Summary of Judgment

1. Introduction

The proceedings were an application for provisional sentence in the High Court of South Africa, Gauteng Division, Johannesburg. The plaintiff, Abner Engineering and Supplies (Pty) Ltd, sought provisional sentence against the defendant, Adrian Thaver, relying on a written acknowledgement of debt as a liquid document.

The procedural history was material. Provisional sentence judgment had previously been granted in favour of the plaintiff on an unopposed basis on 6 May 2020, but that judgment was later rescinded following an opposed rescission application, in which Molahlehi J granted rescission on 23 August 2021. The provisional sentence application thereafter proceeded on opposed papers before Moorcroft AJ, including the defendant’s answering affidavit and an interlocutory attempt to supplement it.

The subject-matter of the dispute concerned whether the plaintiff was entitled to provisional sentence on the strength of the acknowledgement of debt, and whether the defendant had established a defence (going behind the liquid document) sufficient to defeat provisional sentence, specifically a defence of illegality premised on the National Credit Act 34 of 2005 and the plaintiff’s alleged status as an unregistered credit provider.

2. Material Facts

On 17 February 2019, the defendant signed an acknowledgement of debt in which he acknowledged liability to the plaintiff in the amount of R973,400, repayable over four years. The plaintiff relied on this document as a liquid document supporting provisional sentence proceedings.

It was common cause (or not disputed on the papers) that the plaintiff was not registered as a credit provider. This fact became significant because the defendant’s principal defence was that the underlying transaction was, in substance, a credit transaction governed by the National Credit Act, and that the plaintiff’s failure to register rendered the underlying loans (and by extension the acknowledgement of debt) unlawful and void.

The papers reflected a dispute about the underlying causa. The acknowledgement of debt itself recorded a loan as the causa. However, in its later version of events, the plaintiff sought to explain that the monies were placed in business schemes/opportunities proposed by the defendant, from which a return of 20% to 30% was anticipated, and that the acknowledgement of debt arose when the defendant could not repay the plaintiff’s investment. In reply, the plaintiff went further and specifically denied that there was a loan, notwithstanding that the provisional sentence summons and acknowledgement of debt had recited a loan as the causa.

In support of the defendant’s version that the underlying transactions were effectively loans carrying interest, the defendant annexed documentation (including emails) reflecting amounts advanced and amounts described as interest. The plaintiff’s response was that what was described as “interest” was actually a predicted profit share, but the court noted that there was no explanation why an expected profit would be labelled as interest or why the profit amount would be known in advance.

The defendant also attempted to invoke constitutional fairness concerns by alleging an inability to satisfy the judgment debt, relying on a nulla bona return issued by the sheriff in July 2020. The return recorded that the defendant could not point out movables to satisfy a warrant and denied owning immovable property. The court treated this as insufficient to establish inability to pay, because it did not address the defendant’s overall financial position (income, expenditure, other assets, investments, liabilities).

Finally, the defendant sought leave to file a supplementary answering affidavit to introduce reliance on Twee Jonge Gezellen (Pty) Ltd & Another v Land and Agricultural Development Bank of South Africa t/a the Land Bank & Another and to make further submissions regarding the underlying causa. The court treated this as an attempt to introduce additional matter without a satisfactory explanation for the omission from the existing answering affidavit.

3. Legal Issues

The court was required to determine, first, an interlocutory issue: whether the defendant should be granted leave to file a supplementary answering affidavit, and if so, whether that additional material could be considered.

On the merits, the central legal questions were whether the acknowledgement of debt constituted a liquid document entitling the plaintiff to provisional sentence, and whether the defendant had established a defence sufficient to defeat provisional sentence on the applicable standard. This required the court to determine the proper approach to defences that go behind a liquid document, including defences of illegality.

A key application-of-law-to-fact issue was whether the underlying transaction was, in substance, a loan or credit agreement subject to the National Credit Act, and if so, whether the plaintiff’s lack of registration as a credit provider rendered the underlying agreements unlawful and void (with consequential implications for enforcement of the acknowledgement of debt).

The defendant also raised a constitutional dimension derived from section 34 of the Constitution (access to courts and fair hearing) as considered in Twee Jonge Gezellen, in relation to when provisional sentence may limit a defendant’s fair hearing rights, particularly where the defence cannot be established without oral evidence and the defendant cannot satisfy the judgment debt. This raised a mixed question involving the legal framework and the sufficiency of proof on affidavit of inability to pay.

4. Court’s Reasoning

Supplementary answering affidavit

The court refused the defendant’s application for leave to file a supplementary answering affidavit. It noted that the supplementary affidavit sought to advance argument and material relating to the Constitutional Court’s articulation of the provisional sentence procedure in Twee Jonge Gezellen, and further submissions on the underlying causa. The court held that there was no adequate explanation for why these matters had not been addressed in the existing affidavit resisting provisional sentence, and that no basis for condonation had been made out. On that basis, leave was refused, with costs.

Although the defendant attempted to rely on the Twee Jonge Gezellen fairness qualification (relating to a defence requiring oral evidence and inability to pay), the court considered the evidentiary foundation for inability to pay and found it lacking. The nulla bona return, on its terms, did not establish inability to satisfy the debt, because it did not provide evidence of the defendant’s financial position beyond the sheriff’s inability to attach specified assets on that occasion.

Provisional sentence principles and the defendant’s burden

The court summarised the nature of provisional sentence as a remedy allowing a creditor holding a liquid document to obtain a provisional judgment, with final resolution to occur in the principal case. It reiterated that a liquid document is one that, by its terms, demonstrates an unconditional acknowledgement of indebtedness in a fixed or ascertainable amount.

Relying on the Constitutional Court’s exposition in Twee Jonge Gezellen, the court emphasised that a defendant may raise defences that go behind the liquid document, but to defeat provisional sentence the defendant must produce sufficient proof of such a defence to satisfy the court that the probability of success in the principal case is against the plaintiff. If probabilities are evenly balanced on the papers, provisional sentence will be granted; if probabilities favour the plaintiff, it will likewise be granted. The court also reaffirmed (with reference to earlier authority) that, once the inquiry goes behind the liquid document, the onus lies on the defendant to show that, if evidence were heard, the probabilities are that the defendant would succeed.

The underlying causa, substance over form, and the National Credit Act

The court treated the plaintiff’s articulation of the underlying causa as problematic. The acknowledgement of debt had recorded a loan as the causa, but the plaintiff later attempted to characterise the transaction as an investment in business schemes with an expected return. The plaintiff’s reply specifically denied a loan, thereby distancing itself from the loan characterisation reflected in its own provisional sentence papers.

The court cautioned against a purely semantic approach. It reasoned that where money is advanced on terms that it must be repaid irrespective of the success of an underlying venture, and where an additional amount is payable that is, in substance, interest, the transaction is effectively a loan notwithstanding the label attached to it. The court held that, in such circumstances, substance governs and the transaction falls within the ambit of applicable legislation, including the National Credit Act.

Applying that approach, the court considered the defendant’s contention that the underlying agreement(s) were unlawful because the plaintiff was not a registered credit provider as required by section 40 of the National Credit Act (read with GN 513 in GG 39981 of 11 May 2016), and that the underlying agreements were therefore void in accordance with section 89 of the Act. The court noted that the plaintiff’s lack of registration was not disputed.

The court accepted that the material annexed to the defendant’s answering affidavit constituted prima facie support for the defendant’s case, including documentation reflecting interest amounts. The plaintiff’s attempt to recharacterise those interest amounts as predicted profit share was treated as inadequately explained, particularly given the terminology used (“interest”) and the assertion of predetermined profit amounts.

The court further considered the prior rescission judgment. It noted that in the rescission application Molahlehi J had found that the debt underlying the acknowledgement of debt consisted of a series of loans carrying interest of 20% to 30%, and that the unlawfulness of those loan agreements extended to the acknowledgement of debt. The present court treated that finding as materially relevant to the probabilities on the provisional sentence papers.

The court rejected the suggestion that the National Credit Act could be sidestepped by relying on an acknowledgement of debt arising from agreements that are void under the Act. It reasoned that if acknowledgements of debt were enforceable in such circumstances, the Act’s protections could be circumvented simply by recording the terms of an unlawful credit agreement in a liquid document; this would allow the “mischief” targeted by the Act to persist.

Parol evidence rule

The defendant had invoked the parol evidence rule, but the court regarded this reliance as misplaced. It treated the rule as not determinative of the dispute before it, noting that the case did not turn on an attempt to vary, contradict, or add to written terms in the manner typically associated with parol evidence disputes.

Overall assessment of probabilities

On the totality of the above, the court concluded that the probabilities favoured the defendant on the merits of the defence based on illegality under the National Credit Act. In line with the provisional sentence standard articulated in Twee Jonge Gezellen, this meant the plaintiff was not entitled to provisional sentence, and the matter had to proceed to trial in the ordinary course.

5. Outcome and Relief

The court dismissed the defendant’s application for leave to file a supplementary answering affidavit, and ordered the defendant to pay the costs of that interlocutory application.

The court dismissed the plaintiff’s provisional sentence application. It ordered the defendant to file a plea within 20 days, after which the matter would proceed to trial, with the Uniform Rules relating to pleading and trial actions to apply mutatis mutandis as contemplated in Uniform Rule 8(8).

The costs of the provisional sentence application were reserved for determination by the trial court.

Cases Cited

Twee Jonge Gezellen (Pty) Ltd & Another v Land and Agricultural Development Bank of South Africa t/a the Land Bank & Another 2011 (3) SA 1 (CC), [2011] JOL 26870 (CC), 2011 (5) BCLR 505 (CC).

Harrowsmith v Ceres Flats (Pty) Ltd [1979] 4 All SA 45 (T), 1979 (2) SA 722 (T).

Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint Venture [2009] JOL 23348 (SCA), 2009 (5) SA 1 (SCA).

Rich & Others v Lagerwey [1974] 4 All SA 466 (A), 1974 (4) SA 748 (A).

Joseph v Hein [1975] 3 All SA 227 (W), 1975 (3) SA 175 (W).

Allied Holdings Ltd v Myerson 1948 (2) SA 961 (W).

Lesotho Diamond Works (1973) (Pty) Ltd v Lurie 1975 (2) SA 142 (O).

Wustrow v Wustrow 1980 (2) SA 308 (W).

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 34.

National Credit Act 34 of 2005, section 8(4)(f), section 40, and section 89.

Government Notice 513 in Government Gazette 39981 of 11 May 2016 (referred to in connection with the registration requirement under section 40 of the National Credit Act 34 of 2005).

Rules of Court Cited

Uniform Rules of Court, Rule 8(8).

Held

The court held that the defendant’s attempt to file a supplementary answering affidavit was not justified on the papers because the defendant did not explain why the additional matter was not raised earlier and did not make out a case for condonation; the application was therefore dismissed with costs.

On the merits of provisional sentence, the court held that although the plaintiff relied on a liquid document (an acknowledgement of debt), the defendant advanced a defence going behind the document, namely that the underlying transaction(s) were unlawful under the National Credit Act because they were, in substance, credit transactions involving repayment with interest, concluded by an unregistered credit provider. The court accepted that the probabilities favoured the defendant on this defence, and it dismissed the application for provisional sentence, directing that the matter proceed to trial with costs reserved.

LEGAL PRINCIPLES

The judgment applied the principle that in provisional sentence proceedings a plaintiff may obtain provisional judgment on a liquid document, but the defendant may raise any defence that could be raised to an illiquid claim, including defences that go behind the liquid document. Where such a defence is raised, the defendant bears the burden to place sufficient material before the court to show that the probabilities in the principal case favour the defendant; if probabilities are evenly balanced, provisional sentence is granted.

The judgment applied the Constitutional Court’s articulation in Twee Jonge Gezellen that provisional sentence is constitutionally permissible, and that a limitation on a defendant’s section 34 fair hearing rights arises only in the intersectional situation where the defence cannot be shown on affidavit without oral evidence, the defendant cannot satisfy the judgment debt, and the court lacks a discretion to refuse provisional sentence outside special circumstances. The judgment further applied the evidentiary requirement that inability to satisfy the judgment debt must be established by adequate proof; a bare nulla bona return, without evidence of the defendant’s broader financial position, was treated as insufficient.

The judgment applied a substance-over-form approach when characterising the underlying transaction. It treated a transaction requiring repayment irrespective of success, with an additional amount in the nature of interest, as substantively a loan/credit transaction despite being described as an “investment” or profit-sharing arrangement. On that footing, it applied the principle that where a transaction falls under the National Credit Act, non-compliance with the credit provider registration requirement may render the underlying agreement unlawful and void, and that the Act cannot be circumvented by recording the terms of an unlawful credit agreement in an acknowledgement of debt and seeking to enforce that liquid document in provisional sentence proceedings.