section contains a lot of information, the subject matter is rather straightforward. A thorough understanding of the information contained in this study unit will ensure a solid basis for the remainder of the study units on cheques. It is of the utmost importance that you know the definition of a cheque off by heart. By knowing the definition you will at once be able to tell who are the necessary parties to a cheque, and also be able to list the essential elements of a cheque. The definition of a cheque may be divided into the following seven elements: . . . . . . . it is an unconditional order in writing addressed by one person to a bank signed by the person giving it requiring the bank to which it is addressed to pay on demand a sum certain in money to a specified person or his order, or to bearer
The different elements or essentials of the cheque will be discussed in more detail below.
From this definition it is clear that there are always three different parties (or more correctly, three different capacities) to a cheque. Although the parties to a cheque are often three different (and separate persons) this need not be the case. The three essential or necessary parties to a cheque are the following: . The drawer the person who has a current account (eg a cheque account) with the drawee bank and who gives the order to the drawee bank to pay a specified amount to the payee or bearer. . The drawee bank the bank which holds the current account of the drawer and at which the drawer has either deposited an amount of money to be used to pay out cheques, or with which the drawer has made an arrangement for overdraft facilities (ie the drawer does not have sufficient funds of his own and the bank therefore pays the amount of the cheque from its own funds). . The payee the person to whom payment must be made (the name of the payee is usually clearly indicated in the space provided on the face of the cheque. The drawer may decide not to name a specific payee but to make the cheque payable to ``cash or bearer''). Thus, although there must be a drawer, a drawee and a payee to a cheque, the drawer and the payee, for example, may be one and the same person. This will be the case where the drawer draws a cheque on his bank in favour of himself. This is, of course, a way in which the holder of a cheque account may withdraw money from the account for personal use.
2
Non-essential parties to a cheque
The endorser and the endorsee are two non-essential parties to a cheque. Havenga, section 24.3.3 describes the concepts of endorser and endorsee.
Activity
Name the three necessary parties to a cheque.
Feedback
The drawer, the drawee bank and the payee.
3
Study Havenga chapter 24, sections 24.3.424.3.4.3.
The relationships between parties to a cheque
Three different relationships There are always three different relationships to a cheque. . First, there is the underlying relationship between the drawer and the payee. This relationship represents the reason for A drawing a cheque in favour of the payee. For example, the drawer may have promised in terms of a contract of donation to pay the payee a sum of R500. Since the existence of the contract of donation is not clear from the face of the cheque, it is referred to as the underlying relationship.
cheques: definition, parties to, relationships
. Secondly, there is the relationship which arises from the agreement to use the cheque. This relationship represents the agreement between the parties to the underlying relationship that the debt in terms of the underlying relationship will be paid by way of a cheque. Without such previous implied or express agreement between the parties, the debtor is not entitled to force the creditor to accept payment of the debt by way of a cheque. . Thirdly, there are the relationships on the cheque. Apart from the creditor's and debtor's respective rights and duties in terms of the underlying relationship, certain further rights and duties also come into existence when the drawer (ie the debtor) draws a cheque in favour of the payee (ie the creditor). The creditor (as payee) may sue the debtor (as drawer) in terms of the cheque. Such right is not available to the creditor before the cheque has been drawn.
Activity
Name five examples of typical underlying relationships on a cheque.
Feedback
Any five of the following examples may constitute an underlying relationship on a cheque (ie the reason why the drawer drew a cheque and gave it to the payee), namely a contract of sale, lease, donation, work, mandate, service, or insurance, or the payment of damages to the payee (ie the plaintiff) as a result of a delict committed by the drawer (ie the wrongdoer). The number of examples of typical underlying relationships on a cheque are, of course, unlimited.
4
Study Havenga chapter 24, sections 24.3.5.124.3.5.1.8.
The essential elements of a cheque
The essential elements of a cheque are those elements or characteristics which have to be present before a document or instrument will be regarded as a cheque. These elements are derived from the definition of a cheque as discussed above. For the sake of completeness they are repeated hereunder. The eight essential elements of a cheque are (1) (2) (3) (4) (5) (6) (7) (8) an order which is unconditional and in writing addressed by one person to a bank (ie the drawee bank) signed by the person giving it (ie the drawer) requiring the bank to whom it is addressed to pay on demand a sum certain in money to a specified person (ie the payee) or his order, or to bearer
It is important to note that the essential elements must all be present in order for such document or instrument to qualify as a cheque. The presence of merely one or some of these elements does not constitute a cheque. Likewise, if one of the essential elements is absent, the document will not qualify as a cheque. Fictitious payees Please note section 24.3.5.1.8 in Havenga, seventh paragraph. Here it is stated
that where the payee of an order cheque is a fictitious person, the cheque may be treated as a bearer cheque. The following principles are relevant: (1) (2) (3) (4) The intention of the drawer is pivotal in determining whether an order cheque may be treated as a bearer instrument. If the drawer had the intention of making payment to the payee, whether he is fictitious or not, the cheque will remain an order cheque. An order cheque will only be treated as a bearer instrument when the drawer did not intend that payment be made to the payee. If an order cheque is treated as a bearer cheque, no valid signature is necessary to effect negotiation and the person who receives such a cheque may become a holder of it. (A holder is a person who is in possession of a bearer cheque. See section 24.3.6.1.1 in Havenga.)
Activity
Complete the following blank document by inserting all the essential elements of a cheque so that the document qualifies as a valid cheque. Do not insert any of the non-essential elements of a cheque.
20
Feedback
P Smith One hundred rands only
20
100=00
C Burger
5
The non-essential elements of a cheque
The non-essential elements of a cheque are those elements which often appear on a cheque but whose presence or absence does not affect the validity of the cheque. Havenga section 24.3.5.2 discusses the non-essential elements of a cheque.
Activity
Complete the following blank document by inserting four non-essential elements of a cheque on the face of it. Do not insert any of the essential elements of a cheque on the document.
20
Feedback
Payable at: Hatfield Pretoria
2 July
20
09
Stamp: R1
Without recourse
SELF-TEST QUESTIONS
(1) (2) (3) Name the three different relationships on a cheque. May an order cheque ever be treated as a bearer cheque? What are the eight essential elements of a cheque?
10
ANSWERS TO SELF-TEST QUESTIONS

(1) The relationship between the drawer and the payee, the relationship arising from the agreement to use the cheque and the relationship on the cheque itself. Yes, when the payee of an order cheque is fictitious and the drawer did not intend that payment of the cheque be effected to him, the cheque may be treated as a bearer cheque. A cheque is an unconditional order in writing, addressed by one person to a bank (ie the drawee bank), signed by the person giving it (ie the drawer) requiring the bank, to whom it is addressed, to pay on demand a sum certain in money to a specified person (ie the payee) or his order, or to bearer.
(2)
(3)
11
Who can claim payment on a cheque?

Prescribed reading material for this study unit Havenga chapter 24, sections 24.3.624.3.6.2.3. After completing this study unit you should be able to . . . . . . . define the concept of a holder list the rights of a holder briefly discuss the duties of the holder advise someone on who can claim payment on a cheque define the concept of a holder in due course list the requirements for a holder to be a holder in due course explain the special position of a holder in due course
1
Study Havenga chapter 24, section 24.3.6.1.1.
The concept of a holder
Holder This is a difficult and important study unit. It contains basic definitions and concepts. We therefore suggest that you first read through this study unit as a whole before attempting to study the unit in detail. It is of the utmost importance that you know the definition of a holder off by heart. By knowing the definition you will at once be able to tell whether or not a particular party qualifies as the holder of a cheque. The question whether or not someone qualifies as a holder of a cheque has far-reaching consequences. A holder is the payee or endorsee in possession of an order instrument or the person in possession of a bearer cheque. This definition explains the following: (1) The holder of a bearer cheque is anyone who is in possession of it. The bearer of a bearer cheque is, by implication, in possession of the cheque. If someone ``bears'' (literally: ``to carry'', ``to have'' or ``to possess'') the cheque, it is implied that the person is in possession of the cheque since it is not possible to ``bear'' a cheque without being in possession of it. The holder of an order cheque is the payee or indorsee in possession of the cheque. (For a discussion of the concepts of ``payee'' and `ìndorsee'', see again study unit 2 above.) This means that to qualify as the holder of an order cheque one has to be either the payee who is in possession of it, or the endorsee who is in possession of it.
(2)
12
The question whether or not a party qualifies as the holder of the cheque is important for a number of reasons: (1) (2) Discharge (ie valid payment) of the cheque can only be to a holder of the cheque. Note that it is not necessary for the holder of the cheque to be in lawful possession of the cheque or to be the owner of the cheque to qualify as a holder. Thus, it is possible for a thief to be the holder of a cheque. Likewise is it possible for a non-owner of a bearer cheque, such as the agent who receives it on behalf of his principal, to be its holder. Holdership implies possession of a cheque. If someone is not in possession of the cheque, he cannot be the holder, even if he is its owner. However, mere possession is not enough to qualify as the holder of an order cheque. ``Holder'' is a neutral concept. Being holder is thus not synonymous with being owner or creditor: it merely gives one the power to sue on the cheque without implying that one is entitled to the rights embodied in it. Finally, it is important to note that during the ``life'' of a cheque a number of persons may qualify as the holder of it. However, as a matter of general principle it can be stated that it is not possible for two or more parties to be holder of the cheque simultaneously. A cheque may have only one holder at any given time.
(3) (4)
(5)
(6)
Activity
A draws a cheque on B Bank in favour of C or bearer. A delivers the cheque to C. X steals the cheque from C. X presents the cheque for payment to B Bank. Will payment by B Bank to X be payment in due course? Explain.
Feedback
``Payment in due course'' means payment to the holder of the cheque. X is the holder of the cheque notwithstanding the fact that he is not lawfully in possession of it. Because this is a bearer cheque, any person in possession of it qualifies as holder of it.
2
The rights and duties of a holder
The holder of a cheque has certain rights and duties in respect of the cheque. The duties which rest on the holder are not duties in the strict sense of the word but concern certain steps and procedures which the holder must take to enforce his right to payment on the cheque.
Activity
(1) (2) List the four rights of a holder of a cheque. One of the so-called duties of a holder of a cheque is to present the cheque for payment within a ``reasonable time''. What is regarded as a ``reasonable time''?
who can claim payment on a cheque?
13
Feedback
(1) The holder of a cheque may sue on the cheque in his own name, he may present the cheque for payment, he may make certain additions and alterations to a cheque and when a cheque is lost, a holder may ask the drawer for a duplicate of the cheque. See section 24.3.6.1.3 (a) for the answer. Some of the duties of a holder include presenting the cheque for payment within a reasonable time and exercising his right of recourse against the drawer and endorser when a cheque is dishonoured by non-payment.
(2)
3
The holder in due course
The law of negotiable instruments acknowledges a special type of holder, namely a holder in due course. The Bills of Exchange Act 34 of 1964 has set strict requirements before someone will qualify as a holder in due course. As a result, the law also confers certain privileges and rights on a holder in due course. (The special position of the holder in due course is discussed below.) Generally the holder in due course becomes owner of the cheque if all the requirements for holdership in due course are met. It is important to note that someone must comply with all the requirements for holdership in due course before he can qualify as one. You must know all eight requirements for holdership in due course. It will not suffice to know only, for instance, six or seven of the requirements as you will then not be able to tell with certainty whether someone qualifies as a holder in due course.
Activity
List the eight requirements that a person should meet in order to qualify for holdership in due course.
Feedback
To become a holder in due course a person must meet the following requirements: . . . . . He must be a holder. The cheque must be negotiated to him. He must receive the cheque complete and regular on the face of it. He must take the cheque before its due date. He must take the cheque without knowing that it has been dishonoured in the past. . He must take the cheque in good faith. . He must not know of any defect in the title of the person who transfers the cheque to him. . He must take the cheque for value.
4
The special position of the holder in due course
The special position which the holder in due course enjoys can be summarised as follows:
14
. The holder in due course holds the cheque free from equities. This means that the rights of a holder in due course are not affected by any defect in the title of the person from whom he has received the cheque. In other words, when someone qualifies as a holder in due course, he has the peace of mind that he is protected against defences which are not clear from the face of the cheque. Thus, it is possible for a holder in due course to acquire ownership in the cheque even where he acquires it from a non-owner. The concept of ``free from equities'' was explained in study unit 1 above. . As a result of the fact that the holder in due course holds the cheque ``free from equities'' he may enforce payment of the cheque against all parties liable on it. . As a corollary of the principle that the holder in due course holds the cheque ``free from equities'', so-called relative defences cannot be raised against a holder in due course. A relative defence is a defence that prior parties may have among themselves.
SELF-TEST QUESTIONS
Discuss in each of the following cases whether Y is a holder in due course, a holder or a mere possessor: (1) Y receives an order cheque from his father as a birthday present. The cheque was previously dishonoured but Y is unaware of this. You may assume that all the other requirements for holdership in due course have been complied with. A draws a cheque on B Bank in favour of C or order. C, without adding anything to the cheque, gives it to Y, who gives value for the cheque. You may assume that all the other requirements for holdership in due course have been complied with. A draws a cheque on B Bank in favour of cash or bearer. A gives the cheque to Y as payment for a motor vehicle in terms of a contract of sale. You may assume that all the other requirements for holdership in due course have been complied with. A draws a cash cheque on B Bank. A delivers the cheque to Y. The cheque is neither dated, nor is the place of payment of the cheque indicated on it. You may assume that all the other requirements for holdership in due course have been complied with. A draws a cheque on B Bank in favour of Y or order. You may assume that all the other requirements for holdership in due course have been complied with. A draws a cheque on B Bank in favour of Y or bearer and delivers the cheque to Y. Z steals the cheque from Y. You may assume that all the other requirements for holdership in due course have been complied with.
(2)
(3)
(4)
(5)
(6)

(1) This question concerns the requirement that the holder in due course must have given value for the cheque. The fact that Y received the cheque as a gift means that Y did not give value for the cheque and that he will qualify only as a holder (he is the payee in possession of an order cheque) and not also as a holder in due course. The fact that the cheque was previously dishonoured is irrelevant as Y was unaware of this.
who can claim payment on a cheque?
15
(2)
(3)
(4)
(5)
(6)
This question deals with the requirement that the holder in due course must first of all be a holder. As Y is neither the payee (C is) nor the endorsee (there is no endorsee) who is in possession of the order cheque, he is not the holder of it. Y is therefore neither the holder in due course nor the holder but a mere possessor. This question concerns the requirement that the holder in due course must first of all be a holder. As this is a bearer cheque any person in possession of it qualifies as its holder. Y therefore qualifies as a holder in due course of the cheque. This question covers the requirement that the cheque must be complete and regular on the face of it. However, the elements which are omitted in this question, namely the date and place of payment, are non-essential elements and their omission does not affect Y's rights. Y qualifies as holder in due course. This question concerns the requirement that the cheque must be ``negotiated'' to the holder in due course. In the case of an order cheque, it is said that the cheque is not ``negotiated'' to the payee, but that it is `ìssued'' to him. The issuing of a cheque is the first transfer by the drawer to the payee of a cheque. Although Y is the payee of an order cheque he does not qualify as a holder in due course. However, Y does comply with the requirements for holdership. This question concerns the requirement that possession is the basis of holdership. Because Y is no longer in possession of the cheque he is neither holder in due course, nor holder, nor possessor of it.
16
The functions of signatures on cheques

Prescribed reading material for this study unit Havenga chapter 24, sections 24.3.724.3.7.1.1; 24.3.7.1.3
After completing this study unit you should be able to . list the two requirements before someone will be liable on a cheque . define the concept of a ``signature'' . name the three possible functions which a signature may fulfil . name the different functions which a drawer's signature may fulfil . name the different functions which an indorser's signature may fulfil
1
Study Havenga chapter 24, sections 24.3.724.3.7.1.1
The requirement of a signature to establish liability on a cheque
The following two requirements must be satisfied before a party can become liable on a cheque: (1) (2) He must sign the cheque (either as the drawer, the indorser or in any other capacity which indicates his willingness to incur liability on the cheque). He must deliver the cheque. (The requirement of delivery will be discussed in more detail in study unit 7 below.)
The basis to this study unit is the first requirement for liability, namely that no one can be held liable on a cheque if his signature does not appear on the cheque. Thus, as a matter of general principle it can be stated that the mere fact that someone has handled a cheque or that his name appears on the cheque (eg as payee of it) will not result in liability for that person on the cheque. The following principles are applicable: . In accordance with the general principles of the law of contract, the mere fact that someone's signature appears on a cheque will not necessarily result in his being liable on the cheque. . In this regard you are referred to the principle that only persons who have the necessary ``capacity to act'' may incur personal liability. The term ``capacity to act'' refers to the capacity to perform juristic acts, to participate in legal intercourse, to conclude valid contracts or to draw or sign a cheque. Only natural persons (ie individuals like you and me) are potentially capable of having capacity to act. Juristic persons (ie companies, closed corporations and the like) can never be capable of performing juristic acts. . Consequently a contract on behalf of a legal person must be entered into by a natural person. . However, not all natural persons have capacity to act. In certain circumstances a person can be incapable of performing juristic acts, or his
the functions of signatures on cheques
17
capacity can be limited, owing to various factors. These factors include age, marriage and mental deficiency (see again Havenga chapter 5, sections 17). (Please note that you are not expected to study Havenga chapter 5, sections 17 for examination purposes. You are merely referred to that section of the textbook to refresh your memory on the topic of capacity to act.) Of all these factors the effect of age on the capacity to act is the most important for present purposes. . A minor is anyone below the age of 18. As a matter of general principle it can be stated that a contract entered into by a minor without the necessary assistance of his guardian is not enforceable against the minor. However, such contract is not necessarily void and without effect. . With regard to a cheque it can be stated that a minor can draw a valid cheque without the assistance of his guardian but that such cheque is not enforceable against the minor but only against other parties provided, of course, that they have signed it.
Activity
Discuss whether Y will be held liable on a cheque in the following circumstances: (1) Y, the holder of a cheque account at Standard Bank gives one of his standard cheque forms to Z in payment of Y's debt towards Z. X forgets to sign the cheque but he nevertheless gives it to Z with the intention of making Z the owner of it. A draws a cheque on B Bank in favour of Y or bearer. Y is A's minor daughter. Y transfers the cheque to Z in the usual way in which this type of cheque is transferred. A draws a cheque on B Bank in favour of Y or order. Y is A's minor daughter. Y transfers the cheque to Z in the usual way in which this type of cheque is transferred.
(2)
(3)
Feedback
(1) (2) The fact that Y's signature does not appear on the cheque means that he will not be held liable on the cheque. A bearer cheque is transferred by mere delivery. As Y's signature is not necessary for transfer in the usual way, we can assume that her signature does not appear on the cheque and that she cannot be held liable on the cheque. An order cheque is transferred by signature (indorsement) and delivery. As Y's signature is necessary for transfer in the usual way, we can assume that her signature does appear on the cheque. However, because Y is a minor she cannot incur liability on the cheque.
(3)
2
Study Havenga chapter 24, section 24.3.7.1.3
The different functions of signatures on cheques
A signature on a cheque can fulfil the following three different functions: (1) (2) (3) a constitutive function a guarantee function a transfer function
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. The constitutive function of a signature refers to the placing of the drawer's signature on a cheque to effect the cheque's creation. Without such signature no cheque comes into being. Only the drawer's signature fulfils a constitutive function. . The guarantee function of a signature refers to the fact that in certain circumstances the person who places his signature on the cheque undertakes or guarantees to pay the holder of the cheque if the cheque is dishonoured when presented for payment. . The transfer function refers to the situation where the signature of a person is necessary to effect the transfer from that person to the person to whom the cheque is transferred. For example, an order cheque is transferred by an indorsement (ie signature) by the holder of the cheque together with actual or constructive delivery of the cheque. In other words, in order to transfer an order cheque from one holder of the cheque to another validly, the first holder must put his signature on the cheque and then give (ie deliver) it to the next person, who will become holder of it.
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The possible functions of the signatures of different parties to a cheque
A number of different parties may be involved during the lifetime of a cheque. Some of the more frequently encountered parties to a cheque will be mentioned here, followed by a short discussion of the possible functions which their signatures may fulfil. (1) The drawer. The drawer's signature fulfils a constitutive and a guarantee function. Solely the drawer's signature (and not also, eg, the indorser's signature) can fulfil a constitutive function. (The term ``constitutive'' means ``to have the power of constituting'', that is, to have the power to make a thing what it is. In other words, without the signature of the drawer there can be no cheque.) Minor Although the drawer must deliver the cheque to the payee for the lastmentioned to become the holder of the cheque, that does not mean that the signature of the drawer fulfils a transfer function. As a minor cannot, as a matter of general principle, be held liable on a cheque, the signature of a minor drawer fulfils only a constitutive function and not also a guarantee function. Remember that although a drawer who is a major is allowed to add the words ``sans recourse'' to the cheque, it is unlikely that the payee will accept such a cheque as he will not be able to sue the drawer successfully on the cheque. (The words ``sans recourse'' mean ``without recourse''. The purpose of these words on a cheque is to protect the person who adds them to the cheque from liability to subsequent holders.) If the major drawer adds the words ``sans recourse'' to the cheque, his signature fulfils only a constitutive function and not also a guarantee function. In the case of a minor, the law provides for an exception to the rule as the law generally protects the interests of minors. A minor need not add the words ``sans recourse'' to a cheque to enjoy the protection of the law. Such protection is granted automatically. Any person who takes a cheque which was drawn by a minor should be aware that he will not be able to sue the minor successfully on the cheque.
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(2)
The payee. The payee becomes liable on the cheque only if he puts his signature on it. If the payee (as holder) wants to transfer an order cheque to another person, the payee must put his signature on the cheque and deliver it to the other person. The payee then becomes known as the indorser. The signature of such payee (indorser) fulfils a guarantee and a transfer function. In the case of an indorser, the words ``sans recourse'' can be added to a cheque. Such words will then protect the indorser against claims from subsequent holders of the cheque. The signature of the indorser who has added the words ``sans recourse'' to the cheque fulfils only a transfer function. As a bearer cheque is transferred by mere delivery it is not necessary for the holder of it to put his signature on it to effect transfer. However, if the holder decides to put his signature on a bearer cheque (which is in itself not a very clever thing to do because the holder thereby unnecessarily becomes personally liable on the cheque) his signature will fulfil only a guarantee function and not also a transfer function. The endorsee. The endorsee is the holder of the cheque who has received it from a previous holder. For example, if the payee of an order cheque has signed the cheque (ie endorsed it specifically to X) and has delivered it to X, X is known as the indorsee. If X wants to transfer the cheque to another person, he in turn, must put his signature on the cheque. . The signature of the endorsee fulfils a guarantee and a transfer function. Remember that by putting his signature on the cheque the indorsee becomes the (or rather, another) indorser of the cheque. . From this it follows that an indorsee may also add the words ``sans recourse'' to a cheque as the endorsee becomes merely another endorser of it. The signature of the endorsee cum endorser who has added the words ``sans recourse'' to the cheque fulfils only a transfer function.
(3)
(4)
The drawee bank and collecting bank. As banks do not, as a matter of general principle, put their signatures on their client's cheques, they therefore do not incur any liability on their client's cheques. (This is with the exception of the situation where the client obtains a bank-guaranteed cheque from his bank, which is explained elsewhere.)
SELF-TEST QUESTIONS
Here you are provided with two lists. The first list contains a number of functions of the different signatures which may appear on a cheque. The second list contains a description of the different parties to a cheque. Rearrange each option in the second list to correspond with the option in the first list which best describes it. Each option from the second list may be used only once. List 1 (1) (2) (3) (4) (5) Constitutive function. Transfer function. Guarantee function. Constitutive and guarantee function. Transfer and guarantee function.
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List 2 (a) (b) (c) (d) (e) The signature of a drawer who is a major. The signature of an indorser of an order cheque. The signature of an indorser of a bearer cheque. The signature of a drawer who is twenty years old. The signature of an indorser of an order cheque which is accompanied by the words ``sans recourse''.

(1) (d) (2) (e) (3) (c) (4) (a) (5) (b)
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Signatures on cheques on behalf of juristic persons

Prescribed reading material for this study unit Havenga chapter 24, section 24.3.7.1.2.
After completing this study unit you should be able to . distinguish between, on the one hand, natural persons and, on the other hand, juristic persons . name the requirements before a juristic person will be liable on a cheque . describe in two sentences what is meant by the term ``composite signature'' . distinguish, with reference to different practical examples from the case law, when a natural person will incur liability on a company cheque
1
Signatures on behalf of juristic persons
It was explained in study unit 4 above that only natural persons (ie any individual) are potentially capable of having capacity to act. Juristic persons such as companies and closed corporations can never be capable of performing juristic acts. (For the remainder of the discussion in this study unit any reference to a company includes a closed corporation, except where indicated otherwise.) In the present context, juristic acts include the drawing of a cheque. Consequently a cheque on behalf of a company or closed corporation must be drawn or signed by a natural person. The directors of a company or the members of a closed corporation usually draw or sign a cheque on behalf of the juristic person.
2
Composite signatures
The signature on behalf of a company is usually a composite signature. A composite signature usually comprises a stamped impression of the name of the company coupled with the signature of a director. The requirement that the director must sign the cheque in conjunction with the impression of the company's name is usually found in its memorandum and articles of association. If the memorandum and articles of association of the company provides for a composite signature, the signature consists of the stamp impression as well as the signature of the director. If either one of these two elements is missing, the signature will be incomplete and neither the company nor the director will be liable on the cheque. It is important to note that the signature of the director forms an integral part of the
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company's composite signature. This means that, as a matter of general principle, the director will not incur personal liability if he signs the cheque on behalf of the company. However, there are exceptions to the rule. We will now take a look at four different scenarios regarding possible liability on a company's cheque. First, the company alone may be liable. This will be the case when the following two requirements are met: (1) (2) The company must have the capacity to incur liability on a cheque. The person who signs on behalf of the company must have the authority to do so.
Secondly, the company as well as the director may be liable. In this case, if a company cannot pay its debts, the plaintiff will be forced to have recourse to the director whose signature appears on the cheque. It must be remembered that if the director indicates that he is signing in a representative capacity he alone will usually not be held liable. Where the director fails to indicate that he is signing in a representative capacity only, he will be liable. Practical examples of this scenario are discussed in more detail below. Thirdly, it is possible that only the director may be liable. For example, where the company's memorandum and articles of association provide that its cheques must be signed by the managing director, and one of the ordinary directors knowingly and with the intention to deceive the third party signs one of the company's cheques in his own name, the company will not be liable. However, the ordinary director will be liable. Fourthly, it is possible that neither the company nor the director may be liable. This will be the case where, for example, the amount of the cheque exceeds the maximum amount which the memorandum and articles of association of the company authorise the particular director to sign for. You should keep in mind that the liability which a director may incur applies also to indorsements made on behalf of the company. This is a very important principle, especially in the light of the Bills of Exchange Amendment Act of 2000 that is discussed below.
3
Practical guidelines from the case law
The circumstances in which the director will be held personally liable where he puts his signature on a company cheque, are subject to much debate. A number of court cases dealing with this issue are referred to in section 24.3.7.1.2 of the textbook. From these cases it is clear that there are no fixed principles in this regard. However, what becomes evident from these examples is the fact that it is safest for a director to sign a cheque on behalf of a company by clearly indicating next to his signature that he is signing in a representative capacity only. In this regard he may make use of terms such as ``per'', `òn behalf of'', or ``for''. From the examples to which you are referred in section 24.3.7.1.2 it is clear that if the words ``per'' or `òn behalf of'' appear next to only one of several signatures, those directors whose signatures are not clearly qualified may nevertheless incur personal liability. The Bills of Exchange Amendment Act of 2000 has changed the above situation in cases where the signatory signs as drawer on behalf of a principal. Section 24 has been amended and now reads: `Ìf a person signs a bill as drawer, acceptor or
signatures on cheques on behalf of juristic persons
23
indorser and adds words to his signature indicating that he signs for or on behalf of a principal, or in a representative capacity, or if he signs as drawer and the name of the principal appears with his signature, he is not personally liable thereon''. The words in bold have been inserted and it is now clear that it is no longer necessary for the drawer of a bill to indicate that he is signing in a representative capacity if the name of his principal appears ``with'' his signature. It should not matter if the name of the principal was printed (or even pre-printed) on the cheque before the representative signs the cheque as drawer as long as the name of the principal appears ``with'' the name of the drawer. However, it is important to note that the amendment applies only to instances where the signatory signs the cheque as drawer and not in cases where, for example, he signs as indorser or acceptor. Where the signatory in a representative capacity signs, for example, as indorser, he must still indicate that he is signing on behalf of a principal if he wants to avoid personal liability on the instrument. Both an authorised and an unauthorsed agent alike can be held personally liable on an instrument: the authorised agent will be liable if the name of the principal does not appear ``with'' his signature as drawer on the cheque; and the unauthorised `àgent'' will be liable in terms of the proviso to section 24(1) by reason of the absence of authority. This proviso reads: ``Provided that if such person had in fact no authority to sign for or on behalf of the person indicated as principal, or in a representative capacity, he shall be personally liable on the said bill.'' The potential personal liability of the signatory in a representative capacity will in future be determined by how a reasonable person will interpret the cheque, taking into account everything that appears on the face of the cheque.
SELF-TEST QUESTIONS
The company is XYZ (Pty) Ltd. The directors of the company are R Solomon and P Banda. Indicate in each of the following cases how the directors must sign the cheque as indorser on behalf of the company to avoid personal liability. (1) The composite signature of the company consists of a stamp impression with two blank spaces forming part of the stamp. XYZ (Pty) Ltd ....................................................................................................................................... ....................................................................................................................................... (2) The composite signature of the company consists of a stamp impression with two blank spaces forming part of the stamp. XYZ (Pty) Ltd ....................................................................................................................................... ....................................................................................................................................... (3) The composite signature of the company consists of a stamp impression with two blank spaces forming part of the stamp. XYZ (Pty) Ltd ............................................................................................................ (Director no 1) ............................................................................................................ (Director no 2)
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(1) XYZ (Pty) Ltd
.......................................................................................................................................
per R Solomon per P Banda ....................................................................................................................................... per R Solomon

.................................................................
(2)
XYZ (Pty) Ltd
................................................................. (3) XYZ (Pty) Ltd
per P Banda
R Solomon P Banda ............................................................................................................ (Director no 2)

............................................................................................................ (Director no 1)
signatures on cheques on behalf of juristic persons
25
Forged and unauthorised signatures

Prescribed reading material for this study unit Havenga chapter 24, section 24.3.7.1.424.3.7.1.5.
After completing this study unit you should be able to . distinguish between, on the one hand, a forged signature and, on the other hand, an unauthorised signature . explain the legal consequences of a forged signature on a cheque . explain the legal consequences of an unauthorised signature on a cheque . define the term `èstoppel'' in your own words . describe in two sentences what is meant by the term ``holder by estoppel'' . write a short explanatory note on the protection provided by section 53(2)(b) of the Bills of Exchange Act to a ``holder in due course''
1
Study Havenga chapter 24, section 24.3.7.1.4. Forged signature
Forged signatures
Please note that the discussion of forged signatures in this study unit covers the forging of the signature of the drawer as well as the signature of the endorser. A forged signature on a cheque is any fraudulent imitation of a signature with the object of deceiving another person or persons. . It is therefore clear that if a thief steals a cheque and puts his own signature on the cheque it will not amount to a forgery. However, in the vast majority of cases where a cheque is stolen the thief will not put his own signature on the cheque, but he will forge the signature of the person from whom he has stolen the cheque. This will be the case where the signature of the true owner (ie the person who is entitled to possession of the cheque and from whom the cheque was stolen) is necessary to effect the valid transfer of the cheque (ie in the case of an order cheque). . It is important to note that a forged signature is wholly inoperative and can never be ratified. In other words, the person whose signature has been forged cannot afterwards ratify (ie give formal approval or consent to) the forgery.
1.1 THE LEGAL CONSEQUENCES OF A FORGED SIGNATURE

Section 53(2)(b)
The discussion on the legal consequences of forged signatures involves two issues: . There is the principle that a forged signature is wholly inoperative and
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. There is the exception to the first principle which is provided for in section 53(2)(b) of the Bills of Exchange Act. In terms of the Bills of Exchange Act, a forged signature is wholly inoperative. This means that no right to retain or give discharge for the cheque or to enforce payment of it against any party can be acquired through the forged signature. In other words, a forged signature is worthless, but the cheque stays valid although no rights can be conferred or transferred. Two examples will suffice to explain the general rule. (1) If the drawer's signature is forged neither the payee nor any subsequent holder will be able to obtain payment on the cheque from the drawer or any subsequent party who has put his signature on the cheque. If the signature (endorsement) of the payee or any subsequent holder is forged, any person who obtains such cheque subsequent to the forging will acquire no rights on it against any previous party.
(2)
However, section 53(2)(b) of the Bills of Exchange Act provides for an important exception to the general rule that a forged signature is wholly inoperative. The working of section 53(2)(b) may be explained on the basis of the following example: Say John draws a cheque on Standard Bank payable to Yvonne or order and issues the cheque to Yvonne. Pete, a thief, steals the cheque from Yvonne, forges her signature on its back and delivers it to Don who takes it in good faith and for value. Don changes the forged `èndorsement'' to an endorsement in his name, signs the cheque and delivers it to Ezra who also takes it in good faith and for value. Ezra's position is as follows: . In terms of the general principle which provides that a forged signature is wholly inoperative, Ezra will not be able to claim payment from any of the previous parties to the cheque (ie not from John as Ezra is not the holder of the cheque, not from the Standard Bank because Ezra is not the holder and also because the Standard Bank did not sign the cheque [see again study unit 4 above], not from Yvonne as she did not sign the cheque, and not from Don as the forged signature by the thief renders the cheque [subsequent to the forged indorsement] wholly inoperative). . Ezra's only remedy will be to claim from the thief (Pete). Such claim will be based on delict and not on the cheque itself because Pete was never a party (in his own name) on the cheque (he never put his signature on the cheque). The exception and protection provided for by section 53(2)(b) to parties which are in a position like that of Ezra's, is as follows: . It provides that the endorser of a cheque (ie Don), by indorsing it, `ìs precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer's signature and all previous endorsements''. . In other words, section 53(2)(b) provides that if Don indorses the cheque and delivers it to Ezra, Don will not be allowed to rely on the principle that the forged signature of the thief renders the cheque wholly inoperative. In terms of the provisions of section 53(2)(b), Ezra will therefore be able to claim the amount of the cheque from Don (but not from any of the earlier parties to the cheque).
forged and unauthorised signatures
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Section 53(2)(b) merits a few comments: . First, you must remember that the general principle provides that no one can become a holder of a cheque after a forged signature has been made on the cheque. . This also means that no person can become an indorser, or a holder, or a holder in due course of such a cheque. . Section 53(2)(b) provides that notwithstanding this general principle, Don will be regarded as an `èndorser by estoppel'' and Ezra will be regarded as a ``holder in due course by estoppel''. Section 53(2)(b) neither makes Don a (true) indorser nor Ezra a (true) holder in due course, but they are regarded as such for purposes of section 53(2)(b). In passing, something on the meaning of the term `èstoppel''. You must remember that estoppel is a defence in the hands of someone who has been misled by the conduct of another person. The term `èstoppel'' means that a person who has negligently (or intentionally) created an incorrect impression will be held to that impression where another person has acted on the impression to his prejudice. The practical consequences of estoppel may be explained on the basis of the following example: Say that Jane is the owner of a computer business. One day she decides to hold a sale. She puts sale stickers on all the computers in her shop. She mistakenly also puts a sticker on her own computer which she uses for private purposes but which stood next to some of the other computers in the shop. In the course of the day, she sells her private computer to Marks without realising that it is her private computer. At the end of the day, she realises her mistake and informs Marks that she wants her computer back. Marks is not interested in returning it as he bought it at a good price and there are no more computers left on sale. Jane will not be able to claim the computer from Marks because although it was not her intention to sell it, she negligently created the impression that it was for sale and she negligently sold it to Marks. Marks acted to his prejudice on the impression created by Jane in that he could have bought one of the other computers had he been aware of the fact that the computer was Jane's private property. Jane will therefore be held to the impression that she created, namely that she wanted to (and did in fact) sell her computer in terms of the contract of sale to Marks. Estoppel will therefore be a defence in the hands of Marks if Jane wants to claim her computer from him. For more on the term `èstoppel'', see again section 24.3.7.1.4 of your textbook. . Secondly, and closely allied to the first comment, although Ezra will be entitled to rely on the protection provided for in section 53(2)(b) only if he satisfies all the requirements for holdership in due course (see again study unit 3 above), section 53(2)(b) excuses Ezra from the requirement that he must be a holder. (Remember that although Ezra is in possession of the cheque, he does not qualify as a holder as he does not fulfil the requirements for holdership. Although at first glance he appears to be the indorsee of the cheque, he is not. Owing to the forged indorsement there can be no valid endorsee.) . This is the basis of section 53(2)(b). . Thirdly, section 53(2)(b) provides protection to a subsequent ``holder in due course'' (ie Ezra) only against previous `ìndorsers'' (ie Don) and not also against, for example, the drawer (ie John).
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. Finally, you must keep in mind that, as a matter of general principle, section 53(2)(b) applies only to order cheques since bearer cheques are transferred by mere delivery and it will usually not be necessary for the thief to endorse a bearer cheque (ie forging the signature of the holder from whom he has stolen the cheque) to transfer it to a third party.
Activity
Read the scenario below and answer the questions given. Your answers should include an explanation. A draws a cheque on Z Bank in favour of B or order. A delivers the cheque to B. C steals the cheque from B and forges B's signature on the back of it. C adds the words ``Payable to D'' on the back of the cheque and delivers it to D, who takes it in good faith and for value. D, in turn, signs the cheque and add the words ``payable to E'' on the back of it and renders it to E, who takes the cheque in good faith and for value. Finally, E signs the cheque and delivers the cheque to F, who takes the cheque in good faith and for value.
Questions
(1) (2) (3) (4) (5) (6) Will Will Will Will Will Will A be liable towards F? B be liable towards F? C be liable towards F? D be liable towards F? E be liable towards F? Z Bank be liable towards F?
Feedback
(1) No. Because of the forged signature the cheque is wholly inoperative and F is not a holder for purposes of payment of the cheque. Remember that section 53(2)(b) gives F a right against previous `èndorsers'' and not also against the drawer. No. For the same reason as in (1). No, not on the cheque, because C is not a party to the cheque (he did not put his signature on the cheque). However, F can claim from C on delict. Yes. D is an `ìndorser'' as provided for in section 53(2)(b). Yes. E is an `ìndorser'' as provided for in section 53(2)(b). No. First, because the forged signature is wholly inoperative against parties who dealt with the cheque prior to the forgery. Secondly, Z Bank did not sign the cheque.
(2) (3) (4) (5) (6)
2
Study Havenga chapter 24, section 24.3.7.1.5. Unauthorised signature
Unauthorised signatures
An unauthorised signature is the authentic signature of the person who places his signature on the cheque but without the necessary authority to sign the cheque. For example, if the memorandum and articles of association of a company provide that the company's cheques must be signed by the directors, a typist's signature on a company cheque will be an unauthorised signature.
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An unauthorised signature differs from a forged signature in the following respects: . First, an unauthorised signature is the actual signature of the person who places the signature on the cheque. . In the case of a forged signature it is not the signature of the person who signs the cheque but a fraudulent imitation of another person's signature. . Secondly, an unauthorised signature can be ratified by the principal (ie the person on whose behalf the unauthorised signature was made). A forged signature cannot be ratified or approved by the person whose signature was forged.
2.1 THE LEGAL CONSEQUENCES OF AN UNAUTHORISED SIGNATURE

Study Havenga chapter 24, section 24.3.7.1.5. Unauthorised signature The first consequence of an unauthorised signature is that it is wholly inoperative. This means that any person who receives a cheque after an unauthorised signature has been placed on it, will acquire no rights on the cheque. You are referred again to the provisions of section 53(2)(b) which apply with equal force to an unauthorised `èndorsement''. Secondly, a person who signs a cheque but who has no authority to sign, will be personally liable on it. You will remember that in the example given under the discussion of the consequences of forged signatures, the thief was not liable on the cheque because his signature did not appear on the cheque. In the case of an unauthorised signature, the person who signs but who has no authority to sign will be personally liable because his signature appears on the cheque. If an unauthorised signature is ratified by the principal the person who has placed his signature on the cheque will no longer be personally liable.
SELF-TEST QUESTIONS
X is a twenty-two-year-old cashier working in her father's cafe. Answer the following questions by choosing the correct option. (1) If X imitates her father's signature on one of his cheques the cheque will be ................................................ (a) valid (b) wholly inoperative (2) If X puts her own signature on one of her father's cheques without his permission the cheque will be (a) valid (b) wholly inoperative (3) If X indorses one of her father's cheques which was given to him by a customer without his permission, ...................................... will be personally liable on the cheque. (a) X's father (b) X and her father (c) X
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(4)
If X puts her signature on one of her father's cheques without his permission but he ratifies her signature at a later stage, .......................................... will be personally liable on the cheque. (a) X's father (b) X and her father (c) X
(5)
If X endorses one of her father's cheques which was given to him by a customer by imitating his signature but he ``ratifies'' the signature at a later stage, will be personally liable on the cheque. (a) X's father (b) X and her father (c) X

(1) (2) (3) (4) (5) (b) (b) (c) (a) (c)
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Delivery
Prescribed reading material for this study unit Havenga chapter 24, section 24.3.7.2 [the whole section].
After completing this study unit you should be able to . . . . . . . explain the basic importance of delivery explain how delivery takes place explain the different functions of delivery apply the presumptions relating to delivery, to factual problems distinguish between delivery and issue distinguish between transfer and negotiation list the requirements for a valid endorsement and explain the other important provisions of the Act relating to endorsements which do not affect the validity of the endorsement . distinguish between the different types of endorsement
1
Study Havenga chapter 24, section 24.3.7
The basic importance of delivery
Study units 46 were devoted to a discussion of a signature on a cheque as a requirement for liability on a cheque. In study unit 4, however, we mentioned that a signature on its own is not enough to make a person liable on a cheque. One other requirement, namely delivery of the cheque, must also take place before anyone who signed the cheque can be liable. The basic importance of delivery of a cheque is, therefore, that it is a prerequisite for liability on a cheque.
2
How delivery takes place
In Havenga we mention briefly the following: . The term ``delivery'' means the ``transfer of possession'' of the cheque. . This includes the `àctual handing over of the cheque with the intention of transferring ownership'' as well as constructive delivery . The term ``constructive delivery'' includes situations where the cheque is already in the possession of the transferee who, after ``delivery'', now keeps it for himself, or those instances where the cheque is in the possession of a third party who, after ``delivery'', now holds it on behalf of the transferee.
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3
The different functions of delivery
As is the case of a signature on a cheque (see study unit 4), delivery can fulfil any one of three different functions, that is, it can have a . constitutive, . transfer or . guarantee function. Please note and make sure you understand why we say that delivery can fulfil at most two of these functions at the same time and not all three. The two functions which are mutually exclusive (ie they cannot be present at the same time) are the constitutive and transfer functions. At the same time, the only functions which may be present on their own are the constitutive and transfer functions (as in case of a minor who signs and delivers a cheque where there is no guarantee function).
4
Study Havenga chapter 24, section 24.3.7.2.3 .
The presumptions relating to delivery
In order to understand this part of the work properly, it is crucial that you know the definitions of, and distinctions between, an ordinary holder and a holder in due course. . The gist of this part of the work is that, whether a person is a holder or a holder in due course in possession of a cheque, it is presumed that there was a valid and unconditional delivery of the cheque. . If, however, the person in possession is only a holder, the person who signed the cheque may rebut this presumption that is he may lead evidence showing that despite the presumption, he in fact never actually validly and/or unconditionally delivered the cheque. . In contrast, if the cheque is in possession of a holder in due course, the presumption is irrebuttable this means that even though the person who signed the cheque never delivered the cheque or delivered the cheque conditionally (and who therefore cannot be liable on the general principle that delivery is a prerequisite for liability), that person is held to the fiction that a valid delivery took place. When you study the example in Havenga, remember that the thief of a bearer cheque can be a holder of the cheque, even though he stole the cheque. As holder, the thief is entitled to sue (the first right of a holder of a cheque is to institute action on the cheque in his own name). This should be distinguished from the question whether the thief will be successful in his action.
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Study Havenga chapter 24, section 24.3.7.2.4. Issue and delivery
The distinction between delivery and issue
Activity
Read the scenario below and answer the questions given. Your answers should include an explanation. Charlie Brown's wife, Lucy, is on her way to do her monthly grocery shopping at the Checkers store just up their street. Because Lucy has no income (she is a
delivery
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housewife) and does not know how much the groceries will cost, she asks Charlie to sign a blank cheque which she takes with her. At the supermarket she fills in the date, the name of the payee (Checkers or order) and the amount in words and figures and hands the cheque to the teller as payment. (1) (2) Who issued the cheque to whom? If one applies the ordinary principles of liability on cheques, is Charlie Brown liable on the cheque?
Feedback
(1) Lucy issued the cheque to Checkers. A cheque can only be issued once it is complete in form (ie after Lucy filled in the missing details) and delivered (handed over by Lucy to the teller) to someone who takes it as holder (Checkers, being the payee in possession of an order cheque). Yes. Charlie Brown signed the cheque and it was delivered (remember that issue is the first delivery of a cheque) to Checkers by Lucy on his behalf.
(2)
Point to ponder
Look at the above example again. How would your answer have differed had Lucy, contrary to the agreement with Charlie, used the cheque to pay for clothes at Edgars and filled in the cheque payable to Edgars or bearer? Assume further that Charlie found out about this and stopped the cheque (it is more correct to speak of a countermand of payment). To assist you we do not tell you this in the prescribed book you have to bear in mind that Charlie Brown will be able to use the absence of authority on Lucy's part against a claim by a holder, but not a holder in due course.
Feedback
The payee of a bearer cheque may well be the holder in due course of that cheque (in contrast to the payee of an order cheque). As holder (remember, a holder in due course is, in the first instance, also a holder) he has the right to institute action on a dishonoured cheque (as is the case here with the countermanded cheque) in his own name against a party who meets the basic requirements for liability, such as Charlie Brown (who signed as the drawer). The cheque was also delivered to the payee. It is, however, clear that Lucy acted beyond the scope of her authority by using the cheque for a purpose other than the one authorised by Charlie Brown. However, because Edgars is the holder in due course, Charlie will not be able to use this as a defence.
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The distinction between transfer and negotiation
To understand this part of the discussion properly, one has to bear in mind the nature of a cheque as a negotiable instrument, that is, it is a piece of paper which embodies certain rights which may be transferred simply by transferring the piece of paper. Most of us who use cheques, simply use them to pay for things as we would with cash, and as far as we are concerned, only two parties (the drawer and payee) are involved. However, nothing (except, of course, a nontransferable cheque) prevents the payee from transferring the cheque to a creditor, for example, to pay off his debt.
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In order to clarify certain parts of the work, we have decided to give particular meanings to the words ``transfer'' and ``negotiation'', although these meanings may not be entirely consistent with the definitions in the Act. In terms of our definitions we can say the following: . ``Negotiation'' is a narrower term than ``transfer''. . Negotiation is, in fact, a special kind of transfer which leads to the recipient of the cheque being a holder in due course. Please keep this distinction in mind, especially once we get to the discussion on the different types of crossings on cheques and their effects. Havenga touches on this where a cheque crossed with the words ``not transferable'' and a cheque crossed with the words ``not negotiable'' are discussed. . These crossings are discussed in more detail in study unit 9. As mentioned in Havenga, a bearer cheque is transferred through mere delivery and an order cheque is transferred through endorsement plus delivery.
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Endorsement requirements for validity
The requirements for a valid endorsement are the following: (1) (2) (3) (4) It must be in writing on the cheque and must be an endorsement of the whole cheque. A signature is sufficient (see the discussion of a blank endorsement below). Everyone named as payee or endorsee (other than partners) must endorse the cheque. If, as payee or endorsee, the endorser's name is misspelt (remember that the endorser will receive the cheque either as payee or endorsee), the cheque must be endorsed as wrongly indicated and the proper signature must be added.
(Other provisions of the Act which relate to endorsements but which do not affect the validity of an endorsement, are listed in Havenga. Make sure you know them.)
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The different types of endorsement
There are the following three types of endorsement, namely: . an endorsement in blank . a special endorsement . a restrictive endorsement are discussed in Havenga The distinction between the three types of endorsement is best made with reference to form and effect. An endorsement in blank consists of a signature (nothing more) and changes an order cheque to a bearer cheque. A special endorsement consists of a signature coupled with a direction to ``pay X'' or ``pay X or order'' and ensures that an order cheque remains an order cheque. A restrictive endorsement comes in two forms, both of which affect the cheque's transferability as follows:
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(1) (2)
The cheque may be made completely nontransferable by adding to the signature the words ``pay X only''. The other form of a restrictive endorsement gives the endorsee the power to deal with the cheque as indicated thereon but not to transfer the cheque (unless otherwise indicated). This second form of restrictive endorsement could, for example, consist in the addition of the words ``pay X for collection'' to the signature.
Also note the remark in Havenga that should the restrictive endorsement allow for further transfer of the cheque, the endorsee will only acquire the title which the endorser had this means a transfer subject to equities, which, in turn, implies that nobody can be a holder in due course of that cheque. The following remarks on the example in Havenga might prove useful: . Many students, when asked whether a bearer cheque can be converted to an order cheque answer ``yes'' based on the example of someone changing an endorsement in blank (a bearer cheque) to a special endorsement (an order cheque). . The example in Havenga relates to a cheque originally drawn payable to order which is then, through an endorsement in blank, changed to a cheque payable to bearer and subsequently, through changing the endorsement in blank to a special endorsement, changed back to an order cheque. . This should be distinguished from a cheque which is originally drawn payable to bearer. . Such a cheque cannot be changed to a cheque payable to order.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) Name the three functions of delivery. What is `ìssue''? Distinguish between issue and negotiation. Why is the distinction between issue and negotiation important? Name three different kinds of endorsements.

(1) (2) (3) The constitutive function, the guarantee function and the transfer function. Issue is the first delivery of a cheque to a person who takes it as a holder. Issue takes place only where the drawer delivers a cheque to the first payee thereof. Negotiation refers to any further transfer of a cheque from a transferor to a recipient. The recipient of the cheque may also become a holder in due course if all the other requirements for holder in due course are met. Negotiation is one of the requirements which must be met before a person may become a holder in due course of a cheque. Only the payee of a bearer cheque may become a holder in due course through mere issuing. The payee of an order cheque will never become a holder in due course since there is no endorsement on the cheque. Endorsement in blank, special endorsement and a restrictive endorsement. Make sure that you understand the difference between these three types of endorsement.
(4)
(5)
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The liability of the drawer and endorser on a cheque and discharge of the obligation to pay a cheque
Prescribed reading material for this study unit Havenga chapter 24, sections 24.3.7.3 and 24.3.8. After completing this study unit you should be able to . . . . . explain the liability of the drawer on a cheque explain the liability of an endorser on a cheque explain the concept of discharge list the requirements for a payment in due course list the three most important exceptions to the definition of payment in due course
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Study Havenga chapter 24, sections 24.3.7.3.1 and 24.3.7.3.2
The basic liability of the drawer and endorser of a cheque
From the discussion on signature and delivery as prerequisites for liability on a cheque, it should be clear that the drawer's signature on a cheque will (almost always) simultaneously fulfil a constitutive and a guarantee function, while that of the endorser will fulfil a transfer and guarantee function. The question which now arises is what exactly does this guarantee function entail? There are the following two aspects to the guarantee function fulfilled by the signature of the drawer: (1) The bottom line is that the drawer's signature guarantees that if the cheque is properly presented, it will be paid. Although we do not discuss the rules on how a cheque must be presented for payment in detail, the Act contains fairly detailed prescriptions on how this must be done. Suffice it to say, for present purposes, that the essence of proper presentment is the physical presentment of the cheque, within a reasonable time after issue, at the branch of the drawee bank on which the cheque was drawn. In a negative sense, this guarantee means that if, on proper presentment, the cheque is dishonoured because of, for example, a countermand of payment or a lack of funds, the holder, or an endorser who is forced to pay, can sue the drawer for the amount of the cheque.
(2)
The basic liability of the endorser is much the same as that of the drawer the endorser also guarantees that the cheque will be paid on proper presentment
the liability of the drawer and indorser on a cheque
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and, if the cheque is dishonoured (ie it is not paid on proper presentment), the endorser will compensate the holder or a later endorser who has to pay the amount of the cheque.
Example
Study the set of facts below as a typical example of the chain of events in the case of a cheque being dishonoured. John Smith draws a cheque in favour of one of his suppliers, Dick Evans. The cheque is drawn on the Lynnwood Road branch of ABSA Bank (the drawee bank) and it is made payable to ``Dick Evans or order'' for the amount of R1 000. It is also signed by John Smith and delivered to Dick Evans. Dick Evans, however, owes Peter Johnson R1 200 for a surfboard he recently purchased. Dick signs the cheque on the back and gives it to Peter along with R200 in cash. Peter pays the cheque into his account at the Brooklyn branch of Standard Bank (which we refer to as the collecting bank). Standard Bank provisionally credits Peter's account with the R1 000 and thereafter presents the cheque on behalf of Peter for payment at ABSA Bank (assume proper presentment took place). The cheque is dishonoured, however, because John Smith has no funds to his credit in his account and no overdraft facility. The cheque is sent back to Peter (via Standard Bank) with the words ``refer to drawer'' on it. Standard Bank reverses the earlier provisional credit to Peter's account.
Discussion
It is clear from the facts that Peter Johnson will be the unhappy party he has sold a surfboard and is yet to receive part (R1 000) of the purchase price. What he does have, however, is a dishonoured cheque for R1 000 signed by both John Smith (as drawer) and Dick Evans (as endorser). Furthermore, we know that Peter is the holder of the cheque (he is the endorsee in possession of an order cheque) and that as the holder, he is entitled to institute action (to sue) on the cheque in his own name. . The first choice Peter has to make is whether to sue in terms of the underlying contract of sale with Dick Evans or whether to base his action on the cheque. . If we assume that Peter decides to sue on the cheque, the next choice he has to make is whether to sue John Smith (as drawer who signed and delivered the cheque) or Dick Evans (as endorser who signed and delivered the cheque). This decision will be influenced by the following two factors: (1) Which of the two (John or Dick) has the most money. (2) The fact that Peter and John are remote parties may mean that if Peter is a holder in due course, the defences available to John against a claim by Peter will be very limited (only the absolute defences will be available). Because Dick and Peter are immediate parties, Dick will be able to use any defence (absolute or relative) against Peter's claim (irrespective of whether Peter is a holder or a holder in due course). If Peter decides to sue John (as drawer), John will have to pay the amount of the cheque to Peter (unless John can raise a successful defence against Peter's claim).
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If Peter decides to sue Dick (as endorser), Dick will have to pay the amount of the cheque to Peter, but in this case John will have to compensate Dick (look at the principles set out earlier). If we assume that Peter also endorsed the cheque in favour of Austin Martin, and that after the cheque was dishonoured, Austin decided to sue Peter, Peter will have the right to look to either John or Dick for compensation. If Peter looks to Dick, Dick has the right to look to John for compensation.
TIP
As you will see from the above set of facts, things can become fairly complicated in cheque law. The best way to deal with this is always to make a schematic representation of the facts for yourself in which you indicate the sequence in which the parties are involved and their respective capacities.
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Study Havenga chapter 24, sections 24.3.7.3.1 and 24.3.7.3.2
Presumptions relating to the liability of the drawer and endorser
So far we have concentrated on the basic liability of the drawer and endorser on a cheque. However, things are not all that easy. Sometimes, even though it might look as if someone is liable on a cheque (because that person signed the cheque), he might have a good defence to negate his liability. Earlier on, we discussed the concepts of ``relative'' and `àbsolute'' defences. You might remember (if you don't, go back and review that part of the work) that absolute defences are available against all claims on a cheque, even those of a holder in due course. The most important examples of absolute defences are . lack of contractual capacity . forgery
EXAMPLE OF CONTRACTUAL INCAPACITY

Peter Bacela draws a cheque in favour of Trevor Quirk (Jnr) or order. Trevor Quirk (Jnr), who is a minor, endorses the cheque (without any assistance) in favour of Edwill van Aarde. In the meantime, Peter finds out that the amount of the cheque is much more than his actual debt to Trevor Quirk (Jnr), and he countermands payment of the cheque. Edwill clearly is the holder of the cheque (he is the endorsee in possession of an order cheque remember that a minor's signature does fulfil a transfer function) and, if he meets with all the other requirements for holdership in due course, he will qualify as the holder in due course. As such he may sue either Peter Bacela or Trevor Quirk (Jnr). His action against Trevor Quirk (Jnr) will be unsuccessful, however, because Trevor can raise the absolute defence that he does not have contractual capacity.
EXAMPLE OF FORGERY
Peter Bacela draws a cheque in favour of Trevor Quirk (Snr) or his order. A thief, who owes money to attorney, Roger Fixit, for services rendered, steals the cheque
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from Trevor and writes on the back of the cheque ``Pay Roger Fixit''. Below these words the thief forges Trevor's signature. Roger Fixit, who owes his ex-wife alimony writes on the back of the cheque ``Pay Cruella Fixit'' and signs his name below these words. In the meantime, Trevor has informed Peter of the theft and Peter countermands payment. Cruella presents the cheque for payment, but the cheque is dishonoured because of the countermand of payment. In this case, Cruella is not a holder, let alone a holder in due course remember the principle that no title is transferred through a forgery. Should Cruella want to sue any other party to the cheque, the basis of the defence would be that there was a forgery, that this means that she has no title (as holder) and that this, in turn, means that she does not have the right to sue anybody on the cheque. The above examples serve to illustrate how the two main absolute defences lack of contractual capacity and forgery of a signature operate to negate liability. The Act, however, contains important provisions which limit the application of these defences (these principles are also mentioned in Havenga). Let us consider these provisions with reference to our examples, as follows: . As far as the defence of a lack of contractual capacity is concerned, there is a specific provision which holds that the drawer may not use a payee's lack of capacity as a defence against the holder in due course. In our first example, this means that Peter may not use the lack of capacity of Trevor (Jnr) as a defence against Edwill's claim. If the payee's signature is forged, however, then the drawer may use this as a defence against a later person who would have qualified as a holder in due course, had it not been for the forgery. In the second example, therefore, Peter will be able to use the forgery as a defence against Cruella. . The endorser is in a somewhat more tricky situation when it comes to the effect of a forged signature. The Act provides that an endorser cannot deny to a holder in due course that his (the endorser's) title is invalid or that the signature of the drawer or any one of the previous endorsers was forged. This issue was also discussed earlier on when we focused on forged endorsements (see study unit 6). In the second example, this means that Roger cannot use the forgery of Trevor's signature to escape liability as against Cruella. If you are not sure why we say this, go back and study unit 6 again.
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Discharge of the obligation to pay a cheque
Although this topic is discussed for scarcely half a page in Havenga, we cannot overemphasise the importance of a proper understanding of the crucial role the concepts ``discharge'' and, more particularly, ``payment in due course'' as one of the ways through which discharge is effected, play in cheque law. As far as discharge is concerned, you need to know the following four things:
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(1)
(2) (3) (4)
The effect of discharge is that in law the cheque, and the underlying obligation on which it is based, is regarded as having been fulfilled and, consequently, extinguished. This means that nobody can be held liable on the cheque or on the underlying obligation for which the cheque was tendered. Discharge can be effected in a number of ways but the most, and for your purposes, the only important way is through payment in due course. The definition of payment in due course is crucially important and you need to know it off by heart. One of the requirements for payment in due course is that payment must be made to the holder of the cheque (do you remember the definition of the term ``holder''?). Although you are not expected to know all the details at this stage (the topic is covered in detail in study unit 10), you should already take note that there are three important exceptions to the requirement that payment in due course may be made only to a holder of a cheque. These relate to (a) forged endorsements (s 58 of the Act) (b) crossed cheques paid to another bank (s 79 of the Act) (c) absence or irregularity of endorsements (s 83 of the Act)
Activity
Does the bank make a payment in due course in each of the instances listed below? (1) (2) (3) (4) (5) A draws a cheque on B Bank in favour of C or order. C presents the cheque for payment to B Bank and B Bank pays C in good faith. The same as in (1) except C endorses the cheque in favour of D or order and D is paid by B Bank. The same as in (2), except C endorses the cheque in blank and gives it D, who gives it to E and E receives payment from B bank. The same as in (2), except C's signature is forged by X. The same as in (2), except C is a minor.
Feedback
In all these cases, except (4), the bank makes a payment in due course because it pays to a holder and in good faith (on the assumption that all the other requirements for a payment in due course have been met). . In (1) C is the holder as the payee in possession of an order cheque. . In (2) D is the holder as the endorsee in possession of an order cheque. . In (3) E is the bearer and holder of a bearer cheque (the endorsement in blank changed the order cheque to a cheque payable to bearer). . In (4) D has no title to the cheque because of the forgery, which means B bank will not pay the holder. Therefore, in principle, this is not a payment in due course. . This statement should, however, be seen in light of the discussion of the extended protection of the drawee bank where it pays the wrong person (a non-holder) as a result of a forged endorsement see study unit 10 below. . The minor's signature (in (5)) does fulfil a transfer function this means that the endorsement by C is valid as far as the transfer of a title is concerned this
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means that D is the holder (as the endorsee in possession) and therefore entitled to payment.
SELF-TEST QUESTIONS
Please see the questions at the end of study unit 11.
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The nature of the relationship between the drawee bank and the drawer and the different markings on a cheque
Prescribed reading material for this study unit Havenga chapter 24, sections 24.3.9.1 to 24.3.9.2.
After completing this study unit you should be able to . explain the contractual nature of the relationship between the drawee bank and the drawer . explain the function of a cheque within this contractual relationship . name five instances in which the drawee bank is not, as a rule, entitled to debit its client's account after paying a cheque or where there is no duty on the drawee bank to pay a cheque . explain the rules governing the forgery of the drawer's signature . explain the basis of the liability, if any, of the drawee bank as against a third party (other than the drawer) . distinguish between general and special crossings on cheques by giving examples of each . name the parties who may cross a cheque . explain the effect of a crossing on a cheque . explain the effect of the words ``not negotiable'' on a cheque . explain the effect of the words ``not transferable'' on a cheque . explain the effect of the words `àccount payee only'' on a cheque
PLEASE NOTE THAT THIS IS QUITE A LONG STUDY UNIT WHICH, FOR YOUR BENEFIT, HAS BEEN SUBDIVIDED INTO A NUMBER OF SMALLER TOPICS WHICH DO NOT NECESSARILY CORRESPOND WITH THE HEADINGS IN THE TEXTBOOK. BRACE YOURSELF!
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Study Havenga chapter 24, section 24.3.9.1
The contractual nature of the relationship between the drawee bank and the drawer
One of most misunderstood principles of cheque law relates to the relationship between the drawee bank and the drawer. As explained in the textbook, this relationship is, in the first instance, contractual by nature, which means the terms and conditions of the relationship are determined by the parties themselves. The basis of this relationship, however, revolves around the simultaneous presence of two types of contracts (the details of which may differ), namely a contract of loan for consumption (similar to a savings account) as well as a contract of mandate.
the nature of the relationship between the drawee bank
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In other words, the drawee bank agrees to accept money on deposit from a client and to repay it on demand and according to the instructions given by the client, usually in the form of a cheque (but which also could be in the form of, for example, a debit order).
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The function of a cheque within the framework of the contractual relationship between the drawee bank and the drawer
A cheque is the way in which the client (drawer) gives an instruction to the drawee bank to pay the named payee, or his order, or bearer. In terms of the contract with its client, the bank must comply with this instruction, if properly given. As long as the drawee bank complies with the instruction as contained in the cheque, the drawee bank is entitled, after payment of the cheque, to debit its customer's account. Please note that the right to debit the customer's account arises only if the bank carries out the instructions of the client the drawer. However, sometimes the bank pays where in fact it never had a mandate to do so or where if it did, the mandate had been terminated before payment. At the same time, there is a duty on the drawer to give his instructions properly. A more correct way of putting this would be to say that if the drawer does not give his instructions properly, and the bank reacts to the wrong instructions, the drawer will not be able to hold the bank liable for damages.
Activity
In a real case which took place some 40 years ago, the drawer of a cheque was asked by his wife to write out a cheque for R1,00 to two strangers as a deposit for part payment for certain articles of clothing. The strangers did not want to accept cash. When asked to write out the cheque, the drawer was busy installing a pump in his dairy and, because of his greasy hands, he asked the strangers to fill out the cheque so that he could merely sign it. This they did as follows: the cheque was made payable to bearer and between the words `òne'' and ``rand'' they left a space of about two centimetres on the cheque form. Between the ``1'' and the ``,00'' they also left a space of about two centimetres. The drawer signed the cheque. Thereafter, the strangers then added the word ``thousand'' between `òne'' and ``rand'' and also filled in three noughts. The drawee bank paid the cheque and debited the account of the drawer. The drawer then sought a declaratory order that the drawee bank had not been entitled to debit his account with the difference between R1,00 (the amount which correctly reflected his instruction) and R1 000,00, that is, R999,00. How would you solve this problem?
Feedback
As a general rule, we can say that if a drawer negligently draws a cheque in such a way as to facilitate fraud (as in this case) and the drawee bank pays the incorrect amount as a result of such fraud, it is the drawer's loss and the bank will be entitled to debit the account of the drawer with the higher amount. Interestingly, however, the court found on the facts that although the drawer was negligent, so too was the drawee bank. Furthermore, the negligence of the
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drawee bank (and not the negligence of the drawer) was the cause of the cheque being paid for the higher amount. This finding by the court was based on a combination of the following facts: (1) (2) (3) The cheque was for a large amount (40 years ago R1 000,00 was quite something!) and presented for payment by a total stranger. The cheque was payable to cash or bearer. By paying the cheque, the bank was allowing its client (the drawer) to exceed the limit on his overdraft substantially. This should have raised suspicion on the part of the bank and it should have made some queries. The word ``thousand'' was written in thinner ink than the words `òne'' and ``rand'' and it was compressed to fit in between the other two words.
(4)
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Absence or termination of the mandate of the drawee bank to pay a cheque
For our purposes, the most important instance where a drawee bank has in fact no mandate to pay a cheque, is where the drawer's signature has been forged. Very often students are misled by the fact that a forgery is very well executed. Just remember that as long as the drawer's actual signature does not appear on the cheque, there simply is no mandate to the bank to pay. In other words, if the drawee bank does pay the cheque, it cannot debit the client's account. The exception to this rule is where the drawer knows or suspects that his signature has been forged, but fails to notify the bank. There are three ways in which the mandate to pay a cheque is terminated. These are countermand of payment by the drawer, the death of the drawer or the insolvency of the drawer. Please note that countermand of payment should be carried out at the branch of the drawee bank where the account is held. Usually this is done in writing by filling out a form at the branch of the drawee bank. Beware of the fine print, however. Often these forms provide that `ìn the event of the bank inadvertently paying out the cheque, despite the countermand of payment, the bank will still be entitled to debit the client's account''. Also remember that if you stop a cheque, this does not mean that you have discharged all your obligations. That cheque will be dishonoured by nonpayment, and will be sent back to the person who presented it for payment. That person (if he is the holder) will be entitled to sue on the cheque. If a bank pays a cheque in the absence, or after the termination, of its mandate, it cannot debit its client's account. Also note that if a client has no funds in his current account and no overdraft facility, or if he will exceed the limits of his overdraft should a cheque be honoured, the bank is under no duty to honour the cheque.
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The liability of the drawee bank
You will remember our earlier discussion where we explained that a party to a cheque can be liable only if he signed the cheque and if such signature was followed by a valid delivery. Also bear in mind that, as a rule, cheques are not accepted, which is one of the main differences between cheques and bills of exchange. `Àcceptance'' is the legal act of the drawee of a bill by which he signifies his assent with the order of the drawer by signing the bill and delivering it
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to the person who presented it for acceptance. As such (by signing the bill), the acceptor (previously the drawee) becomes liable on the bill itself and, in case of the bill being dishonoured, can be sued on the bill. In contrast, in the case of cheques, the drawee bank never signs the cheque (note, however, the example below) and as such can never be held liable on the cheque by strangers. Liability of the drawee bank can arise only through breach of contract (usually against the drawer) or in delict (by negligently causing damages) or through the special provisions of the Act, for damages for failure to pay a cheque according to the way it was crossed (see below).
Example
Alanis Morrisette draws a cheque in favour of Janet Jackson. The cheque is drawn on the Arcadia branch of Nedbank. Janet indorses the cheque in favour of Cheryl Crow. In the meantime, Alanis finds out that she never actually owed Janet anything. She therefore countermands payment. The cheque is sent back to Cheryl marked ``payment stopped''. Who can Cheryl sue on the cheque?
Feedback
She can (not necessarily successfully) sue Alanis and Janet, who both signed and delivered the cheque, as drawer and indorser respectively. She cannot sue Nedbank because the bank never signed the cheque.
Activity
Can you think of an example where a cheque is accepted or, where it can be said that a cheque is accepted?
Feedback
Section 72A, which was inserted by section 29 of the Bills of Exchange Amendment Act of 2000, now seeks to deal with certified cheques. This section defines a certified cheque as one in which the ``drawee signs it and adds words to the cheque that indicate that the cheque will be paid or that funds are available for its payment'' (s 72A(1)). The section also deals with the liability of the drawee who certifies a cheque: in terms of section 72A(2), the drawee who certifies a cheque undertakes that he will pay the holder, or the drawer or an indorser who has been compelled to pay the cheque according to the tenor of his certification. This undertaking is similar to that of an acceptor of a bill in terms of section 52(a). The drawee that certifies a cheque is, like an acceptor of a bill (s 52(b)), precluded from denying to a holder in due course the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the cheque (s 72A(b)(i)), as well as the existence of the payee and his then capacity to indorse (s 72A(b)(ii)).
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5
General and special crossings on cheques
The Act distinguishes between general and special crossings. The difference between these kinds of crossings is to be found, not only in the form that they take, but also in their effect, which is discussed in 7 below. As to form, the following are examples of general crossings: (1) (2) two parallel transverse lines two parallel transverse lines with the words ``not negotiable'' (as to the meaning of the words ``not negotiable'' see 8 below)
(Please note that the Bills of Exchange Amendment Act of 2000 now only makes provision for the above two possibilities and not the four mentioned in the textbook.) In the case of a special crossing, the name of a bank is written on the face of a cheque. Please note that this does not have to be accompanied by any words or lines, but may be combined with a general crossing.
6
The parties who may cross a cheque
In the textbook we mention three parties who may cross a cheque the drawer (who may add any kind of crossing), the holder (who may cross it in any manner) and the collecting bank (which may, if the cheque contains no crossing or a general crossing, cross the cheque to itself or, if the cheque already contains a special crossing, add a second special crossing for collection in terms of which a second bank is named to collect the cheque on the first bank's behalf). The Bills of Exchange Amendment Act of 2000 now provides that a collecting bank may cross a cheque generally or specially.
Activity
When you deposit a cheque in your account, the bank always stamps the cheque with a stamp containing the name of the bank. Do you think this stamp constitutes a special crossing?
Feedback
There does not seem to be any good reason why this stamp should not be regarded as a special crossing.
7
The effect of a crossing on a cheque
The principles relevant to this heading are deceptively simple: . If a cheque is crossed generally, the drawee bank must pay the cheque to another bank. . If the cheque is crossed specially, the drawee bank must pay the cheque to the bank named in the special crossing. . If the drawee bank does not comply with the above requirements and the true
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owner of the cheque suffers a loss as a result of this failure on the part of the drawee bank, the drawee bank is liable for such damages. Four remarks need to be made about the above principles: (1) If a cheque is crossed, there must always be two banks involved the drawee bank on which the cheque is drawn by the drawer and which has to pay the cheque, and the collecting bank with whom the cheque was deposited by one of its clients (the payee or indorsee) and which presents the cheque for payment to the drawee bank on behalf of that client. This process of collection is followed whenever a cheque is deposited in a bank account. The fact that the drawee bank pays a crossed cheque over the counter does not necessarily mean that the drawee bank will be liable only if the bank's failure leads to loss on the part of the true owner of the cheque. The principles in (1) and (2) above tell only half the story and should be seen in conjunction with the provisions of section 79 of the Act. This section, which is discussed in detail in study unit 10, turns around the requirement of payment of a crossed cheque to another bank by providing, in simplified terms, that if a bank does pay a crossed cheque to another bank in good faith and without negligence, the drawee bank (and sometimes the drawer) will be protected, notwithstanding the fact that the drawee bank pays to a bank which is collecting on behalf of the wrong person. This is also the first time you have come across the concept of a true owner, who, depending on the circumstances, may or may not be the same person as the holder. This concept is discussed in more detail in 8 below.
(2)
(3)
(4)
8
The effect of the words ``not negotiable'' on a cheque
As mentioned in the textbook, the words ``not negotiable'' affect a cheque in the folllowing two ways. (1) The cheque is no longer transferable free from equities this means a person cannot transfer a better title to the cheque than the title he has. In practical terms this means that a holder can only make the next person a holder and not a holder in due course.
Example
Don King draws a cheque in favour of ``Mike Tyson or order''. The cheque is crossed and marked ``not negotiable''. Mike indorses the cheque in favour of Lennox Lewis. The question now is whether Lennox is a holder or holder in due course. As the indorsee in possession of an order cheque, we know that Lennox is, at least, a holder. He cannot, however, be a holder in due course because as the payee of an order cheque, Mike was only the holder of the cheque while he was in possession of the cheque. Mike, however, was not a holder in due course. You will remember that in order to be a holder in due course, the cheque must be indorsed and delivered to that person. Since a cheque is not indorsed and delivered, but is merely issued to the payee of an order cheque, he (Mike) cannot be the holder in due course of that cheque. Moreover, the fact that the words ``not negotiable'' appear on the cheque, means that Mike cannot transfer more rights to Lennox than those he (Mike) had. This means that Mike can only make
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Lennox a holder of the cheque. Therefore, in effect, there can never be a holder in due course of a crossed cheque payable to order on which the words ``not negotiable'' appear. This also explains why one adds these words to a cheque when one draws the cheque they prevent anybody from being a holder in due course, which means that one will be able to use both relative and absolute defences against remote parties, because, at best, any remote party will merely be an ordinary holder of the cheque. (2) The further consequence of the words ``not negotiable'' on a cheque lies in the relief afforded the true owner of a cheque. The requirements for the operation of section 81 of the Act are discussed in Havenga and will not be repeated here. What we will consider is an example of the application of section 81.
Example
Neil Tovey draws a cheque on the Divided Bank in favour of `Àndre Arendse or order'' in payment of a pair of secondhand soccer boots. Neil crosses the cheque and marks the cheque ``not negotiable'' and delivers the cheque to Andre. A thief steals the cheque from Andre and forges Andre's signature on the back of the cheque (in other words, it looks as if Andre indorsed the cheque in blank to make the cheque a bearer cheque). The thief then uses the cheque to pay a long-standing debt owed to a friend, one Shifty McClean. Shifty, who is in dire need of wheels, uses the cheque to buy a bicycle from a shop belonging to Mr Justice Upright. Justice gives the cheque to his assistant, Poppie Nongena, to deposit in his account at the Second Provincial Bank. This Poppie does. Second Provincial presents the cheque on behalf of Justice for payment at the Divided Bank. The Divided Bank pays Second Provincial in good faith and without negligence. Thereafter, the Divided Bank debits Neil's account and Second Provincial credits Justice's account.
Discussion
In order to understand the workings of section 81, it is necessary to jump the gun a bit by stating that because section 79 affords the drawee bank (Divided Bank) and the drawer (Neil) protection, in the above set of facts it will be deemed that proper payment was made by Neil to Andre (see the discussion in study unit 10). This means that not only will the cheque and the underlying obligation between Neil and Andre be discharged, but that Andre will be out of pocket. If section 81 does apply, however, Andre will be able to sue either Shifty or Justice. Let us apply the requirements for section 81, which, of course, must all be present simultaneously as follows: (1) (2) (3) The cheque must be crossed and marked ``not negotiable''. This is evident from the facts we gave you. The cheque must have been stolen or lost while it was crossed and marked ``not negotiable''. This also appears from the facts we gave you. The drawee bank should have paid the cheque in accordance with the crossing to another bank. We told you that the Divided Bank paid the cheque to the Second Provincial Bank in good faith and without negligence. The plaintiff (Andre) should be the true owner of the cheque. Remember that Neil delivered the cheque to Andre. What would the position have been had Neil posted the cheque to Andre and the cheque had been lost or stolen while in the post? Then the agreement, or the absence of agreement
(4)
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between Neil and Andre to use the post, would have determined who would have to bear the risk. If Andre had agreed to the cheque being posted, delivery would have been regarded as having been made (and Andre would have become the true owner) the moment the cheque had been put in the post by Neil. If there was no agreement to use the post, Neil would have remained the true owner until the cheque was actually delivered to Andre. Despite these rules regulating the passing of risk in the case of cheques sent by post, remember that the drawer (Neil) always has a duty to draw a cheque properly, that is by . . . naming the payee correctly making the cheque payable to order crossing the cheque
(5)
(6)
(7)
In our example, Neil did all of this. If Neil neglected to do this (by, for example, posting a cheque payable to bearer), and Andre suffered damages as a result, Andre would be able to hold Neil liable, despite the fact that Andre had become the true owner and the bearer of risk related to the cheque sent by post. The plaintiff (Andre) must show that he suffered loss as a result of the theft or loss. As mentioned earlier, the debt owed by Neil to Andre is discharged, and Andre still has no money. He therefore did suffer a loss. The defendant must have been in possession of the cheque after its theft or loss. This means that, potentially, Andre will be able to hold Shifty, Justice, Poppie and the Second Provincial Bank liable. For the reasons mentioned in (7) below, these possible defendants are, however, limited to Shifty and Justice. The defendant (either Shifty or Justice) should have ``given consideration for'' the cheque or must have received it as a gift. In our case, both Shifty and Justice gave consideration for the cheque in Shifty's case, the debt owed by the thief was extinguished (which is regarded as consideration) and in Justice's case, the cheque was used to pay for the bicycle. Poppie did not give any consideration, as she was merely acting on behalf of Justice. Note the discussion in Havenga in connection with the collecting bank, which in our case is the Second Provincial Bank. Andre will not be able to sue the Second Provincial Bank as a possessor of the cheque merely because the Second Provincial Bank credited Justice's account with the amount of the cheque. Also note that should Andre ask anybody (including Poppie and the Second Provincial Bank) to give him information about the cheque, and that person fails to do so, that person will be liable in terms of section 81, irrespective of the fact that person did not, in fact, give consideration for the cheque and provided, of course, that the other requirements for section 81 are met. If, for example, the cheque was crossed but the words ``not negotiable'' did not appear on the cheque, section 81 simply cannot apply.
Remember that the effect of section 81 should not be studied in isolation, but in conjunction with the discussion of section 79 (protection of the drawee bank in the case of a crossed cheque).
9
The effect of the words ``not transferable'' on a cheque
A cheque may be made nontransferable in any one of a number of ways. The effect of words prohibiting transfer, or indicating the intention that the cheque should not be transferable, can be explained by using the following example:
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Example
Leo Trotsky draws a cheque in favour of Vladimir Lenin. Leo deletes the words `òr bearer'' printed on the cheque form, and writes the word `ònly'' after Lenin's surname. Leo also crosses the cheque and writes the words ``not transferable'' between the lines (this can be done next to the lines as well). Lenin now indorses the cheque by writing on the back of the cheque, ``Pay Gregory Rasputin'' and signing below these words. Lenin then delivers the cheque to Rasputin. It is clear that, while in possession, Lenin was the holder of the cheque (as the payee in possession). The cheque, however, is not transferable which means that it cannot validly be indorsed and delivered so as to constitute Rasputin the holder (as the indorsee in possession). Should the cheque be dishonoured when Rasputin presents it for payment, Rasputin will not be able to sue Leo or Lenin on the cheque, because he (Rasputin) has no standing to sue (he is not the holder, and only holders have standing to sue on a cheque). The Bills of Exchange Amendment Act of 2000 introduced another type of ``non transferable'' cheque. Section 75A(1) now provides that where `à cheque bears boldly across its face the words ``not transferable'' or ``non transferable'' either with or without the word ònly' after the payee's name'' the cheque shall not be transferable but shall be valid as between the parties thereto. The subsection also provides that such a cheque shall be deemed to be crossed generally, unless it is crossed specially and that the words ``not transferable'' or ``non transferable'' may not be cancelled and that any purported cancellation shall be of no effect. Section 75A deals only with a specific type of not transferable cheque, namely a non transferable cheque that complies with the requirements of the section. This does not exclude the possibility that there could indeed be `òther'' cheques that cannot be transferred. If, for example, a crossed cheque is made payable to a named payee `ònly'', such a cheque by itself would without doubt be a cheque that is not transferable because it contains words indicating an intention to prohibit transfer. Section 75A does not change or alter the other provisions of the Bills of Exchange Act. The provisions of the new section 75A(2)(b) may also be important. This subsection provides that a bank shall not be negligent ``by reason only'' of its failure to ``concern'' itself with ``words prohibiting transfer, or indicating an intention that it shall not be transferable, other than in the manner provided for'' in section 75A.
10 The effect of the words `àccount payee only'' on a cheque

Study Havenga chapter 24, section 24.3.9.2.4 Look at the example under (9) above. Suppose the cheque was crossed, the words `òr bearer'' were deleted, there was nothing added after the payee's name and instead of the words ``not transferable'' the words `àccount payee only'' appeared between the two lines of the crossing. In this case, Rasputin would be a holder because, despite the words `àccount payee only'', the cheque would remain transferable. In fact, Rasputin might even be a holder in due course if all the requirements were met.
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SELF-TEST QUESTIONS
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10
The protection of the drawee bank

Prescribed reading material for this study unit Havenga chapter 24, paragraph 24.3.9.3
After completing this study unit, you should be able to . name the three instances in which a drawee bank is protected even though it does not necessarily pay the holder of a cheque . name the requirements for protection by section 58 of the Act . apply section 58 to a set of facts . name the requirements for protection by section 79 of the Act . apply section 79 to a set of facts . explain the difference between sections 58 and 79 . name the requirements for protection by section 83 of the Act (indorsement of cheques deposited in a banking account)
The point of departure: the extended protection of the drawee bank
In study unit 8 we discussed the concept of ``discharge''. In that unit we explained that the most frequently encountered method of discharge is ``payment in due course''. One of the requirements for payment in due course is that payment must be made to the holder of a cheque. The general principle then is that the drawee bank, in order to be entitled to debit the account of the drawer, must pay the cheque to its holder (ie the payee or indorsee of an order cheque who presents the cheque for payment, or the bearer of a bearer cheque who presents it for payment). This principle would, if applied rigorously, be extremely unfair to the drawee bank, basically for the following two reasons: (1) As we know by now, no title is transferred in the case of a forged indorsement of a cheque, and one cannot expect the drawee bank to authenticate the validity of every signature on every cheque. Cheques are not often presented for payment to the drawee bank directly by the holder or purported holder (in the case of a forgery). This person usually deposits the cheque in his account at his bank (the collecting bank). The collecting bank then presents the cheque on behalf of the depositor to the drawee bank for payment. This means that the drawee bank has no idea on whose behalf the collecting bank is presenting the cheque for payment. In such circumstances, it would be difficult to penalise the drawee bank for making an incorrect payment (to a non-holder), unless the dangers were clearly apparent from the cheque itself.
(2)
To address these situations, the Act provides for three instances of extended
the protection of the drawee bank
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protection to the drawee bank where the bank makes a payment in due course/ a payment which discharges the cheque irrespective of the question whether the drawee bank actually paid to a holder. These are (1) (2) (3) section 58 which provides protection in the case of forged or unauthorised indorsements on order cheques section 79 which provides protection in the case of crossed cheques paid to another bank section 83 which provides protection in the case of the absence of an indorsement or in the case of the presence of an irregular indorsement on a cheque
You should study and understand these sections (especially the first two) on two levels. Firstly, you should know the requirements for the application of each section by heart. This, however, is not enough. Secondly, you should ensure that you are able to apply this knowledge, in a practical way, to a given set of facts.
2
Section 58
In Havenga we name and briefly discuss all the requirements that must be present simultaneously before a drawee bank which pays to a non-holder will nevertheless be protected by section 58 in that the drawee bank will be deemed to have made a payment in due course. Consider the following example:
Example
John Kennedy draws a cheque in favour of ``George W Bush or order'' and delivers the cheque to George W in payment of a course ``Let your charisma shine through'' presented by George W and attended by John. The cheque is uncrossed and drawn on the Sunnyside branch of First National Bank. Adolf Hitler steals the cheque from George W. While lazing next to his pool, Adolf forges George's W signature on the back of the cheque (he writes ``George W Bush'' on the back of the cheque). Adolf then takes the cheque to the Sunnyside branch of First National Bank where he obtains payment over the counter. In the meantime, George W approaches John for a new cheque in settlement of his (John's) debt to George W. John informs him that he has consulted a lawyer who has advised him that the underlying debt owed by John to George W (ie the fee for the course) was extinguished (discharged) by the payment made by First National Bank to Adolf and that George W should stop bothering him. George W is also a client of First National Bank, but at the Menlyn branch.
Feedback
As a general principle, payment by First National Bank to Adolf (or any of Adolf's successors) will not be payment in due course, for the simple reason that nobody can be the holder of the cheque that has been forged, and payment in due course must be made to the holder of a cheque (see study unit 8). If, however, the requirements of section 58 are met, then the payment by First National Bank will be deemed (regarded) to be a payment in due course notwithstanding the fact that payment was made to a non-holder. To determine this, we have to consider all the requirements of section 58 in view of the given facts, as follows:
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(1) (2)
(3)
(4)
(5)
It must be an order cheque, which also implies that the cheque must be transferable. This we tell you in the set of facts. It does not matter whether the cheque is uncrossed, the section still applies. Remember that the section also applies to crossed cheques. If a cheque is crossed, you always have to look at section 79 first. If the bank is not protected by section 79 (because, for example, it paid a crossed cheque over the counter) it cannot rely on section 58. There must be a forged or unauthorised indorsement on the cheque. In this case we tell you that Adolf forges George W's signature at home. This means that by the time Adolf gets to the bank, the signature is already on the back of the cheque. This, in turn, means that Adolf presents himself to the bank as the holder of a cheque which had become a bearer cheque through George W's blank indorsement. We are therefore dealing with a forged indorsement and consequently this requirement of section 58 is met. Compare this with the situation where Adolf simply steals the cheque, takes it to First National Bank to obtain payment over the counter and is then asked by the teller to sign the cheque at the back as proof of his identity as George W. In this case the forged signature does not purport to be an indorsement, but serves an identification function to convince the teller that the person presenting the cheque for payment is indeed George W. In this case section 58 will not apply. The bank must pay the cheque in the ordinary course of business and in good faith. This you may assume in the absence of any indications to the contrary. Remember that ``good faith'' has a very precise meaning which is set out in the Act. Study the definition of good faith in Havenga and remember that the term is also of crucial importance in determining who the holder in due course of a cheque is. The person whose indorsement was forged must not be a client of the branch of the bank on which the cheque was drawn. In our example, where the cheque was drawn on the Sunnyside branch of First National Bank, this requirement means that the person whose indorsement was forged (George W) cannot be a client of the Sunnyside branch of First National Bank. If he is, the bank will not be protected because section 58 will not apply. However, we tell you that George W is a client of the Menlyn branch of First National Bank (which is not the branch on which the cheque was drawn). This means that the requirement currently under discussion is complied with.
Taking all of the above into account, the payment by First National Bank to Adolf meets with all the requirements of section 58 which means that the payment will be deemed to be a payment in due course. As a result, First National Bank will be entitled to debit John's account, and the underlying debt between John and George W will be regarded as discharged. George W will have no alternative but to find Adolf and get his money from him.
3
Section 79
The second section which affords extended protection to the drawee bank is section 79. Because Havenga contains an example of the operation of section 79, only the following main principles contained in this section need repeating here: (1) Section 79 applies only to crossed cheques. If a cheque is uncrossed (as in the case of the example used to explain s 58 of the Act), section 79 simply
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(2)
cannot apply. Remember, when faced with a problem, always try to determine whether the cheque is crossed or not. As far as the actual payment by the drawee bank is concerned, the following three further requirements must be met: (a) The drawee bank must pay to another bank (any bank in the case of a general crossing; and the bank named in the crossing in the case of a special crossing). (b) The bank must pay in good faith. (c) The bank must pay without negligence.
(3)
If payment is made according to the principles in (2) above after the cheque has come into the hands of the payee, then the drawer is protected as is the drawee bank. Usually, delivery of the cheque to the payee will determine this question. As far as cheques sent by post are concerned, the same principles are applicable as in the case of the determination of true ownership of a cheque, which was discussed in study unit 9.
On looking at these requirements, the differences between sections 58 and 79 become apparent. (1) Section 79 requires the absence of negligence on the part of the bank (this is not so in case of s 58 which requires only good faith remember that one can be negligent and still be in good faith). Section 79 does not require that the forged signature may not be that of a client of the branch of the drawee bank, but section 58 does.
(2)
In Havenga the reason why the banks have decided not to accept uncrossed nontransferable cheques for collection is discussed. You should be able to follow the explanation in the textbook. Always bear in mind the effect of sections 58 and 79 they protect the drawee bank by deeming certain payments made by the drawee bank to be payments in due course (even though, strictly speaking, these payments do not conform with the general definition of payments in due course). Study the example in Havenga carefully as an illustration of how section 79 works in practice. Sometimes, we set problems based on the examples in the textbook, but with one or two changes. For example, what would have been the position if the cheque had been posted to C and stolen while it was in the post? Clearly this will depend on the arrangement between A and C. If there had been an agreement to use the post, delivery will be deemed to have taken place the moment the cheque was put in the post by A and any payment by the drawee bank after that moment and in accordance with section 79 will protect not only the drawee bank but also the drawer. In the absence of an agreement to use the post, no delivery to the payee will take place until the cheque actually reaches him. Should the cheque be stolen in the post, payment by the drawee bank will be for the account of the drawer while the payee will be entitled to ask the drawer for payment of the underlying debt. Another variation of the basic example in Havenga is that the cheque is not only crossed, but also marked ``not negotiable''. This means that you will have to consider the application and effect not only of section 79, but also of section 80 (one cannot transfer a better title than your own where the words ``not negotiable'' are written on a crossed cheque) and, more importantly, section 81 (in terms of which the true owner has a right of action against a later possessor of
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the cheque, provided all the requirements for that section are met). In the example in Havenga, and on the assumption that the words ``not negotiable'' appear on the cheque and that all the requirements for section 81 have been met, C (as true owner) will be able to hold D (as the later possessor) liable. Remember that A (as drawer) and B Bank (as drawee bank) are still protected by section 79.
4
Section 83 (indorsement of cheques deposited in an account)
In Havenga you will find a discussion of the protection afforded the drawee bank which pays a cheque which has not been indorsed, or which has been irregularly indorsed, and which has been deposited in a banking account. Make sure you know the requirements of this section and that you understand the examples given in the text. Note that this section only covers cheques deposited in an account (not those paid over the counter).
SELF-TEST QUESTIONS
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11
The liability of the collecting bank

Prescribed reading material for this study unit Havenga chapter 24, paragraph 24.3.10.
After completing this study unit you should be able to . explain why sometimes it is fair to hold the collecting bank liable . explain the principles on which one would be able to hold the collecting bank liable . identify different situations in which one would be able to say that the collecting bank was negligent
Although this study unit is short, it should be said at the outset that it requires a thorough knowledge of all the principles discussed in the run-up to it. This is not a study unit which you can merely learn off by heart; you must understand it.
Why is it sometimes fair to hold the collecting bank liable?
If one looks at the examples discussed earlier on relating to the working of sections 79 and 81, we always stated that, as a general rule, the collecting bank will not be liable to the true owner of the cheque, for the following two reasons: (1) (2) Usually the collecting bank acts in good faith. In the case of cheques crossed and marked ``not negotiable'', the collecting bank is afforded special protection by section 81, in that although it possessed the cheque while collecting payment, it is deemed not to have given value for the cheque merely because it credited its client's account.
According to these principles, the only times when the collecting bank will be liable are where (1) (2) in general, the collecting bank intentionally collects payment on behalf of the wrong person in the case of cheques marked ``not negotiable'', the collecting bank either gives value for the cheque (by, for example, allowing the depositor immediately to draw against the cheque) or is deemed to have given value for the cheque (by, for example, refusing to give information about the cheque to the true owner) see study unit 9
These are very limited circumstances. At the same time, the drawee bank (and sometimes the drawer) enjoys the extended protection of sections 58 and 79 of the Act. This is of cold comfort to the true owner of a cheque he is very seldom
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in a position to sue someone for his loss on a cheque and even if he is, the person he sues (the thief) might well not have money to pay him. At the same time, some cheques should, by their very nature (the way they look), raise the alarm on the part of the collecting bank which is in the best position to judge whether everything is in order.
Example
(1) Daryll Cullinan draws a cheque on B Bank in favour of ``Shane Warne or order'' as payment for a pair of flippers. The cheque is deposited in the account of Cyril Mitchley at Z Bank without any indorsement on the cheque. From the cheque itself it is clear that Cyril cannot be the holder of the cheque (he is not the payee or the indorsee of the cheque). A simple inspection (ie just by looking at it) by Z Bank the collecting bank should ring the alarm bells and reveal that they will not be collecting the cheque on behalf of the correct person. Gary Bailey draws a cheque on B Bank in favour of ``Terry Paine only''. The cheque is deposited in the account of Errol Sweeney at Z Bank. Here we are dealing with a nontransferable cheque where only the named payee (Terry) may receive payment. Collection (by Z Bank) on behalf of anybody other than the named payee will also clearly be wrong and, more importantly, easily ascertainable by Z Bank.
(2)
In cases such as these and for the reasons discussed earlier, the courts have now established the principle that the true owner can hold the collecting bank liable.
The principles underlying the liability of the collecting bank
It is important to understand that the collecting bank is not liable on the cheque itself (as, for example, the drawer who signed and delivered the cheque would be) but is liable in delict. For a collecting bank to be liable in delict, the following five requirements must be met: (1) (2) (3) (4) (5) There must have been an act or omission (the presentment of the cheque by the collecting bank and the receipt of payment). The act or omission must have been unlawful (in law there is a duty on a collecting bank not to collect cheques negligently). There must have been intent or negligence on the part of the person committing the act or omission (see the discussion below). Damages must have been caused (usually in the amount of the cheque). There must have been causality (a link) between the act or omission and the damages caused. (Usually, should section 79 apply, payment by the drawee bank will have discharged the drawee bank and the drawer, with the true owner remaining out of pocket.)
All these requirements are present in the (a) to (c) list of what the true owner must prove to hold the collecting bank liable, as discussed in Havenga.
liability of the collecting bank
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Different situations indicating liability on the part of the collecting bank
In the discussion of why it is sometimes fair to hold the collecting bank liable, we identified two situations where, on the face of it, one would be able to say that the collecting bank will probably be found to have been negligent in collecting a cheque, namely the collection of an unindorsed order cheque on behalf of someone other than the payee or the collection of a nontransferable cheque on behalf of someone other than the payee.
Activity
But what about the following situations? (1) Sigrid Undset draws a crossed cheque on B Bank in favour of ``Boris Pasternak or order''. A thief steals the cheque from Boris, forges Boris's signature on the back of it and delivers it to Scott Fitzgerald. Scott deposits the cheque in his account at Z Bank. John Steinbeck draws a crossed cheque in favour of ``Patrick White Investments or order''. The cheque is also marked ``not negotiable''. The cheque is stolen from Patrick White Investments by a thief who stamps the back of it with ``PW Investments''. The cheque is then given to William Golding who deposits it in his account at Z Bank.
(2)
Feedback
As mentioned in Havenga it is much more difficult to find negligence on the part of the collecting bank where the cheque is transferable, as in both the cases here. In judging the conduct of the collecting bank, one must not be fooled by the fact that the indorsement was forged. One must think of how the cheque actually looks when it is handed to the collecting bank for collection in other words, all one must take into account is the fact that there is a signature on the back of the cheque which, as far as the collecting bank is concerned, is a valid indorsement. It is safe to say that in both cases, the collecting bank will not be negligent. Note that in the second example, Patrick White Investments (as the true owner of the cheque) will be able to hold William liable in terms of section 81, provided all the other requirements (apart from the fact that the cheque must be crossed and marked ``not negotiable'') for the application of the section are met. However, Z Bank will not be liable in terms of section 81 (provided it merely credited William's account and did not give value for the cheque you will remember that the collecting bank is protected by s 81).
SELF-TEST QUESTIONS
At this point you have worked through all the principles as they relate to cheques. To test yourself consider the following set of facts and then try to answer the following questions: Bjorn Borg draws a cheque on B Bank in favour of ``John McEnroe or order'' in settlement of a debt owed by Bjorn to John. The cheque is crossed and marked ``not negotiable, account payee only''. The cheque is delivered to John. A thief
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steals the cheque from John and forges John's signature on the back of it. The thief then delivers the cheque to Pat Cash in settlement of a debt owed by the thief to Pat. Pat gives the cheque to Stefan Edberg as payment for a practice session. Stefan then gives the cheque to his business manager, Pete Sampras. Pete gives the cheque to a messenger, Jim Courier, who deposits the cheque in Stefan's account at Z Bank. Z Bank presents the cheque for payment to B Bank. B Bank pays the amount of the cheque to Z Bank in good faith and without negligence. B Bank debits Bjorn's account and Z Bank credits Stefan's account. (1) (2) (3) (4) (5) (6) (7) (8) While John was in possession of the cheque, what was his title to the cheque? Is the cheque nontransferable? Is Stefan the holder of the cheque? On the assumption that John did in fact indorse the cheque (there was no forgery), how would your answer to (3) differ? Were the cheque and the underlying debt between Bjorn and John discharged by the payment by B Bank to Z Bank? Who is the true owner of the cheque? How would your answer to (6) differ had the cheque been posted by Bjorn to John? Will the person identified in (6) have any right of recourse against any of the following parties: Pat Cash Stefan Edberg Pete Sampras Jim Courier Z Bank How would your answer to (8) differ if the cheque had the words ``not negotiable, not transferable'' written on it? How would your answer differ if the cheque had the words ``not transferable'' on it, but the cheque was not crossed?
(9) (10)

(1) As a payee of an order cheque who is in possession of the cheque, John qualifies to be at least the holder of the cheque. He cannot be the holder in due course of the cheque, because the cheque is not indorsed and delivered to him (it is not negotiated in the formal sense, which is one of the requirements for holdership in due course). No. The cheque is still transferable despite the wording on the cheque (see study unit 9). No. No title to a cheque can be transferred through a forgery (see study unit 6). In that case, Stefan would be the holder of the cheque because, on the assumption that the indorsement is a blank indorsement, the cheque changed to a bearer cheque and Stefan, as the bearer of a bearer cheque, would be the holder of the cheque. He would not, however, be the holder in due course because of the effect of section 80 of the Act (see study unit 9) which holds that if a cheque is crossed and marked ``not negotiable'', one cannot transfer a better title than one's own. Because John was only a holder (see (1) above), everybody after him can, at best, only be holders. Yes. Although payment by B Bank was not made to the holder of the cheque, which is one of the requirements for payment in due course, the drawee bank (B Bank) and the drawer (Bjorn) are protected by section 79. In terms of this section, payment will be regarded as having in fact been made
(2) (3) (4)
(5)
liability of the collecting bank
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(6)
(7)
(8)
(9)
(10)
to the true owner of the cheque (this has the same effect as a payment in due course) if the bank pays a crossed cheque to another bank (in the case of a general crossing, as is the case here), in good faith and without negligence (this we tell you in the set of facts). The drawer (Bjorn) is protected because the drawee bank paid the cheque after the cheque had come into the hands of the payee (John). B Bank (the drawee bank) is therefore entitled to debit Bjorn's (the drawer's) account. John does not have the right to ask Bjorn for a second cheque because the debt owed by Bjorn to John has been extinguished by B Bank's payment. John is the true owner of the cheque. Remember that you do not have to be in possession of the cheque to be the true owner. It is only in the case of holdership that you have to be in possession of the cheque. That would depend on whether an agreement (express or implied) to post the cheque existed between Bjorn and John. Had there been an agreement, John would become true owner the moment the cheque was put in the post, otherwise Bjorn would remain the true owner until the cheque actually reached John. Pat Cash and Stefan Edberg are both potentially liable to the true owner (John McEnroe) in terms of section 81, provided all the requirements for that section are met. Pete Sampras and Jim Courier are not possessors who have given value for the cheque, they merely acted on behalf of Stefan Edberg, and therefore they will not be liable in terms of section 81 (in fact, they will not be liable at all). They will, of course, be liable should John request information about the cheque from them and they then refuse to furnish this information. As far as the collecting bank (Z Bank) is concerned, the bank will not be liable in terms of section 81, because it merely collected payment on behalf of Stefan and credited Stefan's account. As such, it did not give value for the cheque nor receive the cheque as a gift. Neither will the bank be liable in delict. We are dealing with a transferable cheque on which one would expect indorsements to appear. In these circumstances it would be very difficult to prove negligence on the part of the collecting bank. In this case, the true owner will not only be protected by the provisions of section 81, but the cheque will also be nontransferable. Unlike in (8) above, in this case a strong argument can be made that the collecting bank was negligent. The warning bells should ring for a bank if it sees a nontransferable cheque with an indorsement on it deposited on behalf of someone other than the named payee. Strictly speaking, in accordance with the decision by commercial banks not to accept uncrossed nontransferable cheques for collection, Z Bank will refuse to present the cheque for payment on Stefan's behalf. (If you are uncertain why this decision was taken, go through study unit 10 again.) Had it done so notwithstanding this decision, the drawee bank (B Bank) and the drawer would not have been protected by section 79 (because this section applies only to crossed cheques). Nor can section 58 protect the drawee bank, because this section does not apply to nontransferable cheques. Furthermore, by paying the amount of the cheque to Stefan, the drawee bank will not have carried out the instruction of the drawer and will not have made a payment in due course which discharges the underlying debt between Bjorn and John. This means that the drawee bank cannot debit Bjorn's account and John will be able to approach Bjorn for payment of the underlying debt. The drawee bank will have to try and recover the money from Stefan, perhaps on the grounds of enrichment.
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12
Bills of exchange and promissory notes

Prescribed reading material for this study unit Havenga chapter 24, sections 24.5 and 24.6.
After completing this study unit you should be able to . . . . define a bill of exchange name the differences between a bill of exchange and a cheque list the six different ways to fix the date of payment of a bill of exchange name the reasons why it is important to establish the due date of a bill of exchange . explain the concept of acceptance . define a promissory note . indicate the differences between a promissory note on the one hand, and cheques and bills of exchange on the other
You should recognise the definition of a bill of exchange in Havenga after all, it is very close to the definition of a cheque. If you compare these two definitions, the following three differences between bills and cheques become clear: (1) (2) In the case of a cheque, the drawee is always a bank. Although a bill may be drawn on a bank, this need not be so as in the case of a cheque. A cheque is always payable on demand. A bill may be payable on demand, but may also be payable at a fixed or determinable future date. Study the different ways in which the due date of a bill may be determined, as well as the reasons why it is so important to determine the due date. Most of these reasons should, and hopefully are, old news by now. The only aspect in this discussion which may cause some problems is the `àfter sight'' bill (ie where the order to pay says ``Pay to XYZ the amount of R1 000 30 (thirty) days after sight)''. It should be clear from the discussion of this type of bill that you have to understand the concept of `àcceptance'' to understand how the due date of the `àfter sight'' bill is determined. In our discussion of the relationship between the drawee bank and the drawer of a cheque (see study unit 9), we mentioned that the drawee bank pays the drawer's cheques because there is a contractual relationship, in terms of which the bank undertakes to honour future cheques, between the bank and the drawer. In the absence of such a contractual relationship, it is surely unfair to expect a bank, or any person for that matter, on whom a bill is drawn, to pay the bill simply because the bank or other person was chosen and named in the bill as drawee. Furthermore, in the absence of a person's signature and delivery, he cannot be liable on the bill.
(3)
This means that for the drawee to be liable on a bill, the drawee must, when the
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bill is presented to it for acceptance, `àccept'' the bill by signing the bill and delivering it back to the person who presented the bill for acceptance. In other words, `àcceptance'' is merely the legal act whereby the drawee named on a bill indicates that it is prepared to pay the bill if it is presented to it for payment and thus becomes liable on the bill as acceptor.
Example
JT Publishing draws a bill on the XXX Bank in favour of `Èmsie Trichardt or order'' as an advance payment for Emsie's new book on etiquette. The bill is payable ``30 days after sight''. On 2 January 1997 Emsie presents the bill for acceptance to the XXX Bank. The XXX Bank signs the bill, dates it 2 January 1997, and delivers it back to Emsie. By accepting the bill, the XXX bank (which was previously the drawee and which is now the acceptor of the bill) has become liable on the bill for payment on or after the due date of the bill, which due date has now been fixed at 30 days after 2 January 1997. After a lapse of 30 days, the bill is then presented for payment to the XXX bank which has to pay. Also note the discussion about the fact that cheques are not accepted and that not all the provisions of the Act (the most important of which are those sections protecting the drawee bank ss 58, 79 and 83) apply to bills. When studying the definition of a promissory note, you will notice that in the case of a note, and because we are dealing with a promise to pay and not an order, there are only two parties the drawer (who in the case of a promissory note is known as the ``maker'') and the payee. Therefore there is no drawee or acceptor involved. IMPORTANT: ALTHOUGH FOR THE MOST PART, THE GENERAL PRINCIPLES RELATING TO CHEQUES ALSO APPLY TO BILLS AND PROMISSORY NOTES, AND IT WILL NOT MATTER WHETHER WE USE A CHEQUE, BILL OR NOTE IN SETTING A QUESTION ON THIS WORK, SOMETIMES IT DOES MAKE A BIG DIFFERENCE.
Example
Karel Poborsky draws a cheque/bill on B Bank/B in favour of ``Patrick Bergen or order''. Mr X steals the cheque/bill from Patrick and writes on the back of the cheque/bill ``Pay Andy Cole or order'' and forges Patrick's signature below these words. Andy Cole writes on the back of the cheque/bill ``Pay Stan Collymore'', signs below it and gives the cheque/bill to Stan.
Discussion
We may all agree that Stan is not the holder of the cheque/bill because Patrick's signature has been forged and the fact is that no title can be transferred through a forgery. This is where there is a parting of the way between bills and cheques, however. Had this been a bill, payment by B to Stan would not have been payment in due course (it is not made to a holder) and neither Karel nor Patrick would have been
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liable on the bill (in both cases because Stan is not a holder and, in Patrick's case, also because he never actually signed the bill). Stan would, however, have been able to hold Andy liable on the bill because, as a prior indorser, Andy would not have been able to deny the validity of earlier indorsements (see the discussion of s 53(2)(b) in study unit 6.) Had this been a cheque, however, we might well have been faced with a situation where, even though payment had not been made to a holder of the cheque, payment by B Bank to Stan might well have been regarded as payment in due course (in terms of ss 58, and/or 83) and then it would have been up to the true owner (Patrick) to try and recoup his loss.
SELF-TEST QUESTIONS
There are no questions set on this study unit. Please make sure you understand the prescribed work and the examples in the text.
bills of exchange and promissory notes
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13
Other methods of payment: credit cards

Prescribed reading material for this study unit Havenga chapter 25, sections 25.125.2.
After completing this study unit you should be able to . explain in you own words what a credit card is . explain the difference between, on the one hand, a cheque and, on the other hand, a credit card . name two types of credit card . explain in your own words how payment is effected when payment takes place by way of a three-party credit card . list the four economic functions of a credit card . name and describe the three different relationships in terms of a three-party credit card agreement . explain the legal consequences flowing from the unauthorised use of a credit card
1
The credit card as a method of payment
The credit card is one of the more modern methods of payment. Whereas the methods of payment which are discussed in chapter 24 of your textbook (ie the cheque, the bill of exchange and the promissory note) are all examples of negotiable instruments (ie they can be transferred from one person to another), the credit card cannot be transferred and therefore does not qualify as a negotiable instrument. The credit card is a convenient and relatively safe method of payment. It has certain advantages for the cardholder (ie the debtor) if compared with, for example, cash or cheques. Some of these advantages are the following: it is a relatively safe method of payment for both the debtor and creditor, it provides credit for a certain period to the cardholder, and if the supplier has agreed with the card issuer to accept the credit card as a method of payment, the cardholder can insist on the credit card being accepted by the supplier as a method of payment. However, it also has certain disadvantages. First, it is not always a very safe method of payment when paying for goods which are ordered by telephone. Secondly, the credit card is not a negotiable instrument and therefore cannot be transferred from one person to another. (For further advantages and disadvantages, see section 2.1 of your textbook.)
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1.1 DIFFERENT TYPES OF CREDIT CARDS

Study Havenga chapter 25, section 25.2.2. There are generally two types of credit cards, namely two-party credit cards and three-party credit cards. Their names are self-explanatory. In the case of a twoparty credit card, there are only two parties involved, namely the card issuer who is also the supplier, and the cardholder. Previously two-party credit cards in South Africa were mainly issued by filling stations to clients who wanted to purchase fuel on credit. Nowadays a number of other types of suppliers, for example hypermarkets and departmental stores also issue two-party credit cards to their clients. In the case of three-party credit cards, there are three parties involved, namely the card issuer (which is usually a bank), the cardholder and the supplier. Presently there are considerably more three-party credit cards in circulation than two-party credit cards. For purposes of this course the three-party credit card is therefore regarded as more important than the two-party credit card. For a discussion of the operation of two-party credit cards and three-party credit cards, study section 25.2.2 of the textbook. An example of a three-party credit card
This is a typical example a three-party credit card. In this example Standard Bank is the card issuer and WG Schulze is the cardholder. Since a three-party credit card is used by the cardholder to buy merchandise from a number of different suppliers, the names of the different suppliers do not appear on it. A two-party credit card differs very little in outward appearance from a threeparty credit card. The only obvious difference is that in the case of a two-party credit card the card issuer (whose name invariably appears on the credit card) is not a bank or other financial institution, but perhaps a hypermarket or departmental store. In the case of a two-party credit card, the card issuer is invariably also the supplier. In that sense the name of the supplier appears on a two-party credit card.
other methods of payment: credit cards
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An example of a sales slip
Activity
Read the scenario below and answer the questions given. Your answers should include an explanation. Standard Bank issues a Master Card to Patsy, one of their customers. Standard Bank also concludes an agreement with MacDonalds Ltd, a fast food chain, that the latter will accept all Master Cards issued by the former, as valid payment for purchases made at MacDonalds. Patsy buys fast foods to the value of R110,00 from MacDonalds and pays for it with her Master Card. (a) (b) (c) (d) (e) Which type of credit card is the Master Card in this set of facts? Which party is the card issuer? Which party is the cardholder? Which party is the supplier? Can MacDonalds refuse to accept Patsy's Master Card as payment?
Feedback
(a) (b) (c) (d) (e) A three-party credit card. Standard Bank. Patsy. MacDonalds. No, except if the credit card is no longer valid.
Activity
Read the scenario below and answer the questions given. Your answers should include an explanation. Pick and Pay Hypermarket issues a Pick and Pay Credit Card to Terry, one of their customers. In terms of the agreement between Pick and Pay Hypermarket and Terry, Terry is entitled to buy merchandise on credit with his Pick and Pay Credit Card from any Pick and Pay outlet. (a) (b) (c) (d) Which type of credit card is the Pick and Pay Credit Card in this set of facts? Which party is the card issuer? Which party is the cardholder? Which party is the supplier?
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Feedback
(a) (b) (c) (d) A two-party credit card. Pick and Pay Hypermarket. Terry. Any outlet of Pick and Pay Hypermarket.
1.2 THE ECONOMIC FUNCTIONS OF A CREDIT CARD

Study Havenga chapter 25, section 25.2.4. The four economic functions of a credit card are . . . . payment credit cash withdrawal cashing of cheques
See the discussion in sections 25.2.4.125.2.4.4 of your textbook. For your purposes the most important function of a credit card is that it is first and foremost a method of payment.
1.3 THE LEGAL RELATIONSHIPS IN TERMS OF A THREE-PARTY CREDIT CARD AGREEMENT

Study Havenga chapter 25, section 25.2.5. Because there are three parties involved in respect of a three-party credit card, there are also three different sets of legal relationships flowing from the three-party credit card agreement. The three sets of relationship are explained in section 25.2.4 of your textbook and nothing needs to be added here.
1.4 THE UNAUTHORISED USE OF CREDIT CARDS

Study Havenga chapter 25, section 25.2.6. The unauthorised use of a credit card occurs when the credit card is used without the permission of the cardholder. The question that remains is who is responsible for paying where the credit card is used by a thief or some other person who has by chance come into possession of the credit card. The standard contracts concluded between supplier, issuer and cardholder usually contain provisions in respect of such losses. These standard provisions are discussed in section 25.2.6 of your textbook.
SELF-TEST QUESTIONS
Study the following set of facts. Standard Bank issues a Master Card on 1 March 1997 to Tanya, one of its clients. Standard Bank concludes agreements with the following food stores to accept all Master Cards issued by Standard Bank as a valid method of payment for goods bought from them: Pick and Pay; Hyperama and OK Bazaars. The different relationships between the parties are governed by standard contracts. In 1997 Tanya buys groceries from the following stores on the following dates: on 20 March from Pick and Pay; on 25 March from Checkers Shoprite; on 3 April from Hyperama. On 19 April Tanya realises that her credit card has been stolen. After she discovers the loss of her card the thief uses her credit card on the following
other methods of payment: credit cards
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dates to buy groceries from the following stores: on 20 April from OK Bazaars; on 29 April from Woolworths Food Hall; on 5 May from Pick and Pay; and on 9 May from Hyperama. Tanya notifies Standard Bank of the loss of her credit card on 30 April. Standard Bank notifies all the suppliers of the loss of the credit card on 6 May. On all the abovementioned occasions the credit card is accepted as valid payment by the different stores. Which party will be liable to the food stores for the purchases made on the following dates? Give reasons for your answers. (You may accept that the thief has disappeared.) (1) (2) (3) (4) (5) (6) (7) 20 March 25 March 3 April 20 April 29 April 6 May 9 May

(1) (2) (3) (4) (5) (6) (7) Standard Bank is liable in terms of the relationship between the card issuer and the supplier. Checkers Shoprite must bear the loss (or sue Tanya for the money) as it did not conclude an agreement with Standard Bank. Standard Bank is liable in terms of the relationship between the card issuer and the supplier. Tanya, as the cardholder, bears the risk from the loss of the card until she has notified the issuer of this loss. Woolworths Food Hall must bear the loss (or try to claim the money from the thief) as it did not conclude an agreement with Standard Bank. Standard Bank, as the issuer, bears the risk from the moment it receives notification of the loss until it notifies the suppliers of this loss. Hyperama, as the supplier, must refuse to accept purchases made against a card which it has received notification of as being lost.
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14
Travellers' cheques, stop orders and debit orders

Prescribed reading material for this study unit Havenga chapter 25, sections 25.325.5. After completing this study unit you should be able to . explain in your own words what a travellers' cheque, a debit order and a stop order are . explain the operation of a travellers' cheque, a debit order and a stop order . put forward arguments whether or not the Bills of Exchange Act applies to travellers' cheques . explain the differences between, on the one hand, a stop order, and on the other hand, a debit order . discuss whether or not a creditor derives rights from a stop order and a debit order . discuss whether or not the acceptance of a debit order by the creditor as a method of payment amounts to payment of the debt
1
Study Havenga chapter 25, section 25.3.
Travellers' cheques
In view of the fact that travellers' cheques are obtainable at a variety of different foreign exchanges and that they are accepted worldwide, they are highly suited as a method of payment when travelling abroad. It is a vexed question whether a travellers' cheque amounts to a bill of exchange, cheque or a promissory note as described in the Bills of Exchange Act. The question whether a travellers' cheque amounts to, for example, a bill of exchange, is important for the following reason. If a document qualifies as a bill of exchange or promissory note as defined in the Bills of Exchange Act, the provisions of the Act will regulate the relationships on the document. However, if a document does not satisfy the definition of a bill of exchange or a promissory note, the parties to the document cannot rely on the provisions of the Act. It is argued in section 25.3.2 of the textbook that some types of travellers' cheques fall within the ambit of the Bills of Exchange Act. A distinction is drawn between, on the one hand, those travellers' cheques in terms of which payment by the issuer of the travellers' cheque is made conditional on countersignature by the traveller, and on the other hand, those travellers' cheques in terms of which payment by the issuer of the travellers' cheque is not made conditional on countersignature by the traveller. In the case of the former, it does not conform to the essential element of unconditionality as required by the Act. You will remember that one of the essentials of a valid cheque is that the order to the drawee bank to pay must be unconditional (see again study unit 2 above). If payment of the travellers' cheque
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by its issuer is subject to the condition that it must be countersigned by the traveller, it is not unconditional as envisaged in the Act. In the case of those travellers' cheques in terms of which payment by the issuer of the travellers' cheque is not conditional on countersignature by the traveller, it would appear that it conforms to the requirements of a bill of exchange (which includes a cheque) as envisaged in the Act. It must be added that the vast majority of travellers' cheques belong to the former type of travellers' cheque. An example of a travellers' cheque
P Banda
12 April
98
P Banda
This is a typical example of a travellers' cheque that does not qualify as a cheque (or bill of exchange) in terms of the Act since payment by the issuer is conditional upon countersignature by the traveller. The parties to the travellers' cheque are as follows: The issuer is Thomas Cook. The traveller is P Banda. The payee/holder is the person who was paid by P Banda.
Activity
Read the scenario below and answer the question given. Your answer should include an explanation. World-Wide Cash is a British company which issues travellers' cheques. The following words appear on their travellers' cheques: ``World-Wide Cash promises to pay an amount of 100 to the bearer of this document provided that it is presented for payment within 90 days of date''. No place for payment is indicated on the travellers' cheque. Does the Bills of Exchange Act apply to this document?
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Feedback
Yes. There is nothing in the set of facts which indicates that this travellers' cheque does not conform to all the requirements of a promissory note. As the place of payment is not an essential of a bill of exchange (or a promissory note) it does not affect the validity of the document. (See again study unit 2 above.)
2
Stop orders
The stop order is not an instrument of payment but rather a method of payment. Furthermore the stop order is not a negotiable instrument as it cannot be transferred from one person to another. A stop order is typically used to pay weekly or monthly debts of a fixed amount such as an insurance premium, property tax payable to a metropolitan substructure (or municipality) or rent. Two important legal principles apply to a stop order. The first principle is that the creditor does not derive any rights from the stop order. The stop order is an instruction by the debtor to his bank to pay a specified third party a fixed amount of money on a regular basis. The debtor signs the stop order and hands it to his bank where he holds a current cheque, credit card or savings account. The creditor obtains no rights in terms of the stop order against the bank or the debtor (ie account holder) since the stop order results only in an obligation between the bank and the account holder. As a result, the creditor receives payment at the will of the debtor and his bank and the creditor can therefore never be ensured of payment at a specific date. Thus, if the debtor revokes payment without notifying the creditor, the latter cannot sue the debtor or the bank on the stop order. In the case of a cheque, the creditor (payee) also obtains no rights against the drawee bank on the cheque but a cheque does result in an obligation between the drawer (ie the account holder) and the creditor. Thus, the creditor may, as a matter of general principle, sue the drawer on the cheque if the latter has countermanded payment of it. (See the discussion in section 25.4.1.1 of the textbook.) The second principle is that the underlying relationship between the debtor and creditor is not terminated by the debtor's giving the stop order to the creditor. When a debtor gives a stop order (literally: an order to pay) to his bank no collateral (ie ancillary or substitute) agreement comes into existence between the debtor (account holder) and the creditor. In the case of a cheque, a collateral agreement does come into existence between the drawer (debtor) and the payee (creditor). (See the discussion in section 25.4.1.2 of the textbook.) These two principles therefore illustrate two important differences between stop orders and cheques.
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An example of a stop order
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3
Debit orders
The debit order is an authorisation by the debtor to his creditor to request an amount from the debtor's bank, and includes an authorisation to the bank to pay the amount to the creditor. The amount which is requested by the creditor may vary and the bank will, as a matter of general principle, pay the amount which is requested by the creditor. It is obvious that a debtor must sign and hand over a debit order only to a creditor who can be trusted. A debit order is typically used to pay weekly or monthly debts of a fixed or varying amount such as a telephone account, a bond payment, a water and electricity account or any other regular payment which may or may not be subject to a regular increase, such as a life insurance premium which is linked to an increase clause to combat the effect of inflation. Although there are similarities between stop orders and debit orders, there are also important differences between these two methods of payment. The similarities are the following: (1) (2) (3) Both are methods of payment. Both contain an instruction to the bank where the debtor is an account holder to pay a certain sum to the creditor. Neither of them result in a collateral agreement between the debtor and the creditor. Thus, the creditor cannot sue the debtor on the stop or debit order if the creditor does not receive payment from the bank. Neither of them is a negotiable instrument.
(4)
The differences between stop and debit orders are as follows: (1) The stop order is a mandate from the account holder to his bank to pay from his account while the debit order is not only a mandate to the bank to pay but also an authorisation to the creditor to request payment from the bank. Closely allied to the first difference is the fact that the stop order is never given to the creditor while the debit order is handed over to creditor and the duty to request punctual payment rests on the creditor. The stop order can only be used to provide for a deduction of a fixed amount from the account of the debtor. The debit order, in contrast, may provide for a varying amount to be deducted from the account of the debtor. The use of a stop order does not suspend the creditor's right to claim payment directly from the debtor, while the creditor's right to claim payment from the debtor is suspended when the creditor accepts a debit order from the debtor. The creditor's right to payment from the debtor is suspended until he has made the necessary request from the debtor's bank.
(2)
(3)
(4)
(See further the discussion in sections 25.5.125.5.2 of the textbook.)
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An example of a debit order
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SELF-TEST QUESTIONS
Here you are provided with two lists. The first list contains a number of different types of debt. The second list contains a number of different methods of payment. Rearrange each option in the second list to correspond with the option in the first list which is the most suitable method of effecting payment of the type of debt described. Each option from the second list may only be used once. List one (1) (2) (3) (4) (5) A telephone account The fixed premium in terms of a life insurance policy A hotel account in London where the guest is a Zimbabwean tourist A loaf of bread at the corner cafe Goods which were advertised on television, ordered by telephone
List two (a) Cash (b) Credit card (c) Stop order (d) Debit order (e) Travellers' cheque

(1) (d) (2) (c) (3) (e) (4) (a) (5) (b)
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15
Letters of credit
Prescribed reading material for this study unit Havenga chapter 25, section 25.6. After completing this study unit you should be able to . describe, in the correct sequence, the steps involved in payment by means of a letter of credit in an international transaction . describe the parties involved in effecting a letter of credit and the role these parties play
Provided you give yourself enough time and you put in the necessary effort, the discussion in the textbook of the process involved in effecting a letter of credit should not pose too many problems. Perhaps the best way of elaborating on the text is to give an example of what one could expect to encounter in practice.
Example
Grabanostrich (Pty) Ltd is a company which runs a number of farms in the Oudtshoorn district. The main part of their business is the marketing of ostrich related products on the international market. Recently, they have managed to woo the representatives of a German firm, Velikelezzer AG, successfully. As a result, Grabanostrich and Velikelezzer have concluded an agreement in terms of which Grabanostrich will export four consignments of grade 1 ostrich skins, each consignment consisting of 1 000 skins, to Germany. Payment will be made in South African rands at R500 000 per consignment. Velikelezzer is adamant that the consignments may not reach them any later than 1 March, 1 June, 1 September and 1 December, respectively.
Feedback
It is clear that at this point, a number of potential problems have not been addressed. One of these is that Grabanostrich is not keen to load a consignment onto a container in Port Elizabeth harbour without knowing whether Velikelezzer will be able to pay for the consignment, and will in fact do so. At the same time, Velikelezzer does not want to pay for the goods unless they can be sure that Grabanostrich will in fact deliver the order and that the order will be up to standard. It is exactly to address these fears that letters of credit are used as a means of effecting payment across international boundaries (they may, of course, operate domestically as well). As a result, Velikelezzer requests on a standard application form that its German bank, the Deutsche Bank, open a letter of credit in favour of Grabanostrich and inform Grabanostrich
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Example of a letter of credit
letters of credit
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(1) (2)
of the letter of credit being opened that payment will be effected on receipt of the following documentation: (a) a bill of lading (b) an insurance policy (c) a certificate of quality from Mr I Checkskins
The onus is then on Grabanostrich to arrange for the inspection and completion of the necessary documentation on shipping the goods. Thereafter, the documentation will be submitted to the bank and, should the bank be satisfied with the documents, it will pay Grabanostrich. Once Velikelezzer refunds its bank, the bank will give the documentation to Velikelezzer which will enable Velikelezzer to take possession of the consignment on arrival in Germany. As discussed in the textbook, there are often other banks involved in a letter of credit. Most often, the issuing bank (in our example, the Deutsche Bank) will approach a bank in South Africa (eg, First National) to act as a confirming bank. First National will then assume the duties of the Deutsche Bank (the issuing bank) by paying Grabanostrich after presentation of the documents. First National will then send the documents to the Deutsche Bank and the last-mentioned, after satisfying itself that First National paid correctly, will then pay First National. Make sure, by using the above set of facts, that you understand the roles that other banks can play in the process.
SELF-TEST QUESTIONS
If you know the prescribed section of Havenga and understand the above example, you should be able to answer any question on letters of credit.
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16
Electronic funds transfer

Prescribed reading material for this study unit Havenga chapter 25, section 25.7. After completing this study unit you should be able to . . . . define an electronic funds transfer distinguish between paper-based transfers and electronic funds transfers distinguish between the two main types of electronic funds transfers name the three most common types of customer activated systems of electronic funds transfers . describe the functioning of each of the three main types of customer activated electronic funds transfer systems . describe the legal relationships involved in the different types of customer activated electronic funds transfer systems . describe the risks and regulation of the unauthorised use of each of these systems
Quite a number of pages are devoted to the topic of electronic funds transfer in the textbook. Having said that, and on a thorough reading of the textbook, it should be apparent to you that not all that many hard and fast principles are evident from the discussion. In what follows we shall attempt to guide you through this part of the work by concentrating more on the structure of the discussion than on all the detail. Subsections 25.7.1 to 25.7.3 of the textbook are devoted to an explanation of the following: . what is meant by electronic funds transfers (section 25.7.1). . the distinction between paper-based transfers and electronic transfers (this distinction is to be found in the permanency of the instruction to the bank to pay) and, importantly (it is somewhat hidden in the text see the first sentence of section 25.7.3) . the distinction between bank activated systems (the ACB) and customer activated systems (ATM's, EFTPOS and Home Banking) The rest of the section is devoted to a discussion of each of the types of customer activated electronic funds transfer systems. In each case the functioning of the system is described, followed by a discussion of the legal relationships and principles involved, with the emphasis on the risks in the case of the unauthorised use of each system. These risks are mainly regulated by the contract between the bank and customer. As the text covering this part of the work in the textbook is largely self-explanatory,
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we use this opportunity simply to urge you to ensure that you know this part of the work. The fact that we do not spend pages and pages repeating the text does not mean that it is unimportant.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) What is an electronic fund transfer? Into which two groups can fund transfers be divided? Name two main electronic funds transfer systems. Name three main electronic funds transfer systems which can be activated by customers. What is EFTPOS? Name three important interdependent contracts in an EFTPOS transaction. What are the differences between an off-line system and an on-line system? What is home banking? What are the advantages of home banking? What are the risks associated with home banking?
ANSWERS TO THE SELF-TEST QUESTIONS

(1) An electronic fund transfer can be described as a funds transfer which is effected largely or completely by electronic techniques. It works just like a cheque in that an instruction is given by the customer to the bank for the transfer of money to another account. (2) Fund transfers can be divided into credit and debit transfers. See section 25.7.1 in Havenga and make sure that you know what the differences between these two groups are. (3) Electronic fund transfer systems can be divided into customer activated systems and systems which are activated by banks to facilitate electronic funds transfers between banks. (4) ATM, EFTPOS and home banking. (5) EFTPOS is an acronym for electronic funds transfer at point of sale, a system which makes it possible to make an electronic payment in a shop with a credit or debit card. (6) The customer/merchant contract, the contract between the customer or EFTPOS cardholder and his bank and the contract between the merchant and the bank. Make sure that you are able to discuss each of these contracts. (7) The answer can be found in section 25.7.5.2 of Havenga. (8) Home banking gives a customer the opportunity to make use of several financial services from the privacy of the home by using a telephone, videotex services and the internet. (9) It is possible to check balances, ask for statements, transfer funds between accounts, stop payment of cheques, order cheque books, obtain financial information and correspond with the bank manager. (10) See section 25.7.6.1 for the answer to this question.
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SECTION 2: THE LAW OF TRUSTS
CONTENTS Study unit 1 The creation of a trust Study unit 2 The office of trustee Study unit 3 The administration of a trust Study unit 4 The trust beneficiary and revocation, variation and termination of a trust 84 89 93 96
The creation of a trust

Prescribed reading material for this study unit Havenga chapter 26, sections 26.1, 26.2, 26.3, 26.4 and 26.5. Lindiwe has two children under the age of four. She is not very healthy and fears that she may not live long enough to provide for the children's education. At the moment she has quite a large estate consisting of property and shares in various companies. How can Lindiwe ensure that there will be funds to provide for her children's education? In this study unit we will consider the creation of a trust as one way in which Lindiwe may provide for her children's education.
1
Introduction
This section needs no further explanation.
2
The basic features of a trust
The basic features of a trust are that the control of trust property is transferred to the trustee to be administered for the benefit of the beneficiary. The person who transfers the property is referred to as the founder and she may be a co-trustee but not the sole trustee. From our example above: if a trust is created by Lindiwe, she will be the founder and the children will be the beneficiaries.
Activity
Name the recognised methods for transferring ownership of movable or immovable property.
Feedback
A distinction is made between original methods of acquiring ownership (eg occupation or prescription) and derivative methods of acquiring ownership (eg delivery of movable property or transfer and registration of immovable property). You must note that a trust may either be an ownership trust or a bewind trust.
Activity
Distinguish between an ownership trust and a bewind trust.
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Feedback
An ownership trust is one in which ownership of the trust property is transferred to the trustee. A bewind trust, on the other hand, is one in which the beneficiary acquires ownership of the trust property but control of such property vests in the trustee. See section 26.2.1 of the textbook
3
The Trust Property Control Act 57 of 1988
In our discussion of the law of trusts we concentrate on trusts which are created in terms of this Act. Trusts may also be created orally but they will not be subject to the Act. In this regard the definition of trust instrument is important. The Act provides that a trust instrument is a written agreement, testamentary writing or a court order. Only trusts created in one of these three ways are subject to the Act.
Activity
A key concept of the Trust Property Control Act 57 of 1988 is ``trust instrument''. Indicate the INCORRECT statement: (1) (2) (3) (4) (5) A trust created orally is valid. A trust instrument is a written agreement, testamentary writing or court order that creates a trust. A trust created orally and reduced to writing is deemed to be a trust instrument. Trusts created by way of a trust instrument are subject to the provisions of the Act. All trusts are subject to the provisions of the Act.
Feedback
(1) (2) (3) (4) (5) is correct. Such a trust is valid but not subject to the provisions of the Act. is correct. This is the definition of a trust instrument contained in the Act. is correct. Such a trust will also be subject to the provisions of the Act. is correct. Only trusts created by way of a trust instrument are subject to the provisions of the Act. is incorrect. Not all trusts are subject to the provisions of the Act. For example, an oral trust will not be subject to the provisions of the Act.
4
The essential requirements for the creation of a valid trust
It must be emphasised that a valid trust can be created only if all the essential requirements are present. These requirements are once again listed here as follows: (1) (2) (3) The founder must intend to create a trust. The founder must express her intention in such a manner as to create a binding obligation. The trust property must be defined with reasonable clarity.
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(4) (5)
The trust object, which may be personal or impersonal, must be defined with reasonable certainty. The trust object must be lawful.
Activity
A testator, in his will executed in 1899, bequeathed to his son the residue of his estate `ìn trust to be applied to the founding and maintaining (of) a home for destitute children''. In consequence of this bequest in trust, the testator's son established a memorial home. Answer the following questions: (1) (2) How was the trust created? Can the trust object be defined with reasonable certainty?
Feedback
(1) The trust was created in a testament. Such a trust is called a trust mortis causa (literally `às a result of death''). This trust only became effective at the time of the testator's death. Yes. In the example above the trust object is impersonal. It is valid since it has a charitable object. Although there eventually may be specific beneficiaries, the purpose of this trust is to benefit the community. You must also note that s the cy pre rule applies to trusts with charitable objects. Such trusts are accordingly benevolently construed.
(2)
5
Factors which are not essential for the creation of a trust
No further explanation is required.
Activity
Indicate whether the following statement is right or wrong and give reasons for your answer: Authorisation by the state is required for the creation of a trust since the Act provides that a person may only act as trustee after she has been authorised thereto in writing by the Master.
Feedback
This statement is incorrect. The Act contains provisions directed at the trustee of a trust created by a trust instrument, but these provisions do not mean that there has to be authorisation by the state for the creation of a trust. Failure to comply with the provisions of the Act also do not invalidate the trust. For greater detail, see Havenga section 26.5.3
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SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) (6) (7) (8) (9) What are the basic features of a trust? What is a bewind trust? Are all trusts subject to the Trust Property Control Act 57 of 1988? Give reasons for your answer. What are the essential requirements for the creation of a valid trust? How would you create a trust mortis causa? And a trust inter vivos? A trust may be created by concluding a contract for the benefit of a third party. Explain. Name all the elements which distinguish a trust mortis causa from a trust inter vivos. What is discretionary trust? And a protective discretionary trust? Is authorisation by the state required for the creation of a trust?

(1) (2) (3) The basic features of a trust are that the control of trust property is transferred to the trustee to be administered for the benefit of the beneficiary. In a bewind trust the beneficiaries have ownership of the trust property while the trustee only administers the trust property. No, a trust created orally is valid but it is not subject to the Act. Only trusts which are created by a written agreement, testamentary writing or a court order are subject to the Act. The essential requirements for the creation of a valid trust are . the founder must intend to create a trust . the founder must express her intention in such a manner as to create a binding obligation . the trust property must be defined with reasonable clarity . the trust object, which may be personal or impersonal, must be defined with reasonable certainty . the trust object must be lawful (5) A trust mortis causa is created in a will. A trust inter vivos is created by means of a contract entered into between living persons. This contract is usually a contract for the benefit of a third party but this is not necessarily the case. The trust founder and the trustee may conclude a contract whereby the latter undertakes to control the trust property subject to the provisions of the trust and for the benefit of the beneficiaries. The beneficiary may accept the benefit.
(4)
(6)
(7) Trust mortis causa Created by making a will. Comes into existence on the death of the trust founder The trust founder is dead and cannot be a co-trustee (8) Trust inter vivos Created by concluding a contract Comes into existence during the life of the trust founder The trust founder may be co-trustee
A discretionary trust is a trust in which the trustee has the power to appoint
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the beneficiaries. A protective discretionary trust is used to protect a beneficiary against herself, especially in the case of insolvency. (9) See section 4.4.1 for a discussion of these trusts. No, authorisation by the state is not needed for the creation of a trust.
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The office of trustee

Prescribed reading material for this study unit Havenga chapter 26, section 26.6.
Lindiwe decides to create a trust to provide for her children's education. She asks you to advise her how she must appoint the trustee. After you have completed this study unit you should be able to advise her on the appointment of trustees. You should also know the circumstances in which a trustee may vacate, resign or be removed from office.
Introduction
In your studies you may have encountered a number of references to the Master. In this regard you are referred to the discussion in Havenga chapter 1 section 1.3.5. There it is pointed out that the Master is an officer of a superior court (``High Court''). The Master has various functions, including the duty to ensure that trusts are properly administered. The Act therefore gives the Master extensive supervisory powers over the office of the trustee. Office of trustee = lawful appointment + qualification + acceptance + authorisation by the Master
2
Appointment must be lawful
The trust instrument usually provides an indication of who has the power to appoint a trustee. This may either be the founder, the other trustee or trustees, the beneficiaries, the Master, some other person, or the court.
Activity
Match the following concepts with their corresponding distinctive meanings: (1) (2) (3) Power of assumption Power of subrogation Power of substitution (a) The power to remove and replace other trustees (b) The power to appoint the beneficiaries (c) The power a trustee has to appoint another in her place when she resigns (d) The power to appoint the beneficiaries (e) The power of appointing additional trustees
Feedback
(1) (e) The power of appointing additional trustees
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(2) (c) The power a trustee has to appoint another in her place when she resigns (3) (a) The power to remove and replace other trustees For additional information, see section 26.6.1.2 of the textbook.
3
Qualifications of a trustee
It is important to note that a juristic person, such as a company or a close corporation, may also be a trustee. The following categories of persons are disqualified from acting as trustee: . a person or his/her spouse who has written or witnessed the will in which such person has been appointed trustee . persons of unsound mind, owing to their incapacity to contract . persons who do not meet the qualifications prescribed by the trust instrument.
4
Acceptance by the trustee
Nobody can become a trustee without her consent. This applies to both a trust inter vivos and a trust mortis causa.
5
Written authorisation by the Master
Activity
A person who is appointed as a trustee of a trust created by a trust instrument may act in that capacity only if authorised thereto in writing by the Master. Which ONE of the following statements is CORRECT? (1) (2) (3) (4) (5) The Master may not dispense with security if a court ordered that security must be provided. The Master grants authority to act as trustee only if the trustee has furnished security. A trustee may take possession of the trust property before she is authorised by the Master to act as trustee. The Master grants authority to act as trustee only if the trustee has been exempted from giving security. A trust is not created before the Master authorises the trustee to act in that capacity.
Feedback
(1) is correct. The Master has a wide discretion with regard to the furnishing of security but may not dispense with security if a court ordered that security must be provided.
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(2) (3) (4) (5)
is not entirely correct. The trustee may be exempted from providing security and then the Master will still grant authority to act as trustee. is incorrect. A trustee who has not been authorised by the Master cannot deal with the trust property. is not entirely correct. The Master may also grant a person authority to act as trustee if she has provided security. is incorrect. A trust is created even though the trustee has not been designated.
6
Number of trustees
This section does not require further explanation.
7
Loss of office by the trustee
Note that a trustee may either vacate, resign or be removed from office. Different circumstances would cause a trustee to vacate, resign or be removed from office.
Activity
Indicate whether a trustee vacates, resigns or is removed from office in each of the following instances: (1) (2) (3) (4) The trustee is placed under judicial management. The trust is terminated. The trustee dies. The trustee fails to give security to the satisfaction of the Master within two months after being requested to do so.
Feedback
(1) (2) (3) (4) The The The The Master trustee trustee Master may remove the trustee from office. vacates her office. vacates her office. may remove the trustee from office.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) Can the beneficiaries of a trust appoint the trustee? Explain. Can a juristic person be a trustee? Substantiate. How many trustees must be appointed? Can a trustee resign from her office? When may the Master remove a trustee from her office?

(1) The founder may give the beneficiaries of a trust the power to appoint the trustee.
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(2) (3) (4) (5)
Yes, any natural or juristic person who meets the qualifications prescribed by the trust instrument may be a trustee. There is no provision in our law which prescribes the number of trustees for a trust. One is sufficient, but more than one is permissible. Yes, a trustee is entitled to resign from office. The Master may remove a trustee from office if the . trustee has been convicted in the Republic or elsewhere of an offence of which dishonesty is an element or any other offence for which she has been sentenced to imprisonment without the option of a fine . trustee fails to give security to the satisfaction of the Master within two months after being requested to do so . trustee has been declared mentally ill or incapable of managing her own affairs . trustee's estate is sequestrated or liquidated or placed under judicial management . trustee fails to perform satisfactorily any duty imposed by the Act, or to comply with any lawful request of the Master
See section 26.6.6.3 of the textbook.
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The administration of a trust

Lindiwe creates a trust and appoints Nomsa as a trustee. Nomsa accepts the appointment and furnishes the Master with the required security. This is the first time that Nomsa has been appointed as a trustee. She approaches you to ask you what she must do. After you have completed this study unit you should be able to explain to Nomsa what her duties and rights are. You will also be able to explain to her how her insolvency will affect the trust.
1
Introduction
In the previous study unit we concentrated on the office of trustee. The trustee fulfils an important role since she is also the officer who is responsible for the proper administration of the trust. A trustee has certain duties and she also has certain rights.
2
Duties of the trustee
The duties of a trustee can be divided into those duties that arise before the administration of the trust can commence and those duties that arise during the administration period.
Activity
Susan is appointed as a trustee under Peter's will. The trust is for the benefit of Peter's wife, Anne, and their two minor children. The trust property consists of a number of seaside cottages which Peter let to holiday makers. The trust instrument stipulates that the income derived from the rent of the cottages must be paid to Anne to provide for her and the children's upkeep. Anne discovers that Susan has been letting the cottages to her friends at very favourable rates. These rates are fifty percent less than those charged by other letting agents at the same seaside resort where the cottages are situated. Furthermore, it appears that Susan has used the cottages without paying any rent. Advise Anne whether she may institute an action against Susan.
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Feedback
The answer is to be found in sections 26.7.1.2 and 26.7.1.3 of the textbook. It is clear that Susan committed a breach of trust. In the first place, she let the cottages for a substantially lower rent than she could have asked. Secondly, Susan's use of the cottages without paying rent amounts to a conflict of interest between her duties as trustee and her private interests. A number of possible consequences flow from the breach of trust, such as removal from office by the Master. Susan will furthermore be personally liable for any loss suffered by Anne and the children as a result of her personal use of the cottages.
3
Study Havenga chapter 26, sections 26.7.2 and 26.7.3.
Powers and rights of the trustee
The powers of the trustee are comprised mainly in the trust instrument. A trustee has a specific power only if granted to him or her by the trust instrument, or if the court is willing to supplement the trustinstrument.
Activity
List some of the powers that are useful to a trustee in the administration of trust assets.
Feedback
These include the power to . . . . . sell, mortgage or let trust property realise investments and reinvest them carry on a business give loans to beneficiaries borrow money on behalf of a beneficiary
These sections do not require further explanation.
4
Insolvency of the trustee
It is important to note the distinction between bare ownership and beneficial ownership. A trustee merely has bare ownership. Consequently, the trust property will not form part of a trustee's insolvent estate except in so far as the trustee is entitled to trust property as a beneficiary.
Activity
Tito and his wife, Mary, create a trust and transfer shares in various companies to the trust. Tito and Mary are appointed as trustees. Clause 5 of the trust instrument provides that the income derived from the dividends paid on the shares will accrue to Mary until she dies. Clause 6 provides that at Mary's death the shares will be divided equally between their three children provided that the youngest child has reached the age of twenty-five. Mary's estate is declared insolvent. The
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trustee of the insolvent estate claims that the shares and the dividends form part of Mary's insolvent estate. Tito approaches you for advice.
Feedback
Mary is a co-trustee and a beneficiary of the trust. However, she is merely an income beneficiary and not a capital beneficiary (see section 26.2.3). The trustee of her insolvent estate will only be able to lay claim to the dividends which are paid on the shares and not the shares themselves. The children are capital beneficiaries and the shares will eventually belong to them. The shares will not form part of Mary's insolvent estate except in so far as she is entitled to the dividends on the shares in her capacity as a beneficiary.
SELF-TEST QUESTIONS
(1) (2) (3) (4) How must the trustee exercise her duties and powers? A trustee has a right of indemnity and a right to remuneration. Discuss. What are the consequences for a trustee if she fails to comply with her duties? Does trust property form part of the insolvent estate of the trustee? Explain.

(1) The trustee must, in the performance of her duties, act with the necessary care and skill which can reasonably be expected from a person in her position. The right to indemnity The trustee is entitled to be indemnified from the trust property for expenses properly incurred in the course of her administration. The trustee is indemnified from expenses such as rates, taxes, the cost of repair and maintenance of trust property, and the cost of experts. Right to remuneration The trustee is entitled to remuneration for services rendered. The trust instrument may prescribe the fee, or the founder and the trustee may negotiate a fee. If the remuneration is not provided for in the trust instrument and the parties do not agree on a fee, the trustee will be entitled to reasonable remuneration. If the parties are unable to agree on what reasonable remuneration is, the Master will determine the remuneration. For additional information, see section 26.7.3 of the textbook. (3) There are basically the following three consequences: . The Master or any person having an interest in the trust property may apply for a court order directing the trustee to perform the duty. . The Master may remove the trustee from office. . The trustee will commit a breach of trust and may be personally liable. (4) As a general rule, a trustee has bare ownership and trust property will not form part of her insolvent estate. However, if the trustee is also a beneficiary, trust property will form part of her insolvent estate.
(2)
the administration of a trust
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The trust beneficiary and revocation, variation and termination of a trust

Prescribed reading material for this study unit Havenga chapter 26, sections 26.8, 26.9 and 26.10. Lindiwe creates a trust inter vivos to provide for her children, Thabo and Thandi's, education. The trust instrument provides that the beneficiaries will be income beneficiaries. May Lindiwe revoke the trust and can Thabo and Thandi prevent her from doing so? May the provisions of the trust be varied to include Zinsi, who was born after the trust was created, as a beneficiary? After you have completed this study unit you should be able to answer these questions.
1
Introduction
The vesting of the beneficiary's right will vary depending on whether the trust is a trust inter vivos or a trust mortis causa.
Activity
Draw up two columns in which you list the difference between the vesting of rights of a trust inter vivos and a trust mortis causa. Now add to these lists the effect of the repudiation of the benefit by the beneficiary.
Feedback
TRUST MORTIS CAUSA Vesting of rights The beneficiary need not accept the benefits in order for the rights to vest. Effect of repudiation If the beneficiary was an income beneficiary, the benefit may accrue to another income beneficiary or the claim of a capital beneficiary will be accelerated. TRUST INTER VIVOS Vesting of rights The beneficiary must accept the benefits in order for the rights to vest. Effect of repudiation The trust property will be returned to the founder. If the founder cannot be found, the trust property will be declared bona vacantia and accrue to the state.
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If the beneficiary was a capital beneficiary, the income beneficiary acquires the benefit if her interest was fiduciary in nature. If the interest was not fiduciary in nature, the residual provisions of the trust instrument apply. In the absence of residual provisions, the rules of intestacy will apply in the case of a testamentary trust.
(Bona vacantia literally means that the property belongs to nobody.)
2
The beneficiary's rights
3
Revocation, variation and termination of a trust
You must distinguish between revocation, variation and termination of a trust because the consequences attached to each of these processes differ. For example, after a trust has been revoked or terminated it ceases to exist. In the case of variation, the trust continues to exist but the provisions of the trust instrument differ.
Activity
In his will executed in 1899, the testator bequeathed to his son the residue of his estate `ìn trust to be applied to the founding and maintaining (of) a home for destitute white children''. In consequence of this bequest in trust, the testator's son established the Marsh Memorial Homes in Cape Town. However, as a result of changes in socio-economic circumstances the number of ``destitute white children'' began to decline and the number of children accommodated in the Marsh Memorial Homes dropped from 120 to 60. The trustees, the Methodist Church of South Africa, approach you for advice. Advise them whether the particular provision of the trust can be varied. If so, what would they have to prove? The above facts are based on the decision in Ex Parte President of the Conference of the Methodist Church of Southern Africa NO: In Re William Marsh Will Trust 1993 (2) SA 697 (C).
Feedback
The provisions of the trust can be varied. In this case, the trust founder is dead and, therefore, cannot vary the provisions of the trust. The trustees will have to approach the court for an order to vary the provisions of the trust. The trustees will have to prove to the satisfaction of the court that the provisions of the trust instrument have brought about consequences which the founder of the trust did
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not foresee. The court will furthermore have to be convinced that the provisions have consequences which (1) obstruct the objects of the founder, OR (2) prejudice the interest of the beneficiaries, OR (3) are in conflict with the public interest. If the court is convinced of the above it may delete or alter a provision or make an order in respect thereof which the court deems just.
4
Trusts and other legal instruments
SELF-TEST QUESTIONS
(1) When can a trust inter vivos be revoked? (2) When will a trust terminate? (3) What is a foundation?

(1) The founder may revoke the trust if she has reserved for herself the right to revoke the trust during her lifetime and if neither the trustee nor the beneficiary has accepted either to act as trustee or a benefit in terms of the trust. If either the trustee or the beneficiary has accepted, the trust may only be revoked with their cooperation and consent. A trust will terminate when . the object of the trust is realised, or the trust has run its course and the prescribed scheme of distribution has been completed . the trust property is destroyed without fault on the part of the trustee and nothing replaces the destroyed property . no beneficiaries have been appointed . acceleration of benefits of the capital beneficiary has taken place, after renunciation or repudiation of the benefit by the income beneficiary . the court orders the cancellation of the trust (3) See section 26.9.3 of your textbook. A foundation is a legal person consisting of a collection of assets for a defined purpose and managed by administrators.
(2)
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SECTION 3: THE LAW OF INSOLVENCY
CONTENTS Study unit 1 Study unit 2 Study unit 3 Study unit 4 Study unit 5 Study unit 6 Study unit 7 Voluntary surrender and compulsory sequestration 100
Effect of sequestration on the person and property of the insolvent and on uncompleted contracts 107 Sequestration on property of the solvent spouse Impeachable dispositions Administration of the insolvent estate Composition and rehabilitation The winding-up of companies and close corporations 115 118 122 125 127
Voluntary surrender and compulsory sequestration

Prescribed reading material for this study unit Havenga chapter 27, sections 27.1, 27.2 and 27.3.
Mr A receives a letter from Mr B telling him that he is unable to pay Mr A the R5 000 he owes him and will need at least two months extension because, as he states in the letter, he is having difficulties at the moment in meeting all his obligations. Mr A hears that some of Mr B's creditors have already issued summonses against B. Should Mr A do the same and see who wins the race to get paid from whatever assets Mr B might have or are there other and better options open to him? This is the type of question that we will answer in this study unit.
1
Introduction
1.1 THE PURPOSE OF A SEQUESTRATION ORDER

The word `ìnsolvent'' is used in two ways: firstly, a person whose liabilities exceed his assets, is said to be insolvent even though his estate has not been sequestrated. In the second instance, the term `ìnsolvent'' is used when referring to someone whose estate has in fact been sequestrated by an order of court in terms of the Insolvency Act 24 of 1936. It is important to remember that the consequences of the Insolvency Act arise only after the debtor's estate has been sequestrated. No change in the status of the debtor occurs until his estate is placed under sequestration by order of court. When a debtor's liabilities exceed his assets, one or two of his creditors who act promptly will perhaps recover the full amount owing to them by taking judgment against the debtor and having a warrant for execution issued. Their claims can then be paid from the proceeds of a sale in execution of the debtor's assets. The remaining creditors will find few or no assets in the estate for payment of their claims. The sequestration procedure is therefore in the first place aimed at achieving a fair distribution of the available assets among competing creditors and preventing a situation where one vigilant creditor gets paid in full because he was the quickest to act against the debtor, while the other (more tardy) creditors get paid nothing or barely anything at all. As regards the debtor, he will never be able to extricate himself from his financial difficulties as long as his unpaid creditors continue to harass him to pay them any of the salary or income which he earns. Insolvency is not regarded as a crime and sequestration as its punishment, and through sequestration the insolvent is given
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the opportunity to eventually build up a new estate to which the creditors in his insolvent estate cannot lay claim.
1.2 HOW TO OBTAIN A SEQUESTRATION ORDER

Only a High Court has jurisdiction to grant a sequestration order as it affects the status of the insolvent debtor. The application for a sequestration order can be brought by the debtor himself (application for voluntary surrender), or by one or more of his creditors (application for compulsory sequestration).
1.3 WHICH ESTATES CAN BE SEQUESTRATED?

The Insolvency Act 24 of 1936 provides for the sequestration of the estates of insolvent debtors. The process of sequestration is applicable only in the case of the estates of natural persons and associations which do not enjoy legal personality, such as partnerships and trusts. Companies and close corporations, which are legal or juristic persons, are not regarded as debtors within the Insolvency Act and have to be wound up or liquidated under the Companies Act 61 of 1973 or the Close Corporation Act 69 of 1984. The winding-up of companies and close corporations will be discussed below in study unit 7.
Activity
This exercise will assist you in understanding which estates are subject to sequestration in terms of the Insolvency Act. Indicate which of the following can be sequestrated in terms of the Insolvency Act: (1) (2) (3) (4) (5) (6) The joint estate of spouses married in community of property. A business owned by a single trader. A trust. A foundation. A deceased estate. A partnership. Yes/No Yes/No Yes/No Yes/No Yes/No Yes/No
Feedback
Where spouses are married in community of property, there is only one joint estate and this joint estate must be sequestrated. In this case, both spouses will be insolvents and will be affected in the same way by sequestration. A business which is owned by a single trader forms part of the assets of such trader and will be sequestrated as part of his estate in case of insolvency. Such a business, which is not run in the form of a company or close corporation, is not a separate legal person and thus is not subject to liquidation. A trust does not enjoy legal personality in terms of our law, and the estate of a trust must therefore be sequestrated. A foundation, on the other hand, is a separate juristic person, and may not be sequestrated, but must be liquidated. A deceased estate which is found to be insolvent, may be sequestrated on
voluntary surrender and compulsory sequestration
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application by the executor (voluntary surrender) or a creditor (compulsory sequestration). A partnership is not regarded as a legal person and therefore the estate of a partnership can be sequestrated. In terms of the Insolvency Act, the estates of all the partners must also be sequestrated simultaneously with the partnership estate.
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Voluntary surrender
Owing to the fact that it is the insolvent debtor himself who applies for the voluntary surrender of his estate, there are strict requirements that he has to comply with before the court can accept the surrender. This is to prevent the debtor from abusing the process for his own benefit. Paragraphs 2.1, 2.2, 2.3 and 2.4 indicate all the requirements that need to be complied with before a court may accept an application for voluntary surrender.
2.1 FORMALITIES
As many creditors as possible must be made aware of the debtor's intention to apply for the voluntary surrender of his estate because it will fundamentally affect their claims if the court accepts the surrender. For this reason the Insolvency Act requires the debtor to publish a notice of his intended application in the Government Gazette and a local newspaper. He must also send a copy of this notice to every creditor whose address is known to him. He must furthermore draw up a statement of affairs in the prescribed form, containing particulars of all his assets and his liabilities, which creditors can inspect before the date of the application.
2.2 INSOLVENCY
The insolvent has to prove that he is in fact insolvent. The statement of affairs mentioned above, will usually prove this, but the court may also accept other evidence which proves actual insolvency.
2.3 TO THE ADVANTAGE OF CREDITORS

This is a very important requirement as the court will refuse the voluntary surrender unless satisfied that sequestration will be to the advantage of the creditors as a group. This is to prevent a debtor from simply using sequestration to rid himself of his debts.
Activity
This is meant to show you how the requirement that sequestration must be to the advantage of creditors is interpreted in practice. A debtor applies for the voluntary surrender of his estate. The application is opposed by one of his creditors, because the wife of the debtor, to whom he is married out of community of property, has been making monthly payments to creditors from her own salary. If the estate is sequestrated, she will stop making these payments, and it is contended by the creditor that sequestration is thus not to the advantage of creditors. What do you think would be the court's opinion on this point?
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Feedback
In an actual case resembling the above facts, the court held that the wife cannot be forced to work and make payments to her husband's creditors. If she stopped working for reasons of ill-health, for example, the payments would stop. The court therefore accepted the voluntary surrender of the debtor's estate, as it would be to the advantage of the creditors because of other reasons.
2.4 SUFFICIENT ASSETS TO COVER COSTS

This requirement is linked to the previous one, as there could obviously be no advantage to creditors if there are not even enough assets to cover costs. Even if the costs can be covered, there should be enough assets left to pay a dividend to creditors. Costs will include items such as Master's fees, trustee's fees, costs for maintaining and selling assets, et cetera.
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Compulsory sequestration
In this case, the debtor's creditor or creditors are the applicants and because they do not have at their disposal all the information which the debtor has, the burden of proof resting on the applicant or applicants is generally lighter than in the case of voluntary surrender. The following three paragraphs indicate the requirements that need to be complied with by the applicant creditor when he applies for the compulsory sequestration of the debtor's estate.
3.1 LIQUIDATED CLAIM

A creditor with a liquidated claim of at least R100, or two or more creditors who together have liquidated claims of at least R200 against the insolvent, may bring such an application. A claim is liquidated if its amount has been ascertained either by way of agreement or through a judgment of the court. An example of a liquidated claim would be the purchase price payable in terms of an agreement of sale; in other words, it is a definite and specific amount. A claim for damages, however, is not a liquidated claim, as it will only be ascertained after a specific sum has been awarded to the claimant in terms of a court order or agreement between the parties. Thus, the applicant creditor must prove that he has the necessary liquidated claim.
3.2 INSOLVENCY OR AN ACT OF INSOLVENCY

The applicant creditor must also prove that the insolvent (debtor) is indeed insolvent, or that he has committed one or more of the act of insolvency. The acts of insolvency are fully discussed in paragraph 27.3.1 of Havenga. Two acts of insolvency are actually contained in paragraph 27.3.1(b). The first one is where the sheriff finds the debtor, requests him to satisfy the judgment or indicate sufficient disposable property to satisfy the judgment and the debtor fails to comply with any of the two requests. The second possibility arises only if the sheriff cannot find the debtor at the address given in the warrant of execution. In this case the sheriff must try to find sufficient disposable property, and if he does not find anything, or enough to satisfy the judgment, this constitutes an act of insolvency as well. The difference between the acts of insolvency described in paragraphs 27.3.1(e)
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and 27.3.1(g) is that in the latter case the debtor must state clearly and in writing, that he is unable to pay his debts or any one of his debts. Although an agreement or offer will only constitute an act of insolvency in terms of 27.3.1(e), if it is an indication of the debtor's inability to pay the full debt, and not mere unwillingness, it need not be in writing and there does not have to be a specific statement that he is unable to pay his debts.
Activity
This activity is intended to illustrate how certain acts of insolvency can come about in practice and what the requirements are for some of them. Which of the following would be regarded as an act of insolvency? (1) (2) (3) (4) The debtor leaves the country to visit his sister in England, without paying his accounts which are due. The sheriff declares in his return that he could not find any disposable property of the debtor to satisfy a judgment. The debtor advertises his property for sale at a price which is only about 60 percent of its real market value. The debtor meets one of his creditors in the supermarket, and suggests that they should arrange a meeting to talk about the amount that the debtor owes this creditor because the debtor is having financial difficulties at the moment and would like to pay smaller monthly instalments.
Feedback
(1) In itself, this is not an act of insolvency because the debtor's intention to evade payment of his debts by his absence must be proved. More evidence will be needed to infer such an intention. This is not sufficient for an act of insolvency, as the sheriff has to state that he could not find the debtor at the stated address, and thereafter could not find enough disposable property. Even an attempt by the debtor to dispose of his property which would have the effect of prejudicing creditors, is sufficient to constitute an act of insolvency. This is not an act of insolvency as the debtor has neither made a written statement that he is unable to pay his debts, nor has he suggested any release from his debts.
(2)
(3)
(4)
3.3 TO THE ADVANTAGE OF CREDITORS

The applicant creditor must also prove that there is reason to believe that the sequestration will be to the advantage of the debtor's creditors. The lighter burden of proof on the applicant is clear when looking at this requirement. When a debtor applies for the voluntary surrender of his estate, he has to prove that it will be to the advantage of his creditors. In the case of an application for compulsory sequestration, however, the applicant need only prove that there is reason to believe that it will be to their advantage.
Activity
This activity is intended to draw your attention to the important differences between voluntary surrender and compulsory sequestration.
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Complete the following table by summarising the requirements of each process as regards the aspects listed on the left. (One has been completed for you as an example.) Voluntary surrender Prior formalities Applicant Insolvency Advantage to creditors Final order Debtor himself Creditor(s) liq claim of R100 (R200) Compulsory sequestration
Feedback
In the case of voluntary surrender, the applicant, being the debtor himself, has to comply with a whole range of prescribed formalities before he can approach the court, while the applicant for compulsory sequestration has virtually no prior formalities to comply with. If the court is satisfied that a voluntary surrender should be accepted, a final order is granted immediately. Where the application is for a compulsory sequestration however, the court first grants a provisional sequestration order which is served on the debtor, and a final order is only granted on the return day.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) What are the two main aims of sequestration? Name the two ways in which a sequestration order can be obtained. What requirements must be met before the court can accept an application for voluntary surrender of an estate? Who may apply to court for a compulsory sequestration order? How does the requirement of `àdvantage to creditors'' in the case of an application for compulsory sequestration differ from that required for an application for voluntary surrender? Name the eight acts of insolvency and the elements of each that have to be proven. How can a notice of intention to apply for voluntary surrender of an estate be withdrawn?
(6) (7)

(1) The two main aims are to achieve a fair distribution of the available assets among creditors of the insolvent and to give the insolvent the opportunity to extricate himself from his financial difficulties and make a fresh start. The two ways are voluntary surrender and compulsory sequestration. The applicant must prove that he has complied with the necessary
(2) (3)
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(4) (5)
(6)
(7)
formalities, that he is indeed insolvent, that sequestration will be to the advantage of his creditors and that there are sufficient assets to cover the costs of sequestration. A creditor with a liquidated claim of at least R100,00 or two or more creditors who together have liquidated claims of at least R200,00 against the insolvent. The burden of proof is lighter in the case of an application for compulsory sequestration, as the applicant need only prove that there is reason to believe that sequestration will be to the advantage of creditors. The applicant for voluntary surrender has to prove that it will be to the advantage of creditors. The answer to this is in section 27.3.1 of the textbook. Note the difference between acts of insolvency where intention has to be proved, and those where effect is important. Such notice may only be withdrawn with the written consent of the Master.
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Effect of sequestration on the person and property of the insolvent and on uncompleted contracts
Mr B's estate has now been sequestrated and he has many questions. How will he support his family; can he keep his present employment; what happens to his house and his car? Mr C wants to know whether he can take back the freezer Mr B bought from him but has not as yet paid for and Mr D needs to know if the contract between himself and Mr B whereby Mr B bought an agricultural holding from him, has now been automatically terminated. This study unit will answer these questions.
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The legal position of the insolvent
1.1 HOLDING OFFICE

The disabilities imposed on an insolvent by the Insolvency Act itself and various other statutes, are not intended as a punishment but rather as a way of protecting the interests of members of the general public who are entitled to the assurance that those who hold offices of responsibility are persons of stability and integrity. An unrehabilitated insolvent is therefore not capable of being a member of the National Assembly or a provincial legislature and may not be appointed as trustee in an insolvent estate or continue to act as one. Strangely enough, however, an unrehabilitated insolvent may be appointed as executor of a deceased estate, although the Master may, and surely will, require that security be furnished by the nominated executor in such a case. Furthermore, an unrehabilitated insolvent may not be the director of a company or participate in the management of a close corporation unless the court authorises such appointment.
1.2 EARNING A LIVELIHOOD

An insolvent may follow any profession or occupation or enter into any employment, but he may not, without the consent in writing of his trustee, either carry on or be employed in the business of a trader who is a general dealer or a manufacturer. This prohibition is somewhat of an anachronism because it means that an insolvent may be employed as a bank manager or do business as a pawnbroker or auctioneer without the consent of his trustee, but would require
effect of sequestration on the person and property
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permission to be employed as a shop assistant in a large department store (= general dealer) or to be a dressmaker (= manufacturer).
Activity
The aim here is to help you identify employment which is prohibited by the Insolvency Act. Indicate whether the insolvent may engage in the following types of employment without the consent of his trustee: (1) (2) (3) (4) (5) (6) Act as a clown at children's parties Farm Work as an estate agent Manage a garage Work in a cafe Run a butchery Yes/No Yes/No Yes/No Yes/No Yes/No Yes/No
Feedback
The insolvent may engage in the activities in (1), (2), (3), (4) and (6) without the consent of his trustee because he will not be a general dealer, but as a variety of items are sold in a cafe and not just goods of a particular type or kind, he will need the consent of the trustee to work in or manage a cafe.
1.3 OBLIGATIONS RELATING TO THE SEQUESTRATION PROCESS

In general, the insolvent has to do whatever is necessary to assist in the administration of his insolvent estate. This includes the obligation to attend the meetings of creditors, keep the trustee informed of his residential and postal address, furnish full particulars of property which he has disposed of and, should he be required to do so by his trustee, give a true and clear explanation of his insolvency and why his liabilities exceed his assets.
1.4 CONTRACTUAL CAPACITY

No further explanation is required here.
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The property of the insolvent
2.1 VESTING OF THE ESTATE IN THE TRUSTEE

The main object of the sequestration process is to liquidate the insolvent's estate and to distribute the proceeds among his creditors. For this reason a sequestration order immediately results in the insolvent losing ownership of his estate. The estate vests in the Master of the High Court until a trustee is appointed, after which it vests in the trustee. The estate remains vested in the trustee unless the insolvent is revested therewith as a result of a composition which provides that the insolvent's property will be restored to him (more about this in study unit 6). Even after rehabilitation, the insolvent is not revested with his estate, and those assets which vested in the trustee at the time of rehabilitation, remain vested in him to be realised for the benefit of the creditors of the insolvent estate.
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2.2 PROPERTY WHICH FALLS INTO THE ESTATE

Remember that not only those assets which the insolvent owns at the time of sequestration will vest in the trustee. All other assets, except those specifically excluded by law, which the insolvent may acquire during sequestration, that is until rehabilitation (which could be a period of as long as ten years) also vest in the trustee. Examples of such assets would include an inheritance or a donation received during sequestration. As explained previously, sequestration of the joint estate of spouses married in community of property results in the insolvency of both spouses and the entire estate vests in the trustee, except of course those assets specifically excluded by statute.
2.3 PROPERTY WHICH DOES NOT FALL INTO THE ESTATE

Study Havenga chapter 27, section 27.4.2(a)(f). Certain property of the insolvent does not form part of the insolvent estate because it is specifically excluded by the Insolvency Act or another Act, and will therefore not vest in the trustee. This enables an insolvent to start accumulating a new estate almost immediately after sequestration. As far as remuneration for work done by the insolvent after sequestration is concerned, the basic principle as stated in the Insolvency Act is that the insolvent is entitled to such remuneration or salary. The trustee only becomes entitled to money which the insolvent has received or will receive in the course of his profession, occupation or employment after the Master has determined which portion of such remuneration is not needed by the insolvent for the maintenance of himself and his dependants. The trustee has to approach the Master and apply for such a determination; if he does not, the insolvent remains entitled to his full salary.
Activity
This activity should help you to recognise those categories of assets which an insolvent may retain after sequestration of his estate. The estate of Mr Jones is sequestrated on 10 January 1996. Which of the following assets in his estate will vest in the trustee? (1) (2) (3) (4) The compensation he received in February 1996 for injuries sustained in a car accident in April 1995. Wood carving tools (he does wood carving as a hobby). Two antique chairs he inherited from his father in March 1996. A life insurance policy valued at R80 000 which he took out on his own life in 1989 and one he took out in 1992 valued at R20 000.
Feedback
Mr Jones will be able to keep the compensation he received as a result of the car accident because he received payment after sequestration, although the accident took place before sequestration. He can also keep R50 000 of the total value of the life insurance policies, because they were taken out more than three years before sequestration, but R50 000 will go to the insolvent estate. The wood carving tools are not essential to earn his livelihood and will also vest in the insolvent estate. It is unlikely that he will be allowed to keep the antique chairs as they are not essential pieces of furniture and could be worth a substantial amount of money.
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3
Legal proceedings not yet finalised
As a general rule, civil proceedings instituted by or against an insolvent are stayed on the sequestration of the estate until the appointment of a trustee. This would include any sale in execution by the sheriff as a result of judgment taken against the insolvent before sequestration. The insolvent may, however, sue or be sued in his own name and without reference to his trustee in the case of certain specified matters, such as divorce or in matters dealing with assets excluded from the insolvent estate, such as a claim for compensation for loss or damage as a result of personal injury or defamation, or for remuneration or pension.
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Uncompleted contracts
4.1 GENERAL PRINCIPLES

The effect of sequestration of the estate of one of the parties to an uncompleted contract is governed by the principles of the common law, unless specific statutory provision has been made for that type of contract. By `ùncompleted'' we mean a valid contract where one or both of the parties to the agreement still have to deliver or fulfil performance. In general, a contract is not automatically terminated if the estate of one of the parties is sequestrated. One important exception to this rule is the contract of mandatum where the insolvent has given instructions to someone like an attorney, architect or auditor to render professional services to him. Such a contract will automatically terminate if the estate of the principal (the person who gave the instructions) is sequestrated. The trustee has the power to repudiate a contract; in other words, he may decide not to perform in terms of that agreement. In this regard he must act in the best interests of the creditors and they may give him instructions on whether he should perform or repudiate. Repudiation by the trustee will still be breach of contract, but, contrary to other cases of breach of contract, the other party does not have the right to claim specific performance from the trustee of an insolvent estate, but can only claim damages. In most cases this will only be a concurrent claim. Three possibilities exist regarding uncompleted contracts: where the insolvent has performed but the other party has not, where neither party has as yet performed and where only the other party has already performed. These are dealt with in sufficient detail in the textbook.
4.2 CONTRACTS FOR WHICH SPECIFIC RULES APPLY

Study Havenga chapter 27, section 27.4.4.1.
4.2.1 Contracts of employment
No further explanation is necessary.
4.2.2 Instalment sale transactions
For this section to be applicable, the contract has to meet with the following three requirements: (1) (2) It must be for a sale of movable property, such as a car or furniture. The purchase price must be payable in part or in full in instalments.
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(3)
It must be stipulated that ownership will not pass to the buyer on delivery to him of the sold goods, but only after the full purchase price has been paid by him to the seller.
(Remember that only the situation where the estate of the purchaser is sequestrated, is regulated by the Insolvency Act.)
4.2.3 Sale of movable property for cash

The reason for this provision in the Insolvency Act is the principle that a cash buyer of movables does not become the owner of the sold goods on delivery unless he has paid the purchase price. The best example of a situation where this section would be applicable is where the purchaser pays by cheque, and the bank then refuses to honour the cheque owing to a lack of funds in the account of the purchaser. Note that the seller only has ten days after delivery to reclaim the goods and not ten days after sequestration. After the ten-day period he loses his claim, and will be left with only a concurrent claim for damages.
Activity
This activity is intended to show you how the various rules regarding uncompleted contracts operate in real life. Mr A sells a bull to Mr B for R60 000 by way of an oral agreement of sale. In terms of the agreement, Mr B pays R30 000 on delivery of the bull to him, and he undertakes to pay the balance of the purchase price at the end of the next month. A week after the bull has been delivered to Mr B, his estate is sequestrated. Can Mr A reclaim the bull because the full purchase price has not as yet been paid, or does he have a secured claim for the balance of the purchase price?
Feedback
Although less than ten days have elapsed since delivery of the bull, Mr A cannot reclaim the bull since this is not a cash sale as only half of the purchase price was payable immediately, while credit was given for the other half. This agreement therefore does not fall within the ambit of the special protection discussed in 4.2.3 above. Furthermore, this is not an instalment sale transaction, as no mention is made of a reservation of ownership by the seller until the full purchase price has been paid. This means that Mr A only has a concurrent claim for the amount still owing to him by Mr B and the insolvent estate remains the legal owner of the bull.
4.2.4 Sale of immovable property

The protection afforded to the purchaser of immovable property by the Alienation of Land Act in the case of insolvency of the seller, only applies if the following conditions are met: (1) (2) (3) The purchase price must be payable in more than two instalments. It must be payable over a period exceeding one year. The property must be registrable land which is intended mainly for residential purposes; in other words, not a farm or an agricultural holding.
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In such a case, protection of the purchaser who has not as yet received transfer from the insolvent seller, takes two forms: the purchaser may take transfer or, if he prefers not to do so, he has a secured claim for repayment of the amount he has already paid on the purchase price. The second form of protection, however, is only available to the purchaser if the contract of sale has been recorded against the title deeds of the property.
4.2.5 Contracts of lease
In principle, the trustee selling immovable property from the insolvent estate must sell it subject to any contract of lease which is still valid. The reason for this is the common law rule of ``huur gaat voor koop''. However, this protection is not absolute. Where the property in question is subject to a mortgage bond which was passed prior to the lease, the trustee should in the first instance put it up for sale provisionally subject to the lease. If the highest offer he receives is not sufficient to cover the amount of the mortgage bond, then the property must be put up for sale free of the lease.
SELF-TEST QUESTIONS
(1) (2) (3) Name three offices which an unrehabilitated insolvent may not hold. May an unrehabilitated insolvent be appointed as a director of a company? What are the restrictions on an insolvent as regards the occupation or profession he may follow? (4) How is the insolvent's capacity to conclude contracts affected by sequestration of his estate? (5) List the five main categories of assets which are excluded from the insolvent estate. (6) What are the general principles which apply when establishing the effect of sequestration on uncompleted contracts? (7) Name two contracts that lapse automatically on sequestration. (8) Define an instalment sale transaction. (9) What effect does sequestration of the estate of the purchaser have on an instalment sale transaction? (10) Under what circumstances will the purchaser of immovable property enjoy special protection if the estate of the seller is sequestrated? What is the nature of this protection? (11) What is the effect of sequestration of the lessor's estate on a contract of lease of immovable property? Is the effect the same where movable property is concerned?

(1) (2) (3) He may not be a member of the National Assembly or a provincial legislature and may not be a trustee of an insolvent estate. Only if authorised thereto by the court. He may not carry on or be employed in the business of a trader who is a general dealer or a manufacturer unless he has the written consent of his trustee. The insolvent may not dispose of any property of the estate and must have the written consent of his trustee to conclude any contract which might adversely affect his estate or any contribution he has to make to the insolvent
(4)
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estate. (This contribution refers to those cases where the Master has made a determination that part of the salary of the insolvent must be paid into the insolvent estate.) Apart from these limitations, he has normal contractual capacity. (5) Assets which are excluded from the estate are (a) clothes, bedding and essential furniture, tools and other means of subsistence (b) remuneration for work done after sequestration (c) pension for services rendered by the insolvent (d) compensation for loss suffered by the insolvent in his personal capacity and paid to him after sequestration (e) part of the value of certain life insurance policies (6) Sequestration does not as a rule automatically terminate contracts to which the insolvent is a party. The trustee has the choice, guided by the wishes of the creditors and the best interests of the insolvent estate, whether to repudiate an uncompleted contract or whether to proceed with its execution. If the insolvent has already performed but the other party has not, the trustee will claim performance from the other party. If the other party has performed, but the insolvent has not, the trustee may uphold the contract or repudiate it. If he decides to repudiate, the other party will only have a concurrent claim for the return of his performance as well as for damages. If none of the parties has performed as yet, the trustee can claim performance from the other party, but then has to tender full performance of the obligations of the insolvent estate. If he decides to repudiate, the other party will have a concurrent claim for damages against the insolvent estate. The other party does not have the right to specific performance by the insolvent estate. A contract of employment where the insolvent is the employer, and a contract of mandatum where the insolvent is the mandator. An instalment sale transaction is a contract for the sale of movables where the purchase price is partly or fully payable in instalments and the contract contains a stipulation that ownership will not pass to the purchaser on delivery of the goods but only after he has paid the full purchase price. Sequestration of the purchaser's estate causes ownership of the sold goods to pass to the insolvent estate and the seller obtains a secured claim for the balance of the purchase price still owing to him. His security is in the form of a hypothec over the sold goods. Protection is given to the purchaser of immovable property by the Alienation of Land Act under the following circumstances: (a) The purchase price must be payable in more than two instalments. (b) Over a period exceeding one year. (c) The property must be registrable land intended mainly for residential purposes. The purchaser may take transfer of the property against payment of transfer costs and the balance of the purchase price or certain specified administration costs, whichever is the greater of the two. If he does not want to take transfer, he will have a secured claim against the insolvent estate for the amount already paid by him, on condition that the contract was registered against the title deeds of the property.
(7) (8)
(9)
(10)
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(11) The lessee of immovable property enjoys limited protection because of the common-law rule of ``huur gaat voor koop''. This means that the trustee has to sell the property subject to the lease. If, however, there is a bond over the property which was registered before the lease, and the trustee cannot get an offer for the property which is enough to cover the amount of the bond, he can put it up for sale again, this time without the lease. The above rule does not apply to movables, and in due course the trustee will repudiate the lease to enable him to sell any movable asset subject to a lease. The lessee will have a concurrent claim for damages.
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Sequestration on property of the solvent spouse

Mrs B runs a small business from home. To her dismay she discovers that the sequestration of the estate of her husband, to whom she is married out of community of property, will have a serious effect on her estate as well. Can she continue with her business and what can she do to protect her interests? You must be able to answer this question at the end of the unit.
Introduction
The reason why this provision was originally introduced into the Insolvency Act was to assist the trustee in getting hold of assets which really belonged to the insolvent estate, but which were fraudulently transferred to the solvent spouse in an attempt to keep these assets outside the insolvent estate. The burden of proof now rests on the solvent spouse, who obviously has the necessary information and documentation, to prove that he is entitled to the assets, instead of the trustee having to prove that they really belong to the insolvent estate. This provision was particularly effective when the common-law prohibition against donations between spouses still existed and such donations did not give the beneficiary of the donation a valid title to the gift. The prohibition was revoked by legislation in 1984, however, and the section has since lost much of its usefulness.
Assets that have to be released
These categories are explained quite clearly in the textbook (see the (a)(d) list, as discussed in Havenga) and need no further explanation here.
Activity
This activity is intended to show you how the various assets of the solvent spouse can be classified for purposes of their release from the insolvent estate. Which of the following assets of the solvent spouse will have to be released by the trustee, and why? (For purposes of this activity we will assume that the parties were married in December 1990 and the estate of the husband was sequestrated in June 1996.) (1) R50 000 which she inherited from her grandmother in February 1996.
sequestration on property of the solvent spouse
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(2) (3) (4) (5)
A car which she bought in February 1992 by trading in her husband's old car as a deposit, and paying the monthly instalments from her own salary. A life insurance policy valued at R500 000 taken out by her husband in 1988 and ceded to her in May 1996. The family home registered in her name although her husband made the monthly repayments to the bank. Furniture she bought with her pension money which was repaid to her when she resigned from her job just before getting married.
Feedback
(1) (2) The solvent spouse will be able to keep the inheritance as she holds it by valid title. The deposit can be regarded as a valid donation from her husband, and as she paid the instalments from her own salary, she also holds the car by valid title. Although the donation of a life insurance policy is legally possible, the fact that he held the policy in his own name for many years, ceding it only one month before sequestration, makes it clear that this was not a true donation, but an attempt to remove it from the control of the trustee. The trustee will have every reason to refuse release of the policy. This is also a donation from her husband, and will have to be released on the grounds that she holds it by title valid as against the creditors of the insolvent estate. This will have to be released as she was the owner of these assets before her marriage to the insolvent.
(3)
(4)
(5)
SELF-TEST QUESTIONS
(1) (2) (3) Which persons qualify as spouses in terms of the Insolvency Act? Name the four categories of property of the solvent spouse that have to be released by the trustee of the estate of the insolvent spouse. Name three ways in which a solvent spouse can acquire property during the course of the marriage which will give him valid title against the creditors of the insolvent spouse. What happens to property of the solvent spouse which is not released by the trustee? What special provision has been made for a solvent spouse carrying on a business?
(4) (5)

(1) The term has been given an extended meaning in the Act and includes not only spouses married according to any law or custom, but also a man and woman who are not legally married but who live together as husband and wife. Property which belonged to the solvent spouse immediately before the marriage, property which was acquired in terms of an antenuptual contract, property which was acquired during the course of the marriage with title valid against the creditors of the insolvent spouse and the proceeds of property which would have been released or assets acquired with such proceeds.
(2)
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(3) (4)
(5)
Donation, inheritance or own income. The trustee has to sell it but the proceeds must be used to pay the creditors of the solvent spouse first. Only if there is any balance of the proceeds of these assets left after such payment, can it be used to pay creditors of the insolvent spouse. Such spouse can obtain an urgent court order to postpone the vesting of all or some of his assets in the Master or trustee, on condition that security is given to the insolvent estate for the value of such assets. This gives the solvent spouse the opportunity to prove that he is entitled to the release of the property, in which case it will not vest in the insolvent estate.
sequestration on property of the solvent spouse
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Impeachable dispositions
Prescribed reading material for this study unit Havenga chapter 27, section 27.6. The trustee of Mr B's estate discovers that Mr B gave a valuable painting to his brother two months before sequestration as payment for an amount that he owed him and could not repay. Six months before sequestration Mr B also registered a bond over his home as security for an amount he borrowed from a friend more than a year ago. These creditors are obviously much better off now than Mr B's other creditors, which does not seem fair. Can the trustee or creditors do something about it?
1
Study Havenga chapter 27, section 27.6, introductory paragraphs.
Introduction
The term ``disposition'' is defined in the Insolvency Act and has been given a very wide meaning to include any transfer or abandonment of rights to property by the insolvent before sequestration. Examples of dispositions which would fall under the definition include sales, leases, mortgages, pledges, deliveries, payments, releases, compromises, donations and suretyships. A disposition made in compliance with an order of court is specifically excluded, because the debtor does not make the disposition voluntarily. He is compelled to make the disposition and has no choice in the matter. The reason why the trustee is conferred with the power to apply to court to have certain dispositions made by the insolvent before sequestration set aside, is to restore the balance between creditors which has been adversely affected by these dispositions. You will notice that the trustee always has to prove that creditors have been unfairly prejudiced or that one or more creditors have been preferred above the others, that is, that they have received a benefit which the others have not. If the application of the trustee is successful, the recipient of the disposition has to return the asset or its value to the insolvent estate. One exception here is in the case where the recipient acted in good faith and gave up any property, security or right in return for the disposition. The trustee's right to have the disposition set aside in such a case, is not affected, but he cannot compel the recipient to return the benefit until he has given the recipient an indemnity.
Activity
This activity is intended to show you how the exception discussed in the previous paragraph would come into effect. Mr B owes Mr F an amount of R2 000. As security for this debt, Mr B gives Mr F two Krugerrands in pledge. Five months before sequestration, Mr B repays Mr F and Mr
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F returns the Krugerrands to Mr B. He is unaware of the fact that Mr B is insolvent. The trustee succeeds in having this payment set aside as a voidable preference. Will Mr F have to return the payment and become a mere concurrent creditor?
Feedback
If Mr F was in good faith and unaware of Mr B's insolvency, he can rely on the fact that he gave up his security, namely the Krugerrands which he held in pledge, in return for the payment. He will therefore not be obliged to return the payment unless the trustee indemnifies him for the loss of his right of pledge. In effect this will mean that the trustee will either have to return the Krugerrands in pledge to Mr F or he will have to allow Mr F to keep the repayment.
2
Dispositions not made for value
The question of how long before sequestration the disposition was made is important. Although there is no time limit, a distinction is made between dispositions that took place more than two years prior to sequestration, and those that took place within the two years prior to sequestration. In the case where the disposition took place more than two years, the trustee has to prove that the insolvent's liabilities exceeded his assets immediately after the disposition was made. If the disposition took place within two years prior to sequestration, however, the onus is on the beneficiary of the disposition, if he opposes the setting aside thereof, to prove that the insolvent's assets exceeded his liabilities immediately after the disposition.
3
Voidable preferences
This is explained in sufficient detail in the textbook.
4
Undue preferences
The intention to prefer, which must be proven by the trustee, pertains to the motive or state of mind of the insolvent, and is based on a subjective test. The trustee can do no more than prove surrounding circumstances which would point to such an intention. One example would be where the trustee can prove that the insolvent really knew at the time of making the disposition that his situation was hopeless and that sequestration was inevitable. On the other hand, should it appear that the insolvent had other and stronger motives for making the disposition, such as his desire to escape criminal prosecution or to gain time in which to extricate himself from his financial difficulties, an intention to prefer will not be proven.
5
Collusive dispositions
Two things distinguish collusive dispositions from undue preferences:
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Firstly, not only the insolvent but also the other party to the collusion must have the intention to prefer or prejudice creditors. This means that the debtor and the other party must have known that the debtor was insolvent and that the disposition would have this effect. Secondly, the collusion does not have to take place between the insolvent and a creditor of the estate, but may be between the insolvent and any other person or party. An insolvent and a member of his family or a friend could, for example, come to an agreement that an asset of the estate should be sold to this particular person in order to put it out of reach of the creditors.
Activity
The aim of this activity is to assist you in identifying the distinguishing features of each of the abovementioned impeachable dispositions. You merely need to fill in the table below. The first aspect of each type of disposition refers to the period of time before sequestration within which the disposition must have taken place; the second aspect refers to the point in time at which the liabilities of the debtor making the disposition must have exceeded his assets; the third aspect would cover the effect or intention which is required in each case and the fourth aspect would be whether the beneficiary can raise any defence to avoid the setting aside of the disposition. Without value Period before sequestration When insolvent Immediately after disposition Intention to prefer creditor none Voidable pref six months Undue pref Collusion
Special characteristic Defence
Feedback
Remember that although there is no time limit in the case of a disposition without value, the burden of proof is affected by the question whether the disposition took place more than two years before sequestration or not.
6
Voidable transfer of a business
You will remember that one of the acts of insolvency listed in section 27.3.1(h) of the textbook was where a trader had given notice of the intended transfer of his business and was unable to pay his debts. This notice refers to the one which is required by the Insolvency Act when a trader transfers his business to somebody else in terms of a contract. Creditors have to be informed of the transfer before it takes place. Note that the notice must be published by any trader transferring his business, and not merely a trader who is insolvent or in any financial difficulty. A ``trader'' is very widely defined in the Insolvency Act, and includes any person
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who buys or sells anything, is involved in building operations or public entertainment, is a hotel or boarding-house keeper and even an estate agent. Farmers selling their own produce are specifically excluded from the definition.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) Name five examples of transactions which would fall under the definition of a disposition in terms of the Insolvency Act. What are the requirements for a successful defence of `ìmmediate benefit'' against an application for setting aside a disposition without value? Compare the requirement of preference to creditors in the case of voidable preferences and undue preferences. What are the penalties for a creditor of the insolvent estate who is a party to a collusive disposition? Under what circumstances, for how long and against whom will the transfer of the business of a trader be void?

(1) (2) Any of the following: a sale, registration of a bond, payment, donation, lease, pledge, delivery, release, compromise and suretyship. The benefit must have been conferred (3) by a husband to his wife or a child born of the marriage within three months after conclusion of the marriage in terms of a duly registered antenuptial contract and the estate of the husband must not be sequestrated within two years after registration of the antenuptial contract
(4)
(5)
One of the requirements for proving a voidable preference is that the disposition must have had the effect or result of preferring one of the debtor's creditors above another. No such intention on the part of the debtor needs to be proven although the lack of such an intention is part of the defence that can be raised by the beneficiary. In the case of an undue preference, however, the trustee must prove that the debtor intended to prefer one of his creditors above another. The creditor has to return the benefit to the insolvent estate, compensate the estate for any loss which the disposition caused, and may be ordered to pay a penalty to the estate as determined by the court, but not exceeding the amount by which the disposition would have benefitted him had it not been set aside. If a trader has transferred his business in terms of a contract and has not published the required notice, the transfer will be void as against his creditors for a period of six months after the transfer. If the estate of the trader is sequestrated within this six-month period, the transfer will be void as against the trustee of the insolvent estate, which means that the trustee will be able to reclaim the business for the insolvent estate. The only two exceptions to this are made where the transfer of the business took place within the ordinary course of that business or in order to give security for the payment of a debt.
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Administration of the insolvent estate

Prescribed reading material for this study unit Havenga chapter 27, sections 27.7, 27.8, 27.9 and 27.10.
In this study unit we will look at the actual administration of the insolvent estate after a final sequestration order has been granted. Who administers the estate and how are the creditors involved? Are all creditors equal or who gets paid first?
1
Study Havenga chapter 27, section 27.7
The trustee
Nothing needs to be added to the textbook.
2
Study Havenga chapter 27, section 27.8
Meetings of creditors
3
Study Havenga chapter 27, sections 27.9 and 27.10
Proof of claims by creditors and realisation and division of the estate
Creditors are classified or ranked into one of the following three groups: secured, preferent and concurrent creditors.
3.1 SECURED CREDITORS

A secured creditor is a creditor who holds security for his claim, that is, the right to be paid first out of the proceeds of the property over which he holds security after payment of certain expenses. One asset can serve as security for more than one claim, in which case one will rank before the other depending on the type of security and the date on which it was given. Assets which are subject to security are called encumbered assets in contradistinction to unencumbered assets which are not subject to any such rights, and form the free residue of the estate. The Insolvency Act gives a precise list of the different types of security which will make a creditor a secured creditor in the case of insolvency of the debtor. These are (1) (2) a special mortgage which could be a mortgage bond over immovable property or a notarial bond over specially described movable property a landlord's legal hypothec for rent owing to him, over the movable property of the tenant on the leased premises
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(3)
(4)
(5)
the hypothec that the seller of movable property under an instalment sale transaction acquires over that property on sequestration of the estate of the purchaser, for the amount still payable in terms of the contract a pledge, which comes into effect when the debtor delivers movable property to the creditor which the latter is entitled to hold until the debt has been paid a right of retention or lien which can be defined as a right conferred by operation of law on a person who is in possession of someone else's property, to retain possession of that property until he has been paid for work he has done on that property, or expenses he has incurred in respect of the property
3.2 PREFERENT CREDITORS

The term ``preferent creditors'' can be used in its wide sense to include all creditors who have the right to receive payment of their claims before others, and this would then include secured creditors. In the narrower sense, preferent creditors are those creditors who do not hold any security for their claims but are entitled to be paid before concurrent creditors, although after secured creditors.
3.3 CONCURRENT CREDITORS

These are the creditors who hold no security for their claims and do not enjoy any preferential right to payment. Apart from being last in line for payment of their claims, they might even be required to make a contribution towards the costs of sequestration instead of receiving any payment on their claims. For this reason creditors without security or any preferent right to payment, very often decide not to risk proving a claim against the estate.
Activity
This activity is intended to assist you in recognising the various types of claims. Indicate what type of claim arises from each of the following and, in the case of secured claims, on what grounds: (1) (2) (3) (4) (5) (6) general bond over movable property amount owing to seller of movables under an instalment sale agreement special bond over immovable property funeral expenses of the insolvent's wife contributions payable by an insolvent employer to the Compensation Commissioner instalments paid by purchaser in terms of an instalment sale transaction in the case of insolvency of the seller
Feedback
The claims are (1) (2) (3) (4) (5) the last preferent claim in the line-up a secured claim based on hypothec a secured claim based on a special bond a preferent claim up to an amount of R300 and a concurrent claim for the balance of the funeral expenses a preferent claim
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(6)
a concurrent claim as no provision is made in the Insolvency Act for insolvency of the seller
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) (6) When and by whom is a provisional trustee appointed? And a trustee? What are the main purposes of the first and second meeting of creditors respectively? What is an encumbered asset? Name the five types of security that would give a creditor a secured claim against the insolvent estate. Explain what the free residue is and the order in which it has to be applied to pay creditors of the insolvent estate. How is the dividend payable to concurrent creditors calculated?

(1) The Master may appoint a provisional trustee as soon as an estate has been provisionally or finally sequestrated. A trustee is elected at the first meeting of creditors by those creditors who have proved their claims against the estate. His election must be confirmed by the Master. The first meeting of creditors is held to enable creditors to prove their claims against the estate and for the election of a trustee. The second meeting is also held for the proof of claims, but another important reason for it is that the creditors have the opportunity to instruct the trustee about the administration of the estate. An encumbered asset is an asset which serves as security for a claim against the insolvent estate. Special bond over movable or immovable property, landlord's hypothec, instalment sale hypothec of seller, pledge and right of retention or lien. The answer to this can be found in section 27.10 of chapter 27 of the textbook. If there is any free residue left for distribution to concurrent creditors, the total amount available is divided by the total amount of concurrent claims to obtain a dividend payable to each concurrent creditor. For example, R1 000 free residue to pay claims totaling R5 000 would give a dividend of 20 cents for each rand claimed.
(2)
(3) (4) (5) (6)
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Composition and rehabilitation

Prescribed reading material for this study unit Havenga chapter 27, sections 27.11 and 27.12.
After the sequestration of his estate, Mr B is quite discouraged. Will he always be subject to the present controls and limitations, or will he be allowed to make a fresh start at some stage?
1
Composition
Note that if an offer of composition has been accepted by the required creditors in number and value, all creditors are bound except in so far as their claims are secured or otherwise preferent. This basically means that only concurrent creditors are bound, and for this reason the votes of secured creditors are only taken into account for that part of their claim that is unsecured. Preferent creditors, however, have the full amount of their claims taken into account for voting purposes. An insolvent is not entitled to apply for rehabilitation after any composition has been reached, but only if he is paying his concurrent creditors at least fifty cents in the rand. Even in such a case, the insolvent may not prescribe as a condition of the composition that he is to receive his rehabilitation, as the question of rehabilitation must be judged by the court. It may be made a condition of the composition that the property of the insolvent estate must be returned to the insolvent, even if no rehabilitation takes place. This is very often the reason why an offer of composition is made in the first place, when funds for the composition are made available to the insolvent estate by friends or family of the insolvent for the specific purpose of having him revested with his assets. Our courts have the power to set aside an acceptance of an offer of composition if it was induced by an improper motive, even a well-meaning one such as a feeling of pity for the insolvent. The composition should be to the benefit of the creditors, in that they will receive a larger dividend on their claims, or be paid sooner than would be the case if the sequestration process runs its course, or something similar.
2
Rehabilitation
Remember that although it is the insolvent's estate that is sequestrated, it is the insolvent person who is rehabilitated.
composition and rehabilitation
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SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) (6) What are the two main differences between a common-law composition and a composition in terms of the Insolvency Act? Which creditors are entitled to vote on an offer of composition? What effect does a composition have on the rehabilitation of the insolvent? What is the effect of a composition on the assets in the insolvent estate? Name the two ways in which an insolvent can be rehabilitated. Name four factors which would influence the period of time that has to elapse between sequestration and an application for rehabilitation.

(1) A common-law composition has to be reached before sequestration and must be accepted by all creditors in order to serve any real purpose as it is only binding on those creditors who have accepted the offer. A composition in terms of the Insolvency Act can only be reached after the first meeting of creditors has taken place and only three-quarters in number and value of the creditors have to accept the offer to make it binding on all concurrent creditors. All creditors are entitled to vote, but a secured creditor is only entitled to vote in respect of the amount by which his claim exceeds the value of his security. A composition that provides for payment of a dividend of at least fifty cents in every rand entitles the insolvent to a certificate to that effect from the Master, and on the strength of this he can immediately apply to court for a rehabilitation order. It can be made a condition of the composition that the insolvent shall be revested with his property or part thereof, and if the composition is accepted, the trustee is bound to return such assets to the insolvent. Automatically after ten years or by order of court within the ten-year period. Whether or not all claims have been paid in full; no claims were proved against the insolvent estate; this was the first time the insolvent's estate has been sequestrated; whether the insolvent has committed any offences relating to his insolvency.
(2) (3)
(4)
(5) (6)
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The winding-up of companies and close corporations

After completing this unit you should be able to . describe the different modes of winding-up of a company and a close corporation and explain when each one is used . explain which parties may apply to court for winding-up . know when a company or a close corporation will be deemed to be unable to pay its debts . set out the consequences of a winding-up order . explain when directors, officials or other persons of a company may be held personally liable by the liquidator . explain when members or other persons of a close corporation may be held personally liable by the liquidator . distinguish between a compromise a company concludes with its creditors and a composition a close corporation concludes with its creditors
1
Study Havenga chapter 27, section 27.13, the introduction paragraph.
Introduction
In study unit 1 (see paragraph 1.3 in study unit 1) of this section it was already indicated that companies and close corporations are not regarded as debtors for purposes of the Insolvency Act and therefore cannot be sequestrated. Companies and close corporations that have become insolvent can, depending on the case, be wound up under the Companies Act or the Close Corporations Act. However, it is important to remember that winding-up or liquidation can also take place for reasons other than insolvency, for example because the company or close corporation failed to commence business within one year after its registration, or because it suspended its business for a whole year. For purposes of this study unit we will only concentrate on insolvent companies and close corporations.
2
Modes of winding-up
A company or a close corporation may either be wound up . by way of a special resolution of the members of a company or a written
the winding-up of companies
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resolution of all the members of a close corporation (called a voluntary windingup); or . by way of a court order (called a compulsory winding up).
2.1 VOLUNTARY WINDING-UP

Study Havenga chapter 27, section 27.13.1.1. A voluntary winding-up can either be . a members' voluntary winding-up; or . a creditors' voluntary winding-up. In the case of a winding-up by the court (see paragraph 2.2 below), it is the court that decides whether or not the company will be placed in liquidation. In the case of a voluntary winding-up, the court is not involved at all. Both forms of voluntary liquidations are initiated in the same way, namely by registration of the resolution of members. A voluntary winding-up commences when the resolution is properly registered at the Registrar of Companies or of Close Corporations. In the case of a member's voluntary winding-up, the creditors really have no interest in the liquidation process, since security for the full payment of their claims against the company would have been provided for. Accordingly, a member's voluntary winding-up takes place under the control of the members, and a creditor's voluntary winding-up under the control of the creditors. When you study this part of Havenga you must make sure that you understand what the difference is between a member's voluntary winding-up and a creditor's voluntary winding-up.
2.2 COMPULSORY WINDING-UP (WINDING-UP BY THE COURT)

Study Havenga chapter 27, section 27.13.1.2. It is important to remember that once a final winding-up order is made by the court, the winding-up will be deemed to have commenced on the date when the application was first presented to the court. It is important for you to know the circumstances in which a company or close corporation will be deemed to be unable to pay its debts. Nothing needs to be added to the textbook.
3
Study Havenga chapter 27, section 27.13.2. 27.13.2.
Consequences of winding-up
Make sure you know what effect winding-up has on the status of a company or close corporation, its property, civil legal proceedings instituted by or against it, as well as the position of directors of the company. Nothing needs to be added to the textbook.
4
The liquidator
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5
Study chapter 27, section 27.13.4.
Meetings and proof of claims
6
Liability of directors, officers and members
The liquidator of a company or a corporation has a duty to investigate whether any person may be personally liable for the way in which the affairs were being carried on. Nothing needs to be added to the textbook.
7
Composition and compromise
SELF-TEST QUESTIONS
(1) (2) (3) In what circumstances may a member's voluntary winding-up take place? When is a company deemed unable to pay its debts? What effect does a winding-up order have on the company's property and on dispositions of property?

(1) A member's voluntary winding-up may take place only if the company or close corporation is able to pay its debts. Before the resolution by members may be registered (and the winding-up may therefore commence), the company must either provide security for payment of its debts within twelve months after winding-up or declare in a certificate that it has no creditors. A company is deemed unable to pay its debts if (a) a creditor having a claim of at least R100 which is already due leaves a demand at the company's registered office, and the company fails for three weeks after that to pay the claim, to give security for it or to compromise to the satisfaction of the creditor, or (b) a warrant of execution or other process issued on a judgment against the company has been returned by the sheriff with an endorsement that he did not find disposable property sufficient to satisfy the judgment or that the disposable property he found did not, upon sale, satisfy the process, or (c) it is proved to the satisfaction of the court that the company is unable to pay its debts. (3) Unlike the case of natural persons, a company does not lose its ownership (the assets do not vest in the liquidator). The property merely falls under the control of the Master and after that the liquidator. If the company cannot pay its debts, the court's permission is required for every disposition of company assets which takes place after the commencement of the winding-up.
(2)
the winding-up of companies
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130
SECTION 4: THE LAW OF ADMINISTRATION OF ESTATES
CONTENTS Study unit Study unit Study unit 1 2 3 The Master and the executor The rights, powers and duties of the executor 132 136
The removal/discharge of the executor and the administration of special types of estate 139
The master and the executor

Prescribed reading material for this study unit Havenga chapter 28, sections 28.1, 28.2, 28.3, 28.4, 28.5, 28.6 and 28.7.
Introduction
During their lives most people acquire an estate. When an owner of the estate dies, the estate has to be administered so that creditors are paid and the remaining assets are transferred to the heirs and legatees. The person responsible for the process of administering the deceased estate is the executor under supervision of the Master. In this study unit we will concentrate on the position of the Master and that of the executor.
2
The Master
In our study of the law of trusts we already referred to the Master. Another duty of the Master is to supervise the administration of deceased estates.
Activity
How does one determine which Master's office will have jurisdiction over the deceased estate?
Feedback
The general rule is that the Master of the area in which the deceased was ordinarily resident will have jurisdiction. If the deceased was not ordinarily resident in the Republic, but has property within the Republic, the Master who was first approached for letters of executorship has jurisdiction.
3
The executor
The executor must not be confused with the trustee. The executor is responsible for administering a deceased estate and the trustee administers a trust. In both cases the Master ensures that the administration is properly done. Three questions may be asked when the position of the executor is discussed: . Who may be an executor? . How is the executor appointed? . What does the Master require before appointing an executor?
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When answering these questions, you must note that there are certain exceptions to the general rule. WHO? ANY NATURAL PERSON WITH FULL CAPACITY EXCEPTIONS . . . . PERSONS PROHIBITED BY LEGISLATION MINORS, PRODIGALS AND MENTALLY DISTURBED PERSONS INSOLVENT PERSON ONLY AFTER LODGING SECURITY JURISTIC PERSON A NOMINEE OF SUCH JURISTIC PERSON
HOW? THE DECEASED CAN NOMINATE AN EXECUTOR IN HER WILL AND THE MASTER MAY APPOINT AT HIS DISCRETION EXCEPTIONS . A PERSON WHO WITNESSED THE WILL OR TOOK IT DOWN IN WRITING IS DISQUALIFIED UNLESS THE COURT DECLARES SUCH A PERSON TO BE COMPETENT . IF THE DECEASED DIED INTESTATE OR DID NOT NOMINATE AN EXECUTOR, OR THE EXECUTOR CANNOT BE TRACED OR DOES NOT ACCEPT THE APPOINTMENT, THE MASTER APPOINTS AN `ÈXECUTOR DATIVE'' WHAT? WHAT DOES THE MASTER REQUIRE BEFORE APPOINTING AN EXECUTOR . . . . . DEATH NOTICE WILL, IF THERE IS ONE PRELIMINARY INVENTORY LETTER OF ACCEPTANCE BY THE EXECUTOR BOND OF SECURITY, IF SECURITY IS NECESSARY
Activity
Indicate the correct statement(s): (1) (2) (3) (4) The executor supervises the administration of estates. A juristic person may not be appointed as the executor of a deceased estate. There is a Master's office in the capital of each one of the provinces of South Africa. An executor dative may be appointed where the executor appointed in the will cannot be traced.
Feedback
(1) (2) (3) (4) is is is is incorrect. The Master supervises the administration of deceased estates. incorrect. A juristic person may be appointed as an executor. incorrect. There is a Master's office in some High Courts. correct.
the master and the executor
133
4
Documents required by the Master before appointing an executor
In paragraph 3 above the documents required by the Master before he will appoint an executor were listed. You must note that a will is only required if there is one. A person may also die intestate, that is without having made a will or where the will is not valid. Since there is no will the Master cannot insist that such a document must be lodged. You should be able to distinguish between the different documents, the contents of the documents and the persons who are responsible for submitting or compiling the documents. Also note that an executor may be exempted from furnishing security under certain circumstances.
Activity
Supply the missing words in the following columns: THE DEATH NOTICE Duty to report to Master by surviving ........... or nearest .............. living in ............ or person ............ within .......... days after ........... THE PRELIMINARY INVENTORY Must be submitted to Master by surviving ........... or nearest ........... living in ........... within ........... days of .............
Feedback
The duty to report rests on the surviving spouse or the nearest relative of the deceased living in the district where the death took place or the person in control of the premises where the death took place within fourteen days after becoming aware of it. The preliminary inventory must be submitted to the Master by the surviving spouse or the nearest relative living in the district where the deceased was ordinarily resident within fourteen days of becoming aware of the death.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) Who supervises the administration of deceased estates? Who may and who may not be appointed as an executor? What documents must be lodged with the Master before he will issue letters of executorship? What must be included in the preliminary inventory and what is its purpose? In what cases is an executor exempt from furnishing security and under what circumstances can the Master still require security from these persons?
134

(1) (2) (3) (4) The Master supervises the administration of deceased estates. You will find the answer in section 28.3.1 of your textbook and see also paragraph 3 above. See section 28.4 of your textbook and see also paragraph above. All immovable and movable property of the deceased as well as claims in favour of the estate must be included in the preliminary inventory. The purpose of the preliminary inventory is to give the Master an indication of the value of the estate and thus to determine the method whereby the estate must be administered. An executor is obliged to furnish security for the proper completion of his or her work except where the executor is . a parent, child or surviving spouse of the deceased . exempted from it in the will . exempted from it by the court. Even if the executor is exempted from furnishing security for any of the reasons stated above, the Master may still require security if . the executor is insolvent or has committed an act of insolvency . the executor lives outside the Republic . there is any other good reason for requiring security. For additional information, see section 28.3.2 of the textbook.
(5)
the master and the executor
135
The rights, powers and duties of the executor

In the previous study unit we discussed the appointment of an executor. In this study unit we will concentrate on the rights, powers and duties of the executor. In other words, what the executor must do to ensure the proper administration of the estate and how this must be done.
1
Introduction
The executor stands in a fiduciary relationship towards the creditors and the beneficiaries. This means that there is a relationship of trust between the executor and the creditors and beneficiaries of the deceased estate. The executor must accordingly act with care and good faith. If she is guilty of maladministration of the estate, or is negligent in administering it, she may be personally liable for damage suffered by the creditors and the beneficiaries.
Activity
Joan is appointed as the executor of Grant's estate. Grant was a collector of vintage cars and one of the cars, the only of its kind in the world, is in an extremely dilapidated state. Joan sells the car to her son for R500 who repairs it and in turn sells it for R100 000. The heirs to Grant's estate finds out about the sale to Joan's son and approach you for advice. Advise them.
Feedback
Joan may be guilty of maladministration of the estate since she sold the car to her son seemingly without the permission of the Master of the court. If this is indeed the case, Joan will be personally liable for the loss suffered by the estate.
2
Duties of the executor
It should be clear to you that the duties of the executor are numerous and onerous. The duties arise from the moment that the executor takes custody of the assets of the deceased estate until she makes payment to the creditors and the beneficiaries and complies with any further requirements set by the Master.
136
Activity
Which one of the following statements is correct? (1) (2) (3) The executor must always open a banking account in the name of the estate. The executor of a deceased estate may pay the creditors of that estate before the Master's approval of the liquidation and distribution account. The executor's inventory of a deceased estate must be submitted to the Master within 30 days of the death of the owner of that estate.
Feedback
The correct statement is (2) because an executor may pay the creditors ahead of time although she then runs the risk of incurring liability for any losses which may result. The other statements are all incorrect: (1) because the banking account need only be opened if the executor holds cash of more than R1 000; and (3) because the executor's inventory must be submitted within 30 days of that executor's appointment.
SELF-TEST QUESTIONS
(1) (2) (3) (4) (5) What does the executor's fiduciary relationship entail? How must the executor deal with cash in the estate? Describe the procedure that must be followed if an executor disputes a creditor's claim. Explain the difference between a legatee and an heir. Name the various methods of liquidation which can be used by an executor.

(1) The fiduciary relationship means that the executor must act with care and good faith. Consequently, if the executor is guilty of maladministration of the estate, or is negligent in administering it, she may be personally liable for damage suffered by the creditors and the beneficiaries. As soon as the executor holds cash of more than R1 000 on behalf of the estate, she must open a banking account in the name of the estate. All moneys of the estate which the executor receives must be deposited in this account. If the executor disputes a claim of the creditor, the creditor may be requested in writing to lodge an affidavit in support of the claim. With the consent of the Master, the executor may require any person with information about the claim, to present evidence under oath before the Master or a magistrate. If the executor disallows a claim, the executor has to inform the creditor in writing (by registered post) and provide reasons for the decision. The creditor may then approach the court to decide on the validity of the claim. (4) See section 28.5.6 of the textbook. A legatee is the beneficiary of a legacy, that is, a specific testamentary bequest of goods or money. An heir is a person who receives the remainder
(2)
(3)
the rights, powers and duties of the executor
137
(5)
of an estate after payment to creditors and legatees. For example, I leave my car to my daughter and the remainder of the estate to my husband. My daughter is a legatee and my husband is my heir. The various forms of liquidation are . . . . making over in specie, partial sell-out, total sell-out, taking over by the surviving spouse in terms of section 38 of the Administration of Estates Act, . redistribution in terms of an agreement between the heirs, and . the administration of insolvent deceased estates in terms of section 34 of the Administration of Estates Act.
138
The removal/discharge of the executor and the administration of special types of estate
Prescribed reading material for this study unit Havenga chapter 28, section 28.3.3, 28.6 and 28.7.
After completing this study unit you should be able to . name and discuss when the Master can remove an executor . name and discuss when the court can remove an executor . discuss the administration of special types of estate
1
Removal and discharge of executors
It is important to make a distinction between those instances where the Master can remove an executor and those where the court can remove an executor.
Activity
Supply the missing word in the following sentences: (1) The .......... can remove an executor from office if she has been appointed as an executor dative and it later appears that an executor testamentary has been nominated. The ............. can remove an executor from office if she is a party to an agreement whereby she undertakes, in her capacity as executor, to grant an heir a benefit to which he is not entitled. The ........... can remove an executor from office if she fails to draw up and lodge the liquidation and distribution account. The ............ can remove an executor from office if she is a minor at the time of her appointment. The ............. can remove an executor from office if she bribed the Master to appoint her. The .......... can remove an executor from office if she failed to liquidate the estate in the manner approved by the Master.
(2)
(3) (4) (5) (6)
Feedback
The missing word in (1), (3), (4) and (6) is Master. In (2) and (5) the missing word is court.
the removal/discharge of the executor
139
2
Study Havenga chapter 28, section 28.6 and 28.7.
The administration of special types of estate
The Administration of Estates Act specifically provides for the administration of some deceased estates and certain other estates. Deceased estates which are administered in a specific way are . . . . estates under R125 000 in value the joint estate of persons who were married in community of property an insolvent deceased estate massed estates
The Act also provides for the administration of the estates of persons who are unable to exercise control over their own estates, such as . absent persons . minors . mentally disturbed persons
Activity
Discuss the administration of an insolvent deceased estate.
Feedback
The executor has to realise the assets in the manner approved of by the Master. The creditors also have to be notified of the way in which the sale will take place and they may lodge objections to it with the Master who may then decide to amend his instructions. The sale will then take place. The executor draws up a distribution account according to the order of preference prescribed for sequestrated estates under the Insolvency Act. The account has to lie for inspection and then be confirmed. For additional information, see section 28.6.3 of the textbook.
SELF-TEST QUESTIONS
(1) (2) (3) (4) When is the executor discharged? Name a few examples of assets of the surviving spouse which do not form part of the joint estate. What is a massed estate? How does a guardian or curator vacate her office?

(1) (2) The executor receives her discharge from the Master as soon as the estate has been finalised. The assets which do not form part of the joint estate are: . limited interests in property in favour of the surviving spouse . assets donated or bequeathed to the surviving spouse on condition that they do not form part of the joint estate.
140
(3)
(4)
See section 28.6.2 of the textbook. A massed estate entails that the estate or part of the estate of a survivor is joined with the estate of the deceased and distributed amongst the beneficiaries as if the whole of the massed estate belonged to the deceased. In exchange the survivor has to receive a limited interest in the property, for example a usufruct. A guardian or curator can be discharged on completion of the administration or she may be removed from office by the Master if she is not a competent person.
the removal/discharge of the executor
141

Commercial Law - Study Guide

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Commercial Law - Study Guide

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Development team Eesa Fredericks Michelle Kelly-Louw Alvereen Leonard Izelde van Jaarsveld

Departmental reviewer Jopie Pretorius

DEPARTMENT OF MERCANTILE LAW UNIVERSITY OF SOUTH AFRICA, PRETORIA

The structure of each study unit

How to use the study guide

SECTION 1: INSTRUMENTS OF PAYMENT AND OTHER METHODS OF PAYMENT

Negotiable instruments and other methods of payment

The term ``negotiable instrument'' and other methods of payment

Cape Town 2 September 2009

section 1 study unit 1

negotiable instruments and other methods of payment

Negotiable instruments as alternatives to cash

section 1 study unit 1

negotiable instruments and other methods of payment

Cheques: definition, parties to, relationships on and elements of cheques

The definition of a cheque and the necessary parties to it

Non-essential parties to a cheque

The relationships between parties to a cheque

section 1 study unit 2

cheques: definition, parties to, relationships

The essential elements of a cheque

P Smith One hundred rands only

section 1 study unit 2

cheques: definition, parties to, relationships

The non-essential elements of a cheque

Payable at: Hatfield Pretoria

ANSWERS TO SELF-TEST QUESTIONS

section 1 study unit 2

cheques: definition, parties to, relationships

Who can claim payment on a cheque?

The concept of a holder

The rights and duties of a holder

section 1 study unit 3

who can claim payment on a cheque?

The holder in due course

The special position of the holder in due course

ANSWERS TO SELF-TEST QUESTIONS

section 1 study unit 3

who can claim payment on a cheque?

The functions of signatures on cheques

The requirement of a signature to establish liability on a cheque

section 1 study unit 4

the functions of signatures on cheques

The different functions of signatures on cheques

The possible functions of the signatures of different parties to a cheque

section 1 study unit 4

the functions of signatures on cheques

ANSWERS TO SELF-TEST QUESTIONS

section 1 study unit 4

the functions of signatures on cheques

Signatures on cheques on behalf of juristic persons

Signatures on behalf of juristic persons

Practical guidelines from the case law

section 1 study unit 5

signatures on cheques on behalf of juristic persons

ANSWERS TO SELF-TEST QUESTIONS

per R Solomon per P Banda ....................................................................................................................................... per R Solomon

XYZ (Pty) Ltd

................................................................. (3) XYZ (Pty) Ltd

R Solomon P Banda ............................................................................................................ (Director no 2)

section 1 study unit 5

signatures on cheques on behalf of juristic persons

Forged and unauthorised signatures