When we first became aware of the banks' reluctance to finance properties registered in entities (companies, close corporations and even trusts), we were a little taken aback. After all, this may not necessarily be the most lucrative way of purchasing property, but it surely is the safest, as it separates the asset (the property) from the individual’s personal financial obligations and misdemeanours. Furthermore, no bank will finance a property in an entity without obtaining a surety from the individuals who control the entity, be it its directors, members or trustees. So what is the risk…?
The answer is simple – let’s take a look at legislation. The New Company Act which was promulgated in April 2009, states that a company may pass a resolution applying for business rescue without informing its stakeholders. This means that it doesn’t have to inform its creditors (including the bank) that it is taking such action. If the bank is unhappy about the company’s application for business rescue, it must apply to the High Court to have this application set aside, which may be overruled.
While under business rescue, creditors are not permitted to touch their assets (including its properties). In event of a debtor defaulting, if a lending institution does not have access to the security on which such lending is based, then the security is futile. Hence, the need to be a lot more cautious when granting a mortgage bond over a property registered in the name of an entity.
Furthermore, this piece of legislation states that all companies and close corporations need to file their annual returns with The Companies and Intellectual Property Commission (CIPC, which replaced CIPRO), failing which the company/close corporation will be deregistered. When a company or close corporation is deregistered, it is no longer a legal entity – it is a non-entity – and all its assets will be assigned to the state. Under this situation, the banks cannot attach any of the assets it has taken as security.
The burden of having the company/close corporation restored, lies on the affected parties (in this case, the bank). Previously the banks could simply approach the courts. Under this new legislation the banks have to obtain all the outstanding financial statements and annual returns, submit them to CIPC and then only apply to the Commissioner to reinstate the company. Obtaining these documents and information from an entity against which the bank has instituted legal action, may prove to be very problematic. Are the warning bells ringing yet?
Whether a bank is willing to grant you a mortgage bond will depend on their risk appetite. The higher the risk, the higher the deposit they will expect of you and the higher the interest rate they will charge you. If you are purchasing a property to be registered in the name of an entity be prepared to pay the price for the privilege.
Unfortunately, this piece of legislation really puts a damper on those financially astute individuals who want to use property investment as a means of reducing the tax liability of the entities under their control. Nothing stops you from purchasing the properties in the name of an entity, but financing them may prove to be challenging. Our advice is (1) use the services of a good bond originator such as Property Factor and (2) use a non-trading vehicle in which to purchase your property.
The reaction of the banks to the risks posed by the New Company Act is another indication that one cannot solve a country’s corruption and economic woes by over-regulating. Sometimes it is best to simply focus on enforcing existing laws and allow entrepreneurs to do what they do best – create much-needed employment opportunities.
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