THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no: 279/2020
In the matter between:
MARTIN VAN ZYL APPELLANT
and
AUTO COMMODITIES (PTY) LTD RESPONDENT
Neutral citation: Van Zyl v Auto Commodities (Pty) Ltd (279/2020) [2021]
ZASCA 67 (3 June 2021)
Coram: WALLIS, MBHA and SCHIPPERS JJA and PHATSHOANE and
ROGERS AJJA
Heard: 18 May 2021
Delivered: This judgment was handed down electronically by circulation to the
parties’ representatives by email, publication on the Supreme Court of Appeal
website and release to SAFLII. The date and time for hand-down is deemed to be
09h45 on 3 June 2021
Summary: Business rescue – effect on liability of surety – interpretation of s 154
of Companies Act 71 of 2008 – deed of suretyship – interpretation – liability of
surety thereunder.
2
________________________________________________________________
ORDER
________________________________________________________________
On appeal from: Northern Cape Division of High Court, Kimberley (Coetzee
AJ, sitting at first instance)
The appeal is dismissed with costs.
________________________________________________________________
JUDGMENT
________________________________________________________________
Wallis JA and Rogers AJA (Mbha and Schippers JJA and Phatshoane AJA
concurring)
[1] The appellant, Mr van Zyl, was formerly the Chief Executive Officer of
Blue Chip Mining and Drilling (Pty) Ltd (BCM). The respondent, Auto
Commodities (Pty) Ltd (Auto Commodit ies) supplied BCM with petroleum
products on credit, but required Mr van Zyl to bind himself as surety for its
resulting liabilities, which he did in July 2014. Thereafter BCM fell on hard times
and on 10 December 2014 it was placed under business rescue. A business rescue
plan was proposed and adopted on 2 June 2015 and implemented, with Auto
Commodities receiving two dividends totalling nearly R1.9 million in December
2015 and December 2016 respectively. The business rescue terminated on
31 January 2017 a s a result of the substantial implementation of the plan. On
21 July 2017 Auto Commodities issued summons against Mr van Zyl for an
amount in excess of R6 million being the shortfall in regard to BCM's original
indebtedness. Its claim was based upon the de ed of suretyship. After a trial, the
claim succeeded before Coetzee AJ in the Northern Cape Division of the High
Court, Kimberley and he granted leave to appeal to this court.
3
[2] Although Mr van Zyl originally raised other defences, the only issue
remaining in dispute between the parties is whether he is liable under the deed of
suretyship to pay the amount claimed by Auto Commodities. His contention was
that, when BCM's business rescue was terminated, s 154(2) of the Companies Act
71 of 2008 (the Act) releas ed BCM from any further indebtedness to Auto
Commodities. He submitted that this in turn released him from liability because
suretyship is an accessory obligation. In argument, the parties focussed on the
perceived differences between the judgment in Tuning Fork1 and an obiter dictum
in New Port .2 However, as a second string to its bow Auto Commodities
contended that the terms of the deed of suretyship were in any event wide enough
to maintain Mr van Zyl's liability whatever the effect of s 154(2) on BCM's
liability to Auto Commodities.
The deed of suretyship
[3] A business rescue plan must be read in the light of the provisions of the
Act governing the consequences of such a plan being adopted and implemented.
Under s 152(4) of the Act, the plan is binding on both the company and its
creditors, but the only provision dealing expressly with the consequences of
implementing the plan are the provisions of s 154. The business rescue plan is
framed somewhat imprecisely in regard to these consequences. As required by
s 150(2)(b)(ii), clause 7.2 of the business rescue plan dealt with the extent to
which the company was to be released from payment of its debts. Clause 7.2.5
said:
'The BRPs3 are of the view that the controlled winding down of the Company's affairs and the
successful finalisation of Proceedings will only be achieved upon adoption of this Business
1 Tuning Fork (Pty) Ltd t/a Balanced Audio v Greeff and Another 2014 (4) SA 521 (WCC).
2 New Port Finance Co (Pty) Ltd and Another v Nedbank Limited [2014] ZASCA 210; 2016 (5) SA 503 (SCA)
para 14.
para 14.
3 An acronym for 'business rescue practitioners'.
4
Rescue Plan in terms of which the Company will be released from the payment of so me of its
debts.'
It is unclear from this language whether the BRPs had in mind anything more
than the statutory inability of the creditors to enforce claims against the company
after the implementation of the plan, but for present purposes we will assume in
favour of Mr van Zyl that it meant the discharge of BCM's debt to Auto
Commodities.
[4] Although a principal debtor’s discharge from liability ordinarily releases
the debtor’s surety, the accessory nature of a surety’s liability is not so rigidly
applied in our law as to preclude some derogation by way of agreement between
the creditor and the surety. In addition to customary terms whereby Mr van Zyl
assumed liability as a surety and co-principal debtor and renounced the benefit of
excussion, the suretyshi p contained several such unobjectionable provisions
which, in varying formulations, are fairly standard in commercial practice.
[5] Clause 3 provided that Auto Commodities was at liberty ‘to extend any
leniency or extension of time to, or compound or make such other arrangements
with, [BCM]’, and that no such action on Auto Commodities’ part ‘shall affect or
in any way be construed to operate as a waiver or abandonment of any of [Auto
Commodities’] rights or claims against us or any of us hereunder.’ Clause 5 listed
various provisions which would apply in the event of the ‘insolvency, liquidation,
sequestration, assignment or placing under judicial management of’ BCM’s
estate or in the event of ‘compromise between [BCM] and any creditor of
[BCM]’. One such listed provision (clause 5.4) was that no dividends or payments
which Auto Commodities received from BCM in one or other of these
eventualities would prejudice Auto Commodities’ ‘right to recover from us … to
the full extent of this Suretyship, any sum which, after the receipt of such
dividends or payments, will remain owing to [Auto Commodities] by [BCM]’.
5
[6] In New Port, where sureties raised a defence similar to that of Mr van Zyl
in the present case, after summarising a provision akin to clause 5.4, it was said:4
‘In other words, the fact that in any of those situations the principal debtor would be released
in whole or in part from its obligations would not disentitle the bank from recovering the
outstanding amount from the sureties.’
Counsel for Mr van Zyl su bmitted that clause 5.4 was distinguishable from the
clause dealt with in New Port, because the surety was only liable for any balance
which, after receipt of dividends or payments, remained owing to Auto
Commodities ‘by the debtor’, that is, by BCM. He submitted that in this case the
discharge of BCM from liability meant there was no longer any amount owing
'by the debtor'. However, on checking it transpired that the clause in New Port
contained the same phraseology as clause 5.4. The reference to the balance owing
‘by the debtor’ was understood there to mean no more than the outstanding
balance of the principal debt, that is, the balance which the principal debtor had
not paid.
[7] This interpretation was clearly correct, and is equally applicable to clau se
5.4. Clause 5 contemplates a compromise between the debtor and one or more of
its creditors. A compromise typically involves a discharge of the unpaid balance.
Another circumstance is liquidation. A liquidation, upon completion, culminates
in the company’s dissolution, at which point there would no longer be a principal
debtor.5 Clause 5.4 nevertheless envisages that in such circumstances there would
be an unpaid balance for which the surety would remain liable.6
4 Para 12.
5 Section 419 of the Companies Act 61 of 1973 read with Item 9 of Schedule 5 to the Companies Act 71 of 2008.
Pieters NO v Absa Bank Ltd [2019] ZASCA 118; 2021 (3) SA 162 (SCA).
6 This would be so in any event as the death of the insolvent or dissolution of the company does not discharge the
surety. Traub v Barclays National Bank Ltd; Kalk v Barclays National Bank Ltd 1983 (3) SA 619 (A) at 633H -
634A.
6
[8] Clause 3 provides a further basis for ar riving at the same conclusion. The
clause entitles Auto Commodities to ‘compound’ with BCM on the basis that
such compounding will not affect or operate as an abandonment of its rights
against Mr van Zyl. In the context of relations between creditors and a debtor, the
ordinary meaning of ‘compound with’ is ‘to enter into a composition with’,
typically through an arrangement between one or more creditors and the debtor
in terms whereof the creditors agree to accept less than their full claims (often
expressed as so many cents in the rand) in satisfaction of the debtor’s
indebtedness to them.7 A surety may agree with the creditor to remain liable in
the event of a composition, even though the composition may put it beyond the
creditor’s power to give the surety a cession of action or right of recourse against
the debtor.8
[9] Under the business rescue plan in this case BCM's creditors were to receive
a dividend depending upon the amount realised by the controlled winding down
of its affairs and in accordance with a stated order of preference. Thereafter the
company was to be restored to its shareholders. The plan contemplated that the
creditors would not be entitled to pursue the company in respect of the balance of
their claims. Even assuming this had the effect of discharging BCM from liability
to Auto Commodities, the latter’s rights under the suretyship were, by virtue of
clauses 5.4 and 3, unaffected and, whether or not it supported the business rescue
plan, it did not operate as an abandonment of its claim against Mr van Zyl.
[10] The appeal could have been dismissed on these points alone without
addressing Mr van Zyl's legal argument, although strictly speaking the legal point
is antecedent to the issue of construction of the deed. However, the trial judge
7 Osche v Van Aardt 1924 OPD 265 at 271 -2; Vlachos and Another v Supermeats Mtuba (Pty ) Ltd and Others
1968 (4) SA 35 (D) at 41H-42C.
8 Standard Bank of SA Ltd v Lewis 1922 TPD 285 at 291; Ottawa Rhodesia (Pvt) Ltd v Burger 1975 (1) SA 462
(R) at 463A-D.
7
was asked for and gave leave to appeal on the basis of the legal point and the
argument focussed on it. Its proper determination is a matter of importance in
regard to the effect of a business rescue plan being implemented. We have been
referred to no less than s even judgments in various divisions of the high court
dealing with Tuning Fork and New Port . There is a measure of confusion in
textbooks and academic articles concerning the impact of an approved and
implemented business rescue plan. 9 Our own researches h ave uncovered four
LLM dissertations10 discussing the two cases and the effect of s 154 of the Act.
Leaving the issue unresolved when it is ripe for decision is undesirable, as that
can only lead to further litigation in the high court and, in due course, the matter
returning to this court. It is therefore appropriate for us to grasp the nettle.11
The general principle
[11] A contract of suretyship is distinct from the contract or contracts between
the principal debtor and the creditor that give rise to the princ ipal indebtedness,
but it is accessory to that contractual relationship and the principal debtor's
obligations under it. Subject to any specific limitation, such as a suretyship in a
limited amount, the surety’s obligations are coterminous with those of th e
principal debtor. Where the surety signs as co -principal debtor, as Mr van Zyl
did, the addition of those words shows that the surety is assuming the same
obligations as the principal debtor. In other words, the obligation of the surety is
the same as that of the principal debtor.12 It follows from the accessory nature of
the surety’s undertaking that the liability of the surety is dependent on the
obligations of the principal debtor.13
9 P Delport et al Henochsberg on the Companies Act 71 of 2008 (Loose-leaf updated to October 2020) 550-14 to
550-22; Natania Locke and Kathleen van der Linde 'Business rescue and the fate of accessory security rights' 2018
TSAR 839 para 6 at 844-846;
10 At four different universities viz University of Cape Town, University of Johannesburg, University of KwaZulu-
Natal and University of South Africa.
11 C/f Administrator Natal v Trust Bank van Afrika Bpk 1979 (3) SA 825 (A) at 831B-C.
12 Kilroe-Daley v Barclays National Bank Ltd 1984 (4) SA 609(A) at 622H-623H.
13 Neon and Cold Cathode Illuminations (Pty) Ltd v Ephron 1978 (1) SA ()A at 470C-D.
8
[12] A consequence of this is that if the principal debtor’s debt is dischar ged,
whether by payment or release, the surety’s obligation is likewise discharged. 14
If the principal debtor’s obligation is reduced by compromise the surety’s
obligation is likewise reduced. If the principal debtor is afforded time to pay that
enures for the benefit of the surety. 15 If the claim against the principal debtor
prescribes so does the claim against the surety.16 This will be subject to any terms
of the deed of suretyship that preserve the surety's liability notwithstanding the
release or discharge of, or any other benefit or remission afforded to, the principal
debtor.
The pleaded case
[13] The starting point for Mr van Zyl's argument was s 154 of the Act. It reads:
'Discharge of debts and claims
(1) A business rescue plan may provide that, if it is i mplemented in accordance with its terms
and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing
to that creditor will lose the right to enforce the relevant debt or part of it.
(2) If a business rescue plan has been approved and implemented in accordance with this
Chapter, a creditor is not entitled to enforce any debt owed by the company immediately before
the beginning of the business rescue process, except to the extent provided for in the business
rescue plan.’
[14] The defence relied on s 154(2) and not s 154(1). There was no allegation,
as would be required if reliance was being placed on s 154(1), that the business
rescue plan provided for BCM to be released from its obligation to pay its debt to
Auto Commodities, or that Auto Commodities acceded to the discharge of that
debt in whole or in part. Section 154(1) was therefore not relevant. Section 154(2)
is directed at the consequences of the approval and implementation of the
business rescue plan for the enforcement by creditors of any debt that existed
14 Moti and Co v Cassim's Trustee 1924 AD 720.
15 Tuning Fork paras 46 to 49 and the authorities there cited.
16 Jans v Nedcor Bank Ltd 2003 (6) SA 646 (SCA).
9
prior to the beginning of the business rescue process. It provides that the creditor
will not be able to enforce the debt 'except to the extent provided for in the
business rescue plan'. The plea read:
'6.3.1 the business rescue plan was implemented;
6.3.2 the business rescue practitioners filed a certificate of substantial implementation of the
business rescue plan in terms of Section 152(8) of the Companies Act, 2008 ("the Act");
6.3.3 in terms of Section 154(2) of the Act, the Plaintiff can no longer enforce any debt which
was owing prior to the business rescue by the debtor ("the statutory compromise');
6.3.4 as a result of the statutory compromise, the debtor [BCM] does not owe anything to the
Plaintiff;
6.3.5 no accessory obligation survives the statutory compromise.' (Our insertion.)
[15] The pleader chose to describe the adoption and implementation of the
business rescue plan as 'the statutory compromise', but that was potentially
misleading. Compromises and arrangements between a company and its creditors
are dealt with in s 155 of the Act and may become binding on creditors as a result
of being sanctioned by the court in terms of s 155(7) of the Act. There is a
significant difference between this section and its pre decessor, s 311 of the
Companies Act 61 of 1973 (the 1973 Act), which provided for compromises and
arrangements between companies and both their creditors and their members, but
the essence of a compromise or arrangement remains unchanged. An arrangement
can be of the widest character.17 Not every compromise or arrangement involves
a reduction of, or discharge, complete or partial, of existing indebtedness. Under
the 1973 Act it was commonplace for such arrangements to involve a person
acquiring the shares of the company and taking cession of all its debts against a
payment to the creditors external to the company.18 In order to bring them within
the section the ceded claims might be reduced by a nominal R1, although whether
the section the ceded claims might be reduced by a nominal R1, although whether
this was necessary is debatable.
17 Du Preez v Garber; In re Die Boerebank Bpk 1963 (1) SA 806 (W) at 813 per Trollip J.
18 See the discussion of section 311 in Justice B Galgut (consulting editor), J A Kunst et al (editors) Henochsberg
on the Companies Act 61 of 1973 (Loose-leaf, 5 ed, last update 2011) p 600 et seq. especially at 602-3.
10
[16] The submission, adoption and implementation of a business rescue plan
affords, if anything, even wider latitude to the parties involved, being the business
rescue practitioners, creditors, other affected persons (which includes
shareholders, trade unions and employees),19 and management. It may in some
circumstances be similar to a compromise or arrangement under s 155, or it may,
as in this case, resemble a winding -up of the company.20 In some circumstances
it may involve a true compromise of a claim by the deliberate discharge of all or
part of it, and in others – of which this is again an example – it involves the
payment of a dividend after realisation of such assets as the company p ossesses,
as an alternative to a formal winding -up. It is undesirable and potentially
confusing for the outcome of a business rescue plan to be described in the
nomenclature of something that, whatever similarities may occasionally exist, is
a different statutory creature.
[17] All three of the propositions advanced in the plea are questionable. As to
the first, it is not correct that the plaintiff can no longer enforce any debt which
was owing to the creditor by BCM prior to the business rescue. That is not w hat
s 154(2) says. It qualifies the inability to enforce the debt with the words 'except
to the extent provided for in the business rescue plan'. The section does not
exclude enforcement of the whole debt, but restricts it to the benefits provided for
in the business rescue plan. It is perfectly possible for creditors to be paid in full
under a business rescue plan, which involves no compromise at all. An example
would be a secured creditor paid in full from the realisation of its security or a
preferred creditor, such as SARS or employees, being paid in full from the general
proceeds under the plan. If only a portion of a debt is paid the balance may not
be enforced by the creditor. The first proposition is too widely stated.
19 See the definition of 'affected person' in s 128(1) of the Act.
20 See sub-sec (iii) of the definition of 'business rescue' in s 128(1) of the Act.
11
[18] The second proposition disregards the wording of s 154(2). Firstly, it does
not say that as a result of the approval and implementation of the business rescue
plan, the debtor, in this case BCM, 'does not owe anything' to the creditor, in this
case Auto Commodities. It says that the creditor cannot enforce the debt that the
debtor owed to it when business rescue commenced, except to the extent provided
for in the business rescue plan. This does not necessarily mean that BCM no
longer owes anything to Auto Commodities. That would only be so if, as a matter
of interpretation of s 154(2), the inability to enforce the debt beyond the stipulated
limit also discharged the debt. Secondly, unlike the requirement in s 154(1) that
the creditor accede to the plan, s 154(2) operates against the creditor even if they
fought tooth and nail against the adoption of the business rescue plan.
[19] The third proposition is dependent on the correctness of the second. It is
only if BCM no longer owes anything to Auto Commodities that the accessory
obligation of M r van Zyl as surety has been discharged. But the mere fact that
Auto Commodities may not enforce BCM's indebtedness beyond what is
provided in the business rescue plan does not inevitably carry with it that result.
Section 154
[20] The argument addressed to us exposed the fact that ss 154(1) and 154(2)
are directed at fundamentally different situations and have very different
consequences. This became apparent from an analysis of the language of the two.
Both subsections have the end-result that a creditor loses the right, as against the
company, to enforce the debt or part of it, but the section draws a distinction
between the situation of a creditor who has ‘acceded to the discharge’ of some or
all of the debt (subsection (1)) and creditors in general (subsect ion (2)). In the
case of subsection (2), creditors – whether they have ‘acceded’ to the arrangement
case of subsection (2), creditors – whether they have ‘acceded’ to the arrangement
or not – cannot enforce their claims against the company except to the extent
provided for in the plan. A statutory bar against enforcement in terms of
12
subsection (2) does not necessarily mean that the company is discharged – it may
be a defence in personam rather than a defence in rem.21 Subsection (1) expressly
refers to the discharge of some or all of a debt, and requires – in order for the
subsection to be operative – that the creditor should have ‘acceded’ to such
discharge.
[21] The analysis also demonstrated that the fault line between the judgment in
Tuning Fork and the dictum in New Port was narrower than it had been perceived
to be. On reflection, whilst this may disappoint academic commentators, we see
little profit in analysing the basis of the judgment in Tuning Fork or the dictum in
New Port. We have had fuller argument on the proper construction of s 154 of
the Act in this case than was addressed in those cases. This has demonstrated that
the proper interpretation and application of that section lay at the heart of the
determination of the legal issue raised by Mr van Zyl. It should have played a
greater role in deciding Tuning Fork and in the wordin g of the dictum in New
Port. But having said that, and to the extent necessary acknowledged our role in
the shortcomings in those judgments, it will be more helpful to readers of this
judgment and those who have to engage in the day -to-day business of busi ness
rescue for us to analyse the section and set out our conclusions. Before doing so
we record that undertaking that analysis has not caused us to doubt the correctness
of the decision in Tuning Fork in the light of the facts in that case and the
arguments addressed to the court. We turn then to consider the two sub-sections
of s 154 separately.
21 Tuning Fork paras 34 and 47-48, referring to Investec Bank Ltd v Bruyns 2012 (5) SA 430 (WCC) (particularly
para 34).
13
Section 154(1)
[22] The sub-section commences by saying that a business rescue plan 'may
provide' that if it is implemented in accordance with its terms, a creditor who has
'acceded' to the discharge of the whole or part of a debt owing to it, will lose the
right to enforce the relevant debt. The permissive language, and the fact that it is
concerned with the terms that may be included in a business rescue plan, are
consistent with it being in the first instance an empowering provision enabling
the business rescue plan to cont ain a provision that operates to discharge the
company's indebtedness to particular creditors. Seen in that light it reinforces the
provision in s150(2)( b)(ii) of the Act that requires the business rescue plan to
include a statement of the extent to which the company is to be released from
payment of any of its debts.
[23] Where such a provision is contained in the business rescue plan and a
creditor 'accedes' to the discharge of the debt. they will 'lose the right' to enforce
it. That is strong language. The debt is discharged, which conveys in ordinary
parlance that it ceases to exist. The creditor who has acceded to such a proposal
not only loses the right to enforce the debt owed to them by the company in
business rescue, but the debt itself is discharged.
[24] It is unclear what is required for a creditor to 'accede' to the discharge of
the debt. Does it mean that they must have agreed to it? If so, is the agreement
constituted by voting in support of the plan, or merely by accepting the benefits
under the plan, or in some other way? The answers to these questions are by no
means clear-cut. The most obvious way for a creditor to ‘accede’ to the discharge
of a part or all of the company’s indebtedness would be by voting in favour of a
business rescue plan providing for such discharge. We need not explore whether
there are other ways in which such accession might take place. We are inclined
14
to agree with Gorven J in D H Brothers22 that the section contemplates a discharge
brought about by the voluntary action of t he creditor, or consented to by way of
an overt act, rather than a compulsory deprivation of rights against the company.
That approach would be consistent with the principle that legislation is not
ordinarily to be construed as depriving people of their ex isting rights.23 It would
also be consistent with the constitutional protection against the deprivation of
property.24
[25] On that approach to s 154(1), if the creditor acceded, or consented, to the
company being discharged from its debt, the application of ordinary principles of
suretyship has the effect that the surety would likewise be discharged. That
accords with the general principle that the liability of the surety is accessory to
that of the principal debtor so that the discharge of the latter serves to discharge
the former.25 There is no inequity in such an approach. A creditor who releases
the principal debtor from all liability can have no complaint if the same act
deprives it of the benefit of the protection provided by the deed of suretyship. It
can protect itself against this by specific provisions in the deed of suretyship or,
as will be shown, by the terms of the discharge agreement.
[26] It is unnecessary to analyse s 154(1) any further because it had no
application in the circumstances of the present case. The structure of the Act is
that any proposed release of the company of its debts must be reflected in the
business rescue plan. Thereafter, if the plan providing for such a release is
approved and a creditor accedes to it, in terms of s 154(1) the creditor will lose
the right to enforce the relevant debt. The 'release' proposed and acceded to
discharges the debt. The discharge of the debt and its unenforceability by the
22 DH Brothers Industries (Pty) Ltd v Gribnitz NO and others 2014 (1) SA 103 (KZP) para 67.
22 DH Brothers Industries (Pty) Ltd v Gribnitz NO and others 2014 (1) SA 103 (KZP) para 67.
23 Millman NO v Twiggs and Another 1995 (3) SA 674 (A) at 679B-C.
24 Constitution, s 25.
25 See Tuning Fork paras 49 to 53.
15
creditor go hand in hand. This is not quite as emphatic language as the word
'extinguished' in s 10(1) of the Prescription Act 68 of 1969, but it seems to have
the same effect, namely, that the debt ceases to exist.
[27] We interpose here that Tuning Fork (an application for summary judgment)
was argued and decided on the basis that the co mpany’s indebtedness to the
creditor had been discharged upon implementation of a business rescue plan
providing for the payment of specified dividends in full and final settlement of
claims, thereby discharging the principal debtor. If, as in the present case, the
argument in Tuning Fork had focused on s 154, it would have been appreciated
that the effectiveness of such discharge depended on the further question whether
the creditor had acceded to the discharge within the meaning of s 154(1).
However, since the court assumed in favour of the defendant that the plaintiff had
voted in favour of the plan,26 this would not have affected the outcome.
Section 154(2)
[28] As with all statutory provisions, the starting point in regard to s 154(2) is
the words of the section and the meaning that they bear on the application of well-
established principles of statutory interpretation. The question that immediately
presents itself is what is meant by saying that the creditor 'is not entitled to enforce
the debt' to any extent beyond that provided by the business rescue plan. Mr van
Zyl's submits that it means that to that extent the debt is discharged and no longer
exists. The alternative construction suggested in the dictum in New Port was that
it prevented enforcement of the debt against the company, but went no further. In
other words, it provides a defence that is personal to the company, without
discharging the debt itself.
26 Tuning Fork para 13.
16
[29] There is a contrast between the language used in s 154(1) and that in
s 154(2). The former speaks of the discharge of the debt, while the latter merely
places a limit on the ambit of the enforcement of the debt. Under the one section
the debt clearly no longer exists. Under the other the debt exists, but is enforceable
only to a limited extent. Drawi ng this distinction makes sense of the heading to
the section, which is: 'Discharge of debts and claims.' If both sub -sections result
in the discharge of the company's debts, the reference to the discharge of claims
is redundant. However, if s 154(1) is tr eated as the provision that results in the
discharge of debts, and s 154(2) as being concerned with discharge of claims as
a convenient shorthand for the non -enforcement of claims, this makes sense of
the heading. The distinction drawn between the discharg e of debts and the
discharge of claims suggests a difference in meaning and effect between the two
sub-sections.
[30] An inability to enforce a debt is not necessarily an indication that the debt
has been discharged. Section 3(1) of the Prescription Act 18 of 1943 provided
that:
'Extinctive prescription is the rendering unenforceable of a right by the lapse of time.'
That is in stark contrast to the provisions of the 1969 Act referred to in para 26,
which provide that a debt is 'extinguished' by prescription. That the change from
the one to the other was deliberate cannot be doubted in the light of the
memorandum by Professor J C de Wet, who drafted the 1969 Act, in which he
explained that this was the purpose of the new statute. He drew a clear distinction
between strong prescription under the new Act and weak prescription under the
old.27 Under the 1943 Act while the debt was rendered unenforceable by
prescription it was not extinguished and did not cease to exist. It could, for
27 J J Gauntlett (ed) Opuscula Miscellanea: Regsgeleerde Lesing en Adviese van J C de Wet' (Butterworths, 1999),
77-114. This is the memorandum he prepared for the South African Law Commission on prescription. He also
drafted the 1969 Act, which was enacted in the terms he had drafted.
17
example, be set off against a deb t owed by the creditor to the debtor and arising
after the lapse of the period of prescription and could support a contract of
suretyship.28
[31] An agreement between the creditor and the principal debtor that the
creditor will not pursue its claim against the debtor, may provide, either expressly
or tacitly, that the creditor's right to pursue the surety remains extant. In Wides v
Butcher29 it was held that the creditor may by agreement discharge the principal
debtor from liability, without at the same time disc harging the surety, provided
the terms of the discharge agreement between creditor and debtor reserve the right
of the creditor to pursue the surety. The effect of such reservation is to preserve
the surety's right of recourse against the debtor in respect of any amount that it is
obliged to pay to the creditor. The discharge is then a pactum non petendo and is
purely personal to the debtor and does not avail the surety30. It is unnecessary for
the surety to be a party to any such reservation, because it doe s not affect the
surety's obligations. It remains in the same position in relation to both the creditor
and the debtor as it was before the conclusion of the discharge agreement.
Whether the discharge agreement contains such a reservation is a matter of
construction of the agreement.
[32] Counsel for the appellant argued, with reference to old authority, that a
perpetual pactum de non petendo , that is, an undertaking in perpetuity by the
creditor in favour of the debtor not to sue for enforcement of the debt, operates as
a release discharging the surety,31 but that is by no means invariably so,32 and the
question is whether this is the proper interpretation of s 154(2). In order not to
28 Section 3(5) of the Prescription Act 18 of 1943.
29 Wides BL and JL v S Butcher and Sons (1905) 26 NLR 567 at 584-5.
29 Wides BL and JL v S Butcher and Sons (1905) 26 NLR 567 at 584-5.
30 CF Forsyth and JT Pretorius Caney's The Law of Suretyship in South Africa (Juta 6 ed, 2010) 188-189.
31 Wessels The Law of Contract in South Africa 2 ed §§ 4039, 4237-4242 and the old authorities there cited
32 See, eg, BOE Bank Ltd v Bassage [2006] ZASCA 50; 2006 (5) SA 33 (SCA) para 9. See also Tuning Fork paras
43(iv), 49 and 52.
18
render either subsection redundant, one must interpret them as having different
legal consequences. The distinction which the language of the section supports is
a distinction between the discharge of a debt (subsection (1)) and a personal
protection in favour of company against enforcement of a debt (subsection (2)).
And since the p ractical effect, as between the creditor and the company, is the
same, namely that the creditor cannot enforce the claim beyond the extent
permitted by the plan, the change in wording in subsection 2 is indicative of the
legislative distinction having been drawn principally, although not necessarily
solely, with claims against sureties in mind.33
[33] Wides v Butcher has not been departed from.34 The material portion of the
judgment of Dove-Wilson J clearly sets out the position. It reads:
'…[A] discharge of the debtor does not liberate the surety if the remedy against the surety is
expressly reserved, because in that case the discharge is not an absolute release, but is merely
a pactum de non petendo. The reservation has that effect, because it rebuts the presumption
which ordinarily exists that if you liberate the principal debtor, you mean to liberate also the
surety, and it has the effect of preserving the right of recourse by the surety against the principal
debtor. The test whether or not the discharge which has been given is absolute, or merely a
covenant not to sue, is whether the debtor is, after the discharge, put in the position of being
able to say to the creditor that "It is inconsistent with the discharge which has been given to
him that there should be any right of recourse against him by the surety." If the debtor is not
in a position to say so, then the surety is not discharged.' (Our emphasis.)
[34] The business rescue plan in this case does not mention claims by creditors
against sureties, or the exercise of rights of recourse by sureties against the
33 An approach that held the debt to be discharged in its entirety under s 154(2) would affect the validity of surety
mortgage bonds. It would also affect pledges of movables given by third parties and, in the case of a ship's crew,
their maritime lien over the vessel on which they were employed.
34 CF Forsyth and JT Pretorius Caney's The Law of Suretyship in South Africa (Juta 6 ed, 2010) 195, fn 59.
LAWSA, Vol 26 (2 ed replacement, by JJ Henning and KL Mould, 2015) para 306 says in general that: 'If the
principal debt is not extinguished but becomes unenforceable the position of the surety is not affected, that is, he
or she remains bound and his or her own debt remains enforceable against him or her.'
19
company. Given that s 154(2) is also silent on this issue, it is difficult to see on
what basis the debtor (BCM) could contend that the statutory inability to sue the
company was inconsistent with the continued existence of a right of recourse
against it by the surety. The section says nothing of the sort, so that it could only
arise by necessary implication from the terms of the discharge, but ab sent any
special provision in the business rescue plan itself there is no basis for reading
such a provision into s 154(2).35
[35] If the whole or a part of the debts of a company become unenforceable as
a result of the adoption and implementation of a business rescue plan, the fact
that some creditors may pursue the balance of their claims against sureties, who
will have a right of recourse against the company, does not negate the purpose of
business rescue. If, as occurred in New Port, the creditor has obtained judgment
against the surety and been paid, the surety's claim will ordinarily stand on the
same footing as that of the creditor that has been paid and have no greater impact
on business rescue. If the surety is closely connected to the company, as is
frequently the case, and the company resumes trading, the surety may be content
for commercial and tax reasons to remain as a creditor while the company's
fortunes are restored. They may even be willing to subordinate their claim to those
of other creditors if that will bring the business back to life. Other scenarios can
be imagined. The company will usually be aware, or its records will show, which
creditors are secured by sureties and, if the position of the surety is relevant to a
successful business rescu e, the business rescue practitioners will be able to
negotiate with the creditor and the surety to address those issues. There is no
reason to think that this cannot be done successfully, as the business rescue
process is often a matter of negotiating a so lution to conflicting interests in
process is often a matter of negotiating a so lution to conflicting interests in
relation to a financially distressed business.
35 Tuning Fork paras 36 to 45 and the authorities there referred to on the limited circumstances in which a statute
may as a matter of necessary implication operate beyond its express terms.
20
[36] An interpretative problem similar to that in this case arose in the well -
known case of Moti and Co v Cassim's Trustee .36 Moti and Co bound itself as
surety for the maker of a promissory note in favour of Cassim's Trustee. The
maker of the note, a firm, then entered into a deed of assignment of its estate with
its creditors in terms of the provisions of the Insolvency Act 32 of 1916. Cassim's
Trustee voluntarily signed the deed of assignment and the assignment was
accepted and registered. The trustee then sued Moti and Co as sureties for the
debt. The issue was whether by agreeing to the assignment the trustee had
discharged the maker's debt and thereby released Moti and Co from its obligations
as surety.
[37] Under the deed of assignment all the maker's property was assigned to the
assignee for its realisation and distribution among creditors. The registration of
the assignment rendered the deed 'binding upon all creditors of the deb tor
(whether they have assented thereto or not)'. Section 126(2)( b) of the 1916 Act
provided that the effect of registration was 'to relieve the debtor from every debt
which was due, or the cause of which arose before the deed of assignment, but
subject always to the deed of assignment.' 37 The case turned on the meaning of
the words 'relieve the debtor from every debt'.38 The majority39 held that to relieve
a debtor from every debt amounted to a discharge of the debt and hence of the
surety.
[38] The minority40 view was that the section in terms did no more than relieve
the debtor of the debt, without extinguishing it. De Villiers JA said:
36 Moti and Co v Cassim's Trustee 1924 AD 720 (Moti v Cassim).
37 Ibid at 735. The reference on this page to s 126(1) appears to be in error as elsewhere in all the judgments the
reference is to s 126(2)(b). Also, the quotation uses the word 'any', but elsewhere it is 'every', which appears to be
correct. The Dutch text was perhaps more emp hatic. It read 'dat de schuldenaar bevrijd word van alle schulden'.
See at 743.
38 Ibid per Innes CJ at 736 and per De Villiers JA at 748.
39 Innes CJ, Kotzé JA and Wessels JA.
40 De Villiers JA and JER de Villiers AJA.
21
‘The only question is: What is the legal effect of a deed of assignment on the liability of a
surety? In my opinion sec 126(2)( b) is conclusive on the matter. It does not purport to
extinguish the obligation but in terms merely relieves the debtor from the debts specified. That
is as far as it goes, and beyond that it should not be extended. Being a release in a statutory
assignment it should be confined strictly to what it legitimately covers. For as Voet (42.3.15)
in connection with the rescriptum moratorium points out it is not to be presumed that the
Legislature wishes to deprive a person of any rights or be liberal at the expense of a third party
(cf Voet 46.1.39).
[39] J E R de Villiers AJA expressed the same principle in even pithier terms:41
‘It would, as it seems to me, be a denial of the elementary principle of justice to deprive a non-
consenting creditor of his recourse against the surety on the assignment of the principal debtor’s
estate. He may have relied, indeed he does usually rely, mainly or entirely on the surety’s
resources when he accepted the principal debtor as such, and he takes the surety with the object
of being able to fall back on him in the event of the principal debtor’s estate being insufficient
to pay the debt. It follows that it would be merely a capricious forfeiture of the creditor’s rights
to release the surety against the will of the creditor in the ver y event against which the …
suretyship was interposed ie in the event of the debtor being unable to pay his debt and being
compelled to surrender his estate or enter into some other arrangement with his creditors,
whether under the aegis of the insolvency or otherwise.’
[40] We quote this latter passage because it highlights an important issue of
context in relation to the interpretation of s 154(2). The purpose of obtaining
security in the form of a suretyship is to have someone other than the debtor to
look to for payment of the debt and this is only necessary when the debtor is in
look to for payment of the debt and this is only necessary when the debtor is in
default or unable to pay. In Jans v Nedcor Bank 42 Scott JA gave a realistic
exposition of the modern surety in saying:
'Sureties do not assume the obligations of others against their wills, but with their free consent.
…. The example given by Baker J postulates a surety whose interest in the debt is no greater
than that of a friend of the principal debtor. But today that is an infrequent occurrence. The
41 Ibid at 750.
42 Jans v Nedcor Bank Ltd 2003 (6) SA 646 (SCA) para 30.
22
typical surety in modern societ y is one who binds him - or herself as co -principal debtor and
guarantees the debts of a company or close corporation which has little in the way of share
capital or assets but is dependent on credit in order to conduct its business. More often than not
the business is that of the surety or a spouse who for various reasons chooses to conduct it
through the medium of a company or close corporation with limited liability. A creditor will
ordinarily refuse to afford credit to such a legal persona in the absence of a personal suretyship
and few businesses can operate successfully without credit. The very existence of the debt is
therefore dependent upon the existence of the suretyship while the object and function of the
latter is, of course, to ensure proper payment of the former.'
The argument for Mr van Zyl is that s 154(2) does away with this protection,
without any express reference to the position of sureties, after the adoption and
implementation of a business rescue plan. A statutory provision should not lightly
be construed as having that effect.
[41] We do not think it necessary to spend time on the debate between the
majority and the minority in Moti v Cassim , for the simple reason that the
language and context of s 126(2)(b) of the 1916 Insolvency Act was markedly
different from the language and context of s 154(2). There is a passage in Innes
CJ's judgment where he recognised the difference between relieving the debtor
of the debt and relieving them from liability to be sued on the debt. It reads:43
'Turning now to sec. 126(2)(b) … the question really hinges upon the meaning of the
expression, "to relieve the debtor from every debt." The words are wide and unconditional ---
they apply to every existing debt in its entirety. There is no limit as to amount or as to time.
Relief no doubt includes temporary or partial removal; anything which relieves. But the
Relief no doubt includes temporary or partial removal; anything which relieves. But the
derivation of the word (relevare) and its ordinary use makes it applicable to an absolute removal
also. And the provision here is that every existing debt is to be lifted --- permanently lifted ---
from the debtor. He is to be relieved from the debt itself, not merely from liability to be sued
upon it. And that involves the termination of the obligation --- an idea which is in consonance
with the scheme as a whole.' … "Relieve" is a wider word than "discharge"; but every discharge
of an obligation is a relief to the debtor, and may be properly so described.' (Emphasis added).
43 Ibid at 736-737.
23
[42] Both Innes CJ and Wessels JA referred in their judgments to the fact that
the sections dealing with the discharge of the debtor's debts on rehabilitation and
composition contained provisions that the liability of the surety was expressly
preserved. However, only Wessels JA drew an inference from this and that was
that the omission of a si milar provision was a casus omissus. The Chief Justice
was clearly of the view that there was no rational basis for treating suretyships
differently in the case of assignment from suretyships in the case of rehabilitation
or composition.
[43] Some play was made in argument of the fact that in s 155(9) dealing with
arrangements and compromises with creditors express provision is made for the
liability of the surety to be unaffected by the compromise. In our opinion, no
inference can be drawn from this. Section 155(9) has much in common with the
provisions of s 311 of the Companies Act 61 of 1973 which contained a similar
provision. It is impossible to tell why no similar provision was inserted in, or as
an adjunct to, s 154(2). Absent that, no inference relevant to the interpretation of
s 154(2) can be drawn from the inclusion of s 155(9). In any event our
interpretation of the section means that there would be no need for such a
provision in cases falling under s 154(2).
[44] A final consideration is that we are enjoined by s 39(2) of the Constitution
to interpret s 154(2) in the manner that best promotes the spirit, purport and
objects of the Bill of Rights. It seems to us that the rights of a creditor under a
deed of suretyship constitutes property within the meaning of that expression in
s 25(1) of the Constitution.44 If s 154(2) is construed in the manner for which Mr
van Zyl contends the effect of the section will be to bring about a deprivation of
44 National Credit Regulator v Opperman and Others [2012] ZASCA 29; 2013 (2) SA 1 (CC); Shoprite Checkers
(Pty) Ltd v Member of the Executive Council for Economic Development, Environmental Affairs and Tou rism,
Eastern Cape and Others [2015] ZASCA 23; 2015 (6) SA 125 (CC) para 40.
24
property and to do so without any outward express ion that this is its effect. The
ordinary creditor, in possession of a deed of suretyship and confronted with a
business rescue plan and s 154(2), would not read the section as providing that
the deed of suretyship would be rendered worthless on adoption a nd
implementation of the plan. This supports the conclusion that the section does no
more than render the debt unenforceable to some extent against the debtor, but
leaves the suretyship untouched.
Result
[45] The primary argument on behalf of Mr van Zyl that h is liability as surety
to Auto Commodities was discharged upon adoption and implementation of
BCM's business rescue plan must fail. We hold that s154(2) does no more than
preclude creditors from pursuing claims against the company after the business
rescue plan has been implemented. It does not affect or extinguish the liability of
a surety for the debt. It is unnecessary to consider whether or how the terms of
the business rescue plan could provide otherwise.
[46] The appeal is dismissed with costs.
_________________
M J D WALLIS
JUDGE OF APPEAL
_________________________
for O L ROGERS
ACTING JUDGE OF APPEAL
25
Appearances
For appellant: E L Theron SC
Instructed by: Louw & Da Silva Attorneys, Kathu;
Lovius Block, Bloemfontein
For respondent: J W Steyn (Heads of argument prepared by G C Pretorius SC)
Instructed by: Swart Redelinghuis Nel Gauteng Inc, Krugersdorp
Symington & De Kok, Bloemfontein.