About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2015
>>
[2015] ZASCA 72
|
|
Lodhi 5 Properties Investments CC and Others v Firstrand Bank Limited (170/2014) [2015] ZASCA 72; [2015] 3 All SA 32 (SCA) (22 May 2015)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 170/2014
In
the matter between:
LODHI
5 PROPERTIES INVESTMENTS
CC
.................................................
FIRST
APPELLANT
LODHI
4 PROPERTIES INVESTMENTS (PTY)
LTD
...............................
SECOND
APPELLANT
MUHAMMED
ISLAM
LODHI
.........................................................................
THIRD
APPELLANT
and
FIRSTRAND
BANK
LIMITED
...................................................................................
RESPONDENT
Neutral
citation:
Lodhi 5 Properties
Investments v Firstrand Bank Limited
(170/14)[2015]
ZASCA 72 (22 May 2015)
Coram:
Maya, Majiedt, Pillay, Mbha JJA and Schoeman AJA
Heard:
4 MARCH 2015
Delivered:
22 May 2015
Summary:
Loan agreement – respondent bank
entitled to restitution in light of lapse of loan and agency
agreements in terms of which
loan lent and advanced to first
appellant before debt extinguished – mora interest payable in
respect of loan agreement governed
by Shari’ah (Islamic) law
which prohibits the charging of interest for a loan – order
granting appellants’ final
winding up justified.
ORDER
On
appeal from:
Gauteng Division of the
High Court, Pretoria (Molefe J sitting as court of first instance):
1
Save to the extent below, the appeal is dismissed with costs,
including the costs of two counsel.
2 Paragraphs 38 (i)
and (ii) of the order of the court below are set aside and replaced
with the following:
‘
Muhammad
Islam Lodhi shall pay to the applicant R2 642 006.98
together with interest thereon at the rate of 15,5 per cent
per annum
as from 15 June 2012 to date of payment.’
JUDGMENT
Maya
JA
(Majiedt, Pillay, Mbha JJA and
Schoeman AJA concurring):
[1]
This is an appeal against orders granted against the appellants by
the Gauteng Division of the High Court, Pretoria (Molefe
J) in three
separate applications brought by the respondent, FirstRand Bank
Limited (the bank). In terms of these orders, the first
and second
appellants, Lodhi 5 Properties Investments CC (Lodhi 5) and Lodhi 4
Properties Investments (Pty) Limited (Lodhi 4) were
placed under
final winding up. The third appellant (Mr Lodhi) was ordered to pay
the bank a sum of R10 328 574, 25 together
with interest at
the rate of 15,5 per cent per annum from 18 April 2011 until date of
payment. The appeal seeks a dismissal of
the applications with costs
and serves before this court with the leave of the court below.
[2]
Lodhi 5 is a close corporation registered in accordance with the laws
of the Republic of South Africa. Its sole asset is immovable
property, Erf 24 Kramerville Township, Johannesburg. It is one of a
group of entities, the Lodhi Group, which include Lodhi 4,
through
which Mr Lodhi, the sole member of Lodhi 5, conducts business
involving rare and fine art, sporting goods, auctioneering
and
textile industries.
[3]
The bank offers its Islamic customers certain specialised services
and products compliant with Shari’ah (Islamic) law
which cater
for Islam’s prohibition on the charging of interest. These
include an Islamic Finance Residential Property Offering
which
includes an agency agreement that allows the bank to act as an agent
when purchasing property on behalf of its customers
in return for a
fixed agency fee. In June 2008 the bank lent and advanced to Lodhi 5,
without interest, a sum of R9,6 million repayable
in 120 monthly
instalments of R88 000, in terms of this dispensation. The loan
was for the purchase of Erf 24, Kramerville
Township and a
neighbouring property, Erf 29 (the property). On 7 May 2008 Lodhi 4
and Mr Lodhi had executed a suretyship bond
in the bank’s
favour securing the indebtedness of Lodhi 5. And on 19 June 2008
Lodhi 5 and Lodhi 4 respectively registered
a covering mortgage bond
and a suretyship bond in the bank’s favour.
[4]
Lodhi 5 made regular payments to the bank in discharge of the loan
until May 2009 and from July to September 2009. During the
ensuing
lull, in November 2009, the Registrar of the Companies and
Intellectual Property Registration Office (CIPRO) placed Lodhi
5 in
deregistration, which was made final in July 2010, for failing to
submit its annual return. However, the deregistration was
subsequently reversed
[1]
at the
instance of the bank which sought to safeguard its interests as Lodhi
5’s creditor. In May 2010 Lodhi 5 made a large
payment towards
the discharge of the loan in the sum of R5 million from an insurance
pay-out, which will be discussed later in
the judgment. No further
payments were made thereafter.
[5]
On 18 April 2011 the bank sent a statutory demand to Lodhi 5 in terms
of s 69 of the Close Corporations Act 69 of 1984 (the
Close
Corporations Act)
[2
]
and a
letter of demand to Mr Lodhi. On 25 May 2011 it sent a statutory
demand to Lodhi 4 in terms of s 345 of the Companies Act
61 of 1973
(the Companies Act).
[3]
The
statutory demands stated that if payment of the sums claimed was not
made within 21 days of receipt thereof, Lodhi 5 and Lodhi
4 would be
deemed unable to pay their debts. The appellants did not respond to
the letters of demands.
[6]
On 5 July 2011 the bank launched the court proceedings in which it
mainly sought to have Lodhi 5 and Lodhi 4 placed under final
winding
up and Mr Lodhi ordered to pay the outstanding amount on the loan.
The bank relied on the written, interest free loan agreement
(the
loan agreement) in terms of which it alleged to have lent and
advanced to Lodhi 5 a sum of R9,6 million. The bank further
relied
upon a written ‘Agency and Administration Services Agreement’
(the agency agreement). In terms of the agency
agreement, the bank,
acting as Lodhi 5’s exclusive agent, would purchase the
property on its behalf. An administration fee
for those services was
payable by Lodhi 5 to the bank in a sum of R7 600 560 (plus VAT)
payable in 120 equal monthly instalments.
The bank alleged that Lodhi
5 had fallen into arrears in terms of both agreements and that sums
of R3 609 331,52 and
R6 773 242,73 remained owing as
capital in terms of the loan agreement and the balance of
administration fees in terms of
the agency agreement, respectively.
[7]
The appellants did not dispute the loan
agreement which they admitted Mr Lodhi had signed. They also admitted
that a capital sum
of R2 682 627 remained owing under the
agreement. But they contended that this debt was not yet due and
payable because
the bank had not accelerated the repayment of
instalments in terms of the loan agreement and that the payment of R5
million amounted
to prepayment of 62 instalments and years’
worth of instalments in advance. Furthermore, a suspensive condition
to which
the loan agreement was subject was never fulfilled to bring
the agreements into effect. Regarding the agency agreement,
they
denied that it came into effect on the ground that it was never
signed. They argued further that even if the agency agreement had
been signed it was, nevertheless, not implemented according to its
terms because the bank did not perform any of the obligations
it
undertook as their agent in terms thereof. Thus, it was contended
that the bank earned no agency fee which amounted to interest
in
breach of Shari’ah law in any event.
[8]
In response, the bank averred in a
supplementary affidavit (one of several allowed by the high court)
filed late into the proceedings,
that the agency agreement, which it
alleged it could not locate, had been signed by an official who was
no longer in its employ
and was unavailable to comment. The bank
accepted that if the court below found that the
agency agreement never came into force and effect by reason of
non-signature, in
light of the absence of proof that it was signed,
then the loan agreement would be similarly affected by reason of
clause 4. The
latter provision required that the agency agreement be
signed and become unconditional. But the bank
contended
that even if the loan and agency agreements were invalid it was still
entitled to the restitution of the outstanding balance
of
R7 007 297,51 (a claim which the appellants unsuccessfully
argued had prescribed in the high court and which they
wisely did not
raise on appeal). This amount comprised the initial capital loan of
R9,6 million less all payments made by Lodhi
5 under both agreements,
together with interest at 15,5 per cent from June 2008, the date of
the initial advance of the loan.
[9]
T
he court below found that both agreements
were valid and enforceable as they had been signed and were compliant
with Shari’ah
law. The court accordingly granted judgment
against Mr Lodhi in the full amount and interest initially claimed.
The court below
also granted the liquidation applications against
Lodhi 4 and Lodhi 5. This was on the basis that these entities had no
valid defence
and were clearly unable to pay their debts, which were
due and payable.
[10]
On appeal the issues crystallised to whether (a) Lodhi 4 and Lodhi 5
were correctly placed under winding up, (b) the appeal
should succeed
partially by the reduction of the amount in the order granted against
Mr Lodhi to the capital amount of R2 642 006,98
admitted as
outstanding, and (c) Mr Lodhi is liable to pay interest on such
amount and if so, from which date.
[11]
The
appellants challenged all the conclusions of the court below. They
argued that the bank’s main claims were wrongly granted
on an
unfounded premise that the agreements came into effect. This was not
proved, they argued, because the agency agreement was
not signed and
the bank itself had ultimately conceded that the issue had to be
decided on the appellants’ version. It was
further contended
that the appellants’ resistance to the claims was justified as
the bank subsequently abandoned them and
claimed restitution. In
terms of the loan agreement, this position conflicted with the bank’s
allegation that the suspensive
conditions had been fulfilled (which
the bank failed to prove in any event). Thus the amounts claimed in
the letters of demand
were not due and payable at the time. And the
bank could claim restitution of the capital outstanding from Lodhi 5
only and not
against the sureties.
It
was further argued that t
he
award of interest had no basis in law
even
if the outstanding debt was due and payable. This was so because the
parties’
intention
to
conclude
an interest free loan agreement
governed
by Shari’ah law excluded the application of the Prescribed Rate
of Interest Act 55 of 1975 (the Act)
[4]
upon which the bank relied.
It
was then contended that the bank’s success in its main claim
meant that its alternative claim for restitution had failed
and could
not be pursued on appeal in the absence of a cross-appeal as the bank
sought to do.
The
winding-up proceedings
[12]
As indicated above, the liquidation applications were based on the
deeming provisions in
s 69
of the
Close Corporations Act and
s 345 of
the Companies Act – that Lodhi 5 and Lodhi 4 should be deemed
unable to pay their debts by neglecting to pay, secure
or compound
their debts demanded by the bank and should therefore be wound up in
terms of s 344(
f
)
of the Companies Act.
[5]
In its
supplementary affidavit the bank also alleged that the financial
statements of Lodhi 5 and Lodhi 4 showed that their liabilities
exceeded their assets. They were also unable to pay their debts and
were therefore commercially insolvent.
[13]
The bank’s locus standi as Lodhi 5’s creditor was not in
dispute. The appellants only denied neglecting to pay
the debt. They
contended that it was not yet due and payable when the bank demanded
payment in view of the loan and agency agreements’
lapse, the
advance payment of R5 million and the bank’s failure to
accelerate payment of the instalments in terms of the
loan agreement.
In their supplementary replying affidavits they contended that Lodhi
5’s financial situation had since stabilised.
[14]
The contention that the bank did not invoke the acceleration clause
under the loan agreement may be dealt with shortly. Clause
18.2 of
the loan agreement gave the bank the right in the event of a breach
of its terms, by written notice, to ‘declare
all or any part of
the Capital Outstandings to be immediately due and payable whereupon
the Capital Outstandings shall become immediately
due and payable;
and/or enforce any or all of its rights under the Security
Documents’
[6]
. The bank
expressly invoked these provisions in its letter of demand of 18
April 2011 which stated that ‘[i]n light of the
aforesaid
breach, [the bank] has instructed us to declare all the Capital
Outstandings of the Loan Agreement … to be immediately
due and
payable’.
[15]
There is similarly no merit in the appellants’ contentions
concerning the R5 million insurance pay-out. Clause 17.2.2
of the
loan agreement specifically provided for the manner in which such
funds (arising from insurance that it took out as cover
against
damage to or destruction of the property) were to be utilised. If any
event which gave rise to a claim under the insurance
occurred, the
bank would, at its sole discretion, be entitled to apply the
insurance proceeds against the ‘capital outstandings’.
And to the extent that any balance of the ‘capital
outstandings’ remained thereafter, such balance would remain a
debt due by Lodhi 5 to the bank. Even on Lodhi 5’s case, after
its loan account was credited with the payment of the R5 million,
a
substantial balance nevertheless remained outstanding on the capital
debt. Needless to say, on the above provisions such payment
certainly
did not absolve Lodhi 5 from discharging its obligations in the terms
specified in the loan agreement. The bank was wholly
entitled to
insist on the continued payment of instalments, and upon the full
debt becoming due and payable, to insist on payment
in full.
[16]
As for the statutory notices to which the appellants did not respond,
the background leading to their issue was not disputed.
Pursuant to a
meeting between the parties’ representatives, including Mr
Lodhi, on 10 February 2010, the bank recorded that
the arrears on
Lodhi 5’s debt stood at R725 074,40 which it was unable to
pay arising from cash flow problems. Mr Lodhi
subsequently confirmed
the correctness of these statements in writing and made certain
proposals to the bank regarding payment
of the arrears. The
debt was not settled and a year later, on 21 February 2011, the bank
sent Lodhi 5 a letter of demand
which was followed by the statutory
notice of 18 April 2011 to which there was no response as already
mentioned. This gave rise
to the deemed inability to pay.
[17]
In addition to this, the financial statements of both Lodhi 5 and
Lodhi 4 and their failure to make any payment barring the
R5 million
since 2009, despite their insistence that they were able to pay their
debts, subsequently showed their actual inability
to pay their debts.
According to their financial statements, as at 28 February 2010 Lodhi
5 owed the bank R2 682 675
and Lodhi 4, which carried a
further liability on the basis of its suretyship, was trading at a
loss. The situation had not changed
by July 2012. Quite clearly, the
two entities are commercially insolvent and the court below correctly
ordered their final winding-up.
The suretyships’
liability
[18]
For the assertion that the restitution claim lies only against Lodhi
5, Lodhi 4 and Mr Lodhi relied on clause 4.4 of the loan
agreement on
which the claim for restitution is based. The clause reads:
‘
In
the event that the Suspensive Conditions are not fulfilled on or
before 31 May 2008, or such other date as may be agreed in writing
between the Parties on or before that date, then this Agreement, save
for the provisions of this clause and of clauses 1, 2, 20,
22, 23,
24, 25, 26, 27 and 28 which shall remain of full force and effect,
shall never become of any force or effect, and no Party
shall have
any claim against any other Party for anything done hereunder or
arising herefrom, save as a result of a breach of any
of the
provisions of this clause 4 by any party, and the parties shall be
restored to the status quo ante.’
[19]
It was argued on the appellants’ behalf that it was clear from
the wording of the clause that if the suspensive conditions
were not
fulfilled after the advance of the loan, the claim would be limited
to one of restitution between the bank and Lodhi 5
only. The words
‘no Party shall have any claim against any other Party’
in the clause referred to parties such as the
sureties, so it was
contended. And a claim would not lie against the sureties here
because to claim restitution, the bank would
first have to tender
release of all securities in terms of the loan agreement, which it
had not done.
[20]
This argument however ignores the provisions of the deed of
suretyship. In terms of clause 1 thereof, Mr Lodhi and Lodhi 4
bound
themselves jointly and severally as sureties for and co-principal
debtors with Lodhi 5 ‘for the due and punctual performance
by
[Lodhi 5] and each of the sureties of all their obligations to the
bank … now due, owing and payable or becoming due,
owing and
payable in the future from any cause whatsoever’. Clause 3 made
provision for the sureties to ‘be bound by
all admissions or
acknowledgements of indebtedness made or given at any time by [Lodhi
5] to the [bank] now or in the future in
regard to any obligation or
liability for which [the] suretyship is given’. These
provisions obviously impose no condition
on the bank to first release
the suretyship to be able to claim against Lodhi 5 and its sureties.
The rights and the obligations
of the parties must be determined with
reference to the terms of the deed of suretyship.
[7]
Furthermore, it does not appear that clause 4.4 itself requires the
bank to tender release of the securities if the loan agreement
lapsed, as seems to have happened here, in the absence of
satisfactory proof that the bank signed the agency agreement.
Mr Lodhi’s
liability
[21]
Regarding Mr Lodhi’s liability as Lodhi 5’s surety, it
was conceded on the bank’s behalf at the outset that
the amount
in the order granted by the court below against him should be reduced
to the admitted outstanding capital sum. The bank
however insisted
that he was liable for interest on the reduced sum at the legal rate
at the material time, 15,5 per cent, calculated
from the date of
delivery of the supplementary affidavit in which restitution was
claimed. I find nothing wrong with this stance.
[22]
The contention that the bank should have cross-appealed against the
finding of the court below, that the agreements were valid
and
binding to sustain its claim for restitution, need only be stated to
be rejected. An appeal lies only against a judgment or
order of court
and not its reasoning.
[8]
Therefore, quite apart from the fact that the bank had no reason to
appeal against the order which granted the precise relief it
sought,
it could not have challenged the finding of the court below on the
status of the two agreements even if it so wished. It
is not
necessary for a plaintiff to cross-appeal where a reduction of the
quantum of damages awarded by a trial court is sought
by a defendant
because such reduction is not a substantive judgment or order but
rather a finding or ruling which the court is
required to make in its
assessment of damages to be awarded.
[9]
By parity of reasoning, there was no basis for a cross-appeal here
too. The judgments of this court in
Giliomee
v Cilliers
and
Southern
Sun Hotel Corporation (Pty) Ltd v G & W Leases CC
upon
which the appellants relied in this regard are clearly distinguished
by their own facts.
[10]
[23]
On the question of interest, it seems to me that the appellants’
argument misconceives the nature of the interest sought
here –
that it was not based on the enforcement of a contractual undertaking
but rather on Lodhi 5’s default. It is
trite that a party which
has been deprived of the use of its capital for a period of time has
suffered a loss which, in the normal
course of events, will be
compensated by an award of mora interest.
[11]
The term mora simply means delay or default; interest a tempore morae
constitutes the damages that flow naturally (without the
need to
place the debtor in mora) from the contract itself by reason of a
debtor having failed to perform a contractual obligation
within the
agreed time.
[12]
Lodhi 5
unlawfully delayed payment of its outstanding debt to the bank. It is
therefore liable to compensate the bank for its failure
to perform on
the due date at the legal rate as prescribed by s 1(2) of the
Act.
[13]
This obligation,
which arose on 15 December 2012 when the bank claimed restitution in
its supplementary affidavit, has nothing
to do with and is not
affected by the Shari’ah law’s prohibition against
payment of interest on a loan debt.
[24]
In the result the following order is made:
1
Save to the extent below, the appeal is dismissed with costs,
including the costs of two counsel.
2 Paragraph 38 (i)
and (ii) of the order of the court below are set aside and replaced
with the following:
‘
Muhammad
Islam Lodhi shall pay to the applicant R2 642 006.98
together with interest thereon at the rate of 15,5 per cent
per annum
as from 15 June 2012 to date of payment.’
____________________________
MML Maya
Judge
of Appeal
APPEARANCES:
For the Appellants:
JD Maritz SC (with him PL Uys)
Instructed
by:
Savage
Jooste & Adams, Pretoria
AP
Pretorius & Partners, Bloemfontein
For
Respondent: A Subel SC (with him JE Smit)
Instructed
by:
Edward
Nathan Sonnenbergs Inc, Pretoria
Rosendorff
Reitz Barry Attorneys, Bloemfontein
[1]
In
terms of
section 26(6)
and (7) of the
Close Corporations Act which
provide:
‘
(6)
The Registrar may on application by any interested person, if he or
she is satisfied that a corporation was at the time of
its
deregistration carrying on business or was in operation, or that it
is otherwise just that the registration of the corporation
be
restored, restore the said registration.
(7)
The Registrar shall give notice of the restoration of the
registration of a corporation in the
Gazette
, and as from the
date of such notice–
(
a
)
the corporation shall be deemed to have continued in existence as
from the date of deregistration as if it had not been deregistered.’
[2]
The
section provides for circumstances under which a corporation may be
deemed unable to pay its debts for purposes of its winding
up. The
relevant part reads:
‘
Circumstances
under which corporation deemed unable to pay debts
(1)
For the purposes of
section 68
(
c
) a corporation shall be
deemed to be unable to pay its debts, if –
(
a
)
a creditor, by cession or otherwise, to whom the corporation is
indebted in a sum of not less than two hundred rand then due
has
served on the corporation, by delivering it at its registered
office, a demand requiring the corporation to pay the sum so
due,
and the corporation has for 21 days thereafter neglected to pay the
sum or to secure or compound for it to the reasonable
satisfaction
of the creditor.’
[3]
The
section provides for circumstances under which a company is deemed
unable to pay its debts for purposes of its winding up
and reads in
relevant part:
‘
When
company deemed unable to pay its debts
(1)
A company or body corporate shall be
deemed to be unable to pay its debts if –
(
a
)
a creditor, by cession or otherwise, to whom the company is indebted
in a sum not less than one hundred rand then due
–
(i)
has served on the company, by leaving the same at its registered
office, a demand requiring the company to pay the sum
so due; or
(ii)
…
and
the company or body corporate has for three weeks thereafter
neglected to pay the sum, or to secure or compound for it to
the
reasonable satisfaction of the creditor.’
[4]
Section
1(1)
of the
Prescribed
Rate of Interest Act 55 of 1975
provides
that ‘[i]f a debt bears interest and the rate at which the
interest is to be calculated is not governed by any
other law or by
an agreement or a trade custom or in any other manner, such interest
shall be calculated at the rate prescribed
under subsection (2) as
at the time when such interest begins to run, unless a court of law,
on grounds of special circumstances
relating to that debt, orders
otherwise.’
[5]
Section
344(
f
)
of the Companies Act provides: ‘A company may be wound up by
the Court if –
.
. . the company is unable to pay its debts as described in section
345’.
[6]
The
loan agreement defines ‘capital outstandings’ as the
aggregate of all amounts of principal and all and any other
amounts
due and payable to the bank under the loan agreement and ‘security
documents’ as the mortgage bond and any
further agreements
entered into at any time by or on behalf of Lodhi 5 or any other
person as security for its obligations to
the bank under the loan
agreement.
[7]
Bock
& others v Duburoro Investments (Pty) Ltd
2004
(2) SA 242
(SCA) para 29.
[8]
Western
Johannesburg Rent Board & another v Ursula Mansions (Pty) Ltd
1948
(3) SA 353
(A) at 355.
[9]
Bay
Passenger Transport Ltd v Franzen
1975
(1) SA 269
(A);
Gentiruco
AG v Firestone SA (Pty) Ltd
1972
(1) SA 589 (A).
[10]
Giliomee
v Cilliers
1958
(3) SA 97
(A);
Southern
Sun Hotel Corporation (Pty) Ltd v G & W Leases CC
[1999]
1 All SA 497 (A).
[11]
Crookes
Brothers Ltd v Regional Land Claims Commission, Mpumalanga
2013
(2) SA 259
(SCA) para 16;
Thoroughbred
Breeders’ Association v Price Waterhouse
2001 (4) SA 551
(SCA) para 85;
Bellairs
v Hodnett& another
1978
(1) SA 1109
(A) at 1145D-G.
[12]
Scoin
Trading(Pty) Ltd v Bernstein
2011
(2) SA 118
(SCA).
[13]
Davehill
(Pty) Ltd & others v Community Development Board
1988
(1) SA 290
(A) at 299B;
Land
and Agricultural Development Bank of South Africa v Ryton Estates
(Pty) Ltd & others
[2013]
All SA 385
(SCA) paras 19 and 20.