Brief Summary

Execution — Rescission of default judgment — Application to rescind default judgment granted in favour of Standard Bank against Pro Seven Products CC — Applicant, as executrix of deceased member of CC, contends judgment was erroneously granted due to lack of proper service and knowledge of the deceased's death — Court finds that the Respondent's failure to notify the executrix and the erroneous issuance of summons against a non-functioning CC resulted in a miscarriage of justice — Default judgment rescinded.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an application for the rescission of a default judgment previously granted in the High Court. The rescission was sought on the basis that the default judgment had been “erroneously sought or granted”, with reliance placed on Uniform Rule 42(1)(a).

The appellant/applicant was Pro Seven Products CC (a close corporation and the mortgagor under a home loan secured by a mortgage bond). The respondent was Standard Bank of South Africa (the mortgagee and judgment creditor). A third party, Kelvin Royston Briedehann, was involved as the purchaser of the property sold in execution after judgment was taken.

Procedurally, Standard Bank issued summons against Pro Seven Products CC (as principal debtor) and also issued summons against the close corporation’s sole member (as surety). Default judgment was granted on 13 October 2011 by Van der Merwe DJP (as he then was) in favour of Standard Bank for payment of the outstanding balance and an order declaring the immovable property executable. The property was thereafter sold in execution on 26 January 2012. The rescission application was served on Standard Bank on 14 June 2012, and was determined in the present judgment delivered on 2 August 2016.

The general subject-matter concerned the validity of a default judgment and execution process arising from a home loan secured by a mortgage bond, where the close corporation’s sole member had died, and where the deceased’s estate (through an executor) had an asserted interest in the corporation’s ability to act, defend proceedings, and manage liabilities—alongside a related dispute about insurance cover allegedly intended to settle the indebtedness on death.

2. Material Facts

Pro Seven Products CC was the registered owner of the immovable property described as Portion 109 (a portion of Portion 20) of the Farm Elandsfontein 334 Township Registration IQ, Gauteng, held under a deed of transfer. A mortgage bond in favour of Standard Bank was registered over the property to secure a loan advanced to the close corporation for the purchase of the property.

The close corporation’s sole member, Samuel Nduduzo Fihlela, signed a deed of suretyship, binding himself as surety and co-principal debtor for the close corporation’s indebtedness under the bond. He died on 26 February 2009. After his death, Fikile Maria Fihlela (his widow, married to him in community of property) was appointed executrix of his estate on 17 March 2009. The property was the family’s primary residence.

It was not in tangible dispute that insurance arrangements existed. The judgment records that the close corporation held a home owner’s insurance certificate issued by Standard Bank (with premiums debited monthly), and that a life assurance premium on the life of the deceased was also being paid and charged to the home loan account as part of the monthly instalment. The deceased further had a personal loan protection plan under which his personal liability as surety or guarantor to the bank was said to be protected on death or incapacity.

On 23 August 2011, Standard Bank issued summons and caused it to be served at the mortgaged property (as the domicilium address) under different case numbers on the close corporation and on the deceased. Service was effected on 3 September 2011 by affixing the summons to the front door, with the sheriff recording that nobody was present. Default judgment was obtained on 13 October 2011 against the close corporation for R247 890.54, interest at 10% per annum from 26 June 2010, and an order declaring the property executable. Without further steps described in the judgment, the property was sold in execution to the third party on 26 January 2012 for approximately R40 950.11.

The applicant’s version (advanced through the executrix) was that she had not seen the summons and only became aware of the judgment on 24 April 2012 when persons arrived to view the property. The applicant alleged that Standard Bank had been notified of the death as early as 2009 and provided with documentation, including letters of executorship, and that further correspondence in 2010 again placed the bank on notice. The applicant relied on internal bank communication (an email referenced in the judgment) indicating that bank personnel had knowledge of the death and knowledge of the existence of policy arrangements.

The respondent disputed aspects of the applicant’s allegations, including disputing (in the answering affidavit) that it was notified of the death as alleged, and contending that the close corporation’s separate legal personality meant the executrix need not have been cited. The respondent’s position was that the close corporation remained the debtor and could be sued irrespective of the member’s death. The court, however, treated as material the evidence indicating the bank’s knowledge of the death and the existence of insurance premiums being incorporated into the monthly loan instalment, and regarded the failure to bring those circumstances to the attention of the court hearing the default judgment as significant.

3. Legal Issues

The central legal question was whether the default judgment of 13 October 2011 was erroneously sought or granted, making it rescindable under Uniform Rule 42(1)(a). This required the court to decide whether, at the time default judgment was granted, there existed material facts unknown to the court which would have precluded the granting of judgment or induced the court not to grant it if they had been disclosed.

The dispute primarily concerned the application of law to fact. The court had to assess (i) the legal consequences of the death of a sole member of a close corporation and the role of an executor in controlling the member’s interest and representing the member’s position in relation to the corporation, and (ii) whether the respondent’s litigation steps—particularly citation and service—were fatally defective in light of those consequences and the respondent’s knowledge.

A further issue, treated by the court as a triable dispute relevant to rescission, was whether the existence and charging of life assurance premiums and related policy arrangements raised a real dispute about the indebtedness and about what should have occurred upon the death of the surety/co-principal debtor.

4. Court’s Reasoning

The court began with the principles governing rescission under Rule 42(1)(a). Relying on Naidoo v Matlala 2012 (1) SA 143 (GNP), it stated that a judgment is erroneously granted if, at the time it was granted, there existed facts unknown to the court which would have precluded the judgment or would have induced the court not to grant it. It also accepted the proposition that non-disclosure of material facts (and deliberate misrepresentation) in the context of a default judgment application may result in the judgment being erroneously granted, and that granting an order without notice to a party with a direct and substantial interest may similarly render the order erroneously granted.

Without purporting to decide the merits of the underlying debt dispute, the court considered it necessary to address the legal consequences of the death of a sole member of a close corporation, particularly where that member held 100% of the members’ interest. The court reasoned that a deceased member’s interest forms part of the deceased estate, referring to the statutory conception of estate property (including incorporeal interests) in section 3 of the Administration of Estates Act 60 of 1965 and section 3 of the Estate Duty Act. The court explained that upon appointment, an executor takes the place of the deceased for purposes of administering the estate, and may make provisional arrangements regarding the running of a business pending finalisation of the estate.

While accepting that a close corporation retains separate legal personality and does not cease to exist on the death of its sole member, the court held that the close corporation in such circumstances lacks a “controlling mind” unless it acts through the person who is legally empowered to represent the deceased member’s interest. The court relied on F J S Painting CC v Absa Bank Ltd (083/3) [2004] ZASCA 52 (28 May 2004) for the proposition (as applied in the judgment) that the business concern becomes owned by the deceased estate through the deceased’s member’s interest, and therefore the executor administers and controls the business pending transfer of the member’s interest in accordance with the will or intestate succession.

The court then linked those principles to the statutory framework in the Close Corporations Act 69 of 1984, including provisions dealing with transfer and representation in respect of members’ interests. It referenced sections 15 and 21, and it emphasised section 29(2)(c) (which contemplates membership/representation by an executor or legal representative where a member is deceased) and section 29(3) (which preserves the power of the representative, from assuming office and even before an amended founding statement is lodged, to represent the member concerned in matters in which the member could have acted until transfer of the interest). It also referred to section 32(3), which provides for representation of a member under legal disability by the legal representative contemplated in section 29(2)(c).

Applying these principles, the court rejected the respondent’s contention that the death of the sole member had “no direct impact” on the close corporation. It accepted that the executrix had a direct and substantial interest in the proceedings, both because she was responsible for the deceased estate which held the member’s interest and because the close corporation could only act through the legally empowered representative of the deceased member’s interest pending transfer. On that basis, the court concluded that the respondent was obliged to cite the executrix and bring the proceedings to her attention, and that service needed to be effected in a manner that provided such notice.

The court held that the court granting default judgment had not been appraised of the material facts that the action was instituted against a close corporation whose sole member had died, and that an executor had been appointed but was not notified of the action. These were treated as material facts which, if known, would have led to default judgment not being granted. The court regarded the failure to bring these facts to the attention of the default judgment court as fatal to the granting of judgment and therefore within the meaning of “erroneously granted”.

The court further considered the evidence indicating that Standard Bank had knowledge of the death and of the insurance arrangements. It referred specifically to an internal email (from a bank employee, Dladla) which the respondent did not meaningfully address, and which the court read as demonstrating knowledge of the death since 2009 and knowledge of policy arrangements affecting the home loan account. The court also referred to Standard Bank’s own correspondence describing the composition of the monthly instalment as including life assurance and home owners’ insurance premiums. The court treated the existence of the life assurance arrangements as giving rise to at least a triable issue, and held that, had the existence and implications of such a policy been disclosed, default judgment would not have been granted without consideration of those facts.

Finally, the court located the rescission remedy within its broader purpose, namely restoring a party’s chance to ventilate a real dispute, and linked this to the constitutional right of access to courts under section 34 of the Constitution.

On costs, the court reasoned that although rescission applications are often treated as an indulgence with costs consequences, the respondent’s opposition was found to be unreasonable because it failed adequately and sincerely to engage with the pertinent issues raised. In those circumstances the court considered it appropriate to make no costs order.

5. Outcome and Relief

The court set aside, in its entirety, the default judgment granted on 13 October 2011, including the monetary judgment for R247 890.54, the interest order at 10% per annum from 26 June 2010, and the order declaring the immovable property executable.

The court made no order as to costs, with each party bearing its own costs of the rescission application.

Cases Cited

Naidoo v Matlala 2012 (1) SA 143 (GNP)

F J S Painting CC v Absa Bank Ltd (083/3) [2004] ZASCA 52 (28 May 2004)

Legislation Cited

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

Close Corporations Act 69 of 1984, sections 12, 15, 21, 29, 32

Administration of Estates Act 60 of 1965, sections 3, 29, 35

Estate Duty Act, section 3

Rules of Court Cited

Uniform Rule of Court 42(1)(a)

Held

The default judgment was rescindable because it had been erroneously granted within the meaning of Uniform Rule 42(1)(a). At the time the judgment was granted, there were material facts—including the death of the close corporation’s sole member, the appointment and role of the executrix as legal representative controlling the member’s interest, and the existence of policy arrangements relevant to the indebtedness—which were not placed before the court, and which would have prevented the granting of default judgment.

The court held that the executrix had a direct and substantial interest and should have been cited and the proceedings brought to her attention. The court further held that the insurance-related facts constituted at least a triable issue, reinforcing the conclusion that judgment should not have been granted on an incomplete factual picture.

The default judgment (including the executable property order) was therefore set aside, and no costs order was made.

LEGAL PRINCIPLES

A judgment is “erroneously granted” for purposes of Uniform Rule 42(1)(a) where, at the time it was granted, there existed facts unknown to the court which would have precluded the judgment or would have induced the court, if aware of them, not to grant it. Once a court concludes that an order was erroneously sought or granted, rescission follows without the need for a further “good cause” enquiry.

Failure to disclose material facts when seeking default relief may render the resulting judgment erroneously granted. Similarly, an order granted without notice to a party with a direct and substantial interest may be treated as erroneously granted.

Although a close corporation retains its separate juristic personality upon the death of a member, the member’s interest forms part of the deceased estate, and an appointed executor is empowered (pending transfer of the interest) to represent the deceased member’s position and to control matters in which the member could have acted. In the case of a close corporation with a deceased sole member, the executor’s role is materially relevant to the corporation’s ability to act and to respond to litigation, and this relevance may create an obligation to ensure proper citation and notice to the executor where the executor’s interests are directly affected.

Pro Seven Products CC v Standard Bank of South Africa In Re. Standard Bank v Pro Seven Products CC (48241/2010) [2016] ZAGPPHC 689 (2 August 2016)