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[2015] ZASCA 160
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Dominick v Nedbank Limited (20463/14) [2015] ZASCA 160 (13 November 2015)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case
No: 20463/14
DATE:
13 NOVEMBER 2015
Not
Reportable
In
the matter between:
UWE
DOMINICK
...........................................................................................................
First
Appellant
HEINER
DOMINICK
.................................................................................................
Second
Appellant
CHARMAINE
LYNN
DOMINICK
.............................................................................
Third
Appellant
And
NEDBANK
LIMITED
...........................................................................................................
Respondent
Neutral
citation:
Dominick v Nedbank Limited
(20463/14)
[2015] ZASCA 160
(13
November 2015)
Coram:
Mpati P, Cachalia, Petse & Dambuza JJA &
Gorven AJA
Heard:
8 September 2015
Delivered:
13 November 2015
Summary:
Suretyship – Principal and surety – discharge of surety
claimed on ground of prejudice caused by creditor’s
conduct –
creditor failing to apply set-off allowed by principal agreement –
failure to apply set-off not constituting
breach of terms of
agreement – prejudice not resulting from breach of legal duty
or obligation - surety not entitled to release.
ORDER
On
appeal from
:
Western
Cape Division of the High Court, Cape Town (Rogers J, sitting as a
court of first instance):
The
appeal is dismissed, with costs.
JUDGMENT
Mpati
P (Cachalia, Petse & Dambuza JJA and Gorven AJA concurring):
[1]
This appeal concerns the question of the release of sureties (the
appellants) from their obligations under deeds of suretyships
signed
by them. The three appellants were the seventh to ninth defendants,
respectively, in an action instituted by the respondent
(Nedbank) in
the Western Cape Division of the High Court, Cape Town, for payment
of the sum of R1 450 037.12, plus interest.
The sum claimed
was allegedly due and owing on an overdraft facility granted by
Nedbank to a close corporation known as Puricare
CC (Puricare).
Puricare was the first defendant in the action, while the second to
ninth defendants were cited as sureties and
co-principal debtors with
Puricare by virtue of deeds of suretyship (suretyships) signed by
them individually, in terms of which
they each bound themselves for
the due payment of any amounts which may become due and payable to
Nedbank by Puricare. In terms
of the suretyships, the liability of
the seventh and eighth defendants (first and second appellants,
respectively) was limited
to R510 000 each, whilst that of the
ninth defendant (third appellant) was limited to R1 200 000.
(Since the witnesses,
during the trial, and the court below referred
to the members of Puricare as ‘shareholders’ I shall, for
convenience,
do likewise.)
[2]
All the defendants initially opposed the action, but on 4 February
2014 – the day before the trial commenced – a
settlement
agreement was concluded between Nedbank and the second to sixth
defendants in terms of which those defendants, collectively,
agreed
to pay to Nedbank an amount of R1 000 000 ‘in full
and final settlement of all amounts owing by them and/or
claimed
against them on the basis and grounds set out in [Nedbank’s]
particulars of claim . . .’. The action, therefore,
proceeded
against the three appellants only. After hearing evidence and
arguments on behalf of the parties the trial judge (Rogers
J), in a
comprehensive judgment, found in favour of Nedbank and ordered each
of the appellants to pay to Nedbank the sums limited
by their
respective suretyships, with interest at 11,5 per cent per annum and
costs on the scale as between attorney and client.
He subsequently
refused the appellants’ applications for leave to appeal. This
appeal is with the leave of this court.
[3]
Puricare
[1]
was a water
purification business, involved in building effluent disposal
facilities for sewerage plants or normal water treatment
plants and
for agricultural purposes. Initially, its directors were Mr Kenneth
Harris (Harris), his wife, Olive, Messrs Albert
Wiffen (Wiffen) and
Riaan Kirsten (Kirsten). They were cited in the action as the third,
fourth, fifth and sixth defendants, respectively.
I shall, as the
court below did, refer to them collectively as the ‘Harris
group’. According to Mr Uwe Dominick, the
first appellant and
only witness who testified on behalf of the appellants at the trial,
he was approached during February 2009
by Kirsten, whom he knew and
who asked him to manage the business of Puricare and to find a buyer
as an investor. Subsequently,
an agreement was concluded between the
first and second appellants, on the one hand, and the Harris group on
the other. At that
time the members of the Harris group, who were
also the shareholders of Puricare, were experiencing financial
difficulties. Puricare’s
balance sheet showed a loss of
R800 000. In terms of the agreement the first and second
appellants obtained a 40 per cent
shareholding in Puricare. They
agreed amongst themselves that the first appellant would occupy the
position of managing director,
while the second appellant would be in
charge of business operations and marketing.
[4]
The first appellant’s uncontested evidence was that Puricare
was trading on an overdraft account with Nedbank, in respect
of which
he and the second appellant became the authorised signatories,
together with Ms Belinda Fourie, the first appellant’s
sister-in-law. The overdraft facility was limited to R150 000,
for which Harris and his wife had stood surety in unlimited
amounts.
With the first and second appellants at the helm, Puricare showed
growth and boasted a turnover of R4 million by August/September
2009.
Although showing growth and profitability, it was still cash-strapped
because there was a lot of ‘work-in-progress’
for which
payment would mainly become due at the end of a particular contract.
But it needed money to pay salaries and to meet
its obligations
towards its creditors. The first appellant had authority to apply for
an overdraft on behalf of Puricare. He accordingly
approached Mr
Patrick Schwartz (Schwartz), a business manager at Nedbank, George,
Western Cape, with whom he had had previous dealings.
In the event,
Nedbank granted an additional, temporary, overdraft facility of
R350 000 in September 2009, for a period of
three months. The
additional facility would expire on 10 December 2009. On the expiry
date the facility was extended until 15 January
2010, when it was
extended further for yet another month.
[5]
When the first appellant realised that Puricare’s debtors were
not making payments and salaries would soon be due, he
arranged,
through Schwartz, on 27 January 2010, for yet another overdraft
facility with Nedbank for the amount of R750 000.
In an email
addressed to Wiffen dated 31 January 2010, the first appellant
advised that he and his wife, Charmaine, had ‘signed
personal
suretyship for R700 000’, which his wife was prepared to
invest for three months. An agreement (principal agreement),
concluded on 29 January 2010, lists the three facilities as follows:
‘
4.1
The R150 000,00 overdraft facility is a demand facility, granted
on a fluctuating basis, without a specific expiry date.
4.2
The R350 000,00 overdraft facility is granted on a temporary
basis and will expire on 15 February 2010.
4.3
The R750 000 overdraft facility will be reviewed as per facility
stated in 4.2.’
Clause
10.2 of the principal agreement records that limited suretyships of
R510 000 each, incorporating cessions of loan funds,
in favour
of Nedbank had been provided by the first and second appellants, as
well as Kirsten and Wiffen. In clauses 10.7 and 10.8
it is recorded
that a limited suretyship for R1 200 000 had been provided
by Ms C L Dominick (Charmaine), together with
a first covering bond
for the same amount over a fixed property, erf 6471 George,
registered in her name. The principal agreement
also records the
existence of suretyships signed by Harris and his wife, Olive, in
unlimited amounts in favour of Nedbank (clause
10.2).
[6]
However, early in February 2010, a shareholders’ meeting was
held to discuss the cash flow problems experienced by Puricare,
since
the additional facilities were to expire on 15 February 2010.
According to the first appellant the meeting became ‘very
heated’, with the Harris group accusing him and the second
appellant of mismanaging the business. This culminated in the
second
appellant severing ties with Puricare. The first appellant testified
that he informed Nedbank of these developments. He
requested Schwartz
to ensure that the sureties were cancelled once the expected funds
had been deposited into the overdraft account,
thus clearing that
account. I should mention that at the time the first appellant
applied for the R750 000 overdraft facility
he assured Schwartz
that ‘substantial cash’ was expected ‘to come back
into the business’ and that orders
were ‘on hand’
from Harlem Effluent Treatment Plant (R1.78 million), Golden Gate
Effluent Treatment Plant (R1.6 million)
and Buffalo City Municipality
(R1.4 million).
[7]
At a shareholders’ meeting held on 15 February 2010 the Harris
group resolved to terminate the first appellant’s
directorship
of Puricare, as well as his authority over the overdraft account. The
first appellant thereafter refrained from effecting
any transactions
on the account although he was still able to access it
electronically. He was also able to access another account
that had
been opened with Nedbank, at the instance of Kirsten, early in
February 2010. This account was known as the Agri account
and was
specifically earmarked for the agricultural side of Puricare’s
business. The first appellant was thus able to monitor
the
transactions of both accounts.
[8]
It is common cause that on 19 February 2010 Puricare dispatched a
letter to its clients, co-signed by Kirsten and Robert Barnard,
as
CEO, advising that it (Puricare) had been changed from being a close
corporation to a company (Pty Ltd). The letter also contained
an
instruction that all payments were henceforth to be deposited into
the Agri account. The first appellant testified that on 5
March 2010
he noted that the Agri account had a credit balance of R280 000,
whilst there was a debit balance of R153 000
in the overdraft
account. He sent an email to Schwartz bringing this to his attention.
The email continued:
‘
Apparently
the Harlem funds will be paid early next week. I request Nedbank to
do the right thing and move the funds immediately
onto the CC account
and simultaneously cancel the R750k facility signed by Charmaine
Dominick. Puricare has not shown any interest
in resolving this
matter.’
[2]
On
9 March 2010 the first appellant sent yet another email to Schwartz –
he also sent copies of the email to two senior credit
managers at
Nedbank – informing him that the Harlem funds had been paid
into the Agri account and that there was a credit
balance of
R942 348.21 in it, while the overdraft account showed a debit
balance of R1 413 155.27. It appears that
on the same day
Nedbank transferred an amount of R913 155 from the Agri account
to the overdraft account, reducing the overdraft
to R500 000.27.
[9]
Puricare objected and on 12 March 2010 it’s attorneys wrote to
Nedbank complaining that the latter had unilaterally ‘re-couped
funds of approximately R913 000 on 8 March 2010’. They
demanded that the amount ‘be made available immediately
to
allow the company to resume trade’, failing which Puricare
would approach the high court urgently for appropriate relief.
Nedbank obliged and, on 17 March 2010, transferred an amount of
R749 155 from the overdraft account to the Agri account.
Puricare’s indebtedness to Nedbank on the overdraft facility
was thus increased to R1.25 million. It is not in dispute that
on 23
March 2010 an amount of R735 990.61 was electronically
transferred from the Agri account to a private account held at
Absa
Bank in Wiffen’s name. After this transaction the Agri account
was left with a nil balance. On 29 April 2010 an amount
of R280 000
was paid into the overdraft account, but on 30 April 2010 an
equivalent sum (R280 269 to be exact) was transferred
from that
account into the Agri account. The first appellant was unable to
explain the transfer, but maintained that it was to
his prejudice.
[10]
It was put to the first appellant under cross-examination that
Nedbank had no option but to reverse the first transfer it had
made
as a consequence of the intervention of Puricare’s attorneys.
His response was that the money had been earmarked for
the overdraft
account and that the agreement between him and Schwartz was that the
overdraft facility would be cleared by the funds
that were scheduled
to be paid into it. As to the transfer of the R280 269 from the
overdraft account to the Agri account,
the first appellant could not
dispute what was put to him on behalf of Nedbank, namely, that
Schwartz would testify that the transfer
was at the specific request
of Puricare, to which Nedbank acceded.
[11]
Schwartz confirmed most of the first appellant’s testimony
relating to the arrangements that were made for additional
overdraft
facilities to Puricare. He testified that Nedbank had no part in
Puricare’s instruction for its debtors to pay
moneys due to it
into the Agri account. He confirmed that he had had various
discussions with the first appellant about the reversal
of payments
made by Puricare’s debtors into the Agri account, but said that
Nedbank could not summarily transfer the funds
in the face of
possible legal action against it.
[12]
Other amounts were, subsequently, also transferred from the Agri
account to Wiffen’s account with Absa Bank during the
period 1
April 2010 to 19 April 2010. With regard to the reversal of the
transfer of a major portion (R749 155) of the amount
of R913 000
from the Agri account to the overdraft account, Schwartz testified
that this was done on the advice of Nedbank’s
internal legal
advisers. As to the transfer of the sum of R280 269 from the
overdraft account to the Agri account he said
that during a
discussion he had had with Wiffen after the money had been paid into
the overdraft account, the latter (Wiffen) had
claimed that the
payment had gone into an incorrect account and that that was the
reason for the transfer.
[13]
The appellants’ original plea was amended during the course of
the trial and the amended plea was neatly summarised by
the court
below as follows:
‘
(a)
There was a duty on Nedbank not to act in a manner that would be
prejudicial to the [appellants] in their capacity as sureties.
(b)
Nedbank, despite having been informed that Puricare had no intention
of repaying the overdrawn facility, allowed Puricare to
transfer
funds from the overdrawn account to the Agri account.
(c)
In particular, on 17 March 2010 Nedbank unilaterally transferred an
amount of R749 155 from the overdrawn account to the
agri
account, despite the fact that at that time no overdraft facility
existed, alternatively the overdraft facility was only R150 000.
(d)
Furthermore, on 29 April 2010 an amount of R280 269, earmarked
to reduce the overdraft, was paid into the overdraft account
but on
30 April 2010 Nedbank unilaterally transferred the same amount from
the overdraft account into the agri account, despite
the fact that at
that time no overdraft facility existed, alternatively the overdraft
facility was only R150 000.
(e)
As a result of Nedbank’s prejudicial conduct towards them, the
[appellants] are entitled to release from the suretyships.’
[3]
In
essence, therefore, the appellants denied that they were bound by the
terms of the surety agreements. They pleaded further that
in allowing
Puricare to arrange that funds earmarked for the overdraft account to
be deposited into the Agri account and by allowing
the transfers of
funds from the last-mentioned account to another bank Nedbank acted
to their prejudice. As a result of Nedbank’s
prejudicial
conduct, so it was pleaded, the appellants had been released from
their obligations as sureties and that, accordingly,
the claim
against them should be dismissed, with costs.
[14]
In this court, counsel for the appellants did not challenge the
evidence of Schwartz that on 15 February 2010 – after
the first
and second appellants’ directorships of Puricare had terminated
– Nedbank extended the overdraft facilities
of R350 000
and R750 000 until 8 March 2010 at the request of the Harris
group and that after 8 March 2010, there was
a further extension of
the R150 000 and R350 000 overdraft facilities. But,
clearly, when it transferred the sum of R749 155
from the
overdraft account to the Agri account on 17 March 2010, Nedbank also
extended the R750 000 overdraft facility to
an undetermined
date. In
Estate Liebenberg v Standard Bank of SA Ltd
1927 AD
502
at 507-508, Wessels JA held:
‘
It
must at once be conceded that by our law every extension of time is
not considered to effect a novation. It seems quite clear
that if the
extension of time is given after the debt becomes payable and when
the debtor is
in
mora
, then
a failure to sue the debtor, or even the actual granting to him of an
extension of time, cannot be regarded as a novation,
and therefore
the surety is not discharged. The surety then has the remedy in his
own hands: all he need do is to pay the principal
creditor and then
proceed against the principal debtor. Van der Linden in his
Gewijsden
,
p. 263, quotes a case to this effect decided by the Hooge Raad. In
that case the extension was granted after the due date. The
surety
claimed that he was discharged on that ground (p. 265), but the Court
held a contrary view. In
Colonial
Government v Edenborough
(4 S.C. 290
,
p. 297) Sir HENRY DE VILLIERS expressed himself in the following
terms: --- “Speaking broadly, I take it as the result of
the
best authorities I have consulted that mere delay in enforcing the
creditor’s claim, or even an extension of the time
of payment,
which does not amount to a novation of the debt, does not in our law
exonerate the surety.”’
Nonetheless,
in a concurring judgment Curlewis JA held:
‘
[W]here
time is of the essence of the contract of suretyship, if before the
date of payment arrives the creditor enters into an
agreement with
the debtor whereby the obligation to pay on that date is extended to
a later date (which is what seems to me to
be understood by the
expression “
prorogatio
obligationis
” in the case of a
debt as distinguished from “
prorogatio
solutionis
,” though I say so with
diffidence), the surety becomes released from his obligation as
such.’
(See
also C F Forsyth and T J Pretorius
Caney’s
The Law of Suretyships in South Africa
6 ed (2010) at 208.)
[15]
The principle relating to the release of a surety as a result of
prejudice caused to him or her by the actions of the creditor
was set
out as follows by this court (per Olivier JA) in
Absa
Bank Ltd v Davidson
[1999] ZASCA 94
;
2000 (1) SA 1117
(SCA) para 19:
‘
As
a general proposition prejudice caused to the surety can only release
the surety (whether totally or partially) if the prejudice
is the
result of a breach of some or other legal duty or obligation. The
prime sources of a creditor’s rights, duties and
obligations
are the principal agreement and the deed of suretyship. If . . . the
alleged prejudice was caused by conduct falling
within the terms of
the principal agreement or the deed of suretyship, the prejudice
suffered was one which the surety undertook
to suffer. . . .’
(See
also
Bock & others v Duburoro Investments (Pty) Ltd
[2003]
ZASCA 94
;
2004 (2) SA 242
(SCA) paras 18 to 21.)
Accepting
this statement of the law as correct, counsel for the appellants
contended that in the present instance the appellants,
at the very
least, should have been released
pro
tanto
by an amount of R1 195 155.
But, considering that all the amounts received from Puricare’s
debtors and transferred
out of the Agri account came to a total sum
of R2 111 849.04, counsel argued, the appellants should be
released
in toto
.
[16]
The last of these submissions may be disposed of presently. As
counsel for Nedbank correctly contended, the appellants’
case,
from their plea and the evidence tendered, was limited to only three
transfers, namely amounts of R749 155 from the
overdraft account
to the Agri account on 17 March 2010; R735 990.61 from the Agri
account to Wiffen’s private account
with Absa Bank on 23 March
2010 and R280 269 from the overdraft account to the Agri account
on 30 April 2010. The amount of
R735 990.61 was not mentioned in
the plea, but was brought up by the first appellant during his
testimony. In any event, the
transfers made from the Agri account to
Wiffen’s accounts with Absa Bank constituted a breach, by
Puricare, of the terms
of the principal agreement. In terms of clause
11 thereof, Puricare (the borrower) ‘unconditionally and
irrevocably’
undertook not to, among other things,
‘transfer’ any part of its assets to any financial
institution other than
Nedbank (clause 11.3.3), unless written
permission to do so was received from Nedbank (clause 11.3). Thus,
even if Nedbank had
‘allowed’ Puricare, as alleged, by
not taking any action, to transfer the moneys to Absa Bank, it was
not in breach
of the principal agreement. Puricare was. No written
permission was alleged to have been given by Nedbank for the
transfers.
[17]
It is so that, in terms of clause 12 of the principal agreement,
Nedbank was entitled, in its sole discretion, ‘to set
off the
indebtedness of [Puricare] to [it] under or . . . arising from [the
overdraft facilities] any and all amounts standing
to the credit of
[Puricare] in the books of Nedbank’ (clause 12.3.9), in
the event Puricare or any surety committing
‘a breach of any
terms and conditions’ set out in the principal agreement
(clause 12.2.2). It was submitted, on behalf
of the appellants, that
the instructions given to Puricare’s debtors by the Harris
group to pay the proceeds of sales due
to Puricare into the Agri
account was in breach of clause 13 of the principal agreement.
That clause provided that an account
was to be opened at any branch
of Nedbank into which ‘proceeds of all sales, including cash
sales and receipts from debtors,
are to be banked timeously into this
account’. It was accordingly contended that in failing to apply
set-off, by transferring
the moneys paid into the Agri account to the
overdraft account and to clear the last-mentioned account, or to
place a
caveat
on the funds in the Agri account to ensure they are not transferred
out of that account, Nedbank prejudiced the appellants.
[18]
But Nedbank was entitled, in its sole discretion, to apply set-off
after Schwartz had been alerted by the first appellant that
Puricare’s directors intended not to clear the overdraft
facilities. It was not obliged to do so. Its failure to apply set-off
was, therefore, not in breach of any of the terms of the principal
agreement, nor those of the suretyships. In any event, Schwartz
testified that he did not know that Wiffen would take out the money
from the Agri account and deposit it in his account with Absa.
It
follows that what remains for consideration is whether the transfer
of the amounts of R749 155 and R280 269 from the
overdraft
account to the Agri account was to the appellants’ prejudice.
[19]
The alleged prejudicial conduct complained of was that Nedbank
allowed debit transactions on 17 March and 30 April 2010 on
the
overdraft account, when the (original) date of expiry of the R350 000
and R750 000 overdraft facilities, 15 February
2010, had come
and gone. However, as has been mentioned above (par 13), those
overdraft facilities had been extended. In his heads
of argument
counsel for the appellants acknowledged that on 15 February 2010 and
on 8 March 2010 arrangements had been made for
the extension of the
overdraft facilities of R350 000 and R750 000 and that
after 8 March 2010 there was a further extension
of the R150 000
and R350 000 facilities. I have mentioned (para 13 above) that
when Nedbank transferred R749 155
from the overdraft account to
the Agri account, at the instance of Puricare’s attorneys, it
thereby also extended the R750 000
facility. But I should
mention that when it transferred the sum of R913 000 from the
Agri account to the overdraft account,
Nedbank was entitled, in its
sole discretion and in terms of clause 12.3.9 of the principal
agreement, to do so by way of set-off
against amounts standing to the
credit of Puricare in its (Nedbank’s) books. This is because
Puricare had breached the terms
of clause 13 of the principal
agreement by instructing its debtors to pay proceeds of sales due to
it into the Agri account (see
para 16 above). Nedbank could,
therefore, have refused to comply with the demand of Puricare’s
legal representative to reverse
the transfer. Similarly, it could
have refused Wiffen’s request to transfer the R280 269 on
30 April 2010 from the overdraft
to the Agri account. But I do not
think it was in breach of the principal agreement or the suretyships
when it succumbed to the
threat of legal action from Puricare’s
attorneys and transferred R749 155 from the overdraft to the
Agri account on
17 March 2010, or acceded to Wiffen’s request
that it transfer R280 269 from the overdraft account on 30 April
2010
to the Agri account.
[20]
Clause 3 of the suretyships signed by the appellants provides that
‘[i]t shall always be in Nedbank’s discretion
to
determine the extent, nature and duration of any banking facilities
to be allowed the principal debtor and all admissions or
acknowledgments of indebtedness by the principal debtor shall bind
[the surety]’. In my view, Nedbank was entitled, in terms
of
clause 3 of the suretyships, to extend the two overdraft facilities
of R350 000 and R750 000 when it did. And, in
terms of
clause 1 of the suretyships, the appellants bound themselves,
‘jointly and severally, as surety and co-principal
debtor in
solidum
(which means, where there are several sureties, each is liable in
full), for the repayment on demand of all amounts which the principal
debtor may
now or at any time hereafter
owe Nedbank . . .’. (My emphasis)
Since the extensions of the overdraft facilities were authorised by
the suretyships, no
breach of any legal duty owed to the appellants,
or obligation towards them under the two agreements, was committed by
Nedbank
when it effected the transfers in question. It follows that
as long as Puricare remained indebted to Nedbank on the overdraft
facilities,
each one of the three appellants remained liable under
the suretyships for the repayment, on demand, of all moneys owed to
Nedbank
by Puricare. They were not released and the appeal must
accordingly fail.
[21]
In his heads of argument counsel for the appellants dealt with the
legal position relating to an out-and-out cession and a
cession in
securitatem debiti
.
In terms of clause 10.3 of the principal agreement all debtors of
Puricare were ceded to Nedbank. I suppose what counsel wished
to rely
on was the failure of Nedbank to exercise its right as cessionary
against the debtors of Puricare. Such argument was, however,
not
pursued in earnest. But even if Nedbank’s failure to exercise
its rights as cessionary had constituted a breach of one
or both
agreements – which was not the case - I do not think the point
was a good one in any event. It was never pleaded,
nor dealt with in
the court below.
[22]
The appeal is dismissed, with costs.
L
Mpati
President
APPEARANCES
For
the Appellants: J Claasen SC
Instructed
by: A Chimes & van Wyk
c/o
Kinniburgh & Associates, Cape Town
Lovius
Block, Bloemfontein
For
the Respondent P De B Vivier
Instructed
by: Fourie Basson & Veldtmann Attorneys, Cape Town
Phatshoane
Henney Attorneys, Bloemfontein
[1]
It
went into liquidation subsequent to the institution of the
proceedings in the high court. Although its liquidators were joined,
they played no part in the proceedings and Nedbank sought no relief
against them.
[2]
The
‘CC account’ referred to in the email is the overdraft
facility account.
[3]
Paragraph
38 of the judgment. (Paragraph numbering reformatted from the
original.)