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[2002] ZASCA 23
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Cape Produce Co (Port Elizabeth) (Pty) Ltd v Dal Maso NO and Another (120/2001) [2002] ZASCA 23; 2002 (3) SA 752 (SCA) (27 March 2002)
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Case no: 120/2001
REPORTABLE
In
the matter between:
CAPE
PRODUCE CO (PORT
ELIZABETH)
(PTY) LTD
Appellant
and
DAL
MASO, RM, NO
First
respondent
SCHOEMAN, PN, NO
Second
respondent
Before:
Smalberger
ADP, Harms, Cameron, Navsa and Mpati JJA
Appeal
heard:
11 March 2002
Judgment:
27 March 2002
_____________________________________________________________________
Subordination
agreement â Effect on liability of surety â Available to surety
even though neither a âdefence
in rem
â nor a âdefence
in
personam
â â Wording of suretyship however excluding reliance
upon agreement â In addition, agreement inapplicable because no
other creditors
in favour of whose claims main creditorâs claim
could be subordinated
JUDGMENT
______________________________________________________________
CAMERON
JA
[1]
This appeal concerns, amongst other issues, the effect on a surety's
liability of
an agreement that subordinates a creditor's claims against a
principal debtor to those of other creditors by postponing
its
enforceability. At issue is a debt of R15 million. It is owed to a
company associated with the appellant, which took cession
of its
claim against two sureties (for brevity I refer to the appellant
itself as 'CPC', and to the respondents in the appeal,
the executors
of the estates of the sureties, who both died after the action was
instituted, as 'the sureties'). The suretyships
at issue date from
October 1988 and July 1996. In them, the sureties bound themselves
jointly and individually as sureties and co-principal
debtors in full
for the debts of the principal debtor, a private company called
Alberti Livestock ('Alberti'). In about October
1996 CPC became the
sole shareholder in Alberti. At that stage Alberti was hugely
indebted to CPC, which had over a period of years
in effect been
keeping it solvent. In December 1996 CPC and Alberti concluded an
agreement in which CPC's claims against Alberti
were subordinated to
those of other creditors. The agreement starts by recording
Alberti's substantial liability to CPC, and that
CPC has 'agreed to
assist' it by subordinating its claims in favour of Alberti's other
creditors. Its further material terms are:
'2. In
order to assist [Alberti], CPC, agrees, subject to the limitation
imposed in 4, that -
2.1 It
subordinates for the benefit of the other creditors of [Alberti],
both present and future, so much of its claim(s) against
[Alberti] as
would enable the claims of such other creditors to be paid in full;
2.2 The
claims of such other creditors of [Alberti], both present and future,
will rank preferent to the subordinated claim of CPC
against
[Alberti].
2.3 .
. .
3. It
is the intention of the parties that this agreement constitutes a
contract for the benefit of other creditors of [Alberti],
both
present and future, and that the benefit shall be capable of express
or implied acceptance by any or all such creditors who
may then
enforce any term of this agreement.
4. The
[subordination] referred to in 2 shall remain in force and effect for
so long only as the liabilities of [Alberti] exceed
its assets,
fairly valued, and shall lapse immediately upon the date that the
assets of [Alberti] exceed its liabilities and shall
not, except by
further agreement in writing, be reinstated if thereafter the
liabilities of [Alberti] again exceed its assets, provided
that the
liabilities of [Alberti] shall be deemed to continue to exceed its
assets unless and until the auditor of [Alberti] has
certified in
writing that he has been furnished with evidence which reasonably H
satisfies him that the liabilities do not exceed
the assets.
5. CPC
hereby agrees that until such time as the assets of [Alberti] fairly
valued exceed its liabilities, and the auditor's certificate
referred
to in 4 has been issued, it shall not be entitled to demand or sue
[for] repayment of the whole or any part of the said
amount owing to
it by [Alberti] and set-off shall not operate in relation to the
subordinated claim in respect of any debts owing
by it now or in the
future, provided that if the auditor of [Alberti] shall certify in
writing that he has been furnished with evidence
which reasonably
satisfies him that the amount by which the liabilities of [Alberti]
exceed its assets, such excess portion of the
subordinated claim as
is specified in the said certificate shall be released from the
operation of this agreement.'
[2]
CPC instituted action against the sureties for payment of some R24
million. The first defendant opposed the action; the second
abided
the Court's decision. At the trial it was agreed that if the action
succeeded judgment should be in the amount of R15 million.
In the
trial Court the action was dismissed; and an appeal to the Full Court
was unsuccessful. The defence that succeeded at first
instance before
Joffe J as well as before the Full Court (Van Oosten J, Claassen and
Mlambo JJ concurring)
1
was that the subordination agreement deferred CPC's right to
claim against Alberti, with a corresponding benefit to the sureties.
Hence CPC's claim against them was premature. CPC's argument that the
subordination agreement was inapplicable because there were
no
liabilities to be subordinated - a fact the evidence clearly
established - was rejected in both Courts. This Court granted
CPC
special leave for a further appeal in terms of s 20(4)(a) of the
Supreme Court Act 59 of 1959.
Does
a subordination agreement create either a defence in rem or a defence
in personam?
[3]
In both the trial Court and on appeal to the Full Court it was held,
invoking the common-law distinction between defences relating
to the
principal debtor personally (defences in
rem
) and those
relating to the nature, validity or existence of the debt itself
(defences in rem), that the subordination agreement constituted
a
defence available to the sureties. This Court considered the
distinction in
Ideal Finance Corporation v Coetzer
,
2
where it held that a surety was not entitled to the protection from
certain types of execution orders that a statute extended to
a
'buyer' under legislation regulating hire-purchase transactions
because the protection the statute afforded the principal debtor
was
personal, and did not affect the nature, validity or existence of
the creditor's claim or cause of action.
3
In
Standard Bank of SA Ltd v SA Fire Equipment (Pty) Ltd and
Another
,
4
Rose Innes J analysed the distinction, in my view accurately, in a
passage that has often been cited and followed, thus:
'The
contrast between defences
in rem
and
in personam
thus
is that those
in rem
attach to the claim or cause of action or
the obligation itself and arise from the invalidity, extinction or
discharge of the obligation
itself, whoever the debtor may be; those
in personam
arise from a personal immunity of the debtor from
liability for an otherwise valid and existing civil or natural
obligation. In the
case of a defence
in personam
the
obligation and debt remain in existence - the creditor may prove
his claim in the insolvency or liquidation, the creditor
may await
the end of the moratorium, the minor's obligation remains a natural
obligation, but in each case the debtor is personally
immune from a
claim. In the case of a defence
in rem
the law does not
recognise the obligation or debt even as a natural obligation
(illegality) or no obligation in fact came into existence
or it was
vitiated on a ground justifying its termination (mistake,
misrepresentation, duress) or the obligation has ceased because
it
has been discharged or otherwise extinguished (payment, compromise,
novation, judgment). It is in this sense that the defences
in rem
are said to adhere to or arise upon the obligation itself, regardless
of the person of the debtor.'
[4] The
distinction between defences in personam and in rem as received from
our common law authorities and interpreted and applied
in our case
law does not, however, seem to me to be helpful in determining the
respective positions of creditor, principal debtor
and surety when a
subordination agreement is at issue. The reason is that the dichotomy
between the two types of defence does not
seem readily applicable to
the situation a subordination agreement creates, which is not to
extinguish the creditor's claim, but
to render it unenforceable
during the subsistence of a condition. The present case illustrates
the point. At the time the subordination
agreement was concluded in
December 1996, the debt was valid and enforceable against both
Alberti and the sureties. What the subordination
agreement did was to
put the enforceability of the debt into abeyance subject to
certain conditions. As Goldstone JA explained
in
Ex parte De
Villiers and Another NNO: In re Carbon Developments (Pty) Ltd (in
Liquidation)
,
5
the subordinated debt 'continues to exist', but 'its enforceability
is made subject to the fulfilment of a condition'. He pointed
out
that the practical effect of such a condition depends on the terms of
the specific agreement. But in creating a moratorium
for the
benefit of other creditors, such a creditor renders its own claim
unenforceable unless other creditors receive payment in
full, with
the result that in the event of the principal debtor's insolvency
'the creditor has no claim'.
6
[5]
The inappropriateness of the received dichotomy to this situation is
evident. On the one hand the subordinated debt is not unenforceable
because it is invalid
7
or because it has been extinguished or discharged. On the contrary,
although its enforceability is made subject to a condition,
until the
occurrence of which the creditor cannot claim repayment at all, the
debt remains in existence. On the other hand, it
would be wrong to
state that for this reason the unenforceability of the debt is purely
'personal' to the principal debtor, since
it does not relate to any
capacity or attribute attaching to the person of the principal
debtor. (Examples from our case law include
a statutory moratorium
for soldiers serving abroad,
8
the fact that the debtor is a buyer protected under a statutorily
regulated transaction of hire-purchase,
9
and the debtor's insolvency.
10
)
[6] It seems
an unnecessary and inappropriate pursuit of doctrinal uniformity to
try to pare or push the case of a subordination agreement
into either
slot in the received dichotomy. The debt is unenforceable because,
while the condition subsists, the creditor's cause
of action
itself is deficient. The creditor has no valid claim until the
condition the subordination agreement spells out has been
fulfilled.
Until then the principal debtor has no need to invoke either a
defence personal to him- or herself, or the extinction,
discharge or
invalidity of the debt: the principal debtor is immune from suit
simply because the non-fulfilment of the condition,
so long as it
endures, renders the creditor's cause of action incomplete.
[7]
This incompleteness affects proceedings against not only the
principal debtor but also a surety, whose liability is accessory
to
that of the principal debtor.
11
The principle of the surety's accessory liability was correctly
applied in
MAN Truck & Bus (SA) (Pty) Ltd v Singh and Another
(2)
,
12
the criticism of which in the judgment of the Full Court misses the
point that the received dichotomy was not applied because it
was not
applicable.
13
In my view, therefore, the conclusion the courts below reached, that
the sureties could invoke the subordination agreement, was
correct, though not for the reasons given.
[8]
The relevance of this analysis to the present case is that the
Judges in the Courts below approached the problem as one primarily
of
categorisation: if the defence based on the suretyship agreement was
in rem, it was available to the sureties and that disposed
of the
main burden of the case. The attempt to press the situation created
by the subordination agreement into the slots provided
by the
received dichotomy, in my view, diverted attention from questions
more pertinent to the resolution of the case. Those were
(a) whether
the fact that the subordination agreement rendered the debt
conditionally unenforceable assisted the sureties in the
light of the
wording of the suretyship agreement; and (b) whether the
subordination agreement was applicable at all, given the
fact - which
was common cause at the trial - that Alberti had no debts (other than
that of CPC) to which that debt could be subordinated.
I now consider
these issues.
The
terms of the suretyship agreement
[9] It is
trite that a surety's liability depends on the terms of the
suretyship.
14
In the present case, the suretyship concluded in July 1996, so far as
is relevant, reads:
'It
is further agreed and declared that . . . [CPC] shall be entitled
without prejudice to its rights hereunder to give time, compound
with, release from liability or make any other arrangements with
[Alberti] . . . in respect of his indebtedness to [CPC]'.
In
MAN Truck & Bus (SA) (Pty) Ltd v Singh and Another (2)
15
the suretyship provided merely that it was 'in the absolute
discretion of the creditor' to 'grant time or other indulgences to
the
debtor' and 'to delay the date of repayment or to vary the
terms of repayment'. The creditor was also empowered 'to release the
whole or any portion of any security or to release any co-principal
debtor or co-surety [and] to compound or make any arrangements
with
the debtor'. It was held that the creditor's giving of time to the
principal debtor did not affect its claim against the surety,
but
that the claim could nevertheless be sued on only when the main debt
was due, namely when the principal debtor had failed to
pay the debt
within the additional time granted. In the present case the Full
Court adopted this approach. It held that the wording
of the
suretyship 'merely ensures that the surety is precluded from
contending that any of the creditor's acts referred to has
prejudiced him thus entitling him to lawfully withdraw from the
suretyship'.
16
[10]
I cannot agree. The suretyship at issue here differs in two signal
respects from that in the
MAN Truck
case. First, the agreement
in
MAN Truck
did not empower the creditor to release the
principal debtor (in contrast to a co-principal debtor or another
surety). More importantly,
however, it did not expressly state what
consequences it precluded from being attached to the granting of time
or any other indulgence.
It merely recorded that the creditor was
empowered to grant time or indulgences, and to release a co-principal
debtor or surety.
The natural conclusion was that the agreement was
intended only to preclude the release of the surety in the
circumstances envisaged
- a consequence that at common law would
otherwise have followed.
17
[11]
The agreement here expressly empowers CPC not only to give time
to
Alberti, and to release it from liability, but stipulates that these
powers may be exercised 'without prejudice to its rights
A
hereunder'. Those rights were expressed to include 'repayment on
demand' of the sum owing by Alberti. The natural and obvious
reading
of these provisions is that CPC was entitled to subordinate in favour
of other creditors the debt of Alberti without prejudicing
its right
to demand immediate repayment from the sureties. If CPC was empowered
to release Alberti entirely without prejudice to
its right to demand
repayment, then it was similarly entitled to subordinate its debt in
favour of Alberti's other creditors without
affecting its entitlement
against the sureties. The larger entitlement must include the lesser,
and in this case that the natural
reading of the suretyship agreement
is that CPC acquired both, and that though the sureties were entitled
to invoke the subordination
of Alberti's debt, the terms of the
agreement of suretyship precluded them from doing so effectually.
[12]
It follows that on this ground alone the trial Court and the Full
Court, in my view, erred in dismissing CPC's claim.
The
interpretation of the subordination agreement
[13]
The most signal reason for concluding that CPC's claim was
erroneously dismissed lies in the evidence, which was not disputed
at
the trial, that, though the subordination agreement would have put in
abeyance the enforceability of CPC's claim in favour of
Alberti's
other creditors, there were at all relevant times no such creditors
at all.
[14] At the
trial before Joffe J, a chartered accountant was called whom the CPC
group of companies had until November 1997 employed
'in-house'.
Thereafter he became a partner in the firm of chartered accountants
that prepared the audited statements relating to
Alberti, which were
submitted without contest as evidence during the trial. It will be
recalled that in October 1996 CPC acquired
all the shares in Alberti,
which was itself thus part of the CPC group at the time the
accountant in question was still employed
by it. The accountant
therefore had first-hand knowledge, which was not put in issue at the
trial, not only of the group's dealings
and specifically of the
financial standing and liabilities of Alberti, but of its
authenticated financial statements in regard to
the position of
Alberti.
[15]
He testified without controversion that all Alberti's other
creditors had been paid in full in December 1996. The sole
outstanding
debt was for the audit fee in the amount of R5 002 for
the financial year ending 30 June 1997. That account was presented
for payment
in December 1997 when it became due (hence after summons
was issued in March 1997). It was paid in full on presentation, as
the auditor
testified at the trial. It was therefore established that
at the time the action was instituted there were no creditors of
Alberti
other than CPC itself, and the Full Court's suggestion to the
contrary
18
is therefore erroneous.
[16]
Despite this, both the trial Court and the Full Court rejected CPC's
contention that the subordination agreement was inapplicable
to the
claim. Both Courts held that the subordination agreement itself
deemed the excess of liabilities over assets to continue until
the
auditor certified otherwise in writing (clause 4), and that until the
certificate in question had been issued, CPC was not entitled
to
demand or sue for repayment of the debt (clause 5).
[17] I am
unable to agree with this approach to the interpretation of the
agreement, which, in my view, flies in the face of the
parties'
intentions at the time the agreement was concluded, offends against
elementary conceptions of commercial reality and disregards
the
purpose for which the contract was created.
19
The critical provision in the agreement is clause 2, and the Courts
below, in my respectful view, omitted to focus on its effect
in
contrast to that of clauses 4 and 5. It is clause 2 that creates the
subordination. That subordination is stated to be 'for the
benefit of
the other creditors of the company [Alberti]'. Only so much of CPC's
claim is subordinated 'as would enable the claims
of such other
creditors to be paid in full'. It is this subordination - that is,
in favour of 'the other creditors' - to which clause
4 expressly
refers back. It is in respect of this subordination that clause 4
deems an excess of liabilities over assets to exist
until
certification, and it is this subordination that clause 5 erects as
an impediment to legal action in the absence of certification.
[18]
How is clause 2 to be interpreted if it is established without
dispute that there are no other creditors at all? In my view,
quite
clearly the subordination it effects is entirely inoperative, and the
deeming provision of clause 4, and the impediment created
by clause
5, do not come into operation at all. Clause 4 was plainly designed
to create a mechanism of proof to avoid disputes about
whether and in
what measure Alberti's assets exceeded its liabilities. Clause 5 was
designed to impede legal action by CPC in the
absence of such proof.
But where there are in fact no disputes at all, and where no disputes
are indeed feasible, because of an absence
of any question about the
existence of other creditors, the certification requirement is wholly
inapplicable.
[19]
In these circumstances the decision by the Courts below that the
absence of appropriate certification vitiated the creditor's
claim
against the sureties is erroneous.
1.1 The appeal succeeds
with costs, including the costs of two counsel.
1.2 The
decision of the Full Court is set aside.
1.3 In
its place, the following order is substituted:
'1. The appeal succeeds
with costs, including the costs of two counsel. I
2. The
judgment of the trial court is set aside.
3. In
its place there is substituted:
(i) Judgment is granted
in favour of the plaintiff against the first and second defendants,
jointly and severally, the one paying,
the other to be absolved, in
the amount of R15 million.
(ii) Interest on this
amount at the prime rate of Nedbank Ltd from 1 October 1996 to date
of payment.
(iii) Costs
of suit, including the costs of two counsel.'
E
CAMERON
JUDGE
OF APPEAL
Smalberger
ADP, Harms JA, Navsa JA and Mpati JA concurred.
1
Reported:
2001 (2) SA 182
(W)
2
1970
(3) SA 1
(A)
3
1970
(3) SA at 8H and 10F, per Rumpff JA; at 12D-E, per Holmes JA.
4
1984
(2) SA 693
(C) 696C-F
5
1993
(1) SA 493
(A) 504H-J.
6
1993
(1) SA 493
(A) 505E-H.
7
CroxonâsGarage
(Pty) Ltd v Olivier
1971 (4) SA 85
(T) (hire purchase contract
offending against s 7 of ct 36 of 1942 renders also suretyship
concluded in respect of it invalid).
8
Worthington
v Wilson
1918 TPD 104
(Public Welfare and Moratoriums Acts 1 of
1914 and 37 of 1917 disabled suit against soldiers on active service
abroad for duration
of their service; defence personal to such
soldiers and not available to sureties).
9
Ideal
Finance Corporation v Coetzer
1970 (3) SA 1
(A).
10
Compare
Jayber (Pty) Ltd v Miller and Others
1981 (2) SA 403
(W)
(sureties liable for damages arising from principal debtorâs
inability to pay rental for full period of lease which arose
because
of principal debtorâs liquidation);
Barclays National Bank Ltd
v von Varendorff and Others
1985 (2) SA 544
(D) 549 (surety not
entitled to rely on limitation for purposes of proof of interest
from date of sequestration on non-preferent
claims against insolvent
principal debtor in s 103 of
Insolvency Act 24 of 1936
on rates of
interest orally agreed to by principal debtor, since provision
inserted for purposes of proof only and not invalidating
underlying
obligation to pay orally agreed interest)
11
Neon
and Cold Cathode Illuminations (Pty) Ltd v Ephron
1978 (1) SA
463
(A) 471C-472F.
12
1976
(4) SA 266
(N) 267H-268B.
13
See
2001(2) SA 182 at 191G-H.
14
ABSA
Bank v Davidson
2000 (1) SA 1117
(SCA) para 19.
15
1976
(4) SA 266
(D)
16
2001
(2) SA 193
(W) 192G-193C.
17
Compare
French v Sterling Finance Corporation (Pty) Ltd
1961 (4) SA
732
(A) 738 (novation of original agreement discharging surety);
ABSA Bank v Davidson
2000 (1) SA 1117
(SCA) para 19
(prejudice to surety resulting from breach by creditor of legal or
other obligation results in release of surety)
18
2001
(2) SA 182
(W) at 189I.
19
See
Venter and Others v Credit Guarantee Insurance Corporation of
Africa Ltd and Another
[1996] ZASCA 50
;
1996 (3) SA 966
(A) 973C-E; RH Christie
The Law of Contract
4ed (2001) pages 243-244.