Fractional ownership revisited

We have previously expressed our serious concerns about the blatant disregard of the provisions of the Share Block Control Act (Act 58/1986) and the Property Time Sharing Control Act (Act 75/1983) by some of the leading role players in the property industry where the so called "Fractional Ownership" sales of shares are concerned.

Please refer to our notes on Fractional Ownership sales dated 21 May 2009 - Fractional concerns - where we urged compliance with the said Acts in order to avoid the sales agreements being void or voidable.

The current rumours about the possible mismanagement of funds by administrators of some of these Schemes necessitates another urgent and critical look at the position of Directors, Shareholders and also the exposure of the Banks who grant financial assistance to these Companies.

The relationship of these Companies, their directors and shareholders are governed by:
- The relevant legislation, being the:
o Share Block Control Act,
o Property Time - Sharing Control Act and
o the Companies Act.
- The Memorandum and Articles of Association of the Company.
- The sale agreement between the Company and the purchaser (future shareholder / director).
- Any shareholders agreement.
-
1. THE LEGISLATION
1.1 The Share Block Control Act (59/1980)
Section 4 reads as follows:
"Presumption as to operation of share block Scheme by Company
For the purposes of this Act a Company shall be presumed to operate a share block Scheme if any share of the Company confers a right to or an interest in the use of immovable property or any part of immovable property."

1.2 The Property Time - Sharing Control Act (75/1983) and in particular the definitions in section 1 (xiii) (a) describing a property time sharing Scheme and in Section 1 (xviii) describing a time sharing interest.

NOTE: Where shares, which grant the purchaser certain rights to the Company's property, are sold the provisions of these two Acts are unavoidable and non compliance will result in these agreements being either void or voidable.

The majority of "Fractional Ownership" contracts fall within this category and even if the provisions of these two Acts were not applicable the provisions of the Companies Act (61/1973) (This Act is to be replaced with the New Companies Act which contains similar provisions)are even more severe:

1.3 The Companies Act (61/1973)

1. Section 38 (1)
   "No Company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares of the Company, or where the Company is a subsidiary Company, of its holding Company."
   
   Section 38 (2A)
   "Subsection (1) does not prohibit a Company from giving financial assistance for the purchase of or subscription for shares of that Company or its holding Company, if -
   
   (a) the Company's board is satisfied that -
   (i) subsequent to the transaction, the consolidated assets of the Company fairly valued will be more than its consolidated liabilities; and
   (ii) subsequent to providing the assistance, and for the duration of the transaction, the Company will be able to pay its debts as they become due in the ordinary course of business; and
   (b) the terms upon which the assistance is to be given is sanctioned by a special resolution of its members."
   
   If purchasers of shares in a "Fractional Scheme" are required to share in the responsibilities for the repayment of a mortgage bond over the Company's property the provisions of Section 38 are applicable and strict compliance with Section 38 (2A) is required.
   
   
2. Section 20(1)(c) prohibits the sale of shares in a private Company (Pty) Ltd) to the public and as many of the Fractional Ownership Companies are private and not public Companies, this provision is fatal to these Schemes.
   
   
3. Section 146 prohibits the sale of shares (in a public Company) to the public without a prospectus. We are not aware of one such Scheme being marketed complying with the provision of this Section.