Brief Summary

Constitutional Law — Forfeiture of rights under the National Credit Act — Application for leave to appeal against High Court order declaring credit agreements forfeited to the state — Applicant contending that the High Court erred in interpreting section 89(5)(c) as mandatory without discretion — High Court's order made in context of agreements entered into by trustees on behalf of an insolvent estate — Constitutional implications of arbitrary deprivation of property raised — Application for leave to appeal refused on grounds of complexity and the necessity for state participation in proceedings regarding forfeiture provisions.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an application for leave to appeal to the Constitutional Court against an order of the Free State High Court. Leave to appeal had been refused by both the High Court and the Supreme Court of Appeal.

The applicant was Cherangani Trade & Invest 107 (Pty) Ltd, a party that had advanced credit and sought to enforce a set of agreements concluded with trustees of a trust and with an individual. The first, second, and third respondents were the trustees acting on behalf of the Selous Estate Property Trust and did not oppose the proceedings. The fourth respondent was initially Alan Clifford Mason N.O., whose estate was subsequently sequestrated; the proceedings continued against the trustees in the insolvent estate of Alan Clifford Mason, who were substituted as the fourth respondent. The fifth respondent, Gill Egremont Mason, was joined due to a potential interest arising from her prior marriage to the fourth respondent, but took no part in the proceedings.

The general subject-matter of the dispute was the consequence, under the National Credit Act 34 of 2005 (the Credit Act), of a credit agreement concluded by an unregistered credit provider. In particular, the applicant sought to challenge the correctness of the High Court’s order under section 89(5)(c), which resulted in the forfeiture to the State of the applicant’s purported rights under the relevant agreements.

2. Material Facts

The material background facts accepted by the Constitutional Court were that the Trust and the fourth respondent borrowed in excess of R2 million from the applicant in order to satisfy a judgment debt. That earlier judgment had been taken against the Trust and the fourth respondent in relation to a debt secured by mortgage bonds over certain farms.

Shortly before the farms were to be sold in execution, a number of agreements were concluded between the parties. These included a loan agreement regulating repayment and consequences of non-payment, a sale agreement providing for the sale of three farms (one owned by the Trust and two by the fourth respondent) to the applicant at a price equal to the loan amount upon non-compliance, and further agreements relating to small loans and associated obligations. The Constitutional Court described the terms of these agreements as onerous, including, for example, a payment of R250 000 as consideration for concluding the agreements and an interest rate that, after a four-month interest-free period, would be 30% per annum.

It was common cause on the papers that the Trust defaulted, and this default triggered the applicant’s High Court application seeking orders to facilitate enforcement of the agreements. In those proceedings the High Court made an order that, insofar as the agreements related to the fourth respondent, declared them void under section 89(5)(a) and further declared under section 89(5)(c) that the applicant’s rights to obtain payment (as expressed in the High Court order) from the fourth respondent were forfeited to the State.

The Constitutional Court also treated as material the procedural fact that the applicant’s arguments regarding the proper interpretation of section 89(5)(c), including whether it conferred a discretion and whether a mandatory forfeiture could result in disproportionate outcomes, were not advanced in the High Court, though they were addressed in the application for leave to appeal to the Supreme Court of Appeal.

3. Legal Issues

The central legal questions arising on the application for leave to appeal were whether the matter raised a constitutional issue or an issue connected with a decision on a constitutional matter, and whether it was in the interests of justice for the Constitutional Court to grant leave.

Within that framework, the substantive interpretive question that the applicant sought to advance concerned the proper construction of section 89(5)(c) of the Credit Act. The applicant contended that section 89(5)(c), read consistently with section 25(1) of the Constitution (prohibiting arbitrary deprivation of property) and interpreted in accordance with section 39(2) of the Constitution, should be understood as conferring a discretion on a court whether to order forfeiture to the State, to avoid potentially disproportionate forfeitures amounting to arbitrary deprivation of property.

The dispute therefore involved primarily a question of law (statutory interpretation with constitutional implications), together with an application of that legal interpretation to the procedural posture of the case in determining whether leave to appeal should be granted. The interests-of-justice enquiry also required evaluative assessment, including institutional considerations relating to the Constitutional Court functioning as a court of first and last instance on an underdeveloped interpretive question.

4. Court’s Reasoning

The Constitutional Court accepted that the matter raised a constitutional issue. It reasoned that interpreting a forfeiture provision that may operate to deprive a party of property, and which might do so arbitrarily if disproportionate, necessarily implicates section 25(1). The Court accepted that the applicant’s contention was that a constitutionally compliant interpretation, using section 39(2), could be to read section 89(5)(c) as affording a discretion to avoid unconstitutional outcomes.

However, the Court held that the more difficult question was whether granting leave to appeal was in the interests of justice, and concluded that it was not.

A significant aspect of the Court’s reasoning concerned the procedural and institutional implications of the Supreme Court of Appeal having refused leave to appeal without reasons, in circumstances where the interpretive and proportionality issues were not ventilated in the High Court. The Court considered that, if leave were granted, it would effectively be required to determine a complex and important interpretive question as a court of first and last instance, without the benefit of considered judgments from lower courts and without the reflective development ordinarily produced through the appellate process.

The Court further emphasised that the interpretive question regarding section 89(5)(c) was itself uncertain and complex. It highlighted difficulty in determining precisely what is “taken away” from the credit provider and what is “forfeited to the State” under the provision, especially given that unlawful agreements are void and that it was unclear whether forfeiture relates only to contractual claims (described as “purported rights”) or also to a potential unjust enrichment claim. The Court noted that neither counsel could provide clear and consistent guidance on the meaning and reach of the forfeiture mechanism.

Related to that uncertainty, the Court considered the practical consequences of an unclear forfeiture order. It reasoned that the uncertainty created the possibility that the insolvent estate might attempt to benefit from the unlawfulness of the agreements by taking inconsistent positions in future litigation: resisting a claim by the State by arguing that only “purported rights” were forfeited (and thus the State has no enforceable rights), while resisting an unjust enrichment claim by the applicant by arguing that such a claim had also been forfeited to the State. The Court regarded this as a problematic possibility and observed that it could not readily be assumed that the legislature contemplated a result where a party benefited from unlawful agreements.

The Court also treated non-joinder of the relevant state entity as a weighty factor against granting leave. It held that the State had a direct and substantial interest in the matter because the interpretation of the forfeiture clause could affect the State’s entitlement to forfeiture in future cases under section 89(5)(c). Because forfeiture would, if ordered, entitle the State to a right to recover, the Court considered that meaningful participation by the Minister for Finance (or the relevant state entity) could be necessary to address the provision’s context and objectives, including the State’s interest in regulating the credit market and curbing irresponsible lending and borrowing.

The Court additionally scrutinised the High Court’s approach. It observed that the High Court disposed of the mandatory/discretionary character of section 89(5)(c) in a single sentence, effectively stating that it appeared mandatory and that no contrary argument had been advanced. The Constitutional Court noted that the High Court made the forfeiture order without investigating the meaning, purpose, and consequences of the provision, with the consequence that it was unclear what exactly had been forfeited. The Court also identified a further difficulty in the wording of the High Court order, which referred to “payment or compensation,” whereas section 89(5)(c) refers to payment of money or delivery of goods and does not refer to compensation, suggesting the possibility that the order may have been wrongly framed.

Notwithstanding these concerns which might ordinarily favour granting leave, the Court held that a decisive factor against leave was the applicant’s failure to provide particulars showing the extent of prejudice it would suffer from the High Court order, or to provide a basis indicating how a referral back to the High Court (to exercise a discretion, if one existed) could realistically result in a different outcome. The Court regarded reliance on a merely notional possibility of a different outcome as insufficient.

Finally, the Court observed that the applicant was not necessarily without other recourse, since it could potentially pursue restitutionary relief against the insolvent estate, and the State might pursue recovery in consequence of forfeiture. The Court considered that the earlier-noted uncertainties could be addressed in such future proceedings if instituted.

5. Outcome and Relief

The Constitutional Court refused the application for leave to appeal, holding that despite the presence of a constitutional issue, it was not in the interests of justice to grant leave in the circumstances.

The Court ordered the substitution of the Trustees in the insolvent estate of Alan Clifford Mason in place of Alan Clifford Mason as the fourth respondent.

Costs were awarded against the applicant, with the application dismissed with costs, including the costs of two counsel, as agreed between the parties.

Cases Cited

Minister of Public Works and Others v Kyalami Ridge Environmental Association and Another (Mukhwevho Intervening) [2001] ZACC 19; 2001 (3) SA 1151 (CC); 2001 (7) BCLR 652 (CC).

United Watch & Diamond Co. (Pty.) Ltd. and Others v Disa Hotels Ltd. and Another 1972 (4) SA 409 (C).

Billiton Aluminium SA Ltd t/a Hillside Aluminium v Khanyile and Others [2010] ZACC 3; 2010 (5) BCLR 422 (CC).

Lane and Fey NNO v Dabelstein and Others [2001] ZACC 14; 2001 (2) SA 1187 (CC); 2001 (4) BCLR 312 (CC).

National Gambling Board v Premier, KwaZulu-Natal, and Others [2001] ZACC 8; 2002 (2) SA 715 (CC); 2002 (2) BCLR 156 (CC).

Bruce and Another v Fleecytex Johannesburg CC and Others [1998] ZACC 3; 1998 (2) SA 1143 (CC); 1998 (4) BCLR 415 (CC).

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 25(1).

Constitution of the Republic of South Africa, 1996, section 39(2).

National Credit Act 34 of 2005, section 40 (including section 40(4)).

National Credit Act 34 of 2005, section 42(1).

National Credit Act 34 of 2005, section 89(2)(d).

National Credit Act 34 of 2005, section 89(5)(a).

National Credit Act 34 of 2005, section 89(5)(c).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Constitutional Court held that the applicant’s challenge to the interpretation and operation of section 89(5)(c) of the National Credit Act 34 of 2005 raised a constitutional issue because it implicated the constitutional prohibition on arbitrary deprivation of property and invoked the interpretive injunction in section 39(2).

The Court nevertheless held that it was not in the interests of justice to grant leave to appeal. It considered that granting leave would place the Constitutional Court in the position of deciding a complex issue as a court of first and last instance, without the benefit of reasoned judgments from the High Court or the Supreme Court of Appeal. The Court further held that the State had a direct and substantial interest in the interpretation of the forfeiture provision and that the absence of the relevant state entity as a party weighed against granting leave.

The Court also held that the applicant failed to provide sufficient information regarding prejudice or prospects of obtaining a different outcome if the matter were referred back, and that other proceedings could potentially address uncertainties surrounding forfeiture and restitution.

LEGAL PRINCIPLES

A matter implicating the interpretation of a statutory forfeiture provision in a manner that may produce arbitrary deprivation of property engages a constitutional issue under section 25(1), and statutory interpretation must be approached consistently with the injunction in section 39(2) of the Constitution.

In applications for leave to appeal to the Constitutional Court, even where a constitutional matter is present, leave will be granted only if it is in the interests of justice. Considerations relevant to the interests-of-justice enquiry include whether the Constitutional Court would be required to act as a court of first and last instance on a complex question without the benefit of prior reasoned decisions and the reflective process of appellate adjudication.

Where the State stands to benefit directly from a statutory forfeiture mechanism and where the interpretation of such a provision could affect the State’s entitlement in future matters, the State has a direct and substantial interest that may necessitate joinder; a merely financial interest is insufficient, but a legal entitlement that may arise from the order can constitute such an interest.

A court should be slow to make statutory orders with significant consequences, such as forfeiture, without investigating the meaning, purpose, and consequences of the provision being applied, particularly where uncertainty exists as to what rights are affected and how the order interacts with possible restitutionary remedies.

Cherangani Trade & Invest 107 (Pty) Ltd v Mason and Others (CCT116/2009) [2011] ZACC 12; 2011 (11) BCLR 1123 (CC) (8 April 2011)