Fashaf ruling sets aside security of FirstRand, Ab
Fashaf ruling sets aside security of FirstRand, Absa
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Judgment may have bearing on RAG wind-up
Chief Reporter
BANKING groups FirstRand and Absa have lost a court case that will see their security set aside over debts of R40m owed to them by former listed clothing retailer Fashion Africa (Fashaf).
The Johannesburg High Court judgment means the two banks will still be able to claim the R40m but will not have any preferential status and will have to queue alongside other creditors which could see them lose part of their money if liquidators cannot realise the full sum.
The Fashaf case could also have implications for the winding up of Retail Apparel Group (RAG), the high-profile insolvency case in which the liquidators have challenged the security over R160m owed to the banks by RAG and its subsidiary, Retail Apparel Pty (RAP).
In Fashaf and RAG, the lead liquidator is SBT Trust chairman Enver Motala, and in both instances, FirstRand and Absa were the main banks claiming the money owed to them was secured.
This court clash arose after Fashaf and associate Jones Retailing went into liquidation 16 months ago.
Motala then set aside the security over the R40m debts owed to FirstRand and Absa as the liquidators believed there were problems in these security agreements a decision which the banks took on review to the Johannesburg High Court.
But in his ruling last week, Judge SJ Grobler upheld the liquidators' decision, stating FirstRand and Absa "have not shown any reason for the review of the decisions made by the (liquidators)".
The problematic clause was a special condition contained in a notarial bond intended to bind Fashaf's property as security for its debts to the two banks, effectively splitting the claims.
Grobler said the contract effectively entitled the banks to pursue the debtor jointly and severally, which would "impose a greater burden on a debtor than he would otherwise be subject to".
Absa and FirstRand will be hoping this is no indication of what will happen to their security in the RAG matter.
In the RAG instance, an 18-month section 417 insolvency inquiry continues, focusing mainly on whether the banks followed the correct procedures when they took security for the R160m owed them by RAG.
Motala claimed the banks' security was shaky and evidence at the inquiry suggested some of the banks had taken security in the wrong company (RAG instead of RAP) and had tried at the last minute to remedy this.
However, the Insolvency Act allows liquidators to set aside changes made within six months of liquidation.
If Motala is correct in RAG as the high court said he was in Fashaf this could see the banks' security set aside. This would mean the banks would have to wait in the same queue as the smaller trade creditors and any monies recovered would be split between all parties.
One implication of both the Fashaf decision and the continuing RAG saga is that banks are set to become far more vigilant in how they draw up security agreements with corporate customers.
With holes now being picked in security agreements governing the banks' relationship with two of their largest former clients, financial institutions may need to revisit the process to ensure any security for their loans is watertight.
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