Jun 1,2011 / News / Legal Brief

The Consumer Protection Act (CPA) has introduced some protection for indebted consumers forced to sell their properties to pay off their debts – a process known as sales in execution.

“Under the new legislation ‘auction’ includes a sale in execution of or pursuant to a court order,” says director at Werksmans Attorneys, Jennifer Smit. “Thousands of residential and commercial properties that are auctioned off will now be affected by the CPA.”

When consumers cannot repay their debts, their creditors are entitled to go to court and obtain a judgment to attach their assets. A sheriff of the court is the only person designated to obtain a warrant and attach, as well as sell, the debtor’s movable property, such as cars, furniture, shares and cash. If the funds raised are insufficient to satisfy the debt in full, any immovable property, such as a house, can be attached.

The CPA does introduce some positive standard requirements that must be met at all auctions, such as auctioneers providing paddles to bidders and ensuring that those attending comply with the Financial Intelligence Centre Act (FICA). It also outlines other requirements, such as notice being given in advance that a sale by auction is subject to a reserved or upset price and prescribes the way an auction should be conducted. In addition, it requires records of the property placed on auction to be maintained.

“But the CPA appears to apply to auctions conducted in the normal course of business and is clearly drafted with auction houses in mind,” says Smit.

She says sales in execution are undertaken by sheriffs of the court, many of whom simply do not have the resources to comply with the new Act.

Smit explains that sheriffs are not always trained to conduct auctions professionally, nor do they have the necessary technology and systems in place to manage an auction effectively. For example, one of the few existing regulatory requirements is that successful bidders at sales in execution auctions must pay 10% of the purchase price in cash – and on properties running into the millions, this often equates to suitcases filled with hundreds of thousands of rand.

“The whole system is rudimentary,” she says.

Smit says there is a lack of clarity in the CPA concerning whether the auctioneer has any duties concerning the quality of the goods on sale. “It’s also not clear how the Act perceives the role of auctioneers – whether as agents or sellers,” she adds.

But the legislation does try to address some of the weaknesses in the current law, including preventing price fixing and collusion at auctions. For example, the CPA prevents the owner or auctioneer from bidding or employing any person to bid at the sale. It also enables consumers to approach a court to declare the transaction void, if the regulations are not adhered to.

“Because sales in execution are effectively forced sales it’s in the interests of both the debtor and the creditor that the highest possible sales price is reached,” says Smit. “Price collusion between seasoned auction attendants keeps prices artificially low, and the CPA regulations do not appear to address this and other issues contextual to sales in execution”

Smit says sheriffs are limited to claiming a maximum commission of R8 750 (excluding VAT and dependent on the ultimate sale price realised) for their auction services in respect of immovable property, irrespective of the value realised at the auction. The allowable commissions for movable assets are even less. This is a disincentive which the CPA does not take into account or address

“The CPA introduces positive measures for consumers, but sheriffs of the court will need to find ways to both cope with and afford the increased administrative burden placed on them,” says Smit. The existing difficulties with sales in execution have not been addressed by the regulations, all they have served to do is introduce new obstacles for the sheriff to contend with.

She also says while the CPA is a step in the right direction for consumers generally, the legislation governing the sales in execution process should be amended to really protect the interests of all parties, not just consumers. Says Smit: “The execution/ forced sale process should also allow parties with an interest in the final sale price realised to appoint an auctioneer of their choice who could use his or her expertise to ensure that debtors’ most valuable assets are not sold for less than they are worth.”

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