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[2010] ZASCA 148
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Desert Star Trading 145 (Pty) Ltd and Another v No 11 Flamboyant Edleen CC and Another (98/10) [2010] ZASCA 148; 2011 (2) SA 266 (SCA) ; [2011] 2 All SA 471 (SCA) (29 November 2010)
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THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 98/10
DESERT
STAR TRADING 145 (PTY) LTD
....................................
First
Appellant
BRIDGING
ADVANCES (PTY) LTD
..........................................
Second
Appellant
and
NO
11 FLAMBOYANT EDLEEN CC
..........................................
First
Respondent
CHRISTIAAN
SCHOEMAN
..................................................
Second
Respondent
____________________________________________________________
Neutral
citation:
Desert Star Trading v No 11 Flamboyant Edleen
(98/10)
[2010] ZASCA 148
(29 November 2010)
BENCH:
NAVSA, CLOETE AND PONNAN JJA, EBRAHIM AND K PILLAY AJJA
HEARD: 10 NOVEMBER 2010
DELIVERED: 29 NOVEMBER 2010
SUMMARY:
Winding-up – locus standi of applicant as creditor –
indebtedness disputed on bona fide and reasonable grounds
–
winding-up order correctly refused.
______________________________________________________________________
ORDER
______________________________________________________________________
On
appeal from
:
North Gauteng High Court
(Pretoria)(B van den Heever AJ sitting as court of first instance)
1 The appeal against paragraphs 3 and 4 of the order of the court
below is allowed and the order is amended by the deletion of
those
paragraphs. Subject thereto and paragraphs 5 and 6 being renumbered 3
and 4 respectively, the order of the court below is
confirmed.
2 Save as is set out in paragraph 1 hereof the appeal is dismissed.
3 The appellants are ordered to pay the respondents’ costs
jointly and severally, the one paying the other to be absolved.
______________________________________________________________________
JUDGMENT
______________________________________________________________________
PONNAN
JA (NAVSA and CLOETE JJA and EBRAHIM and K PILLAY AJJA concurring):
[1] ‘Neither a borrower nor a lender be’
is Polonius’ counsel to his son Laertes in Shakespeare’s
Hamlet
(Act 1 Scene 3). ‘For loan’ as Polonius explains
‘oft loses both itself and friend, [a]nd borrowing dulls the
edge of
husbandry
’
.
Increased consumption, a desire-based need for credit, attractive
borrowing options and alluring methods of repayment have all
contributed to many of us not living our lives by that aphorism. Our
modern consumer driven society does however come at a cost.
As
recently as 2005 it was reported that South Africa’s consumer
debt crisis was costing the country around R12 billion annually
and
that 40 per cent of households nationally were experiencing financial
difficulty as they were unable to meet loan repayments
to micro
lenders and other service providers.
1
The protection of the consumer has become a
common feature in many legal systems. Many countries have adopted
consumer protection
legislation to regulate credit grantor–credit
consumer relationships because they can and do give rise to abuse and
exploitation.
2
Given the borrower’s weaker economic
position
3
(that is usually why a loan is being
sought), he or she is often helpless in the face of contracts -
particularly standard form
contracts presented by the lender. To
borrow from Voet:
4
‘
A needy debtor, pressed by
tightness of ready cash, will readily allow any hard and inhuman
terms to be written down against him.
He promises himself smoother
times and better fortune before the day put into the commissary term,
and thus hopes to avert the
harshness of the agreement by payment;
though such a hope, quite slippery and deceptive as it is, not seldom
finds nothing at all
to encourage it in the aftermath.’
[2] Consumer credit legislation is usually the
means by which credit grantor–credit consumer relationships are
regulated.
The main purpose of consumer legislation is said to be the
protection of the consumer from exploitation.
5
But as Monica L Vessio points out:
‘
What is equally, if not more
important, is an actual balancing of the interests of both credit
consumers and credit grantors. The
reason for the emphasis on this
balance is that over-protecting the consumer may result in the
investor (credit grantor) withdrawing
his funding from the consumer
credit market, due to the fact that the general administrative
expenses of making credit available,
no longer proves a lucrative
venture due to stringent consumer laws. Another feature of the
over-protection of the consumer may
be the passing-on of
administrative costs to the consumer. A subtle balance needs to be
obtained. The risk of over-protecting the
consumer could prove
detrimental.'
6
That balance has been sought to be achieved in this country by the
enactment of the relatively recent National Credit Act 34 of
2005
(the NCA), which seeks, according to its Preamble, inter alia to:
‘provide for the general regulation of consumer credit
and
improved standards of consumer information; . . . prohibit certain
unfair credit and credit-marketing practices; and to promote
responsible credit granting and use and for that purpose to prohibit
reckless credit granting’.
[3] Against that backdrop I turn to the facts in this case. Unable to
raise a loan from any of the established banking institutions,
but
being desperately in need of financial assistance, Mr George Ehlers
(Ehlers) turned to small private lenders although as he
put it, he
knew he 'was going to pay a heavy price for the loan'. One such
private lender to whom Ehlers turned during 2007 was
Desert Star
Trading 145 (Pty) Ltd (Desert Star), the first appellant. Not being
creditworthy he did not qualify for the loan that
he sought. The loan
application was then revised and re-submitted in the name of his son,
Mr Eugene Ehlers (Eugene). The amount
lent and advanced together with
interest and costs by Desert Star to Eugene was the sum of R859 600.
On 8 June 2007 Eugene acknowledged
his indebtedness in writing to
Desert Star and undertook to effect repayment of that sum within
twelve months of that date. The
agreement provided that in the event
of the loan remaining unpaid after 8 June 2008 then the interest
would be recalculated with
effect from the date of the agreement at
the rate of 1.5% per week compounded. As security for the loan,
Ehlers in his capacity
as the sole member of the first respondent, No
11 Flamboyant Edleen BK (the CC), bound it as a surety and
co-principal debtor in
favour of Desert Star in respect of the
indebtedness of Eugene. And as further security a security bond was
registered in favour
of Desert Star over an immovable property, the
sole asset of the CC. Eugene failed to repay the loan and as at 30
May 2008 his
indebtedness to Desert Star stood at R1 253 000.
[4] In the meanwhile on 29 January 2008 Ehlers approached another
small private lender, the second appellant, Bridging Advances
(Pty)
Ltd (Bridging) for a loan. This time the application was made in the
name of his wife, Lèone Ehlers. A written agreement
was
concluded in terms of which Bridging loaned and advanced the sum of
R160 053 (being R150 000 plus interest and costs) to Ms
Ehlers. Here
as well Ehlers bound the CC as a surety and co-principal debtor in
favour of Bridging for the indebtedness of Ms Ehlers.
And as further
security a mortgage bond was registered in favour of Bridging over
the Ehlers family home which was registered in
the name of Ms Ehlers.
Sporadic payments in the total sum of R41 000 were effected by the
Ehlers to Bridging, but given the annual
interest rate of 42.2%
applicable to the loan, the outstanding balance had grown by 6
February 2009 to R205 363.55.
[5] On 30 May 2008 Desert Star caused a notice in
terms of s 69
7
of the Close Corporations Act
8
to be served on the CC claiming payment of the
outstanding amount within 21 days. Bridging took a similar step on 3
February 2009.
In each instance the s 69 notice pointed out that a
failure to timeously comply with the statutory demand would have the
result
that the CC would be deemed to be unable to pay its debts. In
that event each of the notices threatened as a consequence an
application
for the winding-up of the CC. The notices went
unanswered.
[6] On 17 July 2008 Desert Star launched the winding-up application
threatened in its s 69 notice. The CC took no steps to oppose
the
application and on 21 November 2008 the North Gauteng High Court
(Pretoria) granted a provisional order of winding-up and a
rule nisi
calling upon all persons concerned to show why a final order should
not issue. Thereafter Christiaan Schoeman (Schoeman),
the second
respondent, sought leave to intervene in the application with a view
to setting aside the provisional order. In his
affidavit he stated
that Ehlers was a long-standing business associate, who had advanced
R 2.5 million to the CC for the purchase
of its sole asset, the
immovable property and that the loan to the CC constituted Ehlers’
loan account in the CC which had
been ceded to him (Schoeman). He
said:
'To assist G Ehlers I have taken cession of his loan
account for value received and consequently I am a creditor of the
respondent
in an amount of R 2.5 million. The Deed of Cession [is]
annexed hereto marked CS1.’
That was confirmed by Ehlers in his affidavit. I should perhaps add
that neither the existence nor the validity of the cession
was
disputed by either appellant.
[7] On 9 April 2009 Bridging also launched an application for the
winding-up of the CC, but given the fact that a provisional
winding-up order had already issued at the instance of Desert Star,
took no further steps to advance its application. Instead on
3 August
2009 Bridging sought leave to intervene in Desert Star's application.
[8] On 25 November 2009 after certain further affidavits had been
filed by the parties and after hearing argument, Van den Heever
AJ:
1 granted Schoeman leave to intervene in the winding-up application;
2 dismissed Bridging's application to intervene in the winding-up
application;
3 declared the deed of suretyship concluded between Desert Star and
the CC on 26 September 2007 unlawful and
ab initio
void;
4 cancelled Desert Star's rights arising from the deed of suretyship;
5 set aside the provisional winding up order; and
6 ordered Desert Star and Bridging to pay the CC’s and
Schoeman's costs jointly and severally such costs to include those
occasioned by the employment of two counsel.
[9] With the leave of the court below the appellants appeal to this
Court against the whole of the judgment and order of Van den
Heever
AJ.
[10] It can hardly be in dispute that, if the
appellants are to qualify as persons having
locus
standi
to apply for the winding-up of
the CC, it can only be on the ground that each was a creditor
(including a contingent or prospective
creditor) of the CC within the
meaning of s 346(1)(b) of the Companies Act.
9
Each of the appellants alleges that it is indeed
such a creditor. That is disputed. It thus becomes necessary to
consider the nature
of the debt secured by the CC.
[11] The appellants in each instance relied upon a
deed of suretyship. It is so that a contract of suretyship is a
separate contract
from that of the principal debtor and his or her
creditor. It is however accessory to that main contract.
10
Thus for there to be a valid suretyship there has
to be a valid principal obligation. Put differently, every suretyship
is conditional
upon the existence of a principal obligation.
11
For, as Nienaber JA put it ‘[g]uaranteeing a
non-existent debt is as pointless as multiplying by nought’.
12
It follows that a surety is not liable to a person
to whom the principal debtor is not liable.
13
It is well settled that the general rule is that a
surety may avail himself or herself of any defences that the
principal debtor
has save for those defences that are purely personal
to the principal debtor.
14
[12] It is common cause that each of the underlying principal
agreements is a credit agreement as defined in s 8(4)(f) of the NCA
and that the Act applies to them. The thrust of the respondents’
case is that the deed of suretyship is ineffectual inasmuch
as the
debtor identified therein is not indebted to the creditor by virtue
of the fact that the principal debt that it sought to
secure is, in
terms of the NCA, either ab initio void (solely in the case of Desert
Star) and in addition one that is liable to
be set aside or
suspended.
[13] It is undisputed that when Desert Star contracted with Eugene it
was not a registered credit provider. The NCA required it
to be. The
effect of it not being so registered according to Schoeman is that
the agreement concluded between it and Eugene is
void ab initio. In
that regard he states:
'It is clear from the provisions of
Section 40(1)(a) and (b) read with Section 42(1) of the Act and
Government Gazette 28893 dated
the 1
st
of June 2006 that [Desert Star] was
required to register as credit provider before or within 30 days from
the date of the transaction
between [it] and [Eugene].
I respectfully submit that
considering the provisions of Section 4(1) read with Section 8(1)(a)
of the Act the credit transaction
between [Desert Star] and [Eugene]
concluded on the 8
th
of June 2007 is a credit agreement
within the Act and subject thereto.
The implication of not being
registered is simple; the principal agreement of debt concluded
between [Desert Star] and [Eugene]
is void. In this regard I draw the
Honourable Court's attention to Section 40(4)
15
and Section 89(1)(d) read with
89(5)(a) of the Act.
In terms of the Provisions of Section
89(5)(a)
16
of the Act I submit that the
Honourable Court is obliged to declare that the credit agreement
concluded between [Eugene] and [Desert
Star] on the 8
th
June 2007 is void
ab
initio
.
The enforceability of the instrument of suretyship,
which forms the basis of this application, is conditional upon the
existence
of an enforceable debt in favour of [Desert Star] by
[Eugene].
On this basis alone I submit that the application must
fail and the Provisional Order be discharged.'
[14] In support of the additional contention that the agreements are
liable to be set aside or suspended, the respondents assert
that both
Desert Star and Bridging are in common parlance ‘loan sharks’
and that each of the principal agreements constitutes
'reckless
credit agreements in terms of the [NCA]'. The prevention of the
granting of reckless credit is an important lodestar
of the NCA.
Section 81(3) of the NCA precludes a credit provider from entering
into a reckless credit agreement with a prospective
consumer. To
determine when exactly a credit agreement is a reckless one it is to
s 80 that one must turn, which provides that:
‘
(1) A credit agreement is
reckless if, at the time that the agreement was made . . .
(a) the credit provider failed to conduct an assessment
as required by section 81(2), irrespective of what the outcome of
such an
assessment might have concluded at the time; or
(b) the credit provider, having conducted an assessment
as required by section 81(2), entered into the credit agreement with
the
consumer despite the fact that the preponderance of information
available to the credit provider indicated that─
(i) the consumer did not generally understand or
appreciate the consumer's risks, costs or obligations under the
proposed credit
agreement; or
(ii) entering into that credit agreement would make the
consumer over-indebted.’
Sections 81(2) and (3) in turn provide that:
'(2) A credit provider must not enter into a credit
agreement without first taking reasonable steps to assess -
(a) the proposed consumer's -
(i) general understanding and appreciation of the risks
and costs of the proposed credit, and of the rights and obligations
of a
consumer under a credit agreement;
(ii) debt re-payment history as a consumer under credit
agreements;
(iii) existing financial means, prospects and
obligations; and
(b) whether there is a reasonable basis to conclude that
any commercial purpose may prove to be successful, if the consumer
has
such a purpose for applying for that credit agreement.
(3) A credit provider must not enter into a reckless
credit agreement with a prospective consumer.'
In terms of s 83 (1) of the NCA a court, in any court proceedings in
which a credit agreement is being considered, may declare
it to be a
reckless one. If it does do so it may in terms of s 83(2) set aside
all or part of the consumer's rights and obligations
under that
agreement or suspend the force and effect of it.
[15] Eugene is a student, with no employment or fixed earnings, who
is not possessed of any assets. Ms Ehlers stands on much the
same
financial footing. She is a housewife, who also has no fixed
employment, earns no salary and aside from the matrimonial home,
which is now the subject of a mortgage bond registered in favour of
Bridging, is possessed of no assets. It is accordingly submitted
by
the respondents that both Desert Star and Bridging failed to make any
assessment of the financial status of Eugene and Ms Ehlers
respectively. Accordingly, so the submission goes, their ability in
each instance to service the loan was not investigated. Had
such an
assessment been made as is required by s 81(2)(a)(i)-(iii) and (b) of
the Act, so the submission proceeds, Desert Star
and Bridging would
ineluctably have concluded that there was no reasonable prospect of
either repaying the amount loaned. In those
circumstances it is
contended that the agreement was a reckless credit agreement which is
hit by s 81(3) of the NCA.
[16] On the view that I take of the matter it is
not necessary that any firm conclusion be reached at this stage on
the respondents’
contentions. It suffices that the indebtedness
is disputed on bona fide and reasonable grounds for, as Corbett JA
made plain in
Kalil v Decotex (Pty)
Ltd:
17
'In regard to
locus
standi
as a
creditor, it has been held, following certain English authority, that
an application for liquidation should not be resorted
to in order to
enforce a claim which is
bona
fide
disputed by
the company. Consequently, where the respondent shows on a balance of
probability that its indebtedness to the applicant
is disputed on
bona fide
and
reasonable grounds, the Court will refuse a winding-up order. The
onus
on the respondent is not to show that
it is not indebted to the applicant: it is merely to show that the
indebtedness is disputed
on
bona
fide
and
reasonable grounds.'
[17] Desert Star had caused a provisional sentence summons to be
issued against Eugene. In those proceedings Eugene challenged
the
validity and enforceability of the acknowledgment of debt on which
Desert Star sues. Bridging has also instituted proceedings
against Ms
Ehlers. In her plea to Bridging’s summons Ms Ehlers contends
that the agreement upon which Bridging relies constitutes
a reckless
credit agreement. She has also filed a claim in reconvention in which
she seeks, inter alia, an order that the agreement
be declared a
reckless credit agreement and that it be set aside. It goes without
saying that the correctness of the respondents’
contentions can
be determined in those proceedings. It follows that the appellants
will not be remediless, for if those proceedings
were to be decided
in their favour they could thereafter take steps to enforce their
rights flowing from the respective suretyship
agreements.
[18] One final aspect remains. It has been conceded on behalf of the
respondents that the learned Judge erred in declaring the
suretyship
void
ab
initio and cancelling Desert Star's rights flowing
therefrom. It follows that that part of the order of the court below
cannot
stand and it accordingly falls to be set aside. It was agreed
before us that that did not constitute substantial success on appeal
and that the costs should follow the result. For the rest the appeal
is devoid of any substance and is accordingly dismissed.
[19] In the result:
1 The appeal against paragraphs 3 and 4 of the order of the court
below is allowed and the order is amended by the deletion of
those
paragraphs. Subject thereto and paragraphs 5 and 6 being renumbered 3
and 4 respectively, the order of the court below is
confirmed.
2 Save as is set out in paragraph 1 hereof the appeal is dismissed.
3 The appellants are ordered to pay the respondents’ costs
jointly and severally, the one paying the other to be absolved.
_________________
V M PONNAN
JUDGE OF APPEAL
APPEARANCES:
For
First Appellant: F H Terblanche SC
J
E Smit
Instructed
by:
Strydom
& Bredenkamp Inc
Pretoria
EG
Cooper & Majidt Inc
Bloemfontein
For
Second Appellant: M C Erasmus SC
Instructed
by:
Ben
McDonald Attorney
Pretoria
Hill,
McHardy & Herbst Inc
Bloemfontein
For
First Respondents: A Bester
Instructed
by:
Wynand
Viljoen Attorneys
Pretoria
Honey
Attorneys
Bloemfontein
For
Second Respondent: A Bester
Instructed
by:
Buurman
Stemela Lubbe Inc
Pretoria
Honey
Attorneys
Bloemfontein
1
S
Renke & M Roestoff ‘The Consumer Credit
Bill – A Solution to Over-Indebtedness?’
2005
(68)
THRHR
115.
2
Monica
L Vessio ‘The Preponderance of the Reckless Consumer –
The National Credit Bill 2005’ 2006 (69)
THRHR
649.
3
R
Zimmerman
The Law of Obligations: Roman Foundations of Civilian
Tradition
(1990) 166.
4
Cited
in
Graf v Buechel
2003
(4) SA 378
(SCA) at 384A.
5
NJ
Grové & JM Otto
The Basic Principles of Consumer
Credit Law
2ed (2002) 4.
6
Monica
L Vessio op cit p 650.
7
Section
69 provides:
‘
(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; . . .’
8
Act
69 of 1984.
9
Act
61 of 1973 read with s 66(1) of the Close
Corporations Act.
10
Kilroe-Daley
v Barclays National Bank Ltd
1984 (4) 609 (A) at 622I.
11
CF
Forsyth & JT Pretorius
Caney’s Law of
Suretyship in South Africa
6ed (2010) 30.
12
African
Life Property Holdings (Pty) Ltd v Score Food Holdings Ltd
1995
(2) SA 230
(A) at 238F.
13
Digest
46.1.16; Voet 46.1.3; Pothier
Law of Obligations (Translated by
WD Evans)
4.1.393-394.
14
Worthington
v Wilson
1918 TPD 104
at 105;
Standard Bank of SA Ltd v SA
Fire Equipment (Pty) Ltd
1984 (2) SA 693
(C) at 695F-H.
15
Section
40(4) reads:
'A credit agreement entered into by
a credit provider who is required to be registered in terms of
subsection (1) but who is not
so registered is an unlawful agreement
and void to the extent provided for in section 89.'
16
Section
89(5) reads:‘
If a credit agreement
is unlawful in terms of this section, despite any provision of
common law, any other legislation or any
provision of an agreement
to the contrary, a court must order that -
(a)
the
credit agreement is void as from the date the agreement was entered
into;
(b)
the credit provider must refund to the
consumer any money paid by the consumer under that agreement to the
credit provider, with
interest calculated -
(i) at the rate set out in that agreement; and
(ii) for the period from the date on which the consumer
paid the money to the credit provider, until the date the money is
refunded
to the consumer; and
(c)
all the purported rights of the credit
provider under that credit agreement to recover any money paid or
goods delivered to,
or on behalf of, the consumer in terms of that
agreement are either -
(i) cancelled, unless the court concludes that doing so
in the circumstances would unjustly enrich the consumer; or
(ii) forfeit to the State, if the court concludes that
cancelling those rights in the circumstances would unjustly enrich
the
consumer.'
17
1988
(1) SA 943
(A) at 980B-D.