By Chantelle Gladwin-Wood, Partner and Dominique Lloyd, Associate
This article considers the legal question of whether a deposit of money made by a tenant with a landlord on the one hand, or a deposit of a customer of a municipality/Eskom on the other, constitutes a pledge in terms of our law. This is important because if it does, then the landlord or municipality will have a secured claim against the insolvent estate of the tenant or municipal debtor respectively in the event of that entity’s insolvency to the extent of the deposit. This means that in terms of our laws of insolvency they will rank above other creditors in relation to a claim to that deposit and will essentially be “first in line” to recover an amount of money not exceeding the deposit amount to settle any claim that might be owed to them at the time of insolvency by the insolvent debtor.
What is a pledge?
A pledge is the act by a debtor of the giving over of some type of movable property (which includes cash or money in a bank account) to a creditor as security for that creditor’s claim against the debtor, in terms of an agreement which allows the creditor to “absorb” or otherwise use that security deposit in order to settle amounts owing to that creditor by the debtor when the debtor defaults on its obligations in terms of the original agreement between the parties.
One of the problems that a creditor might have when trying to prove a claim against an insolvent estate for a deposit on the basis that it is secured as a pledge, is that the creditor would have to show not only that the money was given over as a deposit but also that there was agreement between the parties that it would serve as security. That can be rather difficult to prove if there is no written document expressly saying as such. It is possible, however, for a court to conclude (in the absence of proof of an express agreement) that this was agreed to between the parties at the time based on the surrounding circumstances of the case.
Facts of Peezee Investments (Pty) Ltd / City of Johannesburg Metropolitan Municipality (Joburg High Court)
In this case the owner of the property had let it to a tenant who was running a printing business from the premises and incurring an average electricity bill of around R2 million a month. The tenant was liquidated and the landlord was held liable for approximately R4 million which the tenant owed to the municipality at the date of its liquidation. The municipality was holding a deposit of around R115, 000.00 at the time of the liquidation. The landlord (Peezee) instituted a claim for damages against the City of Johannesburg Metropolitan Municipality (“COJ”) on the basis that the municipality failed to call for a larger deposit that it was holding on average 2 months’ worth of electricity charges from the tenant as empowered by its by-laws/policies.
The Court decided the matter on the question of whether the landlord had suffered any damages as a result of the municipality’s failure to call for a “top up” deposit, on the reasoning that if the deposit was secured in any sense at the tenant’s insolvency it would have been paid to the COJ in order to diminish any claims that the COJ had against the tenant for outstanding arrears, and this would ultimately have reduced the amount of money that the landlord was held liable to the municipality for, after the tenant was liquidated. However, if the deposit was not a form of security, it would have gone back “into the pot” of money that the liquidators used to pay claims of other creditors out of, and the municipality (not being secured and ranking lower down the list than other creditors who held a higher ranking) would not have received anything. As such, the landlord would only have suffered damages if it would have received something out of the deal – ie if the deposit were secured and it could be retained by the municipality, thereby reducing the municipal debt owing.
The Court held that because the parties could not produce the written agreement entered into when the tenant had (some 20 years ago) opened its municipal account showing that there was an express agreement between the parties that the amount of money deposited with the municipality by the tenant constituted a form of pledge, thus securing the deposit in the event of the tenant’s insolvency, that there was no harm suffered by the landlord because (in the absence of the security deposit amounting to a pledge and being secured) the deposit would not have been awarded from the insolvent estate to the municipality in order to settle any amount owing to the municipality by the tenant at insolvency. The Court did not look at the issue of whether there was a duty of a municipality to call for a “top up” deposit or even to take any deposit at all.
Analysis of Court’s reasoning
With respect, the authors are of the view that the Court took too formalistic approach to the matter as the document required to prove the intention of the parties that the amount given over the municipality as a deposit constitutes a pledge, was signed more than 20 years ago and was not available to prove same. It is submitted that the Court should have held that there was an agreement between the parties that the amount deposited with the municipality be utilised as security for its failure to comply with its obligations to the municipality, thus creating a valid pledge agreement in terms of our law and satisfying the precondition for the trustees of the insolvent estate to have paid the deposit over to the municipality as a secured creditor to the tune of the deposit held. There are thousands (or even hundreds of thousands) of cases in which municipalities open service accounts for customers without having any documentation signed proving that the deposit called for is indeed furnished as security and in terms of a pledge agreement. To find that in the absence of a document expressly setting this out, the deposit given by the municipal customer to the municipality cannot be understood as a pledge and that accordingly the security deposit is not regarded in law as such, would be to put municipalities in the invidious position that they cannot claim against that deposit (which was given precisely for this purpose) in the insolvency of the debtor. This would relegate the municipality’s claim in such instances to a concurrent status, in which event in the majority of cases a municipality would receive little or nothing from the insolvent estate towards the amount owing. It is further submitted that the Judge’s finding flies in the face of established practise in relation to the giving of secured deposits by municipal customers to municipalities (and further in the face of the established practise of the giving of secured deposits by tenants to their landlords for the same purpose) and that the Court should have made a finding that the amount constituted a pledge and was thus secured.
Landlords and municipalities are advised to ensure that the agreement entered into with their respective customers/tenants expressly states that the security deposit given is provided for the creditor to use in order to offset or absorb in the event of a default by the debtor, and to expressly couch this agreement as a pledge agreement in writing. such that it cannot be challenged with the result that the municipality or landlord is unable to prove or succeed in their claim for the deposit at the insolvency stage.
Caveat: Nothing in this article is to be understood as legal advice given to any person in any circumstances. The content hereof is merely an expression of the legal opinion of the authors based on laws as they stand at the time of publishing and possible future consequences, and any person who needs specific legal advice in relation to the issues discussed herein should contact the authors for same. Any specific references to the sources of the laws quoted herein can be obtained directly from the authors upon request.