About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Western Cape High Court, Cape Town
SAFLII
>>
Databases
>>
South Africa: Western Cape High Court, Cape Town
>>
2010
>>
[2010] ZAWCHC 171
|
|
Structured Mezzanine Investment (Pty) Ltd v s Dawids and Others (9587/10) [2010] ZAWCHC 171; 2010 (6) SA 622 (WCC) ; [2011] 2 All SA 583 (WCC) (8 September 2010)
REPORTABLE
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE HIGH COURT, CAPE TOWN)
Case
No: 9587/10
Before
the Hon Mr Justice NJ Yekiso
In
the matter between:
STRUCTURED
MEZZANINE INVESTMENTS (PTY) LTD
Applicant
and
MOGAMAT
ASHRAF DAVIDS
1
st
Respondent
SAMIER
RINQUEST
2
nd
Respondent
SHALLDOWISELY
4 (PTY) LTD
3
rd
Respondent
KHANITA
AHMED
4
,h
Respondent
Coram:
NJ
Yekiso, J
Judgment
by:
NJ Yekiso, J
Counsel
for Applicant:
Adv
J F Pretorius
Attorneys
for Plaintiffs: Sim & Botsi Attorneys
c/o
E R Attorneys
1
st
to 4
th
Respondents:
U
nrepresented
Date
of Hearing:
16
August 2010
Date
of Reasons:
8
September 2010
REPORTABLE
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE HIGH COURT, CAPE TOWN)
Case
No: 9587/10
In
the matter between:
STRUCTURED
MEZZANINE INVESTMENTS (PTY) LTD
Applicant
and
MOGAMAT
ASHRAF DAVIDS
1
st
Respondent
SAMIER
RINQUEST
2
nd
Respondent
SHALLDOWISELY
4 (PTY) LTD
3
rd
Respondent
KHANITA
AHMED
4
,h
Respondent
Coram:
Yekiso
J
Heard:
16
August 2010
Delivered:
8
September 2010
Summary:
Lawfulness of interest rates agreed upon by the parties Not
regulated by the Usury Act, 73 of 1968. Latter piece of
legislation
repealed by the provisions of
section 174(4)
of the
National Credit
Act, 34 of 2005
Interest rate agreed upon not in conflict with the
provisions of Section 1(1) of the Conventional Penalties Act, 15 of
1962 Factors
taken into account in the determination of lawfulness or
otherwise of interest agreed upon.
IN
THE HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE HIGH COURT, CAPE TOWN)
Case
No: 9587/10
In
the matter between:
STRUCTURED
MEZZANINE INVESTMENTS (PTY) LTD
Applicant
and
MOGAMAT
ASHRAF DAVIDS
1
st
Respondent
SAMIER
RINQUEST
2
nd
Respondent
SHALLDOWISELY
4 (PTY) LTD
3
rd
Respondent
KHANITA
AHMED
4
th
Respondent
JUDGMENT
DELIVERED ON 8 SEPTEMBER 2010
YEKISO,
J
[1]
The applicant, Structured Mezzanine Investments (Pty) Ltd, a company
with limited liability incorporated in terms of the company
laws of
the Republic of South Africa, having its principal place of business
at 80 Bonza Bay Road, Beacon Bay, East London, instituted
proceedings out of this court, on notice of motion, against the
first, second, third and the fourth respondents, jointly and
severally, the one paying the other to be absolved, for payment of
an amount of R3,803,572-42, together with interest thereon
at the
rate of 1,5% per week reckoned from 24 October 2008 up to date of
payment. The claim arises out of monies lent and advanced
to a
company called Zapton Investments 786 (Pty) Ltd ("Zapton")
at the latter's special instance and request on 25
April 2008. Each
of the respondents bound themselves as sureties and co-principal
debtors for due and punctual fulfilment by
Zapton of its
indebtedness to the applicant.
[2]
The respondents referred to in the preceding paragraphs are:
[2.1.]
Mogamat Ashraf Davids, an adult business man whose
domicilium
citandi et executandi
is
at 6 Moore Street, Kenilworth.
[2.2.]
Samier Rinquest, an adult business man, whose
domicilium
citandi et executandi
is
at 6 Moore Street, Kenilworth.
[2.3.]
Shalldowisely 4 (Pty) Ltd, a company with limited liability, duly
incorporated in terms of the company laws of the Republic
of South
Africa, having its registered office at 4 Glen Roy, Pinelands, Cape
Town and whose
domicilium
citandi et executandi
is
at 6 Moore Street, Kenilworth.
[2.4.]
Khanita Ahmed, an adult business woman, whose
domicilium
citandi et executandi
is
also at 6 Moore Street, Kenilworth.
[3]
In terms of the loan agreement, concluded at Somerset West on 25
April 2008, the applicant agreed to lend, advance and make
available
to Zapton an amount of R3m on the terms and conditions set out in
the loan agreement. The due date for repayment of
the loan advanced
was 24 October 2008. Interest payable was agreed upon at the initial
rate of 1,25% per week reckoned from the
date the loan was advanced
of the loan (25 April 2008) until payment date (24 October 2008).
The agreement stipulates that in
the event the capital amount,
together with interest at the agreed initial rate not being paid on
due date, an alternative interest
at the rate of 1,5% per week on
the capital amount advanced would be charged. Zapton failed to pay
the capital amount advanced
on due date (24 October 2008) hence the
institution of these proceedings for the recovery of the amount due
inclusive of interest
at the initial rate of 1,25% per week,
together with interest thereon at an agreed alternative rate of 1,5%
per week reckoned
from due date of payment.
[4]
The notice of motion, for the recovery of the amount due, was
subsequently served on each of the respondents who elected not
to
oppose the relief sought.
[5]
Once the
dies
induciae
for
the filing of notices of intention to oppose had expired, the matter
was enrolled for hearing on 3 June 2010 on the unopposed
motion roll
in Third Division. On the day, the matter served before Binns-Ward J
who raised concerns as regards the lawfulness
of the interest rate
agreed upon and subsequently charged and claimed. Counsel was
directed to prepare and file full and comprehensive
heads of
argument in respect of the interest rate issue and the matter was
postponed for that purpose. The matter was ultimately
argued before
me sitting in Third Division on Monday, 16 August 2010. After
hearing argument I granted the order as prayed. I
did not then give
reasons for the order I gave but did indicate to counsel that
reasons for the order I gave would be given on
request provided such
request would have had to be filed within the time limits provided
for in the Uniform Rules of Court.
[7]
The mezzanine funding, such as is provided by the applicant, is
normally used by what is referred to as 'small developers'.
These
developers, despite their size, are major role players in their
niche property development market or are owned by major
role players
in the property development industry who are able to provide
bridging finance to smaller property development entrepreneurs,
using mezzanine funding as a vehicle to provide such bridging
finance. The individuals involved in these development entities
are
all experienced and astute business persons who have a wealth of
professional knowledge, have been involved in the property
and
property development market for years with vast experience of market
trends. They are individuals or legal entities normally
with
relatively large and substantial asset base.
[8]
As has already been pointed out, the mezzanine funding market is a
niche market which is structured to assist these developers,
who
make use of other people's money, in order to finance their
developments. They thus expose other people's money to risks,
thus
enabling them to successfully commence or complete a project which
is ultimately to their financial benefit. The vast
majority of
smaller developers normally do not have sufficient own funding
available which is normally required to be injected
into a
development project in order to meet commercial banks' requirement
underpinning a development bond. It is for this reason
that they
make use of mezzanine funding which, as a general rule, involves the
lending of money over a relatively short period
of time (in the
instance of this matter from 25 April 2008 to 24 October 2008) at
such lending rates inherent to the risks involved
and peculiar to
the circumstances in the property development industry.
[9]
Normally, mezzanine funding is used to bridge that relatively short
period until the commercial banks will feel less exposed
to risk and
be prepared to lend and advance the money required. It is for this
reason, so it is stated on behalf of the applicant
in the
supplementary affidavit, that mezzanine funding is also referred to
as bridging finance. Before any of the commercial
banks would be
prepared to advance any funding in the property development project,
they normally would need to be satisfied
that 30% of the capital sum
required to complete a development project would already have been
spent and injected into the development.
Typically, therefore, a
commercial bank will only fund 70% of the total development costs
whilst the developer is required to
fund the other 30% either out of
its own funds or by way of a loan obtained elsewhere. Evidence tends
to suggest that the conclusion
of the loan agreement in the instance
of this matter was preceded by intense negotiations as regards the
terms of the agreement
including those terms relating to the rate of
interest to be charged.
[10]
Whilst it appears that the profit margins of the mezzanine funders
are high, it would appear that equally high is the risk
involved.
The risks involved would relate to misrepresentation to the
mezzanine funder when applying for a loan; the development
project
overrunning in time and costs; and the potential array of problem
areas such as disputes as regards the development itself
which may
arise during the course of such development. It would appear that
the applicant, and I am told, like all other mezzanine
funders,
obtain its funds from the banks at a rate equalling that of the
mezzanine funder plus a percentage points for its own
profit margin
which, at the time the loan agreement was concluded, was equivalent
to a rate of 1% per month. Equally significant
to the risk element
is an increase in default of payment as has happened in the instance
of this matter.
LAWFULNESS
OF THE INTEREST RATE CHARGED
[11]
Up until its repeal by the provisions of
section 174(4)
of the
National Credit Act, 34 of 2005
, interest rates and finance chargers
were controlled and regulated by the provisions of the Usury Act, 73
of 1968. Since the
repeal of the latter piece of legislation,
lawfulness or otherwise of the rate of interest charged is regulated
by such pieces
of legislation as the
National Credit Act, the
Conventional Penalties Act, 15 of 1962 as also whether the rate of
interest charged offends good morals or is contrary to public
policy. The respondents elected not to challenge the merits of the
claim, inclusive of the rate of interest charged, so that
all that I
am, therefore, required to determine is whether the rate of interest
charged contravenes any provision of the
National Credit Act, the
Conventional Penalties Act or whether the interest charged offends
good morals or is against public policy.
THE
NATIONAL CREDIT ACT
[12
]
Since the repeal of the Usury Act, certain maximum interest rates
charged are regulated by the provisions of
section 105
of the
National Credit Act, which
provides as follows:
"105.
Maximum rates of interest, fees and charges. -
(1)
The
Minister, after consulting the National Credit Regulator, may
prescribe
a method for calculating -
a
maximum rate of interest; and
the
maximum fees contemplated in this Part,
applicable
to each subsector of the consumer credit market, as determined by
the Minister.
(2)
When
prescribing a matter contemplated in subsection (1), the
Minister
must consider, among other things -
the
need to make credit available to persons contemplated in
section
13((a)
;
conditions
prevailing in the credit market, including the cost of credit and
the optimal functioning of the consumer credit
market; and
the
social impact on low income consumers.
(3)
When
establishing regulations contemplated in this section, the Minister-
must
establish different maximums for credit agreements within each
subsector of the consumer credit market; and
may
prescribe the method, consistent with
section 101(3)
, for
allocating service fees between the provision of credit and the
provision of related financial services, in circumstances
in which
a credit provider offers multiple financial services under a single
agreement."
[13]
Arising from the provisions of
section 105
of the
National Credit
Act, the
prescribed maximum interest rates and the manner of
calculation thereof are contained in regulations promulgated
thereunder and,
in particular,
regulation 42
of the Regulations
published in Government Notice R489 published on 31 May 2006 and
subsequently amended by Government Notice
R1209 published on 30
November 2006.
Regulation 42
, under the heading 'maximum prescribed
interest and initiation fee' prescribes maximum interest rates that
may be charged in
respect of each sub-sector mentioned under Table A
as well as maximum initiation fee that may be charged in respect of
each sub-sector
mentioned under Table B.
[14]
The prescribed maximum interest rates referred to in the preceding
paragraph do not apply to Zapton. Zapton, the principal
debtor in
the instance of this matter, is a juristic person. It is quite
evident on the basis of the documentation prepared prior
to the
conclusion of the loan agreement, in particular, the mortgage bond
registered in favour of the applicant, that the asset
value of
Zapton at the time of the conclusion of the agreement exceeded R1m.
Based on this fact, Zapton is thus excluded from
the application of
the provisions of the
National Credit Act in
terms of
section 4(1)
thereof.
Section 4(1)
of the
National Credit Act provides
as
follows:
"4.
Application of Act - (1) Subject to sections 5 and 6, this Act
applies to every credit agreement between parties dealing
at arm's
length and made within, or having an effect within, the Republic,
except -
(a)
a
credit agreement in terms of which the consumer is -
(i)
a
juristic person whose asset value or annual turnover, together with
the combined asset value or annual turnover of all related
juristic
persons, at the time the agreement is made, equals or exceeds the
threshold value determined by the Minister in terms
of section 7(1);
(ii)
the
state; or
(iii)
an
organ of state;
(b)
a
large agreement, as described in section 9(4), in terms of which the
consumer is a juristic person whose asset value or annual
turnover
is, at the time the agreement is made, below the threshold value
determined by the Minister in terms of section 7(1)"
The
monetary asset value or annual turnover as determined by the
Minister for the purposes of section 4(1) is the monetary value
or
annual turnover threshold of not more than R1m.
[15]
In the alternative, the loan agreement concluded between Zapton and
the applicant is a large agreement referred to in section
4(1 )(b)
of the
National Credit Act. A
large agreement is defined as follows
in
section 9(4)
of the
National Credit Act:
"(4
)
A credit agreement is a large agreement it if is -
a
mortgage agreement; or
any
other credit transaction except a pawn transaction or a credit
guarantee, and the principal debt under that transaction
or
guarantee falls at or above the higher of the thresholds
established in terms of
section 7(1)(b)
"
[16]
The respondents, by virtue of the suretyship agreements signed by
each of them, are guarantors to the loan granted to Zapton
by the
applicant. Since the provisions of the
National Credit Act do
not
apply to the principal debtor, Zapton, equally, such provisions do
not apply to the respondents, as guarantors, by virtue
of the
provisions of
section 4(2)(c)
of the
National Credit Act which
provides:
"(c)
this Act applies to a credit guarantee only to the extent that this
Act applies to a credit facility or credit transaction
in respect of
which the credit guarantee is granted."
[17]
The suretyship agreements signed by each of the respondents
constitute a credit guarantee as contemplated in section 8(5)
of the
National Credit Act which
provides:
"(5)
An agreement, irrespective of its form but not including an
agreement contemplated in subsection (2), constitutes a
credit
guarantee if, in terms of that agreement, a person undertakes or
promises to satisfy on demand any obligation of another
consumer in
terms of a credit facility or a credit transaction to which this Act
applies."
Thus,
since the provisions of the
National Credit Act do
not apply to the
principal debtor, Zapton, such provisions equally do not apply to
the respondents. This is so because the principal
debtor in the
instance of this matter is a juristic person as contemplated in the
definition of the term 'juristic person' in
section 1
, and the loan
agreement in question being a large loan agreement as contemplated
in
section 9(4)
of the
National Credit Act.
Clearly
,
therefore, the provisions relating to the prescribed maximum
interest rates as provided for in the
National Credit Act, do
not
apply to Zapton and the respondents.
THE
CONVENTIONAL PENALTIES ACT
[18]
As a rule a penalty provision in the contract, is enforceable unless
the results flowing from such enforcement are disproportionate
to
the loss suffered by the contracting party in whose favour the
penalty provision is intended to operate. The nature of a penalty
stipulation, for the purposes of the Conventional Penalties Act,
appears in sections 1(1) and (4) of the aforementioned piece
of
legislation. In terms of section 1(1) a stipulation in terms of
which a person is liable in respect of an act or omission
in
conflict with a contractual obligation to pay a sum of money is
enforceable.
[19]
The agreed alternative rate of 1,5% per week constitutes the basis
of liability in the event of default or an omission to
pay a debt on
due date. It comes into operation and thus becomes enforceable on
breach of the agreement. It is intended to compensate
the credit
giver in the event of a loss arising from non-performance. Due
regard had to the amount of capital advanced and all
the attendant
risks involved, it cannot, in my view, be said either the initial
rate of interest or the alternative rate of interest
agreed upon is
disproportionate to the attendant risks involved in advancing or
making available the capital required or the
loss suffered as a
result of non-payment. It therefore follows, in my view, that the
initial rate of interest, as well as the
alternative rate of
interest agreed upon, is not in conflict with the relevant
provisions of the Conventional Penalties Act.
In any event, there
also is no evidence to suggest that any one of the respondents ever
complained about the rate of interest,
both as regards the initial
rate as well as the alternative rate agreed upon.
PUBLIC
POLICY
[20]
It is trite law that a court has the power to declare a contract
void should it be determined as being against public policy
or good
morals [See
Sasfin
(Pty) Ltd v Beukes
1989(1)
SA 1 (A);
Botha
(now Griessel) v Finanscredit (Pty) Ltd
1989(3)
SA 773 (A)]. Although parties to a contract are at liberty to agree
on a rate of interest peculiar to the risk involved
and the peculiar
circumstances of the parties, interest which is proved to be
extortionate or usurious cannot be claimed by a
creditor (See
Reuter
v Yates
1904
TS 855
at 859). The onus is on the debtor to prove that a particular
interest rate is too high and should not be enforced by a court.
(Jourbert:
The
Law of South Africa
Vol
5 part 1 para 52)
[21]
In determining whether a rate of interest is usurious and thus
contrary to public policy, a court will take all relevant
circumstances into consideration, such as the rate of interest which
is applied in the economy at the time, the risk involved
in the
transaction, the period of the loan, the amount lent, the relevant
position of the parties and the circumstances existing
at the time
of the conclusion of the contract (See Joubert:
The
Law of South Africa
para
52
supra.
A
court will not lightly interfere with an interest rate upon which
the parties have agreed.
[22]
In the instance of this matter, and as correctly submitted by
Mr
Pretorius,
the
parties to the loan agreement are all experienced business persons
who appear to have enjoyed equal bargaining powers when
the loan was
negotiated and ultimately signed. There is no evidence to suggest
that the applicant was in a better bargaining
position than Zapton
or that any of the parties, who voluntarily bound themselves as
sureties in favour of the applicant, were
misled or coerced in
binding themselves.
[23]
I am in perfect agreement with the submission by
Mr
Pretorius
that
having regard to the nature of the transaction in the instance of
this matter, the niche market which the mezzanine funders
serve and
the market requirements having regard to the general economy, the
interest rate agreed upon in terms of the loan agreement,
in the
circumstances of this matter, does not offend good morals nor is it
against public policy.
[24]
It is for the reasons stated in this judgment that, when I granted
the order I gave, I was of the view that the rate of interest
charged, both at the initial rate agreed upon as well as the
alternate rate, is not disproportionate to the risk undertaken by
the applicant or, put differently, that the interest rate charged is
commensurate to the risk undertaken.
[25]
For sake of completeness, the order I gave is the following:
[25.1.]
Judgment is granted in favour of the Applicant against the First to
Fourth Respondents, jointly and severally the one
paying the other
to be absolved for:-
[25.1.1.]
Payment of the sum of R3,803,571 -42;
[25.1.2.]
Interest on the aforesaid amount at the rate of 1,5% per week,
calculated
from 24 October 2008 until date of payment;
[25.1.3.]
Costs of the application on an attorney and own client scale.
N
J YEKISO, J