BOE Bank Ltd. v Bassage (445/04) [2006] ZASCA 50; 2006 (5) SA 33 (SCA) ; [2006] 4 All SA 105 (SCA) (31 March 2006)

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[2006] ZASCA 50
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BOE Bank Ltd. v Bassage (445/04) [2006] ZASCA 50; 2006 (5) SA 33 (SCA) ; [2006] 4 All SA 105 (SCA) (31 March 2006)

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THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Reportable
CASE NO 445/2004
In
the matter between
BOE BANK LIMITED Appellant
and
J J BASSAGE Respondent
Coram: Mpati DP, Scott, Zulman, Navsa and Cloete JJA
Heard: 10 March 2006
Delivered: 31
March 2006
Summary
:
The effect of a
secured creditor’s election to rely upon its security when proving
its claim in terms of
s 89(2)
of the
Insolvency Act 24 of 1936
is not
to release a surety to the creditor for the shortfall in the claim.
Neutral citation: This judgment may be referred to as
BOE Bank Limited v J J Bassage
[2006] SCA 50 (RSA)
___________________________________________________________
JUDGMENT
___________________________________________________________
ZULMAN JA
[1] The issue in this appeal is whether the
appellant has a claim against the respondent as surety for the
balance of a debt of Zandills
Shoe Manufacturers Limited (in
liquidation) (‘the Company’), when payment of the balance cannot
be enforced against the Company
by the appellant because it has
elected to follow the procedure set out in s 89(2) of the Insolvency
Act 24 of 1936 (the
Insolvency Act). The
High Court of the Natal
Provincial Division (Niles-Duner J) dismissed the claim. The appeal
is with the leave of the court
a quo
.
[2] The issue arises in the following manner:
1. The Company was indebted to NBS Bank Limited (NBS),
the predecessor in title of the appellant, in terms of two action
bond agreements.
2. The indebtedness was secured by two covering mortgage
bonds over immovable property owned by the Company.
3. On 3 July 1996 the respondent bound himself in
writing as surety and co-principal debtor, renouncing the benefits of
excussion
and division, to NBS for the debts of the Company.
4. The Company was finally wound up on 12 May 2000. On
18 May 2000 three joint liquidators were appointed.
5. On 26 October 2000 the appellant deposed to an
affidavit in terms of
s 44(4)
of the
Insolvency Act in
accordance with Form C to the First Schedule of the
Insolvency Act in
proof of a claim against the Company of R1 972 721,06 plus
interest at a margin of 0,50 per cent above the prime rate to
date of
payment. The affidavit states:
‘(3) That no other person besides the said Company is
liable (otherwise than as surety) for the said debt or any part
thereof.
(4) That the said Creditor has not,
nor to my/our knowledge on my/our behalf received any security for
the said debt or any part thereof
save and except:
1
st
and 2
nd
mortgage bonds
over Rem of Lot 1571 Pietermaritzburg situate in the city of
Pietermaritzburg which security has been valued at R800 000.
(5) . . .
(6) That the said Creditor relies solely on the
realisation of its security for satisfaction of its claim.’
6. By virtue of resolutions adopted at a second meeting
of creditors of the Company held on 27 October 2000 the liquidators
were:
‘[A]uthorised and empowered to abandon any assets
which are subject to any right of security to the creditor concerned,
in full
settlement of the creditor’s claim or at an agreed
valuation as the case may be, provided the liquidators are satisfied
that no
benefit could accrue to the concurrent creditors of the
Company were the asset in question to be realised in the ordinary
course,
subject to the creditor concerned paying the costs of
realisation attributable to its security in terms of
s 89(1)
of the
Insolvency Act.’
7. On 14 November 2000 the liquidators and the appellant
concluded an agreement entitled ‘Deed of Abandonment’ in terms of
which
the Company’s immovable property was abandoned by the
liquidators to the appellant for a consideration of R800 000
including value
added tax.
8. At a special meeting of creditors held on 26 January
2001 the appellant proved its claim of R1 972 721.06 plus
interest.
The appellant submitted the affidavit dated 26 October 2000
which is referred to in sub-paragraph 5 above in support of the
claim.
9. On 24 April 2001 the appellant sued the respondent as
surety for payment of the sums of R623 891,13 and R385 897,40
plus
interest on these amounts which represented the net shortfall of
the amounts which the appellant had recovered from the company in
liquidation.
[3] By virtue of s 366(1) of the Companies
Act of 1973 (the Companies Act) the provisions of the
Insolvency Act
regarding
the proof of claims are
mutatis mutandis
applicable
to the proof of claims against companies in liquidation. In terms of
s 342 of the Companies Act, the provisions of the
Insolvency Act
regarding
contributions by creditors towards any costs incurred in
the winding-up of a company, apply to the winding-up of a company.
[4]
Section 44(4)
of the
Insolvency Act
requires
that a claim must be proved by affidavit in a prescribed
form corresponding substantially with form C or D of the first
schedule
of the
Insolvency Act. It
must, inter alia, be stated in the
affidavit whether the creditor holds security for his claim, the
nature and particulars of that
security and the amount at which the
security is valued by the creditor.
[5]
Section 89(2)
of the
Insolvency Act provides
that:
‘
If a secured creditor (other than a secured creditor
upon whose petition the estate in question was sequestrated) states
in his affidavit
submitted in support of his claim against the estate
that he relies for the satisfaction of his claim solely on the
proceeds of the
property which constitutes his security, he shall not
be liable for any costs of sequestration other than the costs
specified in
subsection (1), and other than costs for which he may be
liable under paragraph (a) or (b) of the proviso to section
one
hundred and six
.’
[6] The respondent’s counsel submitted that once the
appellant proved its claim and relied solely on its security, it had
no further
claim that was enforceable against the company; and that
it followed that the respondent as surety was discharged from any
liability
to the appellant on the claim. For this submission the
respondent’s counsel relied in particular on the following dictum
of Galgut
AJA in
Bank of Lisbon and South Africa Ltd v The Master
1
‘A creditor seeking to prove his claim has to comply
with
s 44(4).
If he alleges he holds security he must, in terms of
that section, furnish the nature and particulars thereof to prove
that his security
exists. If he then acts in terms of
s 89(2)
, and
declares that he relies for the satisfaction of his claim solely on
the proceeds of the property which constitutes ‘
his
security’, the section provides, save for certain exceptions not
here relevant, that he shall not be liable for any costs of
sequestration.
The italics are mine.
Sections 44(4)
and
89
(2) must be read together. The
intention is clear. A creditor who claims that he is a secured
creditor and who does not wish to share
in the free residue and who
looks only to the proceeds of his security is not liable for any
costs of sequestration, nor can he receive
more than his security or
its proceeds, whether or not there is a free residue. “His
security”, i.e. the security designated
as such by the creditor,
may prove to be valueless or may have ceased to exist. There is
nothing in the wording of
s 89(2)
which suggests that that fact will
render such a proved creditor liable for any costs of sequestration.
As indicated above, the whole
purpose of the section is to enable a
creditor, who believes when lodging his claim that his security has a
value, to limit his claim
to the value of his security and to free
him from liability for costs. If it should transpire that his
security has become valueless
the basis on which he proved his claim
would fall away. He would not have a claim against the estate. The
position cannot be different
in the case of a creditor who
bona
fide
believes that he holds security and specifically limits his
claim and his potential liability. He for all practical purposes
ceases
to be a creditor of the estate. The bank was in fact in that
position.’
Remarks to similar effect were made in
Absa Bank Ltd
v The Master.
2
In both cases the liability of a surety for the debts of
the company being wound up were not in issue. The comments were
directed
to the position of a secured creditor who elects not to
share in the free residue and looks only to the proceeds of its
security
for the satisfaction of its claim. The dictum of Galgut AJA
merely means that any shortfall between the eventual net amount
recovered
by a creditor from the proceeds of its security cannot be
recovered from, or is not enforceable against, the company or paid
out
to the creditor from any free residue. The words, ‘He for all
practical purposes ceases to be a creditor of the estate’ must
be
read in their context. They do not mean that the debt is extinguished
or wiped out entirely for all purposes, more particularly
for the
purposes of enforcing a claim for any shortfall, for example against
a surety.
[7] Consistent with what was held in
Bank of Lisbon
,
the liquidation and distribution account and encumbered asset account
shows the abandonment of the company’s immovable property
to the
appellant in an amount of R800 000 and confines the award to the
appellant (R76 535,78) to the surplus on the account
without any
concurrent claim. The account nowhere states that the balance of the
claim has been abandoned or it no longer exists.
It merely reflects
the fact that the appellant has no concurrent claim to any part of
the free residue.
[8]
Section 89(2)
of the
Insolvency Act does
not state
that the effect of a creditor who elects to rely on its security in
proof of its claim results in the claim being extinguished
entirely.
The election is merely an election to execute on the claim or to
prove the claim in a certain way. The object of the section
is to
confer a benefit on a secured creditor; it enables it to recover the
value of its security without rendering itself liable
for the costs
of sequestration. The section goes no further than that. There is
nothing to justify the construction that a creditor
by electing to
rely solely on its security, abandons or waives the balance of the
claim and is thereby precluded from proceeding
against a surety for
the balance. Indeed, if such a far reaching consequence had been
intended by the legislature it would have said
so in unequivocal
terms. The section means no more than that a creditor may limit the
extent to which he will participate in the
assets of the insolvent
estate to the value of the asset which is his security. Once having
made that election he is bound by it;
he may not participate in the
free residue even if his security should prove to be without value.
Both the
Bank of Lisbon
and
Absa Bank
cases decide no
more than this. But this does not mean the balance of the claim no
longer exists or has been waived. It remains extant.
There is no good
reason why it cannot be enforced against a surety who has waived the
defence of excussion as is the position in
this case.
[9] It is well established that if a creditor waives a
portion of the debt, the surety is to that extent discharged.
3
In the present matter there was no intention on the part of the
appellant to waive the debt to the extent that it exceeded the
proceeds
of the realisation of the security. Nor in my opinion does
s
89(2)
effect such a waiver. The operation of the section was to bring
about a
pactum de non petendo
in terms of which the appellant
agreed not to proceed against the company for the balance of its
claim. It is true that the claim
for the balance became unenforceable
against the company, but the consequence is not (as the respondent’s
counsel submitted it
was) that the suretyship became unenforceable.
An unenforceable debt (provided it does not arise from a prohibited
transaction) is
a natural obligation which is capable of supporting a
suretyship.
4
[10] Scott JA aptly describes the typical surety in
modern society in these terms in
Jans v Nedcor Bank Ltd
5
(a case dealing with the question whether interruption or delay in
the running of prescription in favour of the principal debtor
interrupts prescription in favour of the surety):
‘The typical surety in modern society 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.’
It would not make sound commercial sense if it were to
be held that a creditor who elects to rely on its security in proof
of its
claim thereby and without more waives or abandons any rights
that it has against the surety.
[10] If one were notionally to think away the insolvency
of the company, then if the appellant had proceeded against the
company,
relying upon the mortgage bonds for recovery of what the
company owed it, and had obtained a judgment against the company but
upon
issuing a writ had recovered only half of the claim, the
appellant would obviously not have deprived itself of its right to
proceed
against the respondent for the balance of its claim. The
position is no different in principle because the company is
insolvent and
the appellant has elected to prove its secured claim in
terms of
s 89(2).
[11] It is of some significance that
s 129(3)(d)
of the
Insolvency Act specifically
provides that rehabilitation does not in
any way affect the liability of a surety for the insolvent. Similarly
a statutory composition
under
s 120(3)
of the
Insolvency Act does
not
release sureties. Section 311(3) of the Companies Act provides that
no compromise or arrangement shall affect the liability of
any person
who is a surety for the company in question.
[12] It was also argued on behalf of the respondent that
the consequence of the deed of abandonment and subsequent proof of
its claim
against the company which resulted in the appellant having
no further claim against the company, deprived the respondent as
surety
of his right of recourse against the company as principal
debtor, if he paid the appellant the balance of the claim. The
argument
is not sound. On insolvency of the company the respondent,
insofar as he had not paid the appellant’s claim, had a conditional
or contingent claim against the debtor’s estate.
6
If the respondent pays the appellant the unsatisfied shortfall of the
appellant’s claim, he would then be entitled to prove a concurrent
claim in the insolvent estate.
7
It would not be open to the liquidators effectively to raise against
the respondent the fact that the appellant, in proving its secured
claim, had limited its claim to the proceeds of the security
abandoned to it.
[13] I am accordingly of the view that the
court
a quo
erred in finding that the appellant in limiting
its claim to the value of its security had abandoned the unsatisfied
balance of its
claim against the company, with the result that the
indebtedness of the company was extinguished to that extent and with
the further
consequence that the respondent was released as surety to
the appellant.
[14] The court
a quo
directed the
appellant to pay inter alia the costs occasioned by the postponement
of the matter on 26 May 2003. There was no basis
for the trial court
to deprive the appellant of those costs. The matter had been set down
for hearing on that date. The respondent
then amended his plea. The
amendment formed the basis on which the matter was eventually argued
and decided. The appellant was entitled
to a proper opportunity to
consider its position in respect of the amendment and was correctly
granted a postponement for such purpose.
[15] Subsequent to the judgment of the court
a quo
,
the parties agreed that in the event of this court upholding the
appeal, there should be judgment in favour of the appellant in
the
sum of R550 000,00 together with interest thereon at the rate of 0,5
per cent per annum above the prime rate charged by the appellant
from
12 May 2000 to date of final payment.
[16] In the circumstances the following order is made:
1. The appeal is upheld with costs, such costs to
include costs of two counsel.
2. Paragraphs 1 and 2 of the judgment of the court
a
quo
are set aside.
3. It is declared that the respondent is liable to the
appellant as surety in terms of the deed of suretyship executed by
him in favour
of the appellant on 3 July 1996 pursuant to which the
respondent bound himself as surety and co-principal debtor with
Zandills Shoe
Manufactures Ltd (in liquidation) for amounts due by
the company to the appellant’s predecessor in title, NBS Bank Ltd.
4. The respondent is directed to pay the appellant R550
000,00 together with interest thereon at the rate of 0,5 per cent per
annum
above the prime rate charged by the appellant from 12 May 2000
to date of final payment.
5. The respondent is directed to pay the appellant’s
costs of suit including the costs occasioned by the postponement on
26 May
2003 and such costs shall include the costs of two counsel
where employed.
_____________________
R H ZULMAN
JUDGE OF APPEAL
CONCUR: ) MPATI DP
) SCOTT JA
) NAVSA JA
) CLOETE JA
NAVSA JA:
[1] I have had the benefit of reading the judgment of
Zulman JA. I agree with the conclusion and the order proposed, but
adopt a different
approach which is set out hereafter.
[2] In 6
Lawsa
(reissue) para 216 the following
appears:
‘
Extinction of principal obligation
Since the
obligation between a creditor and a surety is always accessory to the
principal obligation between the creditor and the
principal debtor,
extinction of the principal obligation, in any way whatsoever, serves
to discharge (release) the surety. An exception
to this general rule
exists where the principal debt is extinguished by the rehabilitation
of an insolvent principal debtor, and
also where the principal debtor
is a company which is liquidated and dissolved.’
In support of this proposition two decisions of this
court are referred to, namely,
Traub v Barclays National Bank Ltd,
Kalk v Barclays National Bank Ltd
1983 (3) SA 619
(A) and
Norex
Industrial Properties (Pty) Ltd v Monarch SA Insurance Co Ltd
1987
(1) SA 827
(A).
[3] In the
Traub
matter, Botha JA said the
following (at 634A):
‘
If the principal debtor is a natural person and he
dies, his surety remains liable to his creditor; and a surety for a
company remains
liable to its creditor if it is liquidated and
dissolved under s 419 of the Companies Act.’
In that matter the appellants had been sureties for a
company that had lost all of its assets and was subsequently
deregistered.
[4] In the
Norex
matter, Botha JA said the
following (at 840F-H):
‘
When a surety binds himself to a lessor “for the
due fulfilment by the lessee of all its obligations in terms of the .
. . lease”,
and the lessee goes insolvent, in consequence of which
the liquidator terminates the lease and the lessor suffers a loss in
respect
of the rental, that can assuredly not be regarded as a cause
foreign to the lease. On the contrary it seems to me to be apparent
that that was exactly the kind of eventuality against which the
lessor would have wished to protect himself by procuring the
suretyship,
and in respect of which the surety bound himself to
indemnify the lessor.’
[5] The insolvency process is to enable creditors to
institute claims against the debtor. The
Insolvency Act provides
the
means for them to do so. The purpose of
s 89(2)
is set out in
the judgment of Zulman JA. In my view, the creditor is, for the
reasons set out in the
Traub
and
Norex
cases, clearly
entitled to proceed against the surety for the balance of what is
owed to it. As pointed out in the
Norex
matter, insolvency is
one of the reasons for which a creditor would require security such
as a suretyship. This makes sound commercial
sense. The liquidation
process is one through which creditors seek as best they can to
obtain what is due to them from the principal
debtor. It is in that
context that the
dicta
in the
Bank of Lisbon
and
Absa
Bank
cases referred to in the judgment of Zulman JA should be
seen.
[6] In my view, on the basis of the
Traub
and
Norex
cases and the reasoning set out above, the issues of
waiver and abandonment, or extinction of the debt insofar as the
surety (in
this case the respondent) is concerned do not arise. Put
simply, and restating what is set out in those two cases, the
liquidation
process does not extinguish the surety’s indebtedness.
_________________
M S NAVSA
JUDGE OF APPEAL
1
1987 (1) SA 276
(A) at 287G-288C.
2
1998 (4) SA 15
(N) at 29J-31B.
3
See for example
Moti and Co v Cassim’s
Trustee
1924 AD 720
at 737.
4
C F Forsyth & J T Pretorius
Caney’s The
Law of Suretyship
p 38 and authorities cited in n 17, including
Voet
ad Pandectas
46.1.9, Gane’s translation vol 7 p 22;
Wessels
The Law of Contract
2 ed paras 1268 and 1276.
5
2003 (6) SA 646
(SCA) para 30 at 661I-662B.
6
Forsyth & Pretorius
(supra n 4) at 167 and
the authorities referred to in footnotes 84 – 86.
7
Taylor & Thorne NNO v The Master
1965
(1) SA 658
(N) 611A-H and Forsyth & Pretorius (supra n 4)
157-158.