Brief Summary

Contract — Loan agreements — Misrepresentation — Applicants entered into loan agreements with Brusson Finance believing their home would serve only as security for a loan, but later discovered the agreements effectively transferred ownership of their property — Court held that the misrepresentation by Brusson's consultant constituted a breach of duty, rendering the agreements voidable at the applicants' instance.

Comprehensive Summary

Summary of Judgment

1. Introduction

The matter was an application in the Free State High Court, Bloemfontein, for declaratory and consequential relief arising from a set of interlinked written agreements relating to immovable property. The applicants sought an order declaring the agreements unlawful and void and compelling steps to restore ownership of their home to them.

The first and second applicants were a married couple married in community of property, and the third applicant was the National Credit Regulator. The first respondent was Brusson Finance (Pty) Ltd (Brusson), the second respondent was Amanda Boshoff (described as the “investor”), the third respondent was Absa Bank Limited (as bondholder), and the fourth respondent was the Registrar of Deeds (in an official capacity).

The application was opposed by the first and second respondents. The respondents also launched an interlocutory application to strike out portions of the founding papers. That striking-out application was dismissed with costs. The core dispute concerned the proper characterisation and legality of a “sale-and-repurchase” scheme involving the applicants’ home, and whether it constituted an unlawful credit transaction and/or an impermissible enforcement mechanism (including a pactum commissorium and parate executie), particularly in light of the National Credit Act 34 of 2005.

2. Material Facts

The court accepted that the applicants owned and lived in a home in Dobsonville Gardens, Soweto. They experienced severe cash-flow problems and could not obtain conventional credit because they were overextended and “black listed”. They required approximately R40 000 to deal with arrears on a motor vehicle instalment sale agreement. Their home was their only meaningful security, with an approximate value of R260 000 and an existing bond of about R93 000–R94 000, for which they paid monthly instalments of about R1 200.

In March 2007, the applicants responded to a newspaper advertisement by Brusson inviting homeowners to obtain finance “regardless” of credit rating. The first applicant contacted Brusson and dealt with a consultant, “Jabu”. On the applicants’ version (treated as largely undisputed for purposes of the court’s assessment of the papers), Jabu conveyed that Brusson would settle the Absa bond and that the applicants would receive R168 000 as the balance, and further assured them that their house was not being sold but was merely “security” for the loan.

The applicants signed four documents. These included a signed offer to purchase in blank and a blank deed of sale, as well as a memorandum of understanding between the applicants and Brusson, and a memorandum of agreement involving Brusson, the investor, and the applicants. The documentary terms (as set out in the annexures before the court) reflected that the applicants were “sellers” to the investor for R168 000, and that occupation would remain with the applicants who would pay occupational interest of R2 827,12 per month. The applicants also undertook to pay transfer costs and to pay Brusson an administration fee.

A further document recorded a “repurchase” by the applicants from the investor at R210 000, payable over 24 months in minimum instalments of R2 827,12, linked to an interest rate coupled to prime (stated at 16,15% at the time). The documentation placed significant administrative and financial control with Brusson, including requirements that payments, rates, levies, and insurance premiums be paid to Brusson, that notices be copied to Brusson, and that Brusson could enter the property for inspection and/or repairs. It also provided for payments to Brusson on transfer, and contemplated outcomes following default and even following the investor’s death that would lead to an acquisition of the property by Brusson on stipulated terms.

The applicants later discovered that the funds used to cancel the Absa bond were drawn from the same R168 000 purchase price rather than being paid in addition thereto. They received R24 109,53 paid into their bank account. For purposes of the relief sought, it was accepted that the applicants’ receipts comprised the cash amount paid to them, the settlement of the prior bond (rounded to R94 000 for calculation), and a further amount (R5 000) deducted for rates and taxes that was used to their advantage. The total benefit taken into account for restitution was R123 109,53.

The respondents disputed the correctness and completeness of the annexed agreements but did not place alternative “true” copies before the court. They also raised technical and factual objections, including that the transaction was not a credit agreement and that disputes of fact required referral to trial. The court evaluated these denials as largely bare and evasive when measured against the documentary record and other circumstances relied upon.

3. Legal Issues

The court was required to determine whether the set of agreements, viewed in substance, constituted a single integrated transaction and, if so, what its true nature was. This involved an inquiry that was partly factual (what the parties truly intended and implemented) and partly legal (the legal consequences of the transaction properly characterised).

A central legal question was whether the agreements were simulated, disguising what was in substance a loan secured by immovable property, and whether the scheme operated as an unlawful pactum commissorium and/or an unlawful mechanism akin to parate executie, by enabling a party effectively to take ownership of secured property upon default without appropriate legal process and without reference to proportionality between the debt and the value of the security.

The court also had to determine whether Brusson was, in substance, a credit provider under the National Credit Act 34 of 2005, whether Brusson was required to be registered as such, and whether the lack of registration rendered the agreements unlawful and void under the statutory scheme, particularly with reference to section 40(4) read with section 89(2)(d).

Further issues included whether the National Credit Regulator had standing to participate as an applicant in the proceedings, and what restitutionary relief was competent if the agreements were declared void, including whether restitution depended on proof of enrichment and whether the common-law rule associated with fully performed illegal agreements applied.

4. Court’s Reasoning

The court approached the matter by examining whether the ostensible form of the contracts matched their real nature and implementation, applying the approach articulated in Maize Board v Jackson 2005 (6) SA 592 (SCA). Although the respondents argued that linked agreements can remain distinct and that reciprocity cannot automatically be inferred across all documents, the court emphasised that the present documents, on their face and by their own “entire agreement” language, pointed strongly to a single integrated scheme.

On the interrelationship of the agreements, the court held that the documents were interrelated and interdependent and formed one transaction. The memorandum of agreement explicitly recorded that it, together with the initial sale and the repurchase agreement, contained the entire agreement. The court considered that the investor’s purchase would not have occurred without the repurchase arrangement, and it accepted that the applicants never intended a genuine sale with loss of occupation and ownership in the ordinary commercial sense. The applicants’ allegations on this score were regarded as not seriously contradicted on the papers.

The court then assessed features that it considered foreign to bona fide sales of immovable property. These included the seller remaining in occupation and paying occupational interest, the seller (not purchaser) paying transfer costs, payment streams and notices being channelled through Brusson, and the unusual allocation of risks and benefits. The court also attached weight to Brusson’s own documentation (a “client procedure information sheet” and diagram) describing the client’s property as security/collateral, describing a “temporary transfer” to an investor in exchange for financial relief, and describing an immediate sale back to the client under a sale-by-instalment arrangement, culminating in re-transfer to the client upon fulfilment. The respondents’ own characterisation of the arrangement as akin to a pawn transaction was also noted as consistent with the applicants’ contention that the scheme functioned as security for finance rather than a true sale.

From these circumstances, the court drew the conclusion that the real intention was that the applicants were obtaining a loan against the security of their home, and that the agreements were simulated transactions. It reasoned that Brusson’s role exceeded that of a mere broker: Brusson administered the financial flows, inserted itself as surety/co-principal debtor to protect the investor, and structured the default consequences in a way that resulted in Brusson ultimately obtaining the property upon default. This, the court held, amounted to an unlawful pactum commissorium, because the scheme effectively permitted Brusson (through the integrated contractual mechanism) to acquire and retain ownership of the secured property upon default without reference to the relationship between the value of the property and the amount advanced.

On the National Credit Act issues, the court held that once the scheme was properly characterised as credit being granted to consumers (with Brusson effectively bearing the risk and controlling the transaction), Brusson was required to be registered as a credit provider. The applicants alleged that Brusson was involved in more than a hundred such agreements; the court treated this allegation as effectively unchallenged in any acceptable way on the papers. It was common cause that Brusson was not registered. The court accordingly concluded that the agreements were unlawful and void by operation of section 40(4) of the National Credit Act read with section 89(2)(d).

The court addressed a temporal point raised regarding section 89, noting that section 89 was not in force at the time, but that the unlawfulness and voidability consequences were incorporated via section 40(4), which was in force when the agreements were concluded. It declined to decide whether the further consequences in section 89(5) applied, expressing a prima facie view that those consequences did not apply retrospectively, and noting the absence of cited authority to support retrospective application as required by the relevant transitional provisions referenced (Schedule 3, section 4(2)).

On the respondents’ reliance on the rule in Wilken v Kohler 1913 AD 135 (as discussed in Legator McKenna Inc v Shea and Others 2010 (1) SA 35 (SCA)) to resist restitution where parties have fully performed, the court held that this rule does not apply to transactions prohibited by law, relying on the SCA’s discussion in Legator McKenna Inc v Shea and Others 2010 (1) SA 35 (SCA).

On locus standi, the court rejected the respondents’ reliance on section 15(a) of the National Credit Act as a bar to the National Credit Regulator’s participation. It interpreted section 15(a) as dealing with informal dispute resolution under the Act, and accepted the submission that a broader reading would render section 87(2) superfluous. The court held that the Regulator had a real and sufficient interest in compliance with the Act and was not prohibited from approaching a court for declaratory relief concerning unlawfulness.

Finally, on remedy, the court held that the applicants were entitled to restitution restoring them to their original position. It rejected the respondents’ argument that restitution depended on proof of enrichment and accepted that the appropriate relief was to reverse the transaction in a practical manner. It identified two potential mechanisms: transfer back subject to the existing bond being reduced to the restitution figure, or transfer free of the bond against payment of the restitution amount, recognising that the first mechanism would require Absa’s cooperation.

5. Outcome and Relief

The court declared the relevant agreements entered into between the applicants and respondents unlawful and void. It ordered the first and second respondents, jointly and severally, to take steps to restore the property to the applicants, either by reducing the existing Absa bond to not more than R123 109,53 and transferring the property subject to that reduced bond within specified time periods, or alternatively (if Absa’s consent could not be obtained) by transferring the property free of the bond against simultaneous payment by the applicants to the first respondent of R123 109,53, secured by a guarantee from a recognised financial institution delivered before transfer.

The first and second respondents were ordered to pay all transfer and related costs (including transfer duty) for the re-transfer to the applicants. They were also ordered, jointly and severally, to pay the costs of the application, including the costs of two counsel. In addition, the court authorised the Registrar of the High Court to sign necessary documents to effect transfer if the respondents failed or refused to comply, and granted leave to the applicants to approach the court on the same papers (duly amplified) for further monetary relief reflecting any difference between the existing bond and the restitution amount and expenses incurred in respect of transfer-related costs.

Cases Cited

Wynns Car Care Products v First National Industrial Bank Limited [1991] ZASCA 34; 1991 (2) SA 754 (AD)

Wilken v Kohler 1913 AD 135

Legator McKenna Inc v Shea and Others 2010 (1) SA 35 (SCA)

Maize Board v Jackson 2005 (6) SA 592 (SCA)

Legislation Cited

National Credit Act 34 of 2005 (including section 15(a), section 40(4), section 87(2), section 89(2)(d), section 89(5), and Schedule 3 section 4(2))

Rules of Court Cited

No rules of court were expressly cited in the judgment.

Held

The court held that the various written instruments constituted a single, integrated transaction and that their true nature was not a bona fide sale and repurchase of immovable property but a simulated arrangement designed to achieve the effect of a loan secured by the applicants’ home.

It held that the structure and implementation of the scheme resulted in an unlawful pactum commissorium, enabling Brusson, upon default, to obtain ownership of property worth substantially more than the underlying indebtedness through contractual mechanisms foreign to genuine sale transactions.

It further held that Brusson was, in substance, a credit provider required to be registered under the National Credit Act 34 of 2005, that it was not registered, and that the agreements were accordingly unlawful and void under section 40(4) read with section 89(2)(d). The National Credit Regulator was held to have standing to seek declaratory relief. The applicants were held entitled to restitution restoring their position through re-transfer of the property on terms crafted to reverse the effects of the void scheme.

LEGAL PRINCIPLES

The judgment applied the principle that courts must look beyond contractual form to ascertain whether the real nature and implementation of an arrangement is consistent with its ostensible form, and may conclude that agreements are simulated where the documented structure disguises the true transaction, assessed in light of all relevant circumstances.

It applied the principle that contractual mechanisms which, in substance, allow a party advancing funds to obtain ownership of secured property upon default—without the protections ordinarily associated with lawful enforcement—may constitute an unlawful pactum commissorium, particularly where the arrangement disconnects the value of the security from the amount advanced and channels default consequences toward forfeiture of property.

It applied the statutory principle that where a party is in substance a credit provider within the regulatory scheme of the National Credit Act 34 of 2005, and is required to be registered but is not registered, the resulting credit agreement(s) may be unlawful and void in terms of the Act (as treated by the court through section 40(4) read with section 89(2)(d) on the facts and timing presented).

On remedy, it applied the principle that where agreements are unlawful and void, the court may order restitution aimed at restoring the parties to their original position, and that restitution in this setting is not necessarily dependent on proof framed as an enrichment claim; rather, it may follow from the voidness of the transaction and the need to reverse its practical effects. It further accepted that the common-law approach associated with fully performed illegal agreements (as discussed in the authorities cited) does not bar restitution where the transaction is prohibited by law.

It also applied the principle that a statutory regulator may have locus standi to approach a court for declaratory relief to ensure compliance with the statute it administers, and that provisions dealing with informal dispute resolution do not necessarily preclude such court proceedings.

Ditshego and Others v Brusson Finance (Pty) Ltd and Others (5144/2009) [2010] ZAFSHC 68 (22 July 2010)