Brief Summary

Constitutional Law — National Credit Act — Rescission of default judgment — Applicants sought to rescind a default judgment granted to FirstRand Bank for loan enforcement, claiming improper termination of debt review and negligence by their attorneys. The High Court dismissed the rescission application, finding no bona fide defense due to the breach of a debt-restructuring order. The Constitutional Court considered whether to grant leave to appeal and the merits of the case. Holding — The Constitutional Court held that the breach of the debt-restructuring order entitled FirstRand to enforce the loan without further notice, and the default judgment was not erroneously granted. The application for rescission was dismissed, and leave to appeal was granted in the interests of justice.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an application in the Constitutional Court for leave to appeal against a High Court decision refusing to rescind a default judgment. The default judgment arose from mortgage-loan enforcement proceedings instituted under the framework of the National Credit Act 34 of 2005 (the NCA) and implicated the statutory regime governing debt review and debt-restructuring orders.

The applicants were Mr Destri Joseph Malcolm Ferris and Mrs Soraya Lachporia Ferris, consumers who had obtained home-loan finance secured by a mortgage bond. The first respondent was FirstRand Bank Limited, the credit provider and bondholder. The second respondent was D Lee (whose role did not feature prominently in the reasoning as set out in the supplied text).

The procedural history was extended. After the applicants fell into arrears, they entered the NCA debt-review process, culminating in a magistrates’ court debt-restructuring order. Following breach of that restructuring order, FirstRand instituted enforcement proceedings, obtained a default judgment (after the applicants’ defence was struck out), and the applicants later sought rescission in the High Court. The High Court refused rescission; leave to appeal was refused by the High Court and then by the Supreme Court of Appeal. The applicants ultimately approached the Constitutional Court, doing so out of time, which necessitated an application for condonation.

The general subject matter of the dispute was whether the applicants were entitled to rescission of the default judgment—particularly in light of alleged defects in delivery of a section 86(10) termination notice and the interplay between debt review, debt-restructuring orders, and subsequent enforcement once a restructuring order is breached.

2. Material Facts

In October 2007, the applicants borrowed money from FirstRand to purchase a home. The loan was secured by a mortgage bond over the property. The applicants subsequently fell into arrears.

In February 2009, the applicants applied for debt review in terms of section 86(1) of the NCA. In March 2009, the debt counsellor made an offer to FirstRand proposing repayment terms more favourable to the applicants than the original agreement. The parties disputed whether FirstRand ignored the offer (as the applicants asserted) or refused it because it was not permissible under the NCA (as FirstRand asserted). It was common cause in the narrative that it did not appear that FirstRand made a counter-offer.

In September 2009, the debt counsellor brought an application in the Randburg Magistrates’ Court under section 86(7) seeking an order declaring the applicants over-indebted and rearranging their obligations. While that application was pending, FirstRand sent a notice on 20 April 2010 under section 86(10) purporting to terminate the debt review. The applicants consistently contended the notice was not properly delivered. Although FirstRand initially contested that point, it conceded before the Constitutional Court that the section 86(10) notice had not been properly delivered.

On 30 April 2010, the Magistrates’ Court granted a debt-restructuring order on terms requested by the applicants. The order declared them over-indebted, rearranged their debt obligations, and stated that the original credit agreement would be “revived and be fully enforceable” if the restructuring order were breached.

On 7 May 2010, approximately a week later, the applicants fell behind on payments due under the debt-restructuring order. By 14 June 2010, they had fallen further behind, having paid only R1 000 of almost R9 000 then owed under the order. FirstRand issued summons seeking payment of the full outstanding balance plus interest and an order declaring the home specially executable.

The applicants entered an intention to defend and delivered a plea contending that the debt review had not been terminated due to defective delivery of the section 86(10) notice. FirstRand filed a replication contending it was entitled to enforce because the applicants had breached the debt-restructuring order. FirstRand pursued summary judgment, which the applicants successfully resisted. Thereafter, the applicants failed to make discovery timeously, leading FirstRand to apply to strike out the defence and seek default judgment. The order was granted on 9 November 2011.

On 23 May 2012, more than six months later, the applicants sought rescission under Uniform Rule 42(1)(a) alternatively under the common law or Rule 31. They attributed their default principally to their attorneys’ negligence, and argued (amongst other things) that the default judgment was wrongly granted because the section 86(10) notice had not been properly delivered and that execution would unjustifiably infringe the right of access to adequate housing.

On 5 October 2012, the High Court dismissed the rescission application, concluding in substance that there was no basis for rescission and that the applicants lacked a bona fide defence. Subsequent leave applications failed in the High Court and Supreme Court of Appeal. The Constitutional Court application was filed late.

3. Legal Issues

The central questions before the Constitutional Court were whether to condone the late filing of the application for leave to appeal, and whether leave to appeal should be granted. Those enquiries depended materially on whether the proposed appeal had reasonable prospects of success and whether it was in the interests of justice to entertain it.

The prospects enquiry, in turn, required consideration of whether the High Court’s refusal to rescind the default judgment was legally vulnerable. This involved applying the legal standards for rescission under Rule 42(1)(a) (judgment “erroneously sought or erroneously granted”) and, alternatively, under Rule 31 and the common law (requiring “good cause”, including a reasonable explanation for default and a bona fide defence on the merits).

The dispute thus involved a combination of questions of law (interpretation and application of the NCA provisions concerning enforcement following breach of a debt-restructuring order; requirements for rescission and condonation), and the application of law to fact (whether the default judgment was “erroneously granted”; whether the applicants had a bona fide defence; whether their explanation for default was reasonable; and whether the High Court’s discretion was properly exercised).

4. Court’s Reasoning

Jurisdiction and constitutional character

The Court accepted that the matter raised constitutional issues because it required interpretation of the NCA in a manner connected to constitutional commitments, as recognised in earlier Constitutional Court authority concerning the NCA. On that basis, jurisdiction was established without needing to determine the impact of the later constitutional amendment referenced in argument.

Condonation: interests of justice and prospects

The Court applied the principle that lateness is not the only consideration and that the governing standard for condonation is whether granting it is in the interests of justice. In that enquiry, the Court treated prospects of success and the importance of the issues as relevant factors, and recognised overlap between the condonation enquiry and the leave-to-appeal enquiry.

The explanation tendered for the delay (fault attributed to a correspondent attorney) was characterised as less than satisfactory. The absence of opposition by FirstRand and lack of demonstrated prejudice were not treated as decisive, and the Court reiterated that condonation is not granted merely for the asking. Nonetheless, the Court accepted that certainty on when a credit provider may enforce a loan subject to a breached debt-restructuring order was of broader importance, and it granted condonation on balance.

Rescission under Rule 42(1)(a): no “error” in the default judgment

The Court emphasised that Rule 42(1)(a) differs from rescission under Rule 31 and the common law because it does not require “good cause” (including a bona fide defence). The key requirement is whether the judgment was “erroneously sought or erroneously granted”.

On the merits, the Court concluded there was no error in the granting of default judgment because the applicants had breached the debt-restructuring order, and that breach entitled FirstRand to enforce the original loan without further notice. The Court grounded this conclusion in the NCA’s text, stating that section 88(3)(b)(ii) does not require a further notice; rather, it prevents enforcement while debt review applies unless the debtor defaults on the restructuring order (among other stipulated circumstances). Additionally, section 129(2) was treated as expressly excluding the need for a section 129(1) notice for debts subject to debt-restructuring orders.

The Court also relied on the express terms of the restructuring order, which provided that the “rights and obligations as amended” would be revived and “fully enforceable” upon default under the court order. In the Court’s analysis, this reinforced the statutory position that enforcement may follow breach without more.

The Court further reasoned that even if further notice had been required, the absence of such notice would at most amount to a dilatory defence (suspending proceedings rather than negating the cause of action) and would not constitute the kind of irregularity that renders a judgment “erroneously granted” for purposes of Rule 42(1)(a).

Response to the applicants’ substantive contentions

The applicants relied on the conceded defect in delivery of the section 86(10) notice to contend that enforcement was incompetent because the debt review had not been terminated. The Court rejected this as missing the point: while FirstRand could not rely on section 86(10) to justify enforcement (given defective delivery), it had an independent basis for enforcement arising from the breach of the debt-restructuring order and the operation of the NCA and the order’s terms.

The applicants also argued FirstRand had failed to participate in the debt-review process in good faith because it refused the debt counsellor’s initial offer without a counter-offer. The Court treated the asserted good-faith duty (even if applicable earlier) as not assisting after a debt-restructuring order had been made, because the order displaced the need for negotiated agreement. The Court also noted that the restructuring order was granted on the applicants’ own requested terms, which undermined any suggestion of prejudice flowing from the alleged lack of good faith.

A further contention—that the applicants had “substantially” complied with the restructuring order—was rejected. The Court noted that substantial compliance may be recognised in some settings, but found no textual indication in the NCA or the order that anything short of actual compliance sufficed. The argument was also raised for the first time at the hearing in the Constitutional Court, and the Court referred to its cautious approach to issues raised for the first time on appeal. In any event, the payment history described (R1 000 paid out of almost R9 000 owed at the relevant time) did not persuade the Court that substantial compliance existed.

The applicants’ pleading-based argument—that FirstRand could not raise non-compliance with the restructuring order in replication—was also rejected. The Court reasoned that FirstRand had pleaded termination of debt review by section 86(10) notice; the applicants met that by asserting the debt review had not been terminated; and it was therefore open to FirstRand in replication to advance the alternative basis for enforcement, namely breach of the restructuring order.

Rescission under Rule 31 and the common law: absence of good cause

Turning to Rule 31 and common-law rescission, the Court reiterated that these routes require good cause, comprising a reasonable explanation for default, bona fides in bringing the application, and a bona fide defence with a prima facie case on the merits.

The Court held that the applicants failed at least the explanation and merits components. It stated that attorney negligence does not invariably constitute a reasonable explanation. It also noted that it was not seriously disputed that Mrs Ferris became aware of the default judgment within about 20 days of its being granted, yet rescission was only sought much later.

On the merits, the Court found the applicants lacked a bona fide defence because their breach of the debt-restructuring order entitled FirstRand to enforce and they presented no other defence going to the merits of the enforcement claim.

Interference with discretion and interests of justice for leave to appeal

The Court restated the standard for appellate interference with discretion: interference is warranted only if the discretion was not properly exercised, for example through capriciousness, wrong legal principle, incorrect appreciation of the facts, lack of unbiased judgment, or absence of substantial reasons. The Court concluded that nothing in the High Court’s approach justified interference.

Because the applicants lacked reasonable prospects of success, the Court held it was not in the interests of justice to grant leave to appeal. It added that even if relief were granted, it would only delay an outcome that would likely recur because FirstRand could enforce again; the applicants’ conduct in the litigation did not assist them (including their stance regarding knowledge of the default judgment and vacillation on breach); and they had another remedy, namely a potential claim against their attorneys.

5. Outcome and Relief

The Constitutional Court granted condonation for the late filing of the application for leave to appeal. It nonetheless refused leave to appeal on the basis that the matter lacked reasonable prospects of success and that it was not in the interests of justice to hear it.

As to costs, FirstRand conceded it did not seek costs, and the Court made no order as to costs.

Cases Cited

Ferris and Another v Firstrand Bank Limited and Another (CCT 52/13) [2013] ZACC 46; 2014 (3) BCLR 321 (CC); 2014 (3) SA 39 (CC).

Sebola v Standard Bank of South Africa Limited and Another (full citation not provided in the supplied judgment text).

Bertie Van Zyl (full citation not provided in the supplied judgment text).

Fillis (Eastern Cape Division of the High Court) (full citation not provided in the supplied judgment text).

Legislation Cited

National Credit Act 34 of 2005, including sections 86(1), 86(7), 86(10), 88(3)(b)(ii), 129(1), and 129(2).

Constitution of the Republic of South Africa, 1996, including section 167(3)(b)(ii).

Constitution Seventeenth Amendment Act (mentioned in relation to section 167(3)(b)(ii); further details not provided in the supplied text).

Rules of Court Cited

Uniform Rules of Court, Rule 42(1)(a).

Uniform Rules of Court, Rule 31.

The Constitutional Court’s Rules (referred to in relation to the time period for filing; specific rule number not provided in the supplied text).

Held

The Court held that the late filing of the leave-to-appeal application should be condoned in the interests of justice, but that leave to appeal should nonetheless be refused because the proposed appeal lacked reasonable prospects of success and it was not in the interests of justice to entertain it.

On the merits of rescission, the Court held that the default judgment was not “erroneously sought or erroneously granted” for purposes of Rule 42(1)(a), principally because the applicants’ breach of a magistrates’ court debt-restructuring order entitled the credit provider to enforce the original loan without further notice under the NCA framework and the terms of the restructuring order. The defective delivery of the section 86(10) notice did not avail the applicants because enforcement was independently justified by breach of the restructuring order.

The Court further held that rescission could not be obtained under Rule 31 or the common law because the applicants failed to show good cause, including a reasonable explanation for default and a bona fide defence on the merits. It also held that there was no basis to interfere with the High Court’s discretionary refusal of rescission.

LEGAL PRINCIPLES

The governing standard for condonation is the interests of justice, in which prospects of success and the importance of the issues are relevant, and lack of opposition or prejudice is not decisive.

Rescission under Uniform Rule 42(1)(a) does not require good cause, but requires that a default judgment must have been “erroneously sought or erroneously granted”; a merely dilatory complaint (one that would delay proceedings but not defeat the cause of action) does not without more establish the kind of error contemplated by the rule.

Where a debt-restructuring order exists and is breached, the NCA provisions cited (including section 88(3)(b)(ii) and section 129(2)) were applied to support the proposition that the credit provider may enforce the original credit agreement without further notice, and that the specific content of the restructuring order may reinforce that enforceability upon breach.

Rescission under Rule 31 and the common law requires good cause, including a reasonable explanation for the default and a bona fide defence with a prima facie case; attorney negligence is not necessarily a sufficient explanation, particularly where an applicant becomes aware of the judgment and delays further.

An appellate court will interfere with a lower court’s exercise of a discretionary power only if that discretion was not properly exercised, including where the lower court acted on a wrong principle, misapprehended the facts, acted capriciously, or lacked substantial reasons.

Ferris and Another v Firstrand Bank Limited and Another (CCT 52/13) [2013] ZACC 46; 2014 (3) BCLR 321 (CC); 2014 (3) SA 39 (CC) (12 December 2013)