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[2011] ZAGPJHC 21
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Slip Knot Investments 777 (Pty) Limited v Project Law Prop (Pty) Limited and Others (36018/2009) [2011] ZAGPJHC 21 (1 April 2011)
IN
THE SOUTH GAUTENG HIGH COURT
JOHANNESBURG
CASE
No. 36018/2009
REPORTABLE
In the matter
between:
SLIP
KNOT INVESTMENTS 777 (PTY) LIMITED
Applicant
and
PROJECT
LAW PROP (PTY) LIMITED
1
ST
Respondent
IAN
MEYER
2
ND
Respondent
PROJECTPROP
DEVELOPMENTS (PTY) LIMITED
3
RD
Respondent
______________________________________________________________
JUDGMENT
______________________________________________________________
WILLIS J:
[1] The applicant
has approached the court by way of motion proceedings for an order
that the first and second respondents are jointly
and severally
liable, the one paying the other to be absolved, to pay the applicant
an amount of some R15 million, together with
interests and costs.
[2] The debt
arises from a written agreement of loan concluded between the
applicant and the first respondent secured by a written
deed of
suretyship signed by the second respondent. The third respondent is a
nominal respondent only. The money was lent as so-called
“short
term bridging finance” in a property development scheme. In the
papers this type of funding is called “mezzanine
funding”.
The expression “mezzanine funding” has come to the fore
in the South Gauteng High Court relatively
recently. Although there
may be minor but nevertheless distinct differences between “short
term bridging finance” and
“mezzanine funding”, for
the purposes of this judgment these differences are unimportant.
[3] After several
postponements at the request of the first and second respondents, the
application came before Barrie AJ on 15
February, 2011. No affidavits
were filed ion behalf of the respondents. It would seem that Barrie
AJ was troubled about the lawfulness
of the rate of interest which
the applicant had claimed.
Barrie
AJ suggested
that an
amicus curiae
should be appointed
to make submissions to the court on the issue. Mr
Moorcroft
was duly appointed as a
micus
.
He has the distinction of being the author of
Banking
Law
and
Practice
.
1
I am much indebted to Mr
Moorcroft
for his helpful submissions in the matter as I am to the Johannesburg
Bar Council, which acting in accordance with the finest of
its
traditions, adopted a wise and obliging attitude in selecting his
appointment.
[4] The borrower
in a “mezzanine funding” transaction is typically a small
developer requiring capital for which its
own funding is insufficient
and for which the commercial banks are unwilling to lend. The lender
borrows the money from the commercial
banks. The money is lent
short-term. The risks but the rewards too are high for the lender.
Borrowers of “mezzanine funding”
are typically
experienced “players” in the property development market.
[5] The rate of
interest charged to the first respondent was 1,25% per weekmonth
until the first respondent fell into arrears and
thereafter 1,5% per
weekmonth. In an affidavit by Mr Duncan Campbell, the portfolio
manager of the applicant, the change in interest
rate after a debtor
is in default isn justified on two main grounds: (i) administrative
costs in the monitoring and “follow-up”
of the debt
increase substantially once it is in default and (ii) the risk rises
considerably.
[6] The first
respondent fell into arrears on 12
th
October 2008. The applicant elected to cancel the agreement on 22
nd
May, 2009. The
amicus
and the counsel for
the applicant agreed that the amount owing as at 6
th
March 2009 was R 11 337 822, 54.
[7] The
amicus
and counsel for the
applicant agreed that the
in
duplum
rule should
be been applied to the calculations made. The manner of application
of the
in duplum
rule
in this case is consistent with the recent decision of the Supreme
Court of Appeal (‘the SCA”) in the case of
Nedbank
Ltd and Others v The National Credit Regulator and Another
.
2
[8] Mindful of the
fact the
National Credit Act, No.34 of 2005
, as amended (“the
NCA”) has repealed the Usury Act, No. 73 of 1968, as amended,
the
amicus
and
counsel for the applicant agreed that there are three issues that
fall to be decided:
(i) whether the
applicant’s calculations result in a contravention of the NCA;
(ii) whether the
loan is usurious to the extent that it is unlawful or
contra
bonos mores
;
(iii) whether the
increase in the rate from 1,25% to 1,5% after the first respondent
was in default constitutes an unlawful penalty
in terms of the
Conventional Penalties Act, No.51 of 1962, as amended.
[9] Referring to
sections 1, 4(1) (b), 4 (2) (c), 7 (1) (b) and 9(4) of the NCA, the
amicus
and
counsel for the applicant agreed that the provisions of the NCA were
not applicable to this transaction because the principal
debtor is a
juristic person whose asset value or annual turnover at the signature
date of the agreement exceeded R1 million and
the agreement
constituted a “large agreement” as envisaged in the NCA
with its value exceeding the thresholds determined
in terms of the
NCA. I agree.
[10] The
amicus
and counsel for the
applicant both submitted that insofar as the second respondent as
surety was concerned, my sister Satchwell
was correct in holding in
Firstrand Bank Ltd v
Carl Beck Estates (Pty) Ltd
3
that sureties for agreements that fall outside of the NCA cannot
invoke the provisions of the NCA as a defence. See, also:
Standard
Bank of SA Ltd v Hunkydory Investments (Pty) Ltd and Another.
4
As I said in
Stocker
v Giddings and Another
,
5
a unanimous “full
bench” appeal, it is trite that sureties are
promissores
subsidiarii
, that
their obligations are accessory to that of the principal debtor.
6
In that judgment I observed that this entails,
inter
alia
, that a surety
has the same defences
in
rem
as the principal
debtor. I repeat my summary that, in plain English, the Latin
expressions in this paragraph mean that sureties
have the same
substantive defences as are available to the principal debtor, no
more and no less. Accordingly, I agree with Satchwell
J. The
applicant succeeds on the first point to be decided.
[11]
In
determining whether a defence of extortionate rates of interest or
usury can be sustained it is helpful to refer to
the judgment of
Innes J
(as he then was) in
Reuter
v Yates
7
where he said
:
It
comes to this - in deciding whether the defence of usury has been
sustained, and whether the lender has taken such an undue advantage
of the borrower, has so practised extortion and oppression, that his
conduct, being akin to fraud, disentitles him to relief, the
Court
will examine all the circumstances of the case. It will not only look
at the scale of interest which has been stipulated
for, but will have
regard to the ordinary rate prevalent in similar transactions, to the
security offered and the risk run, to
the length of time for which
the loan was given, the amount lent, and the relative positions of
the parties. Approaching the present
dispute in that way, we find
that the evidence given by the appellant was not very full. It
certainly does not prove the existence
of extortion or oppression.
The rate agreed upon was high, but the parties were dealing at arms’
length, the sum advanced
was a small one for a short period, and
there appears to have been no security.
Innes J found that
the borrower was not justified in refusing to pay on the ground that
a usurious rate of interest had been “stipulated
for”.
8
The court, sitting in an appeal from the magistrate’s court in
Johannesburg, affirmed the principles set out by Watermeyer
J (as he
then was) in
Dyason v
Ruthven
.
9
In
Bekker and Another
v Oos-Vrystaat Kaap Koöperasie Bpk
10
the Supreme Court of Appeal confirmed that
Reuter
v Yates
was correct
in terms of the onus which a person claiming an unlawfully high rate
of interest bears.
With
exquisite politeness, t
he
amicus
and
counsel for the applicant requested me to deliver a “reportable”
judgment because “those in the market”
needed to know
whether this was still good law in this division.
[12] Quite apart
from any other consideration, this decision remains most emphatically
good law in this division: it was decided
by a full court having an
area of jurisdiction coextensive with that of the present day North
and South Gauteng High Courts. The
principles in question cannot have
been abrogated by disuse. I consider the case
Reuter
v Yates
to be
another of the little treasures in our legal attic.
11
That which Innes J said in the passage quoted above remains good law.
Both t
he
amicus
and counsel for the
applicant agreed that this was so. I am fortified in my conviction on
this point by the fact that, in the shadow
of Table Mountain, Yekiso
J referred to the case with approval in
Structured
Mezzanine Investments (Pty) Ltd v Davids and Others.
12
[13] For the sake
of completeness I record that, on the clear authority of the cases of
Sasfin v Beukes
13
and
Juglal NO v
Shoprite Checkers (Pty) Ltd t/a OK Franchise Division
,
14
it cannot be found that the agreement was
contra
bonos mores
: the
first and second respondents were “no babes in the woods”
and, accordingly, there are no considerations of protecting
the poor
or others in an inferior bargaining position such that it would be
unconscionable or immoral to enforce the agreements
in question.
15
Against
the background of the facts
in
casu
,
the second point
must also be decided in favour of the applicant.
[14] On the
question of whether the increase in the rate of interest from 1,25 to
1,5% after the first respondent was in default
amounted to a penalty
in contravention of the Conventional Penalties Act, the splendid
unanimity of the
amicus
and counsel for the
applicant fell apart. They did, however agree that, on this issue
too, it would be important to have a “reportable”
judgment. Relying on the provisions of section 1 of the Conventional
Penalties Act, the
amicus
submitted that this was a penalty.
[15] This section
provides as follows:
A
stipulation, hereinafter referred to as a penalty stipulation,
whereby it is provided that any person shall, in respect of an
actor
omission in conflict with a contractual obligation, be liable to pay
a sum of money or to deliver or perform anything for
the benefit of
any other person, hereinafter referred to as a creditor, either by
way of a penalty or as liquidated damages,
shall, subject to the
provisions of this Act, be capable of being enforced in any
competent court.
Any
sum of money for the payment of which or anything for the delivery
or performance of which a person may so become liable,
is in the Act
referred to as a penalty.
On this issue, we
authors on matters of banking part company amicably.
16
Section 1 of the Conventional Penalties Act does not so much define a
penalty as that it provides that what is conventionally regarded
as a
penalty falls within the purview of the Act. In other words, one must
first ask oneself whether the increase in the rate of
interest is a
penalty. In my view, it is not.
[16] As a former
banker myself, I think I may fairly take cognisance of the fact that,
as counsel for the applicant submitted, the
commercial banks have,
since time immemorial, charged a higher rate of interest once a
debtor is in default for precisely the same
reasons as those advanced
by Mr Campbell. As Innes J said in the passage above in
Reuter
v Yates
, risk is a
factor to relevant interest. Self-evidently, risk increases once a
debtor is in default. Besides, these justifications
by Mr Campbell
for the increase in the rate of interest were undisputed.
[17] Even if I am
wrong in regard to whether the increase in the rate of interest
amounts to a penalty, the
amicus
and counsel for the
applicant both agreed, entirely correctly, that the Conventional
Penalties Act only affects the enforceability
of a penalty if it is
out of proportion to the prejudice suffered, if it is markedly
greater than the prejudice and if the excess
is such that it would be
unfair to enforce the penalty.
17
They also agreed that the onus of proof is on the debtor to show that
the penalty is out of proportion to the prejudice suffered.
18
Mindful of the recent judgments decided by Yekiso J in
Structured
Mezzanine Investments (Pty) Ltd v Davids and Others
,
referred to above and Bozalek J in
Plumbago
Financial Services (Pty) Ltd t/a Toshiba Rentals v Janap Joseph t/a
Project Finance,
19
the interest claimed
does not appear to be disproportionate to the prejudice which the
applicant has suffered. The applicant succeeds
on the third point as
well.
[18] At the time
when I reserved judgment there was a not unimportant point which we
all overlooked. It is that the applicant is
not entitled to interest
at the rate provided for in the agreement after that agreement had
been cancelled. The reason lies in
the doctrine of election as set
out by Watermeyer AJ (as he then was) in the case of
Segal
v Mazzur
.
20
An innocent party to a contract that has been breached by another
party cannot blow hot and cold; he cannot approbate and reprobate
the
contract.
21
Segal v Mazzur w
as
expressly approved by the SCA in
S
Du Plessis and Another NNO v Rolfes Ltd
.
22
The point is so clear that I have not invited counsel to come to
court again to address me on it. The applicant cancelled the
agreement on 22nd May, 2009. Interest for the period from 6
th
March, 2009 to 22
nd
May, 2009 amounts to R1 870 737. This is the period from the date
upon which we all agreed the amount owing was R11 337 822 until
the
date of cancellation. The sum of R11 337 822 and R1 870 737 is R13
208 559. The applicant is entitled to payment of this sum.
[19] Mindful of
sections 1
(1) and (2) of the
Prescribed Rate of Interest Act, No. 55
of 1975
, the new
section 2A
introduced by the Prescribed Rate of
Interest Amendment Act, No. 7 of 1997and the helpful judgment by
Thring J on the subject in
the
MV Sea Joy
case,
23
it seems to me appropriate to order interest at the prescribed rate
in terms of the
Prescribed Rate of Interest Act, as
amended, from
23
rd
May, 2009, the day after cancellation to the date of payment. The
prescribed rate is 15,5%
per
annum
.
24
The agreement between the applicant and the first respondent provides
for costs on an attorney and client scale.
[20] The following
is the order of the court:
The first and
second respondents are ordered, jointly and severally, the one paying
the other to be absolved, to make payment to
the applicant of:
1. R13 208 559
(thirteen million, two hundred and eight thousand, five hundred and
fifty-nine rands);
2. Interest on the
aforesaid sum at the rate of 15,5%
per
annum
, calculated
from 23
rd
May, 2009 to date of payment; and
3. The costs of
the application, which costs may include the costs consequent upon
the employment of two counsel and may be taxed
on an attorney and
client scale.
DATED AT
JOHANNESBURG THIS 1st DAY OF APRIL, 2011
______________________
N.P.WILLIS
JUDGE
OF THE HIGH COURT
Counsel
for the Applicant: Adv.
R.
Stockwell
SC (with
him, Adv
J. F.
Pretorius
)
No
Appearance for the Respondents
Amicus
curiae
: Adv
FJ.
Moorcroft
Attorneys
for Applicant: Sim and Botsi Attorneys Incorporated
Dates
of hearing: 30
th
March, 2011
Date
of judgment: 1
st
April, 2011
1
LexisNexis: Durban, 2009
2
[20011]
ZASCA 35 (28 March 2011)
3
2009
(3) SA 384
(T)
4
(1)
2010 (1) SA 627
(C) at paragraphs [13] and [14]
5
GSJ
Case No A3006/2010 delivered on 17 November, 2010 at paragraph [7].
Boruchowitz, Monama JJ and I dismissed an appeal from
the judgment
of Van Eeden AJ.
6
See, for example,
Imperial
Cold Storage and Supply Company Limited v Julius Weil and Co
1912 AD 747
at 750 and
Trust Bank of Africa Ltd v Frysch
1977 (3) SA 562
(A) at 584F-G.
7
1904
TS 855
at 858
8
Ibid.
9
3
S.282
10
">
10
[2000] 3 All SA 301
(A) at paragraph [9]
11
For
another example of what I consider to be a treasure in our legal
attic, see
Mineworkers
Investment Co (Pty) Ltd v Modibane
2002
(6) 512 (W) at paragraph [24].
12
2010
(6) SA 622
(WCC) at paragraphs [19] t0 [22]
13
1989
(1) SA 1
(A) at 8C-9G
14
2004
(5) SA 248
(SCA) at paragraphs [12]-[13]
15
Since time immemorial, our common law has set its face against
exploitation in the levying of interest. A most illuminating
discussion on this aspect can be found in an historical survey by
Grov
é
,
Die gemeenregtelike beheer van woeker in die Suis-Afrikaanse Reg,
De
Jure
, 1989 (22),
233 and Die gemeenregtelike beheer van woeker in die Suis-Afrikaanse
Reg (vervolg),
De
Jure
, 1990
(23),118.
16
The
amicus and I share a similar pastime: writing books on banking. Mine
was
Banking
in South African Law
,
Juta’s: Cape Town, 1981.
17
See
Western
Credit v Kajee
1967 (4) SA 386
(N) at 389H-391E;
Maiden
v David Jones (Pty) Ltd
1969 (1) SA 59
(N) at 63A-64A;
Van
Staden v Central South African Lands and Mines
1969 (4) SA 349
(W) at 351D-353E;
Bloemfontein
Munisipaliteit v Ulrich
1975 (4) SA 785
(O) at 789C-791B;
Santam
Bank Bpk v Kellerman
1978 (1) SA 1159
(C) at 1163B-C;
Murcia
Lands CC v Erinvale Country Estate Home Owners Association
[2004] 4 All SA 656
(C)
18
See,
Smit
v Bester
1977 (4) SA 937
(A) at 940H-943A;
Chrysafis
v Katsapas
1988 (4) Sa 818
(A) at 828H-J.
19
2008
(3) SA 47
(C)
20
1920
CPD 634
at 644-5
21
RH
Christie. 2006.
The
South African
Law
of Contract. 5
th
Edition. LexisNexis: Durban, p540.
22
[1996] ZASCA 45
;
1997
(2) SA 354
(SCA) at 364G-365A
23
1998
(1) SA 487
(C at 505F-508I
24
GN
R1814 GG 15143 of 1
st
October 1993