Tuning Fork (Pty) Ltd T/A Balanced Audio v Greeff and Another (18136/13) [2014] ZAWCHC 78; 2014 (4) SA 521 (WCC); [2014] 3 All SA 500 (WCC) (28 May 2014)

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[2014] ZAWCHC 78
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Tuning Fork (Pty) Ltd T/A Balanced Audio v Greeff and Another (18136/13) [2014] ZAWCHC 78; 2014 (4) SA 521 (WCC); [2014] 3 All SA 500 (WCC) (28 May 2014)

THE HIGH COURT OF
SOUTH AFRICA
(WESTERN CAPE
DIVISION, CAPE TOWN)
Case
No: 18136/13
DATE:
28 MAY 2014
In the matter
between:
TUNING FORK (PTY)
LTD t/a BALANCED AUDIO
....................................
PLAINTIFF
And
JACOBUS MARTHINUS
JONKER GREEFF
..............................
FIRST
DEFENDANT
DELANO SHANON
KASNER
..................................................
SECOND
DEFENDANT
Coram: ROGERS J
Heard: 19 MAY
2014
Delivered: 28 MAY
2014
JUDGMENT
ROGERS J:
Introduction
[1] The crisp but
important issue in this case is whether a creditor loses its claim
against a surety if a duly adopted and implemented
business rescue
plan provides for the creditor’s claim against the principal
debtor to be compromised in full and final settlement
of such claim.
A suretyship may stipulate that the claim against the surety will
survive a compromise with the principal debtor
but this is not such a
case.
The facts
[2] The question
arises here in an opposed application for summary judgment. The facts
appearing from the answering affidavit are
the following.
[3] The company
which was later to become the subject of the business rescue plan
began to purchase audio and visual equipment from
the plaintiff
during 2000. On 15 November 2011 the defendants, who are and have at
all material times been the directors of the
company, signed
unlimited suretyships for the company’s debts, present or
future, in favour of the plaintiff. The terms of
the suretyships were
identical. The obligation undertaken by each surety was as surety and
co-principal debtor and with the renunciation
of the usual benefits,
including excussion. The suretyship provided that a certificate under
the hand of the creditor would be
prima facie proof of the amount due
and owing by the company.
[4] The suretyship
was a continuing one which was not to be affected by any change in or
temporary extinction of the company’s
obligations. Mr Subel SC,
who argued the matter for the plaintiff, accepted that this did not
change the accessory nature of the
surety’s obligation. If the
principal debt was ‘changed’, the surety would, in terms
of the provision I have
summarised, be liable for the changed debt.
If the company at any time discharged its existing liability to the
plaintiff but subsequently
incurred a new liability, the surety would
be liable for the new liability despite the ‘temporary
extinction’ of the
principal debt.
[5] On 31 July 2013
the company was placed in business rescue pursuant to Chapter 6 of
the Companies Act 71 of 2008 (‘the
Act’). The business
rescue practitioners prepared a business rescue plan as envisaged by
s 150. The plan was considered and
adopted by a meeting of the
relevant stakeholders on 4 October 2013.
[6] The purpose of
the plan was to allow the company to continue trading. An amount of
R6 million was to be paid on account to a
particular supplier (an
entity named as Group Appliance) which had been the company’s
largest trade creditor by far. This
would allow the company to
continue receiving stock. Group Appliance’s claim was not to be
compromised though it was evidently
willing to await a revival of the
company’s fortunes before demanding payment of the balance of
its claim. Two banks with
secured claims were to receive a specified
amount. The remaining concurrent creditors, including the plaintiff,
were to receive
a dividend of 28,2 cents in the rand in full and
final settlement of their claims. The business rescue practitioners
said that
this was an improvement on the anticipated concurrent
liquidation dividend of 18 cents in the rand.
[7] The relevant
clause in the business rescue plan, insofar as the concurrent
creditors are concerned, reads as follows (inclusive
of its heading):
‘Section
150(2)(b)(ii) - Release from debt
Should the Creditors
approve the Business Rescue Plan, the payment under the Business
Rescue Plan to them will be in full and final
settlement of their
claims against the Company with the exception of Group Appliances.
Group Appliance will continue to supply
stock to the Company once the
Business Rescue Plan has been implemented and will secure further
payments in respect of their pre-commencement
date from the Company
in the future.
The Business Rescue
Plan provides for a payment of R6,000,000,00 to Group Appliance in an
attempt to ensure that the balance of
the pre-commencement date is
kept at a manageable level for trading purposes going forward.’
[8] Clause 7.3
stated that the company would continue in existence and operate after
the implementation of the plan ‘with
its affairs having been
restructured as provided for’ in the plan.
[9] Clause 8.1
specified, among the ‘special conditions to be satisfied’,
the adoption of the plan ‘as full and
final settlement of the
Creditors’ claims against the Company with the exception of
Group Appliances’.
[10] In the schedule
of concurrent claims annexed to the plan the plaintiff’s claim
was recorded in an amount of R626 375,42.
[11] On 25 November
2013 the business rescue plan was implemented. The plaintiff on that
day received its concurrent dividend of
R176 637,87. The business
rescue proceedings formally terminated on 5 December 2013 upon the
filing of a notice of substantial
implementation as contemplated in s
132(2)(c)(ii).
[12] Action in the
present case was instituted on 1 November 2013, ie after the adoption
of the business plan but before its implementation.
The form of
action was a simple summons. The summons did not make mention of the
business rescue proceedings. A notice of intention
to defend having
been delivered, the plaintiff on 2 December 2013 served an
application for summary judgment. On 24 January 2014
the defendants
filed their opposing affidavit. They raised two grounds of
opposition, namely [a] that the compromise with the principal
debtor
released them from liability; [b] that they had reason to question
the quantification of the plaintiff’s claim.
[13] The answering
affidavit did not say whether the plaintiff voted for or against the
adoption of the plan. I shall revert in
a moment to whether the
manner in which a creditor voted affects the position of that
particular creditor. I invited counsel during
argument to tell me, if
they were willing to do so by agreement, how the plaintiff had voted.
They were apparently unable to agree.
I intend to proceed on the
assumption that the plaintiff voted in favour of the scheme. I do so
because if such an assumption (which
is the most favourable to the
defendants) would be decisive in their favour, I would be inclined,
despite the absence of evidence
one way or the other, to refuse
summary judgment in the exercise of the discretion I have in terms of
rule 32(5). I do not think
it would be fair to enter summary judgment
against the defendants where it might emerge that, because the
plaintiff supported the
business rescue plan, it lost its claim
against the defendants. The defendants may not even know (though this
is somewhat unlikely,
given their close association and apparent
continuing involvement with the company) how the various creditors
voted.
Overview of
conclusions
[14] It may be of
assistance if I were, at the outset, to state the conclusions at
which I have arrived on the main issue:
[i] Applying the
well-established-test for implying a term in a statute, one cannot
imply a term, in the business rescue provisions
of the Act, to the
effect that creditors’ rights against sureties are or are not
unaffected by the adoption of a business
rescue plan. The matter has
simply not been addressed.
[ii] The general
principles of our law of suretyship must thus be applied to determine
what effect, if any, the provisions contained
in any particular
business rescue plan have on sureties.
[iii] One of the
general principles is that, if the principal debt is discharged by a
compromise with or release of the principal
debtor, the surety is
released unless the deed of suretyship provides otherwise (the deeds
of suretyship in this case do not provide
otherwise).
[iv] This general
principle applies also to a compromise or release pursuant to a
statute, regardless of whether the creditor himself
supported the
compromise or release (unless, of course, the statute provides
otherwise, which is not so here, given the absence
of any express or
implied term on the matter).
[v] Accordingly, if
a business rescue plan provides for the discharge of the principal
debt by way of a release of the principal
debtor, and the claim
against the surety is not preserved by such stipulations in the plan
as may be legally permissible, the surety
is discharged.
[vi] The plan in the
present case is reasonably to be construed as one by which the
company, as principal debtor, has been discharged
from its liability
to the plaintiff. Since the position of sureties for the company was
not addressed in the plan, the defendants
have on this construction
of the plan been discharged.
[vii] Summary
judgment must thus be refused.
The quantum
defence
[15] I can dispose
of the defendants’ quantum defence in a few words. They say
that, although the business rescue plan lists
the plaintiff’s
claim as R626 375,42, there were mistakes in the quantification of
this claim. Following further communication
between the business
rescue practitioners and the plaintiff, the latter’s claim was,
they assert, reduced by agreement to
R515 650. The defendants add
that in their view further credits must be passed but that the credit
notes and explanatory documents
are in the plaintiff’s
possession. They provide no particulars of these further credits.
[16] The amount
which the plaintiff claims, and which was certified in the annexure
to the particulars of claim, is R515 650, which
on the defendants’
version is the amount settled upon between the plaintiff and the
business rescue practitioners. In oral
argument, Mr Subel said that,
if I granted summary judgment, the dividend of R176 637,87 would need
to be deducted. As to interest,
he said that the plaintiff would be
content to claim mora interest as from 26 November 2013, the date
following the receipt by
the plaintiff of the dividend. I agree with
Mr Subel that this is a best-case scenario for the defendants. (I
mentioned to counsel
in argument that the dividend received by the
plaintiff was exactly 28,2 cents in the rand on the original claim of
R626 375,42.
This suggests that the plaintiff in fact received the
dividend on the larger claim, not the reduced claim. Counsel were
unable
to explain this. However, it would be to the benefit of the
defendants that the plaintiff received a larger dividend than perhaps

it should have done.)
[17] There remains
the question whether the defendants have said enough to call into
question the amount of R515 650. I do not think
so. They are, and
have at all material times been, the directors of the company. They
must have been closely involved in the drawing
up and finalising of
the business rescue plan, because among other things the plan
includes a settlement of the amount which they
owed to the company on
loan account and required them to pay a sum of R6,5 million to the
company in settlement thereof. Their
family trusts were and remain
the shareholders of the company. They are not in the position of
strangers to the company’s
affairs, where a court might
exercise its discretion against granting summary judgment to allow
the surety to test the quantification
of the claim by way of
discovery and so forth (cf Gruhn v M Pupewitz & Sons (Pty) Ltd
1973 (3) SA 49
(A) at 57H-59A). I cannot believe that the business
rescue practitioners would have settled the amount of the plaintiff’s

claim without consulting with the defendants. In any event, the
defendants have not said enough to show that the relevant records
are
not in the possession of the company or that they have requested the
records from the plaintiff and not received them.
[18] For these
reasons, I do not think that the quantum defence passes muster as a
ground for resisting summary judgment. I may
add that, regardless of
whether the plaintiff’s claim was correctly quantified at R515
390,72, that was the figure settled
upon between the plaintiff and
the company (the latter represented by the business rescue
practitioners). The company could not,
I think, thereafter have
disputed the quantum of the claim. And if that is so, the defendants,
who stood surety for the company’
debts arising from whatsoever
cause, might well be bound in respect of the sum acknowledged by the
company.
The discharge
defence - relevant statutory provisions
[19] I turn now to
the main point, namely whether the adoption and implementation of the
business rescue plan resulted in the defendants’
discharge.
[20] The procedure
of business rescue was introduced into our law as part of Chapter 6
of the new
Companies Act, which
came into force on 1 May 2011. The
definitions in Part A of Chapter 6
(s 128)
apply to the whole
Chapter. Parts B to D
(ss 129
to
154
) deal with new process of
business rescue. Part E
(s 155)
deals with a separate procedure of
compromise with creditors (‘the compromise procedure’).
The compromise
procedure
[21] It is
convenient to deal first with the compromise procedure.
Section 311
of the repealed Companies Act 61 of 1973 dealt with offers of
compromise in ss 311 and 312. The new compromise procedure and the

old offer of compromise bear a number of similarities. The old
procedure referred, as does the new, to a ‘compromise or
arrangement’ and could concern creditors or members or both.
The scheme needed to be approved, as in the new process, by a

majority in number representing at least 75% in value of the
creditors or class present and voting. As with the new procedure,
the
scheme, if approved, had to be sanctioned by the court. A sanctioned
scheme was, as in the new procedure, binding on all creditors
or
members as the case might be.
[22] There are some
differences between the new compromise procedure and the old offer of
compromise. In the new procedure, only
the board of the company or
its liquidator (if it is in liquidation) may propose an arrangement
or compromise. It is not necessary
to obtain a court order to convene
the meeting of creditors. The details which the proposal must contain
are set out more extensively
in s 155(3) than in s 312 of the old
Act. The new Act expressly states that the sanctioning of a scheme by
the court depends on
whether the court finds the scheme to be ‘just
and equitable’, though this is not a change in substance since
that
is the test which our courts in any event used in relation to
the old schemes of arrangement.
[23] Section
155(3)(b) provides that the ‘Proposals’ part of the
document sent to creditors or members must ‘include
at least’
certain specified matters, among which are
‘the extent to
which the company is to be released from the payment of its debts and
the extent to which any debt is proposed
to be converted to equity in
the company, or another company’.
[24] Section 311(3)
of the old Act contained the following provision:
‘No such
compromise or arrangement shall affect the liability of any person
who is a surety for the company.’
[25] Section 155(9)
of the new Act contains a provision to identical effect and in
substantially the same form:
‘An
arrangement or a compromise contemplated in the section does not
affect the liability of any person who is a surety of
the company.’
Business rescue
[26] The new
business rescue procedure was introduced in place of the unsuccessful
procedure for judicial management in the old
Act with a view to
enhancing the prospects of reviving distressed companies to the
general benefit of stakeholders and the economy.
[27] Once business
rescue proceedings have commenced, the distressed company is
protected from legal proceedings by way of the moratorium
provided
for in s 133 of the new Act. Both parties referred to the judgment I
gave in Investec Bank Ltd v Bruyns
2012 (5) SA 430
(WCC), where I
held that the moratorium was a so-called defence in personam for the
distressed company and did not protect a surety
for the company.
Counsel in the present case did not contend that Investec was wrongly
decided. (I refused leave to appeal and
I understand that a petition
to the Supreme Court of Appeal was likewise unsuccessful.) In Nedbank
Ltd v Wedgewood Village Golf
and Country Estate (Pty) Ltd &
Others Case 20896/2010 (an unreported judgment delivered on 3 July
2013), Blignault J was not
persuaded that Investec was wrong (para
21), though he in any event found against the sureties on the basis
of the express terms
of the suretyships.
[28] I draw
attention to the fact that there is no provision in the new Act which
states that the moratorium does or does not operate
in favour of a
surety for the distressed company. The conclusion I reached in
Investec was based on our common law of suretyship,
having regard to
the character of the statutory moratorium created by s 133 in favour
of the company.
[29] Section 150
provides that the business rescue practitioner, after consulting the
creditors, other affected persons and the
management of the company,
must prepare a business rescue plan for consideration and possible
adoption at a meeting held in terms
of s 151. Save in minor respects,
the matters that must be included in a business rescue plan, as
specified in s 151(2), are the
same as those that must, in terms of
the new compromise procedure, be contained in a proposal for an
arrangement or compromise
in terms of s 155(3).
[30] The
consideration and adoption or rejection of a business plan are dealt
with in s 152. In the usual case, the voting interests
will be held
by creditors, though employees have a right to be heard (see s 144).
The adoption of a business rescue plan requires
support by the
holders of more than 75% of the creditors’ voting interests
actually voted plus by the votes of at least 50%
of the ‘independent’
creditors’ interests actually voted (in terms of the definition
in s 128(1), a creditor
will be ‘independent’ if the
creditor is ‘not related to the company, a director or the
business rescue practitioner’).
If the plan alters the rights
of any class of holders of the company’s securities, a vote of
such holders must also be taken;
otherwise, the vote by the requisite
majority of creditors constitutes final adoption of the plan (s
152(3)(b)).
[31] Section 152(4)
provides that a plan that has been adopted is binding on the company,
on each of the creditors of the company,
and on every holder of the
company’s securities, whether or not such person was present at
the meeting or voted in favour
of the adoption of the plan or has
proved a claim against the company.
[32] The company
must, under the direction of the practitioner, take all necessary
steps to implement an adopted plan (s 152(5)).
Once the plan has been
substantially implemented, the practitioner must file a notice of
such implementation (s 152(8)). Section
132 (2)(c)(ii) provides that
one of the circumstances which brings business rescue proceedings to
an end is the filing of a notice
of substantial implementation of an
approved plan.
[33] Section 154
(the last of the sections dealing with business rescue) provides as
follows:
‘(1) A
business rescue plan may provide that, if it is implemented in
accordance with its terms and conditions, a creditor
who has acceded
to the discharge of the whole or part of the debt owing to that
creditor will lose the right to enforce the relevant
debt or part of
it.
(2) If a business
rescue plan has been approved and implemented in accordance with this
Chapter, a creditor is not entitled to enforce
any debt owed by the
company immediately before the beginning of the business rescue
process, except to the extent provided for
in the business rescue
plan.’
Evaluation
The statutory
moratorium
[34] In his written
submissions, Mr Subel, after referring to the moratorium in s 133,
quoted paragraphs 15 to 19 of my judgment
in Investec. However, and
as Mr Subel acknowledged in oral argument, the question that arises
in the present case does not concern
the statutory moratorium in
favour of the distressed company but the effect of an adopted and
implemented plan by which the creditor
has received a concurrent
dividend in full and final settlement of its claim against the
principal debtor. The surety in Investec
raised, as his first
argument, that on a proper interpretation of s 133(2) there was an
express protection in favour of the surety.
I rejected that argument.
The surety’s other argument was that, on general principles of
the law of suretyship, the moratorium
in favour of the principal
debtor operated also in favour of the surety. In rejecting that
argument, I relied on the distinction
between a defence in rem, which
strikes at the existence of the principal debt, and a defence in
personam, which provides a personal
defence to the principal debtor
while leaving the debt in existence. I found that the moratorium fell
into the latter category
and was thus not available to the surety.
[35] In the present
case, by contrast, the statutory moratorium in favour of the company,
which is by its nature temporary, has,
with the finalisation of the
business plan, been superseded by a release of the company against
payment to the concurrent creditors
of a specified dividend in full
and final settlement of their claims. That is a distinction which
potentially makes all the difference.
Paragraphs 20 to 24 of Investec
reflect that I was keenly aware of the distinction. There I made the
assumption, without so deciding,
that a duly adopted plan by which a
creditor’s claim was finally compromised would operate to
discharge the surety. In Investec
that stage had not been reached and
might never have been reached (at the time the surety was sued, there
was a contested application
for business rescue pending before the
court).
An implied term
in the Act?
[36] Mr Subel’s
main submission in oral argument was that the lawmaker could not have
intended, when enacting the provisions
relating to business rescue,
that a surety would be discharged merely because the principal debtor
(the distressed company) had
been released from the claim by virtue
of a provision in a business rescue plan of the kind contemplated in
s 150(2)(b)(ii). Mr
Ferreira, by contrast, submitted that, in
accordance with general principles of suretyship, a suretyship could
not survive the
discharge of the debt (whether through compromise or
otherwise).
[37] A distinction
must, in my view, be drawn between a legal consequence dictated by
the terms of a statute and a legal consequence
determined by the
common law in response to a statutory event. If the statute deals
with the matter, whether expressly or by necessary
implication, cadit
quaestio; the statute applies, regardless of what the common law
might otherwise have determined. If the statute
does not deal with
the matter, the answer must be sought in the common law, even though
such answer might be influenced by the
character of the statutory
event.
[38] In regard to a
release from creditors’ claims pursuant to the new compromise
procedure, s 155(9) expressly provides that
the compromise does not
affect the liability of any person who is a surety of the company.
That follows s 311(3) of the old Companies
Act. If the new Act
contained a similar provision in relation to a business rescue plan,
the surety would remain liable and no
question of the kind raised in
this case could arise. The absence of a similar provision in relation
to business rescue proceedings
is striking. It seems to me to be
exceedingly difficult to argue that the lawmaker intended there to be
a similar safeguarding
of rights in the case of business rescue
proceedings but chose not to say so. The safeguarding provision in s
155(9) was enacted
simultaneously with the business rescue
provisions. Sections 150(2)(b)(ii) and 155(3)(b)(ii) are identical in
framing the requirement
that a business rescue plan and scheme of
arrangement must deal with the extent to which the company is to be
released from the
payment of its debts. The safeguarding provision in
s 155(9) must have been enacted (as was the old s 311(3)) because a
scheme
of arrangement with creditors would typically (though not
necessarily) contain such a release in settlement of the creditors’

claims. A business rescue plan would also typically (though not
necessarily) contain such a release, yet a safeguarding provision
is
absent. The obvious place for it to have been included, if it was
intended, was in s 154.
[39] There are other
instances where the lawmaker has expressly preserved claims against
sureties despite a discharge of the principal
debtor.
Sections 119
and
120
of the
Insolvency Act 24 of 1936
permit an insolvent to
submit to his trustee a written offer of composition. Subject to
certain conditions, an offer of composition
becomes binding on all
creditors if accepted by creditors whose votes amount to not less
than three-fourths in value and three-fourths
in number of the votes
of all the creditors who have proved claims.
Section 120(3)
concludes
with a provision that a composition shall not affect the liability of
a surety for the insolvent.
[40] Another example
relates to rehabilitation. The effect of rehabilitation is to
discharge all debts of the insolvent which were
due, and the cause of
which had arisen, before the sequestration and which did not arise
out of any fraud on the part of the insolvent
(s 129(1)(b)).
Section
129(3)(d)
provides in that context that a rehabilitation shall not
affect the liability of a surety for the insolvent.
[41] This statutory
context, and particularly the presence of
s 155(9)
, is a discouraging
start for the argument that the business rescue provisions contain a
necessarily implied term preserving rights
against sureties where the
principal debtor has been released pursuant to an approved and
implemented business rescue plan. In
Rennie NO v Gordon & Another
NNO
1988 (1) SA 1
(A) Corbett JA (as he then was) said, with
reference to a plethora of earlier cases, that our courts have
consistently adopted
the position that words cannot be read into a
statute by implication ‘unless the implication is a necessary
one in the sense
that without it effect cannot be given to the
statute as it stands’ (at 22E-H). This view has been repeated
(see, for example,
American Natural Soda Ash Corporation &
Another v Competition Commission & Others 2005 (6) SA 158 (SCA)
para 27). As I
observed in Berg River Municipality v Zelpy 2065 (Pty)
Ltd
2013 (4) SA 154
(WCC), slightly different formulations have at
times been used by the Supreme Court of Appeal and the Constitutional
Court, in
particular modifications of language or implications that
are necessary ‘to realise the ostensible legislative intention’

or ‘to make the statute workable’ (para 29). I suggested
the following synthesis (para 29):
‘To say that
effect cannot be given to a statute as it stands unless something is
implied into it seems to me to be indistinguishable
from saying that
the Act is not workable without the implication. These two
formulations (which mean substantially the same thing)
are in turn
the basis upon which one can to deduce that the implication is
necessary to achieve the ostensible legislative intention.’
[42] I do not
believe it can be said that an implication to the effect that rights
against sureties are safeguarded is necessary
to make the business
rescue provisions of the new Act workable or that without such an
implication effect could not be given to
the Act as it stands. On the
assumption that the reaction of the common law to a release of the
kind contemplated in s 150(2)(b)(ii)
is that sureties will
automatically be released (a matter I shall address presently), the
effect of the statute as it stands is
perfectly workable. Upon the
adoption and implementation of such a business rescue plan, the
creditors would receive their dividend
and the distressed company
along with the sureties would be released. That might be less
advantageous to creditors than the preservation
of their claims
against sureties but that cannot be equated with a conclusion that
the business rescue provisions of the Act are
unworkable.
[43] It must be
borne in mind, in this regard, that the argument for the implication
does not rest only, or even primarily, on a
balancing of the
interests of creditors on the one hand and sureties on the other. In
the assessment of the argument for or against
an implication, one
must also take account of the interests of the distressed company and
all its stakeholders, including employees
and persons who have funded
the company by way of share capital. Various possibilities would
present themselves to the lawmaker
if it were to deal with the matter
expressly:
[i] The lawmaker
might decide that the release of the company will not affect
creditors’ claims against sureties but that
any surety sued by
the creditor would still have his ordinary right of recourse against
the company. The obvious commercial disadvantage
of this choice is
that the company might then face claims from sureties for the very
claims which the company has compromised as
against the creditors.
This would hinder the recovery of the company and the attainment of
the objectives of business rescue. It
would also discourage
participation by those who might otherwise have been willing to
provide ongoing support for the company after
the termination of
business rescue.
[ii] Alternatively,
the lawmaker might decide that the release of the company will not
affect creditors’ claims against sureties
but that sureties
will lose their right of recourse against the company. This would be
best for the creditors and the distressed
company but unfair to the
sureties. The surety’s contingent right of recourse against the
distressed company is incapable
of being ascribed a value in the
business rescue proceedings (for the same reasons as apply in the
insolvency proceedings: see
Proksch v Die Meester & Andere
1969
(4) SA 567
(A) at 589D-F; Absa Bank Ltd v Scharrighuisen
2000 (2) SA
998
(C) paras26-27) so that the surety would not be entitled to vote
on the proposed adoption of the scheme (see the definition of ‘voting

interest’ in s 128(1)(j) read with s 145(4)). Effectively,
therefore, the sureties will be voiceless in the taking away of
their
rights of recourse. Although a surety undertakes his obligation in
the expectation that the suretyship might be enforced
for the very
reason that the principal debtor is financially distressed, he might
nevertheless take comfort from the existence
of his right of
recourse. Sometimes a creditor will claim from a surety rather than
the principal debtor because the surety is
an easier target. Or the
creditor might sue the surety because the principal debtor is
currently financially constrained though
has reasonable prospects of
recovery.
[iii] Alternatively,
the lawmaker might decide that the release of the company will be
accompanied by a release of claims against
sureties. This would
provide some disincentive for creditors to support a business rescue
plan. Some creditors might have suretyships
while others, who do not,
might carry the day in the adoption of a business rescue plan.
Nevertheless, as a general proposition
the body of creditors
determines whether or not to accept the plan. If a creditor is
reluctant to support a business rescue plan
because it would
jeopardise his claim against a surety, he might be able to settle
with the surety more favourably than with the
company, leaving the
surety to take over the claim and thus vote in regard to the business
rescue plan (cf Investec para 22).
[iv] Another
alternative is that the lawmaker might decide to leave it to the
stakeholders to regulate the position of sureties
by appropriate
provisions in the business rescue plan. (Indeed, in the absence of an
implied term in the new Act, that is the effect
of the Act as it
stands.) A surety is a contingent creditor of the company. I see no
reason why a business rescue plan should not
incorporate tripartite
provisions operating between the creditor, the company and the
surety. The plan might provide, by way of
example, for the surety to
pay an additional sum in settlement to the creditor and for the
abandonment by the surety of his right
of recourse against the
company. Or the surety might agree that creditors’ rights
against him will be preserved (cf Friedman
v Bond Clothing
Manufacturers (Pty) Ltd
1965 (1) SA 673
(T) at 677D). Even if the
surety were unwilling to make any compromise, there is authority for
the view (see below) that the creditor
and company could agree, as a
term of the plan, that the creditor’s right against the surety
will be preserved, the effect
being that the ‘release’ in
favour of the company is merely be a pactum de non petendo and that
the company acknowledges
that it will be liable to the surety under
the latter’s right of recourse if the creditor chooses to sue
the surety.
[v] In combination
with the immediately preceding option, the lawmaker might also
consider that a creditor, when taking a suretyship,
can guard itself
against the effects of a voluntary or statutory compromise or release
by the inclusion of appropriate terms in
the suretyship. Indeed, the
standard suretyships used by banks and other large financial
institutions in this country usually contain
protection of this kind
(cf Cape Produce Co (Port Elizabeth) (Pty) Ltd v Dal Maso &
Another NNO
2002 (3) SA 752
(SCA) para 9; Investec supra para 25,
Nedbank Ltd v Wedgewood supra para 5). (For this reason, the legal
issue in the present case
might not present itself for decision very
often. I note, in passing, that the suretyships in this case were
executed about six
months after the new Companies Act came into
force.)
[44] I express no
view as to what the fairest choice would be if the lawmaker were to
deal with the matter explicitly. The competing
possibilities
nevertheless show, to my mind, that there is no obvious answer
permitting one to conclude that the lawmaker must
have intended X or
Y or Z, even though it did not say so. It has been held more than
once that the court cannot fill a casus omissus
in a statute and that
it is dangerous to speculate on what the lawmaker intended or would
have thought appropriate (Summit Industrial
Corporation v Claimants
against the Fund Comprising the Proceeds of the Sale of the MV Jade
Transporter
1987 (2) SA 583
(A) at 596J-597D; Caroluskraal Farms
(Edms) Bpk v Eerste Nasionale Bank van Suider-Afrika Bpk and Other
Cases
[1994] ZASCA 23
;
1994 (3) SA 407
(A) at 422B-G).
[45] This does not
lead to the converse conclusion that there is an implied term in the
statute that sureties will be released.
The position, in my view, is
that the lawmaker has simply not dealt with the question one way or
the other and that regard must
thus be had to the common law when
assessing the liability of the surety. As will appear, this is what
happened in Moti and Co
v Cassim’s Trustee
1924 AD 720.
Although Moti was not cited by counsel in written or oral argument,
it seems to me the most relevant authority by far to the outcome
of
this case.
The common law on
discharge of sureties
[46] Because the
obligation of a surety is accessory, the general legal position is
that extinction of the principal obligation
extinguishes the
obligation of the surety (Forsyth & Pretorius Caney’s The
Law of Suretyship 6th Ed at 188). Apart from
the obvious case of
discharge following payment in full by the principal debtor, the rule
finds application, for example, where
the principal debt is
discharged by settlement or is extinguished by prescription (see Voet
Commentary on the Pandects (tr Gane)
46.1.36; 46.3.13; 46.4.4; Van
Leeuwen Roman Dutch Law (tr Kotze) 4.4.7; Pothier Obligations (tr
Evans 1853) para 377; Wessels The
Law of Contract 2nd ed paras
3951-3952 and 4038-4039. Pothier, in the text cited, puts it thus:
‘It results
from the definition of a surety’s engagement, as being
accessary to a principal obligation, that the extinction
of the
principal obligation necessarily induces that of the surety; it being
of the nature of an accessary obligation, that it
cannot exist
without its principal; therefore, whenever the principal is
discharged, in whatever manner it may be, not only by
actual payment
or compensation, but also by a release, the surety is discharged
likewise; for the essence of the obligation being
that the surety is
only obliged, on behalf of a principal debtor, he therefore is no
longer obliged, when there is no longer any
principal debtor for whom
he is obliged.’
[47] This general
principle is the source of the defences often described as defences
in rem. As noted, they are to be distinguished
from defences in
personam, such as (for example) the moratorium in s 133(2) which I
found in the Investec case to be personal to
the distressed company
and to have no effect on the existence of the debt.
[48] It is to be
noted that the liquidation of a company or the sequestration of an
individual does not terminate the debts of the
company or the
individual. The rights of creditors to institute legal proceedings
against the company or the trustee are restricted
by statute but the
debts remain and the creditors may prove them in the liquidation or
sequestration. The fact that they receive
a dividend which is less
than their full claims does not mean that the debts are discharged
(cf Nel NO v Body Corporate of the
Seaways Building & Another
[1995] ZASCA 83
;
1996 (1) SA 131
(A) at 138E-139G).
[49]
The general
principle, that the accessory debt of a surety is discharged when the
principal debt is discharged, has been stated
in numerous
authorities, including: the full bench decision in Colonial
Government v Edenborough & Others
(1886) 4 SC 290
at 296 (in the
context of an allegedly material alteration in the principal debt);
Trust Bank van Afrika Bpk v Ungerer 1981 (2)
SA (T) at 225 in fine
(in the context of a settlement with the principal debtor);
Kilroe-Daley v Barclays National Bank Ltd 1984
(4) 609 (A) at
622I-623I (in the context of prescription of the principal debt);
Leipsig v Bankorp Ltd
[1993] ZASCA 198
;
1994 (2) SA 128
(A) at 132H-133A (again in the
context of prescription); Millman & Another NNO v Masterbond
Participation Bond Trust Managers
Pty Ltd (under Curatorship) &
Others
1997 (1) SA 113
(C) at 122C; Cape Produce Co (Port Elizabeth)
(Pty) Ltd v Dal Maso & Another NNO supra paras 3-7 (in the
context of a subordination
agreement executed between the creditor
and the principal debtor); BOE Bank Ltd v Bassage
2006 (5) SA 33
(SCA) para 9 (waiver by creditor of portion of the debt releases the
surety to that extent but not if the arrangement is a mere
pactum de
non petendo).
[50] This is the
principle which was acted upon, though apparently in reliance on
English cases, by a full bench in Wides v Butcher
& Sons
(1905)
26 NLR 578.
I mention it because of its relevance to a settlement
between an insolvent debtor and his creditors. The principal debtor
in that
case assigned her estate for the benefit of her creditors in
terms of s 158 of the Natal Insolvency Act of 1887. The deed of
assignment
stated that the signing creditors released, acquitted and
discharged the debtor from all claims and demands whatsoever. In
appending
its signature, the plaintiff firm (the respondents in the
appeal) added the subscript, ‘subject to recourse upon third
parties’.
Thereafter the firm sued the defendant firm (the
appellants in the appeal) as surety. Beaumont J and Dove Wilson J
delivered substantive
judgments and Broome J a brief concurring
judgment.
[51] Beaumont J said
that the question was whether the assignment was an absolute release
of the principal debtor or only a covenant
not to sue. He considered
that, if the reservation made by the plaintiff had been contained in
the body of the deed of assignment,
it would have constituted a
recognition by the principal debtor that the plaintiff might yet sue
the sureties. Although Beaumont
J did not expressly say so, his
underlying premise was obviously that, if the creditor was reserving
its right to sue the sureties,
the principal debtor might be sued by
the sureties in terms of their right of recourse. That was the risk
which made it necessary
for the creditor to prove that its rights
against the sureties had been reserved with the consent of the
principal debtor. (As
Broome J said in his brief judgment, a
reservation by the creditor of its rights against the principal
debtor clearly modified
the debtor’s position and the debtor’s
assent to such a reservation was thus needed – p 589.)
Beaumont J said
that the plaintiff’s insertion of the
reservation beneath its signature had not been shown to be something
to which the principal
debtor had consented to and that the deed of
assignment thus operated as an absolute release, with the effect that
the sureties
could not be sued.
[52] Dove Wilson J
agreed, saying that there was nothing in the deed of assignment to
show that the discharge was other than absolute.
He stated the legal
position thus (at 584):
‘There is no
doubt that a simple discharge of a debtor by a creditor discharges
also the surety, upon the simple ground that
if it were otherwise, it
would be a fraud upon the debtor, to profess to discharge him of the
debt due to the creditor, and at
the same time to leave him open to
recourse against him by the surety. But a discharge of the debtor
does not liberate the surety
if the remedy against the surety is
expressly reserved, because in that case the discharge is not an
absolute release, but is merely
a pactum de non petendo. The
reservation has the effect, because it rebuts the presumption which
ordinarily exists that if you
liberate the principal debtor, you mean
to liberate also the surety, and it has the effect of preserving the
right of recourse
by the surety against the principal debtor. The
test whether or not the discharge which has been given is absolute,
or merely a
covenant not to sue, is whether the debtor is, after the
discharge, put in the position of being able to say to the creditor
that
“It is inconsistent with the discharge which has been
given to him that there should be any right of recourse against him

by the surety.” If the debtor is not in a position to say so,
then the surety is not discharged.’
[53] Dove Wilson J
cited, as authority for this proposition, the test laid down by the
House Of Lords in Muir v Crawford 1875 LR
2 HL at 456. It appears to
me, with respect, that, based on our own authorities, the preferred
reasoning is that the surety’s
release is a result of the
accessory nature of his obligation. A unilateral intention on the
part of the creditor to reserve his
right against the surety is
insufficient. If the creditor and the principal debtor reach
agreement that the creditor will not sue
the principal debtor but
that the creditor preserves his right to sue the surety, with the
resultant risk that the surety will
be entitled to exercise his right
of recourse against the principal debtor, the principal debtor’s
defence may be regarded
as personal. The arrangement between the
creditor and principal debtor does not prejudice the surety, because
his right of recourse
remains.
[54] I revert now to
the decision in Moti and Co v Cassim’s Trustee supra. Those who
studied bills of exchange at university
may recall the case for its
discussion of the first point which had to be decided, namely the
character of the obligation undertaken
by a person who endorses a
promissory note prior its delivery to the payee. I am not concerned
with that question. It is enough
to record that the Appellate
Division unanimously found that the endorser (the appellant firm) was
in the position of a surety
for the maker of the note (the principal
debtor) in favour of the respondent trustee (the payee/creditor).
What is of importance,
for present circumstances, is the decision of
the court on the second question, namely whether, in the light of the
release of
the principal debtor pursuant to a statutory assignment of
the debtor’s estate under the Insolvency Act 32 of 1916, the
appellant
firm’s liability as surety had been discharged. All
five judges deliver judgments on the point, on which they divided
three/two.
I mean no disrespect to the two dissenting judges (De
Villiers JA and JER de Villiers AJA) when I say that a very strong
majority
decided the point in favour of the surety – Innes CJ,
Kotzé JA and Wessels JA.
[55] All five judges
proceeded on the basis that, if the effect of the statutory process
had been to discharge the principal debt
rather than giving the
principal debtor a personal protection, the surety would be released,
even though the statute did not say
so. Innes CJ, consistently with
other authority I have already mentioned, said that, when the
principal debtor is discharged by
a release, the surety is likewise
discharged (at 737). The question examined in Moti was whether the
principal debtor had been
discharged.
[56] Because the
statutory context bears close resemblance to the present matter and
was regarded by the judges as important to
the outcome, it is
appropriate briefly to summarise it (as did Innes CJ at 733-735).
Prior to the enactment of the Insolvency Act
32 of 1916, there were
statutes in the former colonies and republics regulating insolvency.
These statutes contained varying provisions
for a composition between
a debtor and his creditors and for rehabilitation. They were
characterised by the express statutory reservation
of creditors’
rights against sureties, notwithstanding the release of the principal
debtor upon a composition or the discharge
of his debts upon
rehabilitation.
[57] The Insolvency
Act of 1916 ‘carefully followed’ (see Innes CJ at 734 in
fine) the old legislation in relation to
offers of composition (ss
105-106 ) and rehabilitation (ss 108-112); and s 106(3) and 112(1)(d)
repeated the preservation of rights
against sureties insofar as these
procedures respectively were concerned. (The procedures in question
are substantially those subsequently
enacted in ss 119-120 and
124-129 of the current
Insolvency Act 24 of 1936
.) The provisions
regarding composition did not in terms state that the debtor was
released or that his debts were discharged but
such an outcome was
and is inherent in the notion of composition. The provisions in
question simply stated that a duly adopted
composition would be
binding on the debtor and all concurrent creditors but that an
acceptance of the offer of composition would
not affect the liability
of any person who is a surety for the insolvent. The provisions
regarding rehabilitation expressly stated
that the effect of an order
of rehabilitation would be to discharge all debts of the insolvent
but would not affect the liability
of any surety for the insolvent.
[58] In addition to
these two (by then) familiar processes, the 1916 Act introduced a
third procedure, namely an assignment by a
debtor for the benefit of
his creditors (ss 115-128). It is unnecessary to describe the
procedure governing such an assignment,
save to note that it was an
assignment which could become binding on all creditors by virtue of
its acceptance by creditors representing
at least three-fourths in
value and in number (s 123). Section 126(1) stipulated that from and
after registration of the deed of
assignment it would be binding upon
all creditors (whether they assented thereto or not) whose claims
were due or the cause of
whose claims arose before the date of the
assignment. Paragraphs (b) of s 126(2) provided that the immediate
effect of the registration
of the deed of assignment was:
‘(b) to
relieve the debtor from every debt which was due or the cause of
which arose before the date of the assignment, but
always subject to
the deed of assignment’.
[59] Innes CJ
remarked upon, and clearly regarded as significant, the express
preservation of rights against sureties in the composition
and
rehabilitation provisions and the absence of such express
preservation in regard to the new assignment procedure. He considered

that there was no material difference between the discharge of debts,
as provided for expressly in the rehabilitation provisions,
and the
relief of the debtor from his debts, as provided for expressly in the
new assignment provisions. Relief from debt, as used
in the new
assignment procedure, was used in the sense which for practical
purposes was identical to a discharge of debts. The
relief of a
debtor from his debts was inconsistent with the continued existence
of the debts (737). And his further conclusion
was that, because the
effect of the duly adopted assignment was to relieve the debtor of
the debt in question, any surety for those
debts was likewise on
common law principles discharged (737 in fine).
[60] Innes CJ said
that this conclusion was unaffected by whether the creditor who held
the suretyship was or was not among the
creditors who supported the
assignment (at 736):
‘There is some
authority for the proposition that a dissenting creditor to a
non-statutory composition is in a stronger position
than one in the
majority (Voet 2.14.28). But I agree with the members of the
Provincial Division that the Statute intended to place
all creditors
on the same footing. So soon as the requisite proportion have signed,
and registration has followed, the assignment
is binding upon them
all. I can find no differentiation between signatories and
non-signatories. The results of registration affect
all of them
alike. And they follow from the express provisions of the Statute,
not from the contract evidenced by the signatures
to the deed, –
though those signatures were necessary in order to set the statutory
machinery in motion.’
[61] Innes CJ
thought his conclusion to be inevitable if the court confined itself,
as it was required to do, to the interpretation
of the language of
the
Insolvency Act. He
arrived at his conclusion with reluctance
because he could see no reason why a surety should remain liable
after a composition
or a rehabilitation but not after an assignment.
But a court of law, he said, had no power to improve a statute by
reading into
it something which is not covered by the words used
(739). He thought that the lawmaker may have intended that the
continuing liability
of a surety should be dealt with in the deed of
assignment, and he drew attention in that regard to the concluding
words of
s 126(2)(b)
which I have already quoted: ‘but subject
always to the deed of assignment’. He found it unnecessary to
decide what
effect a stipulation in a deed would have which purported
to preserve rights against sureties. He added, though, that in view
of
the practical importance of the matter it was desirable that any
doubts should be removed by the lawmaker at an early date.
[62] Kotzé JA
concurred, stating that relieving a debtor of debts necessarily meant
that, quoad the debtor, there was no
longer any debt or obligation.
That being so, the natural effect of the removal of the principal
obligation was that the sureties
were also discharged (742). He held
that there was no distinction between a voluntary act of release and
a statutory release. Unless
the statute, in discharging the principal
debtor, reserved the right of the creditor against the sureties, the
accessory obligation
was likewise discharged (743). He also agreed
with Innes CJ that a minority of creditors could be bound by a
decision of the majority
(743).
[63] Wessels JA
likewise said that to relieve a person of a debt is to release him
from the legal bond that binds him to his creditor;
if a person is
relieved or released from a debt, the debt is discharged quoad that
person (745). The learned judge of appeal continued
(745-746):
‘Now if by the
common law the debtor is discharged from a debt or from all his debts
the surety is released. If in the case
of assignment the creditors
agree with the debtor that they will be satisfied with his assets and
will take these in full settlement
then they discharge the debtor
from all obligation to pay them the difference between the amount of
the debts and the value of
the assets.
Of this discharge
the surety is by our law entitled to take advantage.
Now the fact that
the Legislature has altered the common law in the case of
rehabilitation and composition and clearly enacted that
the sureties
are to remain liable, and the fact that in the case of assignment
under Chapter 6 the Legislature has been silent
as regards sureties,
leads me to infer that the Legislature did not think of the case
where sureties had bound themselves and an
assignment under the Act
takes place, and if the Legislature did not think of it, it could not
have intended in such a case to
alter the common law as regards
sureties...
It appears to me,
therefore, that we have to deal here with a casus omissus and that
the Act has not deprived the surety of his
common-law rights.’
[64] It appears to
me that Innes CJ and Wessels JA proceeded on the basis that the
lawmaker either did not think about the matter
or, if it did, was
content to leave it to the parties to deal with it in the deed of
assignment. Either way, the common law would
apply. Kotzé JA,
after referring to the common law, said that the lawmaker ‘must
be taken to have intended the necessary
effect of its language as
contained in the sub-section, unless it appears that it did not
intend that the surety should likewise
be discharged’, that it
was for the creditor to establish that the lawmaker did not intend
the law to take its ordinary course,
and that there was nothing in
the Act to show that the lawmaker had a different intention (742).
Kotzé JA did not, as I
understand this passage, mean to convey
that there was a term necessarily implied in the statute that
creditors would lose their
rights against sureties. Rather, he was
not persuaded that there was a positive intention to preserve rights
against sureties,
with the result that the common law, whatever it
was, would apply.
[65] The two
dissenting judges agreed with the majority that the matter was
unaffected by whether a particular creditor had supported
or opposed
the assignment. They nevertheless reached a different conclusion by
contrasting the terminology of the rehabilitation
provisions
(‘discharging debts’) and the new assignment provisions
(‘relieving the debtor’). They said
that, in the
rehabilitation provisions, the lawmaker had found it necessary to
preserve rights against sureties because the stated
effect of a
rehabilitation order was to discharge the debts themselves. A
preservation of rights against sureties was unnecessary
in the case
of the new assignment procedure, because s 126(2)(b) merely relieved
the debtor from the debts without extinguishing
the debts (De
Villiers JA at 748; JER de Villiers AJA at 750-751). They were not
prepared to assume that the lawmaker had been
guilty of a casus
omissus. Such a construction of the statute should not be entertained
as long as the language of the Act was
open to another construction.
The reason they held another construction to be open was the
difference in language I have just mentioned.
In the process of
interpretation, they also laid emphasis on the distinction between a
voluntary release and a statutory one. De
Villiers JA declined to
express any opinion as to whether, in the case of a statutory
assignment, a surety who was sued by a creditor
could exercise his
rights of recourse against the debtor (749). JER de Villiers AJA did
not mention that point.
[66] It may be
observed that De Villiers JA, in his judgment, contrasted the
rehabilitation provisions with the new assignment provisions
but did
not advert to the existence of an express preservation of rights in
the case of a statutory composition or explain the
justification for
its presence. JER de Villiers AJA referred to both the
rehabilitation provisions and the composition procedure.
In regard to
the latter, he said that the mere acceptance of the composition does
not discharge debts,
‘but the Act
provides (no doubt in order to exclude the operation of the common
law as to arrangements between creditor and
principal debtor) that
the acceptance of the offer of composition by the creditors shall not
affect the liability of any surety
for the insolvent.’
The learned Judge of
Appeal perhaps took it for granted that a composition would involve a
discharge of the balance of the principal
debtor’s debts so
that preservation of rights against sureties was necessary.
[67] The decision
reached by the majority in Moti necessarily overruled the contrary
expression of opinion in Standard Bank of SA
Ltd v Lewis
1922 TPD 285
(at 290-291 per Mason J and at 295 per Gregorowski J) and in
Malmesbury Board of Executors and Trust Co v Duckitt and Bam
1924 CPD
101
(at 105-109 per Searle JP). Both cases were was cited in argument
in Moti (see 723) but neither the majority nor the majority judges

found it necessary to mention them. In Malmesbury Board Searle JP
thought that the cause of the surety’s right of recourse

against the principal debtor would arise only after the date of
registration of the assignment and he thus considered that the

creditor retained his right against the surety and that the latter
retained his right of recourse against the principal debtor.
A
similar view was apparently adopted by the court a quo in Moti. None
of the judges in the appeal approved that view. Innes CJ
rejected it
as follows (at 738):
‘The
Provincial Division was largely influenced by the view that the claim
of the surety against the principal debtor did
not arise before but
after the assignment. It was not a debt “which was due, or the
cause of which arose before the date
of assignment,” and was
not therefore covered by sec. 126(2)(b). This is a point not
necessary to decide. Because even if
it were so – that is to
say if the surety did not become a creditor unless and until he paid
– the resulting position
would, on my reading of sec. 126, be
unaffected. The surety is released owing to the release of the
principal debtor because his
obligation is subsidiary to the main
obligation; not because it does not itself fall within the wording of
sec. 126. And the surety
being released, his claim against the
principal debtor after assignment can never arise.’
[68] Moti has been
cited on many occasions in support of the accessory principle and I
am not aware of any subsequent dissent from
it. It was directly
applied, for example, in Standard Bank v Lowry & Another
1926 CPD
328
, where Gardiner J also held that the attempt by a particular
creditor to reserve its rights against sureties by qualifying its
signature to the deed of assignment with the words ‘without
prejudice to any security held by the bank’ was ineffective;

and also in Madka v Kalsheker
1954 (4) SA 185
(SR), where it was said
that Moti ‘unquestionably’ represented the law on the
point and that the surety’s defence
would have been bound to
succeed but for the fact that the creditor’s rights against the
surety had been preserved by an
express stipulation in the deed of
assignment (at 186C-E). (I may mention, as an historical footnote,
that s 45 of the Insolvency
Law Amendment Act 29 of 1926 amended the
1916
Insolvency Act by
inserting, into
s 126(2)(b)
of the main Act, a
proviso preserving rights against sureties, and that the statutory
assignment procedure was abandoned with the
passing of the
Insolvency
Act 24 of 1936
. Whether the effect of the 1926 proviso was that the
surety retained his right of recourse against the principal debtor
was not,
as far as I have been able to ascertain, the subject of any
reported decision.)
[69] There is at
least one instance where the full rigour of the accessory principle
seems not to have been applied. It has been
held that a surety is not
released if the principal debtor, being a corporation, is
deregistered or dissolved. In Barclays National
Bank Ltd v Traub;
Barclays National Bank Ltd v Kalk
1981 (4) SA 292
(W) Myburgh J had
to consider, among other points, whether sureties had been released
by the deregistration of the principal debtor.
He found that this was
not the case (294D-295F). He based his decision on the fact that the
deregistration occurred after litis
contestatio and on the fact that
a statutory procedure existed for the restoration of a company to the
register with the express
statutory nullification of all the effects
of deregistration. On appeal
(1983 (3) SA 619
(A)) Botha JA gave the
defence short shrift (at 633H-634A):
‘In my opinion
this defence is without merit. In support of it, counsel said: there
cannot be a debt without a debtor. Whatever
validity such a statement
may have in other contexts, it certainly cannot be applied to the
facts of this case. It is not the law
that a surety is freed from
liability to the creditor when the principal debtor ceases to exist.
If the principal debtor is a natural
person and he dies, his surety
remains liable to his creditors; and a surety for a company remains
liable to its creditor if it
is liquidated and dissolved under s 419
of the Companies Act. In short, there is no foundation for the
argument that [the company’s]
deregistration released the
appellants from liability to the Bank.’
[70] The general
principles relating to the accessory nature of the surety’s
liability were cited by the sureties’ counsel
to the court in
Traub, reference being made inter alia to Colonial Government v
Edenborough supra and Moti (see the summary of
argument at
622H-623A). The counter-argument for the bank was that the
deregistration provisions of the old Companies Act provided
for
retrospective reinstatement and that an application for reinstatement
could be made at the instance of a ‘creditor’,

necessarily implying that the company’s debts still existed
(625 in fine). The Appellate Division did not suggest that Moti
was
wrongly decided or that the accessory principle was not the general
rule. Whatever the precise basis for the court’s
decision (I
note that Traub was not mentioned before me in argument), I do not
think it detracts from the conclusion, so clearly
laid down by the
majority in Moti, that the accessory principle applies to a discharge
of the principal debtor by way of release
or compromise, whether
voluntary or statutory.
[71] I should add
that, although the old Companies Act does not appear to have made
express provision for the preservation of rights
against sureties
upon the deregistration or dissolution of a company, such
preservation may well be achieved by s 83(2) of the
new Act which
contains a wide provision to the effect that the removal of a
company’s name from the register does not affect
the liability
of any former director or shareholder of the company or any other
person ‘in respect of an act… that
took place before the
company was removed from the register’. The execution of a
suretyship on behalf of a company prior
to its deregistration might
well be such an act.
Application of
principles to present case
[72] In my opinion,
one has here a similar situation to that which confronted the court
in Moti. The lawmaker re-enacted, with some
modifications, the offer
of compromise provisions and repeated the preservation which formally
existed in respect of rights against
sureties. The lawmaker also
introduced the new procedure of business rescue. The lawmaker failed
expressly to deal with the position
of sureties and there is no basis
for implying a term into the Act preserving rights against sureties.
The common law must thus
be applied once the distressed company has
been released from its liabilities pursuant to a duly adopted
business rescue plan.
[73] As in Moti, I
do not think there is any distinction between the position of
creditors who voted for the plan and of those who
voted against it. A
creditor who votes in favour of the adoption of the business rescue
plan conveys nothing more that he is willing
to be subjected to the
effects which the scheme in law will have, whatever they may be.
Those effects are the same for those who
support and those who oppose
the plan.
[74] Section 150(2)
sets out what must be included in a business rescue plan. The
proposals in the plan
‘must include
at least … the extent to which the company is to be released
from the payment of its debts, and the extent
to which any debt is
proposed to be converted to equity in the company, or another
company’.
A business rescue
plan is not required, on my reading of s 150(2), to provide for the
release of the company from the payment of
its debts. The plan must
simply spell out the extent of the proposed release. There are a
range of possibilities. A business rescue
plan might leave the debts
of the company unaffected altogether, with or without an extension of
time for payment (in which case
the extent of the proposed release
might be regarded as nil); or the plan might leave the capital of the
debts unaltered but modify
the provisions as to interest or release
the company of part but not all of the capital or interest, and such
release may or may
not be accompanied by the payment of a dividend.
The effect of varying provisions of this kind on the liability of
sureties will
depend on an application of the common law to the
precise terms of the plan.
[75] It is possible
that a plan could, as I have previously mentioned, deal with their
position on a tripartite basis or by way
of arrangement between the
creditors and the company in the form of a pactum de non petendo (see
Natal Bank v Bansfield & Co
(1885) 6 NLR 178
at 181-182; Wides v
Butcher Bros supra; Innes CJ in Moti at 739; see also Forsyth &
Pretorius op cit at 195). I do not see
why this should not form part
of the extent of the release. But I do not think a plan can provide
that, as between the creditors
and the company, the company will be
released but claims against sureties preserved unless it is on the
basis that the sureties
retain their rights of recourse against the
company (in which case the release would more properly be expressed
as a pactum de
non petendo).
[76] The question
whether the defendants in the present case have been discharged thus
depends on the terms of the approved plan.
Since the question arises
at the stage of summary judgment, I do not think I can grant summary
judgment unless I am satisfied that
the plan is not reasonably
capable of an interpretation that the company’s indebtedness to
the plaintiff has been discharged.
I am not so satisfied. Clause 7.2,
under a heading referring to ‘release from debt’, states
that concurrent creditors,
including the plaintiff, will receive the
specified dividend ‘in full and final settlement of their
claims against the Company.’
This is repeated in clause 8.1.
Although, on my reading of s 150(2), a business rescue plan does not
have to provide for a ‘release’,
the most natural reading
of the plan in the present case is that the company has been
absolutely released from its debts to the
creditors in question. In
Moti the majority judges saw no distinction between relieving a
debtor of a debt and discharging the
debt. If anything, the
justification for equating a release of a debtor in full and final
settlement of the claim with a discharge
of the debt is stronger. The
release cannot be described as purely personal.
[77] Section 154(1)
provides that a plan may stipulate that, if it is implemented in
accordance with its terms and conditions, ‘a
creditor who has
acceded to the discharge of the whole or part of the debt owing to
that creditor will lose the right to enforce
the relevant debt or
part of it’. Section 154(2) provides that if a plan has been
approved and implemented, ‘a creditor
is not entitled to
enforce any debt owed by the company immediately before the beginning
of the business rescue process, except
to the extent provided for in
the business rescue plan’. The two sub-sections appear to me to
some extent to overlap. Both
of them, in turn, might be considered
unnecessary in the light of s 152(4), which states that a duly
adopted plan is binding on
the company and on all of its creditors,
whether or not the creditor was present at the meeting, voted for or
against the plan
or proved a claim. The use of the word ‘acceded’
in s 154(1) also strikes me as inapt, because the lawmaker could
surely
not have intended that the discharge contemplated in that
sub-section would depend on whether or not the creditor had agreed to

the term in question; that individual agreement is not necessary
appears from s 152(4).
[78] Be that as it
may, I consider that the plan in the present case, on a reasonable
(and perhaps the most probable) interpretation,
provides that the
debts owing to the concurrent creditors (other than Group Appliance)
will be discharged by the payment of a dividend
in full and final
settlement, with the result (somewhat unnecessarily stated in s
154(1)) that those concurrent creditors have
lost their right to
enforce the debts in question. The right to enforce the debts would
also be precluded by the overlapping (and
again somewhat unnecessary)
terms of s154(2). And to the extent that it is relevant (and I do not
believe that it is), I must decide
the case at this stage on the
assumption that the plaintiff supported the adoption of the plan and
thus (if s 154(1) were to be
construed literally) ‘acceded to’
the discharge of the company’s debt to it.
[79] The plan
contains no provision preserving the creditors’ rights against
sureties and at this stage there is no basis
for implying such a
preservation. Mr Subel did not argue that the plan contained such a
preservation nor did he contend that, if
the defendants were liable,
they retained their rights of recourse against the company. His
argument was simply that the release
of the company from its debts
did not affect the sureties, and that is an argument which, for the
reasons I have given, I cannot
accept.
[80] I need not now
decide whether evidence of background and surrounding circumstances
would be admissible in the interpretation
of the plan and, if so,
whether there is any evidence which could conceivably lead to a
different construction being placed on
the plan. I do not know
whether the position of sureties was discussed in meetings between
the creditors and the business rescue
practitioners. The plaintiff
may unilaterally have assumed that its rights against the defendants
would be unaffected by the adoption
of the plan. It may even be that
the business rescue practitioners thought that in law creditors who
held suretyships would be
able to enforce them without the sureties
having any right of recourse against the company. The defendants may
have held a different
view. They owed the company R11 375 770 on loan
account. In terms of the plan they agreed to pay R6,5 million to the
company in
full and final settlement of their liability. This was
part of the funds which enabled the business rescue practitioners to
make
their proposals, including a material improvement on the
liquidation dividend which creditors would otherwise receive. If the
defendants
had been told that they might yet be held liable to
concurrent creditors as sureties, they might not have been willing to
raise
the sum of R6,5 million (the source of these funds, and whether
the defendants themselves had surplus assets to that extent, are
at
this stage unknown). The various apprehensions or misapprehensions as
to the law which the parties may have entertained cannot
in
themselves affect the interpretation of the plan.
[81] It may be
mentioned that there is not even the difference of language in the
Act which might have justified the distinction
on which the two
dissenting judges in Moti based their decision. Here the language
used, both in relation to business rescue plans
and schemes of
arrangement, is ‘the extent to which the company is to be
released from the payments of its debts’,
yet there is an
express reservation in the latter instance but not the former.
[82] I was referred
to the judgment of Kathree-Setiloane J in African Banking Corporation
of Botswana Ltd v Kariba Furniture Manufacturers
(Pty) Ltd &
Others
2013 (6) SA 471
(GNP). The learned judge was called upon to
decide a number of issues arising from business rescue proceedings.
The effect of paras
19 to 64 of her judgment was that the business
rescue plan in that case had, because of the invocation by a
particular stakeholder
of s 153(1)(b)(ii) procedure, been validly
adopted and become binding. The plan provided among other things for
the compromising
of creditors’ claims, including the claim of
the plaintiff. The learned judge refused the relief sought by the
applicant
(a creditor) in regard to the setting aside of the plan. In
paras 65 to 72, however, she concluded that the applicant was
entitled
to a declaratory order that the sureties for the company’s
indebtedness remained liable. Although the learned judge cited
my
judgment in Investec in support of her conclusion (para 70 and
footnote 29), Investec is in my respectful opinion distinguishable

for the reasons I have stated.
[83] It may be
thought illogical that, after the commencement of business rescue
proceedings but prior to the adoption of a business
rescue plan, the
company enjoys the protection of a personal moratorium which the
surety cannot invoke, whereas after the adoption
of a business rescue
plan a creditor might be precluded from suing the surety. But there
is in truth no illogicality. It all depends
on what the business plan
eventually stipulates. The commencement of bankruptcy proceedings may
provide for a temporary moratorium
personal to the debtor; but a
compromise or release might come later, and the effect of such
compromise or release might differ
from a personal moratorium.
[84] The judge in
African Banking of Botswana said (para 68) that there was no express
provision in Chapter 6 of the Act which provides
that the adoption of
a business rescue plan would deprive creditors of their rights
against sureties. That is true but there is
likewise no provision in
the Act which preserves rights against sureties. Whether the adoption
of a business rescue plan will or
will not affect a creditor’s
right against a surety will, for the reasons I have explained, depend
on an application of common
law principles to the actual terms of the
plan.
[85] The learned
judge said that the effect of a statutory provision depriving
creditors of their claims against sureties would
be ‘drastic’,
because it would deprive a creditor of its rights against the surety
simply by virtue of the adoption
of a business rescue plan. She
considered that if the lawmaker had intended the adoption of a
business rescue plan to have such
a ‘far-reaching consequence’,
the lawmaker would have expressly provided for this consequence (para
68). Of course,
and as I have said, the adoption of a business rescue
plan does not without more affect a creditor’s rights against
the surety;
it depends upon an application of the general principles
of the law of suretyship to the actual provisions of the plan.
Accepting,
though, that a business rescue plan will often provide for
the principal debtor’s release, the question whether the effect

of discharging the surety is ‘drastic’ depends from whose
perspective one looks at the question and how one balances
the
competing interests. The surety might regard it as drastic to
preserve a creditor’s claim against him without preserving
his
right of recourse against the company. One might say that at least
the creditors hold their fate in their own hands whereas
the surety
has no say in the matter.
[86] I thus
respectfully disagree with the learned judge’s conclusion to
the extent that she held that the release of a distressed
company
from its liabilities to creditors under an approved business rescue
plan left the position of sureties unaffected.
[87] I was also
referred to the decision of Gorven J in DH Brothers Industries (Pty)
Ltd v Gribitz NO & Others
2014 (1) SA 103
(KZP). That was again a
case where, by virtue of the invoking of the s 153(1)(b)(ii)
mechanism, a plan had purportedly become binding
on creditors. The
plan made provision for the cession of creditors’ claims to a
third party against payment of their likely
liquidation dividend or
R100 which ever was highest. The business rescue practitioner
contended that the liquidation dividend payable
to various creditors,
including the applicant, as independently valued was less than R100
so that those creditors would lose their
claims against payment of
that sum. The applicant applied for relief which included the setting
aside of the resolution placing
the company under business rescue,
the setting aside of the appointment of the practitioner, a
declaration that the s 153(1)(b)(ii)
offer was not one as
contemplated by the Act, and the setting aside of the purported
approval of the plan.
[88] The learned
judge found for the applicant on the first point (the invalidity of
the resolution placing the company under business
rescue) but
acceded to a request to deal with the other grounds in case he was
wrong. In the course of a detailed consideration
of the further
grounds, the learned judge dealt with the validity of a plan which
provided for the cession of claims to a third
party (paras 64ff). He
said the submission depended, to an extent, on whether the plan
precluded the applicant and other creditors
from proceeding against
sureties (para 65). He observed that the business rescue provisions
did not contain the same preservation
of rights as s 155(9). He
considered that the effect of the plan in the case before him was
that, since the claims of creditors
were to be ceded and because
there was no provision retaining the right of the cessionary to
enforce the deeds of suretyship, the
creditors would (if the plan
were valid) be precluded from suing the sureties. The applicant
argued that, because all creditors
were bound by an adopted plan
(whether they voted for it or not), the lawmaker would have included
a similar protection to s 155(9)
had it envisaged that compulsory
cessions of claims could form part of a plan (para 66). The learned
judge apparently agreed with
this contention, saying that it ‘must
follow as night follows day that a plan which deprives non-acceding
creditors of the
right to enforce a claim against a surety does not
pass muster’ and that a compulsory cession could not be part of
the plan
(para 67).
[89] I need not
decide whether a business rescue plan may or may not provide for a
compulsory cession of claims. The plan in the
case before me does not
depend on any such cession. Instead there is a release of the company
from its debts. The Act expressly
envisages that a plan may include a
release of the company from its debts, and for all the reasons I have
explained the effect
of such a release must be determined with
reference to general principles of the law of suretyship.
[90] In Moti, Innes
CJ’s concluding observation was that it would be desirable for
the lawmaker to amend the
Insolvency Act so
as to clarify the
position. Needless to say, that would be equally desirable in
relation to business rescue.
Conclusion
[91] The application
for summary judgment must thus be refused.
[92] In regard to
costs, it is often appropriate in summary judgment proceedings to
direct costs to stand over for determination
at the trial or to order
them to be costs in the cause, because the defence often depends on
facts which may prove to be incorrect.
Here, however, the primary
point is one of law and I have decided it against the plaintiff. The
position is much the same as where
an exception based on a point of
law is dismissed. It is notionally possible, upon the dismissal of an
exception, that the trial
judge might decide the law point
differently but an exception in such circumstances would generally be
dismissed with costs.
[93] Very little
time was spent on the quantum defence. No apportionment of costs is
warranted by the unsuccessful assertion of
that defence.
[94] I make the
following order:
[a] The application
for summary judgment is refused and the defendants granted leave to
defend the main action.
[b] The plaintiff
shall pay the defendants’ costs of opposing the application for
summary judgment.
ROGERS J
APPEARANCES
For Plaintiff:
Mr A Subel SC
Instructed by:
Edward Nathan
Sonnenbergs Inc
150 West Street
Sandown, Sandton
c/o 1 North Wharf
Square
Loop Street
Cape Town
For Defendants:
Mr A Ferreira
Instructed by:
Assheton-Smith
Inc
2nd floor
Sedgwick House
24 Bloem Street
Cape Town