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[2018] ZASCA 93
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Madibeng Local Municipality v Public Investment Corporation Ltd (603/2017) [2018] ZASCA 93; 2018 (6) SA 55 (SCA) (1 June 2018)
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THE
SUPREME COURT OF APPEAL
OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 603/2017
In
the matter between:
MADIBENG
LOCAL MUNICIPALITY
APPELLANT
and
PUBLIC
INVESTMENT CORPORATION LTD
RESPONDENT
Neutral
citation:
Madibeng
Local Municipality v Public Investment Corporation Ltd
(603/2017)
[2018] ZASCA 93
(1 June 2018)
Coram:
Ponnan,
Wallis and Willis JJA, Plasket and Makgoka AJJA
Heard:
17 May
2018
Delivered:
1 June
2018
Summary:
Local
government – defence that loans raised by a municipality
unenforceable for want of prior written consent of Administrator
of
province – raising of loans to repay other loans not requiring
consent – procedure – rule 38(2) – too
late for
appellant to object to agreement to determine separate issue on
affidavit.
ORDER
On
appeal from:
Gauteng
Division of the High Court, Pretoria (Jansen J sitting as court of
first instance):
1
The order of the court below is set aside and substituted with the
following order:
‘
1
It is declared that the loans raised by the defendant from the
plaintiff are not unenforceable for want of compliance with s 52(2)
of the Local Government Ordinance 17 of 1939.
2
The defendant is ordered to pay the plaintiff’s costs on an
attorney and client scale, such costs to include the costs of
two
counsel.’
2
The appeal is otherwise dismissed with costs, including the costs of
two counsel.
JUDGMENT
Plasket
AJA (Ponnan, Wallis and Willis JJA and Makgoka AJA concurring)
[1]
The central issue in this appeal is whether, when the respondent, the
Public Investment Corporation Ltd (the PIC)
[1]
lent money to the Brits Town Council (Brits), the predecessor of the
appellant, the Madibeng Local Municipality (Madibeng), Brits
was
authorised to raise the loans. The argument raised by Madibeng is
that Brits acted without authorisation, with the result that
the
loans are unenforceable. In the trial court, the Gauteng Division of
the High Court, Pretoria, Jansen J found that there was
no merit in
this argument. This appeal is before this court with the leave of the
court below.
The
facts
[2]
During the late 1980s and early 1990s, Brits raised a number of short
term loans at favourable interest rates from a number
of
institutions. Its plan was to invest the funds on the capital market
in the hope that the returns would outperform the cost
of the loans.
The profits could then be used for future capital projects.
[3]
Matters did not turn out as planned. By 1993, Brits found itself in
deep trouble as minutes of its council meetings and reports,
that
form part of the record, attest. Urgent remedial action was required,
not only to deal with the looming fiscal crisis, but
also to deal
with what appears to have been a serious breakdown in accountable
administration in Brits’ treasury.
[4]
To address the fiscal problem, it became necessary to re-schedule a
number of loans, as the loans were of a short-term nature
while the
underlying investments matured at later dates. To this end, Brits
borrowed a large amount of money from the PIC in order
to pay its
existing short-term loans. On 11 January 1994, in order to repay the
loans it had taken from the PIC, Brits issued to
the PIC a series of
zero coupon stock certificates – essentially promissory notes.
It also pledged a number of insurance
policies to the PIC.
[5]
When Madibeng, which by now had succeeded Brits, failed to timeously
repay the PIC, the latter first exercised its rights in
terms of the
pledged policies. Those were insufficient to cover the full extent of
Madibeng’s indebtedness. The PIC then
proceeded to institute
proceedings against Madibeng on the strength of the zero coupon stock
certificates.
[6]
Three zero coupon stock certificates are in issue in this case. The
first, BR 25, is in respect of a loan of R29 306 987.70.
With an interest rate of 12.47 percent, it had a face value on
maturity of R93 million. The second, BR20, is in respect of a loan
of
R10 219 836.60. With an interest rate of 13.29 percent, it
had a face value on maturity of R37 million. The third,
BR26, is in
respect of a loan of R26 072 786.40. With an interest rate
of 12.47 percent, it had a face value on maturity
of R87 million. The
value of the others, namely BR17 to BR32, were paid to the PIC upon
maturity.
The
pleadings
[7]
In its particulars of claim, the PIC pleaded that, on 11 January
1994, Brits issued to the PIC three zero coupon stock certificates
–
BR25, BR20 and BR26 – which were to be redeemed by payments of
R93 million, R37 million and R87 million on 30 June
2003, 30 November
2003 and 30 November 2003 respectively.
[8]
The PIC pleaded that when the zero coupon stocks fell due, Madibeng
failed to honour them. When amounts received as a result
of the
pledge and part payments made by Madibeng were taken into account,
the capital amounts that the PIC claimed to be outstanding
and to be
due were R65 086 208.30 in respect of BR25, R28 993 449.70
in respect of BR20 and R68 560 304.24
in respect of BR26.
[9]
The PIC claimed payment of these amounts plus interest at the reduced
rate of 10 percent per annum from 1 February 2010 to date
of payment.
[10]
Madibeng filed a special plea and a plea over. The special plea was a
plea of prescription to which the PIC replicated on the
basis that
the part payments and other unequivocal admissions of liability had
interrupted prescription.
[11]
In the plea over, Madibeng admitted that it had failed to pay the PIC
when the zero coupon stocks fell due. It pleaded that
Brits was ‘not
duly authorised to issue the zero coupon stock certificates and that
it is for this reason not in law liable
to the plaintiff’; that
they were ‘invalid, unlawful and unenforceable . . . due to the
fact that the defendant was
not in law duly authorised to issue them
to the plaintiff’; that Brits’ authority to issue them
derived from the Local
Government Ordinance 17 of 1939 (the
Ordinance) and that they were issued in contravention of the
Ordinance with the result that
they were ‘invalid, unlawful and
unenforceable against the defendant’.
[12]
The precise terms of the defence are set out in paragraph 20 of the
plea, which states:
‘
The
defendant further pleads that –
20.1
at all material times, and in particular, on 11 January 1994, when
the zero coupon certificates were issued, the defendant
was a
municipality to which the Ordinance applied;
20.2
the zero coupon certificates upon which the plaintiff relies purport
to have been issued in terms of section 52 of the Ordinance;
20.3
the issuing of the zero coupon certificates to the plaintiff amounted
to raising a loan;
20.4
in terms of section 52(1)(a) and (b) of the Ordinance, the defendant
could only raise a loan for purposes of defraying expenditure
in the
execution of its powers; or repaying an existing loan; or to finance
temporarily loan expenditure or expenditure on revenue
account
incurred in anticipation of receipt of revenue estimated in terms of
section 58 and from which the expenditure would have
been defrayed;
20.5
In terms of section 52(2) of the Ordinance, the defendant could only
raise a loan contemplated in section 52(1) with the prior
approval of
the Administrator appointed in terms of section 68 of the South
Africa Act, 1909;
20.6
the loans allegedly raised by the issuing of the certificates were
not raised for any of the purposes contemplated in section
52(1) of
the Ordinance and were not raised with the prior written approval of
the Administrator. The Administrator could not have
validly and
lawfully approved the raising of the loans in view of the fact that
the purpose of such loans would in any event have
been unlawful;
20.7
in the event that it is found that the Administrator gave written
approval, such approval would have been
ultra vires
due to the
fact that the purpose for which the loans were purportedly raised is
not a purpose for which the Administrator could
in law have validly
and lawfully approved;
20.8
the raising of the loans by the issuing of the zero coupon
certificates was accordingly
ultra vires
, did not and could
not have created a valid and lawful obligation capable of giving rise
to any of the claims upon which the plaintiff
relies in these
proceedings;
20.9
there is, accordingly, no valid debt owing by the defendant to the
plaintiff due to the fact that the basis of the plaintiff’s
claims is invalid and of no force and effect in law for the reasons
stated above.’
[13]
The PIC filed a replication in which it pleaded, inter alia, that the
raising of the loans was not subject to the Ordinance,
that s 52 did
not apply and that Madibeng was ‘in law liable to make good and
repay all the amounts advanced to it by the
Plaintiff as a result of
the loan agreements/transactions concluded and effected by the
parties’.
[14]
Madibeng also counter-claimed an amount of R15 million plus interest
on the basis of unjust enrichment. The quantum it claimed
was the
amount it had paid to the PIC in respect of what it termed its
‘purported obligations’ towards the PIC in respect
of the
zero coupon stocks. The counter-claim is not relevant to the issues
that arise in this appeal and no more need to be said
of it but that
it must have felt to the PIC that, in light of the defence raised,
insult was being added to injury.
The
separation of issues
[15]
Two days before the trial was to commence, Madibeng gave notice that
it wished to have the issues – namely the enforceability
of the
loans, prescription and the counter-claim – separated, with
only the enforceability of the loans being decided.
[16]
At first, the PIC was opposed to the separation of issues. It was,
however, persuaded to agree to the separation. It was also
agreed,
apparently at the suggestion of Jansen J, that rather than oral
evidence being tendered, the parties would each file affidavits
in
which they would set out their contentions. They were both free to
refer to documents in the trial bundle, which is now part
of the
appeal record. On this basis, the issue of the enforceability of the
loans was determined, with the other issues being postponed
sine die.
[17]
In Madibeng’s affidavit, deposed to by Mr N E Mmbengwa, its
manager for legal services, the defence that was pleaded
in respect
of the separated issue was set out fully and consistently with the
plea: the loans were unenforceable because they were
raised without
the written consent of the Administrator in terms of s 52(2) of the
Ordinance. The PIC dealt with the issue in its
answering affidavit,
deposed to by its attorney, Mr M P C Manaka. Madibeng had the
opportunity to, and did, reply.
[18]
In her judgment, Jansen J concluded that ‘the zero coupon
certificates issued by the defendant are valid and that the
defence
of the defendant is without merit and a mere dilatory defence’.
[2]
She agreed with counsel for the PIC that a ‘punitive costs
order’ should be made against Madibeng ‘given the
fact
that it knew that the point of authority was without merit, and a
mere delaying tactic’.
[3]
She accordingly made the following order:
‘
The
separate issue regarding the alleged invalidity of the zero coupon
certificates is dismissed with a punitive costs order, such
order to
include the costs of two counsel.’
The
issues
[19]
While I said in the opening paragraph of this judgment that the
principal issue in this appeal is whether the loans are enforceable,
two further issues also require consideration. The first is
Madibeng’s contention that the procedure adopted by the high
court was irregular with the result that the proceedings should be
set aside and remitted to the high court. The second is the
propriety
and form of the costs order. I shall deal with them after considering
the principal issue.
The
enforceability of the loans
[20]
It is clear from the plea that the point that Madibeng took in order
to sustain the defence of the unenforceability of the
loans was that
the loans required the written consent of the Administrator of the
Transvaal and that consent was never granted,
with the result that
Brits acted without authority when it raised the loans.
[21]
In what follows, I shall assume (without deciding), in favour of
Madibeng that the Ordinance applies.
[22]
Section 52 of the Ordinance provides:
‘
(1)
Subject to the provisions of this Ordinance, a council may by special
resolution –
(
a
)
raise a loan for –
(i)
defraying expenditure incurred in the execution of its powers; or
(ii)
repaying an existing loan: Provided that –
(
aa
)
the loan shall not exceed the amount outstanding on the original
loan; or
(
bb
)
the period within which the loan is redeemable shall not exceed the
unexpired portion of the period within which the original
loan is
redeemable;
(
b
)
raise a short term loan, including a loan at call, in order to
finance temporarily –
(i)
loan expenditure; or
(ii)
expenditure on revenue account incurred in anticipation of the
receipt of revenue estimated in terms of section 58 and from
which
the expenditure would have been defrayed; or
(
c
)
obtain overdraft facilities from a bank.
(2)
A council shall not raise a loan contemplated in paragraph (
a
)(i)
or (
b
) of subsection (1) without the prior written approval of
the Administrator or obtain overdraft facilities as contemplated in
paragraph
(
c
) of that subsection without such approval,
and the Administrator may grant such approval subject to such terms
and conditions
as he may determine . . .
(3)
Where a loan contemplated in subsection 1(
a
)
is raised by the issue of stock, the provisions of the Johannesburg
Municipal Borrowing Powers Ordinance, 1903 (Ordinance 3 of
1903),
except section 51, shall apply
mutatis
mutandis
.’
[23]
The point can be disposed of easily. The facts establish that the
loans that Brits raised were for the purpose of paying back
other
loans. They are loans contemplated by s 52(1)(
a
).
In terms of s 52(2), such loans do not require the prior written
approval of the Administrator. There is, accordingly, no merit
in the
point. This means that in respect of the separated issue, Jansen J
arrived at the correct conclusion.
The
procedural point
[24]
It was argued on behalf of Madibeng that the procedure adopted by
Jansen J was irregular and that, as a result, her order should
be set
aside and the matter remitted to the High Court. In my view, there is
no merit in this argument for the following reasons.
[25]
First, rule 38(2) of the uniform rules allows for evidence to be
adduced by affidavit in trial proceedings. The rule provides:
‘
The
witnesses at the trial of any action shall be examined viva voce, but
a court may at any time, for sufficient reason, order
that all or any
of the evidence to be adduced at any trial be given on affidavit or
that the affidavit of any witness be read at
the hearing, on such
terms and conditions as to it may seem meet: Provided that where it
appears to the court that any other party
reasonably requires the
attendance of a witness for cross-examination, and such witness can
be produced, the evidence of such witness
shall not be given on
affidavit.’
[26]
The approach to rule 38(2) may be summarised as follows. A trial
court has a discretion to depart from the position that, in
a trial,
oral evidence is the norm. When that discretion is exercised, two
important factors will inevitably be the saving of costs
and the
saving of time, especially the time of the court in this era of
congested court rolls and stretched judicial resources.
More
importantly, the exercise of the discretion will be conditioned by
whether it is appropriate and suitable in the circumstances
to allow
a deviation from the norm. That requires a consideration of the
following factors: the nature of the proceedings, the
nature of the
evidence, whether the application for evidence to be adduced by way
of affidavit is by agreement, and ultimately,
whether, in all the
circumstances, it is fair to allow evidence on affidavit.
[4]
[27]
In this case, the parties agreed to place evidence on affidavit
before the court on the separated issue. It was, in essence,
a law
point, and the facts were never in dispute: Madibeng either admitted
or did not deny the payment of the loans to it and the
issuing of the
zero coupon stock certificates. In its plea, no facts were alleged to
place in dispute anything that appears in
the trial bundle. In these
circumstances, I can see no basis upon which it can be suggested that
Jansen J exercised her discretion
injudiciously.
[28]
Once Madibeng agreed to the procedure, it was no longer open to it to
object on appeal. I also cannot see what possible prejudice
it could
have suffered. Indeed, in its reply, it took issue with none of the
facts adduced by the PIC in its answering affidavit.
Conclusion
and order
[29]
In turning to consider the propriety of Jansen J’s costs order
it is, unfortunately, necessary to say something about
the way in
which Madibeng conducted its case. It took the money on offer from
the PIC in order to avert a crisis of Madibeng’s
own making. It
agreed to a means of repayment. When its debts fell due, it made
certain payments. Then, after it had reneged and
summons was issued
against it, it raised the unenforceability of the loans as a defence.
[30]
The conduct of Madibeng was beyond the pale. As an organ of state, it
is required to act ethically, and has failed dismally
to do so in
this matter. Litigation, said Harms DP in
Cadac
(Pty) Ltd v Weber-Stephen Products Co & others
,
[5]
‘is not a game’; organs of state should act as role
models of propriety;
[6]
and they
may not behave in an unconscionable manner.
[7]
[31]
The unconscionable approach taken by Madibeng appears to be the basis
for Jansen J granting a ‘punitive costs order’.
By that,
I presume she meant an order of costs on the attorney and client
scale. While it was within her discretion, on the strength
of
Madibeng’s unconscionable conduct to award a punitive costs
order against it, her order conduces to confusion and cannot
be
endorsed in its original form.
[32]
Jansen J’s order in respect of the merits also requires
reconsideration. She ordered that the ‘separate issue regarding
the alleged invalidity of the zero coupon certificates is dismissed’.
In my view, it would have been more appropriate for
a declaratory
order to have issued to the effect that the loans were not
unenforceable for want of the Administrator’s consent.
Thus,
despite the appeal failing, both orders cannot stand. They must be
set aside and replaced with the orders set out below.
[33]
In the result:
1
The order of the court below is set aside and substituted with the
following order:
‘
1
It is declared that the loans raised by the defendant from the
plaintiff are not unenforceable for want of compliance with s 52(2)
of the Local Government Ordinance 17 of 1939.
2
The defendant is ordered to pay the plaintiff’s costs on an
attorney and client scale, such costs to include the costs of
two
counsel.’
2
The appeal is otherwise dismissed with costs, including the costs of
two counsel.
___________________
C
Plasket
Acting
Judge of Appeal
APPEARANCES
For
appellant
K Tsatsawane and X Mofokeng
Instructed by
Gildenhuys Malatji Inc,
Sandton
Honey Attorneys,
Bloemfontein
For
respondent
P L Mokoena SC and P Khosa
Instructed by
Werksmans Attorneys,
Sandton
Symington & De Kok
Attorneys, Bloemfontein
[1]
The PIC was
established by the
Public Investment Corporation Act 23 of 2004
. It
is a company that is wholly owned by the government, with the
Minister of Finance being the shareholder representative. Its
main
object, in terms of
s 4
, is to be a financial service provider.
[2]
Paragraph 37.
[3]
Paragraph 39.
[4]
See
New
Zealand Insurance Co Ltd v Du Toit
1965 (4) SA 136
(T);
Havenga
v Parker
1993 (3) SA 724
(T);
Abraham
v City of Cape Town
1995 (2) SA 319
(C);
Colarrosi
v Gerber
ECG 29 July 2004 (case no. 613/03) unreported. See too D R Harms
Civil
Procedure in the Superior Courts
(Vol 1) B-278 to B-279.
[5]
Cadac (Pty) Ltd
v Weber-Stephen Products Co (Pty) Ltd & others
[2010] ZASCA 105
;
2011
(3) SA 570
(SCA) para 10.
[6]
S v Makwanyane
& another
[1995] ZACC 3
;
1995
(3) SA 391
(CC) para 222.
[7]
MEC: Department
of Police, Roads and Transport, Free State Provincial Government v
Terra Graphics (Pty) Ltd t/a Terra Works &
another
[2015]
ZASCA 116
;
2016 (3) SA 130
(SCA) paras 17-18.