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[1991] ZASCA 174
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Hippo Quarries (Transvaal) (Pty) Ltd. v Eardley (189/90) [1991] ZASCA 174; 1992 (1) SA 867 (AD); [1992] 1 All SA 398 (A) (28 November 1991)
CASE NO. 189/90
IN THE SUPREME COURT OF SOUTH AFRICA APPELLATE DIVISION
In the
matter between:
HIPPO QUARRIES (TRANSVAAL) (PTY) LIMITED Appellant
and
KEITH EARDLEY Respondent
CORAM:
JOUBERT, MESTADT, NIENABER JJA
et PREISS, KRIEGLER AJJA
DATE HEARD:
12 NOVEMBER 1991
DATE DELIVERED:
28 NOVEMBER 1991
JUDGMENT
NIENABER JA:
The issue is whether a document, ostensibly the
cession of a trading debt from one associated company to another, was in truth a
cession
or a sham.
Hippo Quarries (Pty) Ltd ("Hippo") and Hippo Quarries (TransvaaI)(Pty) Ltd
(now the appellant and the plaintiff in the court below)
are subsidiaries of the
same holding company. At all material times the plaintiff has been dormant
though not defunct. Hippo, on
the other hand, has been trading actively. Its
business consisted, in the words of a former director of both companies, Allen
Jones,
"of manufacturing and supplying aggregates to the construction and other
civil industries." Rietfontein Sand and Stone (Pty) Ltd
("Rietfontein") bought,
sold and transported building materials. It was a customer of Hippo. Its
directors were Keith Eardley and
his wife Sandra Margot Eardley. Keith Eardley
was the defendant in the court below and is the present respondent. I shall
refer to
him as the defendant.
2
On 7 May 1984 the defendant signed a printed
form in
which he bound himself as surety and
co-principal debtor for the payment of
the debts of
Rietfonteln. The suretyship, surprisingly, was not in
favour of Hippo, the company with which Rietfontein was
trading, but in favour of the plalntiff
"...for the due payment on demand by the debtor of all and any monies which the
debtor may now or from time to tlme hereafter owe
to the creditor from
whatsoever cause and howsoever arising and whether as principal debtor,
guarantor, or otherwise, and whether
severally or jointly or trading alone or in
partnership or under any other name, as well as for the due and punctual
performance
and discharge by the debtor of his obllgatlons under any and all
contracts or agreements now or hereafter entered into by the debtor
wlth the
creditor."
On 24 September 1986 the defendant
completed
and signed a further document, termed "Application for
Credlt" on behalf of Rietfontein, clause 20.10 of which
reads as follows:
"In the event of the customer being a company, the person whose signature
appears on the contract as representing the company, hereby
specifically binds
himself as surety and co-principal debtor for payment of all monies whlch may
now or in the future be due and
owing by the customer to the company."
3
On this occasion the document was executed in favour of "Constone Reef (Pty)
Ltd, trading as 'Hippo Quarries'". Constone Reef (Pty)
Ltd had by then changed
its name to Hippo Quarrles (Pty) Ltd ie Hippo.
The position, then, was that by 1987 the plaintiff and Hippo each held a deed
of suretyship in which the defendant assumed liability
for the future
indebtedness of Rietfontein, howsoever arislng.
Such indebtedness arose during 1987. Hippo sold and supplied goods to
Rietfontein to the value of R71 257,14.
On 19 May 1987 Rietfontein was placed in final liquidation.
On 27 May 1987 Hippo instituted action against Rietfontein, as debtor, and
the defendant, as surety, for payment of the amount of
R71 257,14. The action
against the defendant was based on the suretyship agreement which the defendant
had signed on 4 May 1984.
When it eventually dawned on Hippo that that
suretyship was not drawn in its favour but in favour of the plaintiff, the
actlon was
withdrawn with
4
a tender of costs. It was then resolved, on legal
advice, and after a
review of the optlons open to them,
that the plaintiff rather than Hippo would take the
initiative in recovering Rietfontein's debt from the
defendant; and that
to enable the plaintiff to do so
Hippo would cede its claim agalnst
Rietfontein to the
plaintiff "for collection".
This happened on 14 October 1987. The
cession read as follows:
"
CESSION
HIPPO QUARRIES (PROPRIETARY) LIKITED hereby
cedes, assigns
and makes over to HIPPO
QUARRIES (TRANSVAAL) (PROPRIETARY) LIMITED
all its
rights, title and interests in and to
its claim against Rietfontein Sand and
Stone
(Proprletary) Limited in the sum of
R71 257.14.
Being in respect of goods sold and delivered
by HIPPO
QUARRIES (PROPRIETARY) LIMITED
during 1987."
Jones, to whom reference was made earlier, signed the document on behalf of
both cedent and cessionary. Rietfontein and the defendant
were duly advlsed of
the cession.
The plaintiff thereupon instituted the present action against the defendant
in the
5
Witwatersrand Local Division. It relied on two causes of action: firstly, on
the suretyship which the defendant completed in its favour
and which, so it was
alleged, was activated by the cession of the claim; alternatively, on clause
20.10 of the document the defendant
completed in Hippo's favour and the benefit
of which, so it was alleged, passed to the plaintiff conjointly with the cession
of the
claim.
Both causes of action failed. The court a quo (M J Strydom J) held that no
true cession was intended and that the so-called cesslon
was a mere pretext to
enable the plaintiff to recover a debt on behalf of Hippo which Hippo itself was
unable to recover. The plaintiff's
claim was accordingly dismissed with costs.
An application for leave to appeal to this court was, however, granted. Hence
this appeal.
Jones was called by the plaintiff. He was
the only witnëss to give evidence on elther side. He
testified as follows:
"And what would be the position should you be successful in
this actlon, where would that
money go? The money would go into Hippo
Quarries Transvaal, which would then pay off
6
its inter company account with Hlppo Quarries (Pty)
Limited.
So it will just, the money
will
eventually end up with Hippo Quarries? It
would flow through indeed, yes.
So that Hippo Transvaal is nothing but a conduit to get the money back to
Hippo
Quarries (Pty) Limited?
That is correct."
And again:
"And you will see that it says it was noted
that Hippo Quarries (Pty) Limited
had
supplied certaln crushed aggregate to
Rietfontein Sand and Stone (Pty)
Limited for
a consideratlon of R71 275,14 and then (2) it
says that Hippo
wished to cede this debt to
the company, in other words to Hippo
Transvaal
for collection? Ja.
Is that correct? That is
correct.
Is that indeed what was decided, I see
that you signed at the bottom
there? Ja.
Once again, Mr Jones, this confirms what you told me yesterday that thls was a
cession purely to enable Hippo Transvaal to
collect
the debt owing to Hippo, is that correct?
That is correct."
These passages, so it was held, demonstrated that Hippo's right" of action
against Rietfontein never vested in the plaintiff; the
plaintiff's function was
simply to collect the debt on Hippo's behalf, and, in the words of the court
below,
7
"...that the transaction's real character had been concealed and that it had
been dlsguised to resemble a cession instead so that
Hippo Quarries (Pty)
Limited, using plaintiff as its instrument, might sue defendant and recover from
him, on its behalf, the amount
of R71 257,14." That finding in effect disposed
of both
causes of action: the first, based on the
suretyship
executed in favour of the plaintiff, because debt
and
suretyship, failing cession, had never been grasped in
one hand; and
the alternatlve cause of action, based on
clause 20.10, because debt and
suretyship, faillng
cession, had never passed to the plaintiff.
The cession was thus an
essential link in the plaintiff's case against the defendant. The plaintlff had
to prove its authenticity.
It did so by producing an apparently regular and
valid written cession. The evidentlary burden thereupon shifted to the defendant
to show that the document in reality was not what it seemed to be. (Skjelbreds
Rederl A/S and Others v Hartless (Pty)-Ltd
1982 (2) SA 710
(A) at 733E-G.)
Cession, it is trite, is a particular method of transferring a right. The
transfer is effected by means of agreement. The agreement
conslsts of a
8
concurrence between the cedent's animus transferendi of the right and the
cessionary's corresponding animus acquirendi. If a complete
surrender of the
right is not intended the transaction, however it is dressed up, is not an
out-and-out cession. The aim is to discover
the true intention of the parties to
the disputed cession. That enquiry, like any enquiry into intention, is a purely
factual one.
If found to be feigned the simulation is disregarded.
Counsel for the defendant, in support of the judgment a quo, listed a number
of factors which, in their cumulative effect, so it was
submitted, showed that
it was never intended that Hlppo's right of actlon against Rietfontein should
vest in the plaintiff; that
the so-called cession was, in the words of Nicholas
J in Mannesmann Engineering and Tubes (Pty) Ltd v LTA Construction Ltd
1972 (3)
SA 773
(W) at 775E merely "...a cloak under cover of which the plaintiff would
institute action against the defendant"; and that the written
cession, though
not a dellberate fabrication, was accordingly not a true reflection of the
parties real intention and should not
be treated as if it were.
9
The factors enumerated by counsel were: the plaintiff is not a trading
company - it would not therefore in the normal course of events
have taken
cession of a claim; the plaintiff and Hippo are sister companies both
represented by Jones; the debt itself was worthless
and there was no prospect or
intention of recovering anything from Rietfontein; the plaintiff gave no
consideration for the cession;
Hippo was responslble for financing the
litigation; and finally, perhaps most significantly, the plaintiff obtained no
beneficial
interest in the outcome of the litigatlon and hence in the ceded
claim, since whatever it recovered from the defendant would be credited
to
Hippo.
Counsel for the defendant did not contend that there was any subterfuge or
dishonesty about the transaction between Hippo and the
plaintiff. They were
sister companies. The one was possessed of a claim against Rietfpntein and the
other of a suretyship binding
the defendant. The express purpose of the exercise
was to tle the one to the other so that the sum owed by Rietfontein could be
recovered
from the
10
defendant. The cession was the knot. There was
nothlng improper about that
purpose. It was a
legitimate means to a legitimate end. There is, as was
stressed by Didcott J in Bird v Lawclaims (Pty) Ltd
1976 (4) SA 726
(D) at 729F-G a
"...crucial distinction between transactions honestly arranged as authentic
means to particular ends and those whlch have been dlshonestly
feigned..."
That the plaintiff was a dormant company
is a neutral factor; if it demonstrates anything at all, it is that the wrong
suretyship
printed form was used, no doubt due to a clerical error, when the
defendant was asked to guarantee the debts of Rietfontein and was
given the
plaintiff's form instead of Hippo's. That the plaintiff and Hippo were sister
companies made it easier for them to redress
the error. It also explains why no
consideration was given for the cession, why Jones signed on behalf of both
parties and why Hippo
became liable for the costs of the litigation. This was in
terms of a management agreement between Hippo and all the other companies
in the
group, including the plaintiff, whereby the expenses of all the companies
11
were borne by Hippo. There was nothing sinister about
it.
As for the point that the plaintiff gained
no
direct benefit from the cession, counsel sought
to derive support from two reported cases in particular, namely Kotsopoulos v
Bilardi
1970 (2) SA 391
(C) and Skjelbreds Rederi A/S v Hartless (Pty) Ltd
supra.
In Ketsopoulos v Bilardi supra, Corbett J, in
contrasting a cession of a right to monies and an
irrevocable mandate to collect them, said (at 399A-C):
"...the essential enquiry is whether the mandate granted to Walter Goldberg
Trust amounted, or was equivalent to, a cession of the
right to the moneys
payable in terms of the Bilardi agreement; or whether it was merely a mandate
irrevocable in the sense that revocation
thereof might expose the principals
(the plaintiff and Theodorus Kotsopoulos) to an actlon for damages. As I
understand the authorities,
this is really a question of intention but the
hallmark of a mandate amounting to a cession is that it should give the agent an
interest
not merely in the exercise of his authority but in the verything vested
in, or entrusted to, him by his principal (Ward v Barrett,
N.O. and Another,
supra at p.738). This type of mandate is sometimes spoken of as a power of
attorney 'coupled with an interest'
or 'a power given as security'".
12
Counsel for the defendant sought to extract a principle from this dictum viz
that a transaction can only have been intended as a cession
if the supposed
cessionary secured an additional interest or advantage for himself, beyond the
mere vesting of the right in him.
It was for that reason that counsel submitted
that the decislon in McLachlan v Wienand
1913 TPD 191
was wrong and the one in
Marsh v Van Vliet's Collection Agency
1945 TPD 24
was right.
In McLachlan's case a creditor, Wienand,
obtained cesslon from three other creditors of their
claims against a common debtor, McLachlan, to enable
him to enforce all four claims in a single action. No
consideratlon passed for the cessions, the
understanding between all the parties being that
Wienand would account to each of the others for a
proportionate share of any proceeds he happened to
recover from McLachlan. This was held to be above
board and valid. Mason J said, at 195:
"In the present case there can be no real question but that the object of all
parties was a perfectly honest and legitimate one namely
to minimise expense and
save time and trouble. And as that object could only be carried out by making
the plaintiff the owner
13
of these claims, why should not effect be given to the documents of cession in
accordance with thelr tenor and the intention of the
parties. The plaintiff
became dominus of the claims and the money recovered; the cedents had an action
in personam agalnst him for
a dlstribution of what he
recovered."
In Marsh v Van Vliet's Collection Agency
supra the plaintiff, who carried on the business of debt collecting, took
cession of a claim
from a professional man against his patient. They agreed that
the cessionary would account to the cedent for 75% of all monies he
was able, at
his own cost, to recover from the debtor. This was held to be a valid
cession.
It was because the cessionary was entitled to retain part of the proceeds
that counsel contended that the latter transaction was intended
to be a true
cession whereas the earlier one in McLachlan's case was not. And what was true
for McLachlan's case, so it was submitted,
is true for this one.
I disagree. The dictum in Kotsopoulos v Bilardi supra does not support
counsel's reading of it. That dictum simply means that a transaction
will not be
a cesslon if, accordlng to its tenor, the right whlch
14
the agent is to administer or enforce does not vest in him.
A cession,
otherwise valid, is in my view not assallable on the sole ground that the
cessionary was to collect the debt for the ultimate
benefit of the cedent. The
present situatlon is of course a little more complex. Here the cession was
effected not merely for collection
purposes but to convert an unsecured claim in
the hands of one creditor into a secured claim in the hands of another. Does it
matter?
That question must be reconsidered in the light of the second case cited
by counsel for the defendant, Skjelbreds Rederi A/S v Hartless
(Pty) Ltd
supra.
In Skjelbreds' case one peregrinus (the creditor) ceded its claim against
another peregrinus (the debtor) to an incola. This was to
enable the incola to
do what the peregrinus creditor was in law incapable of doing, namely, to attach
an asset of the peregrinus
debtor ad fundandam jurisdictionem. As in the present
case it was agreed, though not disclosed in the document of cession, that the
cessionary would account to the cedent for anything it managed to
15
recover from the debtor. This court held that the transaction was not a
genuine cesslon because the partles in truth intended the
incola to be a
mandatory or nominee (and hence not a cessionary) of the peregrinus creditor to
enforce the claim against the peregrinus
debtor on the former's behalf. The
attachment was accordingly set aside.
There are similarities between Skjelbreds case and the current one. There,
too, the cession was intended to serve a secondary purpose
for the ultimate
benefit of the cedent; no consideration was given for it; and the cessionary was
under a duty to account to the
cedent for any proceeds recovered as a resuit
thereof.
But there are also significant differences. Perhaps the most glaring one is
this: in that case the ostensible cession was devised
to clrcumvent a legal
impediment or disabllity - a peregrinus is disqualified in law from attaching
the property of another peregrinus
ad fundandam jurisdictionem. (Ewing McDonald
& Co Ltd v M & M Products Co
[1990] ZASCA 115
;
1991 (1) SA 252
(A) at 258J-259A.) In the
present case there was no
16
legal disability. The cession was devised to capture
Hippo's debtor in the
net of the plaintiff's
suretyship. In Skjelbreds case the cession was
designed to achieve what,
as a matter of law, the
cedent was unable to attaln, ie attachment; here the
cession was designed to achleve what, as a matter of
fact, the cedent was incapable of doing ie resorting to
someone else's suretyship. That this difference
coloured this court's assessment of the parties'
intention in Skjelbreds' case (cf 734A-B) also appears
from its observatlons on the two Transvaal cases
mentioned earlier, McLachlan v Wienand supra, and Marsh
v Van Vliet's Collection Agency supra. At 736G it was
said:
"I find nothing in the judgments in these cases which supports the view that
an agent is entitled to enforce a claim when hls principal
is, as a matter of
law, not entitled to do so, but, if anything is indeed said therein which is
capable of supportlng such a view,
then I find myself unable to agree with
it."
And agaln, at 737 C-D:
"...these cases cannot be regarded as authority for the proposition that an
agent can enforce a claim when his principal is not
17 in law entitled to do so."
(I do not read these
remarks, incidentally, as overruling these cases. Rather the contrary.) Another
consideration which reinforced
this court's impression that the cesslon in
Skjelbreds' case was conceived as a
ruse
"...to escape some disability which otherwise the law would
impose"
(per Innes J in Zandberg v Van Zyl
1910 AD
302
at 309), was that the parties to the cession deliberately and deslgnedly
refrained from mentioning the duty to account both in the
cesslon document and
in the founding affldavit in support of the application for attachment (at
734F-735C).
These factors are, of course, all absent in the present case. In my view
Skjelbreds' case is clearly distinguishable from the present
one on the facts
and to the extent that the enquiry into the intention of the parties to the
cesslon is a purely factual one the
reasonlng and the remarks of this court in
Skjelbreds' case must be conflned to cases in which its facts are substantlally
dupllcated.
18
I return to the facts of this case. Jones was not cross-examined about the
implications of the arrangement between Hippo and the plaintiff
- about whether
the plaintiff was entitled to compromise the claim, about whether the clalm
would have vested in its estate in the
event of the plaintiff's liquidation, and
about other similar matters that could have polnted to the true intention of the
parties
to the cession. Those are matters that should have been explored by the
defendant if he wished to override the evidentiary burden
which rested on him.
All that remained in his favour was the single circumstance that Jones agreed
with the proposition put to him
that the plaintiff was "nothing but a conduit".
He made that concesslon because the whole idea was to employ the plaintiff's
suretyship
for Hlppo's benefit. Hippo could of course have proceeded agalnst the
defendant in terms of clause 20.10 of the 1986 "applicatlon
for credit". But
that would have meant discarding the 1984 suretyship as a potentlal cause of
action. The only way in which the latter
suretyship could have been exploited
was if Hippo ceded its debt against Rietfontein to the
19
plaintiff. In that manner both suretyships could be harnessed against the
defendant.
Notwithstanding the submission of counsel for the defendant, which
he advanced at a late stage in his argument, that the arrangement
between Hippo
and the plaintiff was contra bonos mores, there was nothing illegal or devious
about either the purpose of, or the
method employed by the parties to the
cession. To cede the claim because the cessionary, for whatever legitimate
reason, was better
poised to collect it than the cedent was not intrinsically
wrong. Motive and purpose differ from intention. If the purpose of the
parties
is unlawful, immoral or against public policy the transaction will be
ineffectual even if the intention to cede is genuine.
That is a principle of
law. Conversely, if their intention to cede is not genulne because the real
purpose of the parties is something
other than cession, thelr ostenslble
transaction will likewise be ineffectual. That is because the law disregards
simulation. But
where, as here, the purpose is legitimate and the intention is
genulne, such intention, all other things belng equal,
20
will be implemented.
That Hippo and the plaintiff, as sister companies, were not at arm's length,
that no consideration passed between them for the cession,
and that it was
understood between them that any amount recovered by the plaintiff from the
defendant would eventually be channelled
to Hippo, do not, therefore, render the
deallngs between the parties suspect and do not detract from the legitimacy of
their exercise.
Two separate transactions are invoived, firstly, the obligationary agreement
(in terms of which Hippo would cede the claim to the
plaintiff and the plaintiff
wouid account to Hippo), and, secondly, the cession proper. (Cf Johnson v
Incorporated General Insurances
Ltd
1983 (1) SA 318
(A) at 331G-H.) What the
court a quo in effect did was to merge these two legal acts, separate in time
and nature, into a single
composite transaction which it then categorized as a
disguised mandate to coliect the debt. Mandate and cession are distinct legal
concepts: in the one case the mandatory, if an agent, acts in the name and on
behaif of his principal in enforcing the right; he
21
obtains no interest in the right itself. In the other
case the cedent is
succeeded by the cessionary as the
holder of the right; and the cedent
retains no interest
in the right itself. The end result may be the same
in
that the proceeds are remitted to "the principal", but
in nature and structure the two types of transaction
differ fundamentally. They may of course be
interlinked - where the mandator, for instance, cedes
his right of action to the mandatory to enable the
latter to enforce the debt qua cessionary. (Cf Marsh v
Van Vliet's
Collection Agency supra, at 30-31.) As it
was expressed by Didcott J in Bird v Lawclaims (Pty)
Ltd supra, at 730C,
"...the relationship between agent and prlncipal does not necessarily
exclude, but may co-exist with and overlap, the
association between cessionary and cedent."
In my view none of the considerations mentioned by counsel for the defendant
refutes Jones' explanation that the parties to it genuinely
intended a cession,
slnce that was the only means by which the Hippo group could capitalize on the
1984 suretyship which the defendant
executed in favour of one of the
22
group. Agency was never contemplated because it would have been wholly
ineffectual. It would have been ineffectual because a mere
mandate to act as
agent would not have created the debtor-creditor relationship between the
plaintiff and Rietfontein on the strength
of which the suretyship could be
invoked. Notionally both routes were available to them: but the one, cession,
was feasible and the
other, agency, was not. Consequently there would have been
no purpose for Hippo and the plaintiff to have contemplated agency which
was to
be camouflaged as cession.
In my view the defendant failed to discharge the evidentiary burden of
showing that the transaction was not intended to be a cession.
It follows that
the plaintiff should have succeeded on its main cause of action. That being so
there is no need to dwell on the alternative
cause of action.
The following order is made:
1. The appeal succeeds wlth costs.
2. The order of the court a quo is set
aside. The following order
is
substituted:
23
Judgment is granted in favour of the plaintiff in the terms sought by it in its
summons:
(a) Payment of the sum of R71
257,14;
(b)
Interest thereon at the
rate of 1296 per annum a tempore morae from date of judgment to date of
payment;
(c)
Costs of
suit.
P M NIENABER JA
JOUBERT JA )
NESTADT JA ) CONCUR
PREISS AJA )
KRIEGLER AJA )