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[2014] ZAWCHC 175
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Investec Bank Ltd v Lambrechts N.O and Others (6570/2014) [2014] ZAWCHC 175; 2019 (5) SA 179 (WCC) (27 November 2014)
THE
HIGH COURT OF SOUTH AFRICA
(WESTERN
CAPE DIVISION, CAPE TOWN)
In
the matter between
Case
No: 6570/2014
DATE:
27 NOVEMBER 2014
INVESTEC
BANK
LTD
............................................................................
APPLICANT
And
HUGO
AMOS LAMBRECHTS N.O
.........................................
FIRST
RESPONDENT
JOHANNA
MAGDALENA LAMBRECHTS N.O
................
SECOND
RESPONDENT
ERNEST
DEREK TAYLOR N.O
.............................................
THIRD
RESPONDENT
Coram
:
ROGERS J
Heard:
18 NOVEMBER 2014
Delivered:
27 NOVEMBER 2014
JUDGMENT
Rogers
J:
Introduction
[1]
This is an opposed
application by the applicant (‘Investec’) for the
provisional sequestration of the trust estate of
which the
respondents are trustees (‘Muscat’). Everything is in
issue: Investec’s claim and whether it is
bona
fide
disputed on
reasonable grounds; Muscat’s alleged factual insolvency;
benefit to creditors; and the appropriate manner for
exercising the
court’s residual discretion. Mr Manca SC, leading Ms Reynolds,
appeared for Investec. Mr van Riet SC, leading
Mr W van Niekerk,
appeared for Muscat.
[2]
Muscat’s sole
asset of any substance is an immovable property (made up of two
adjoining erven) in Saxenburg Park, Kuilsriver
(‘the
property’). The property is leased out as a truck/bus depot.
The property comprises three buildings with a mix
of office, workshop
and warehouse facilities as well as a large paved yard area.
[3]
The first respondent
(‘Lambrechts’) is the leading figure in Muscat’s
affairs and made the answering affidavit.
He has property interests
apart from Muscat. The vehicles for these other interests include the
Huganel Trust (‘Huganel’)
and Plasto Properties 5 Pty Ltd
(‘Plasto’).
[4]
Lambrechts says that
during 2006 he was approached by Gary Palmer of Investec regarding a
short-term loan product. The loan would
be structured in such a way
that the instalments would comprise almost exclusively interest, with
most of the capital to be repaid
in a final balloon payment at the
end of the loan’s term. Lambrechts alleges that Palmer told him
that Investec would restructure
such loans at the end of their term
so that the capital would not have to be repaid upon expiry of the
initial period.
[5]
The first loan which
Lambrechts concluded with Investec was done through Plasto. This was
during November 2006. The loan was for
an 18-month period. The Plasto
loan was restructured (rolled over) on three occasions – during
June 2008 for 24 months, during
June 2010 for another 24 months and
during September 2012 for another 24 months.
[6]
During April 2008
Lambrechts caused Muscat, which had been recently established, to
conclude an agreement for the purchase of the
property at a price of
R17,1 million. It appears that Muscat intended to finance the
purchase price through a short-term loan with
Investec. The said loan
was concluded in October 2008, a few months after the first renewal
of the Plasto loan. The principal was
R19 225 720,
comprising R17 million in respect of the purchase of the property, R2
million as an additional advance (for
renovations and improvements,
so it seems), R216 000 for Investec’s fees and R9120 for
the valuation fee. The period
of the loan was five years. The balloon
payment, due in October 2013, was R14,25 million, from which one can
see that the monthly
instalments covered interest plus a small
portion of the capital.
[7]
It was a special
condition of the loan agreement that a valuer appointed by Investec
should give a minimum valuation of the property
of R24,88 million in
its current condition and of R26,5 million upon completion
(presumably meaning the completion of renovations
and improvements
then intended to be carried out). The valuations were duly obtained
and the money advanced. As security for the
loan, a mortgage bond of
R20 million was registered over the property.
[8]
During March 2012
Investec and Muscat concluded a second loan agreement which
superseded the first. The principal debt in terms
of the second loan
agreement was R14,9 million, described as a restructuring of the
first loan agreement. The period of the second
loan was 20 months,
meaning it would expire in November 2013, which was more or less when
the initial loan would have expired.
The instalments over the 20
months were lower than those specified in the initial loan agreement,
and the residual balloon payment
due in November 2013 was R14,55
million.
[9]
Investec explained in
its replying papers that during September 2010 Muscat had started
defaulting on its monthly instalments and
was in arrears by more than
R1 million in early 2011. Muscat found a new tenant for the property
in mid-2011. This, according to
Investec, was the background to the
conclusion of the second loan agreement. Investec agreed to reduce
the monthly instalments
in order to give Muscat breathing space to
recover. This meant that the portion of capital included in the last
20 monthly instalments
of the initial five-year period was less than
under the first loan agreement.
[10]
By March 2012 the
person at Investec dealing with Lambrechts was William MacRobert.
Lambrechts claims that MacRobert made the same
representation to him
as Palmer had done regarding the fate of the loan upon expiry.
[11]
Muscat did not on 1
November 2013 make the balloon payment allegedly due in terms of the
second loan agreement. Although the residual
payment specified in the
agreement was R14,55 million, Muscat had made certain advance
payments, the result of which was that on
Investec’s view of
the position the amount due on 1 November 2013 was R12 475 832.
[12]
During November 2013
there was email correspondence involving MacRobert regarding property
transactions which Muscat and Lambrechts’
other property
vehicles intended concluding with subsidiaries of Freedom Property
Fund Ltd (‘Freedom Property’), an
entity to be listed on
the JSE. These transactions, if they came to fruition, would or may
have resulted in the settlement of Muscat’s
indebtedness to
Investec. I shall return to these transactions presently.
[13]
In January 2014
representatives of Investec met with Lambrechts, conveying to him
that Muscat was in breach of the second loan agreement
and that
Muscat had to make the residual payment. Lambrechts says that he was
taken aback at Investec’s stance, as it was
at odds with what
had been represented to him by Palmer and MacRobert. This meeting was
followed by a formal letter of demand on
24 January 2014. Muscat’s
attorneys responded, stating that it was always Investec’s
practice to renegotiate the terms
of the loans upon expiry and that
Muscat was not in arrears. Reference was also made to imminent
property transactions which were
likely to be finalised shortly. In
their reply Investec’s attorneys disputed the content of the
letter.
[14]
Investec launched the
sequestration application on 14 April 2014 for hearing on 2 May 2014.
By virtue of a payment made by Muscat
in December 2013, the balance
allegedly owing at the time the application was issued was
R12 138 347 plus interest as
from 27 March 2014. A notice
of opposition having been delivered, the application was postponed on
2 May 2014 with a timetable.
Muscat failed to deliver its answering
papers in accordance with the timetable. The answering papers in the
event were only served
on 7 August 2014. This led to a further
postponement on 12 August 2014, Muscat being liable for the wasted
costs. Investec filed
its replying papers on 3 November 2014. These
papers were also late, having regard to the timetable set in the
order of 12 August
2014. At the hearing before me, Muscat did not
press its opposition to condonation.
Investec’s
claim
[15]
There are two related
questions relating to Investec’s claim. The first is whether
Investec has established its claim on a
prima
facie
basis, ie
whether the balance of probability on the affidavits is in its favour
in that regard. If that question is affirmatively
answered, the
further question is whether Investec’s claim has been shown by
Muscat to be
bona
fide
disputed on
reasonable grounds, in which case sequestration proceedings would be
regarded as inappropriate (see, for example,
Hülse-Reutter
& Another v HEG Consulting Enterprises Pty Ltd (Lane & Fey
NNO Intervening)
1998 (2) SA 220
(C) at 218D-219H).
[16]
In my view, the balance
of probability on the affidavits is in Investec’s favour and
Muscat has not demonstrated a
bona
fide
dispute on
reasonable grounds.
[17]
The contractual
relationship between the parties is governed by the terms of the
second loan agreement. The contract unambiguously
requires the
residual amount to be repaid on the expiry of 20 months, ie 1
November 2013. The contract contains no provision obliging
Investec
to restructure the contract upon the expiry of the 20 months. Clause
4.3.9 of the standard terms and conditions states
that upon the
occurrence of an ‘event of default’ one of the options
open to the bank in its sole discretion is ‘to
direct the
borrower to renegotiate the terms of’ the agreement and by
written notice extend its term pending such renegotiation.
I need not
decide whether this provision is legally enforceable. What should be
noticed, however, is that it applies only in the
event of default.
For present purposes, the only relevant event of default as defined
in clause 4.1 of the standard terms and conditions
was Muscat’s
failure to make the balloon payment 1 November 2013. This presupposes
that the debt was indeed due and payable
on that date. Any extension
pending renegotiation was a matter for Investec’s sole
discretion.
[18]
Leaving aside fraud,
the alleged oral statements by Palmer and MacRobert can be of no
assistance to Muscat, because clause 34 of
the standard terms and
conditions states that the documents comprising the loan agreement
constituted the whole agreement between
the parties, with neither
side being bound by any undertaking, representation or warranty not
recorded therein.
[19]
Although in its
answering papers and heads of argument Muscat deployed the alleged
oral statements by Palmer and MacRobert in various
different legal
ways, the only one Mr van Riet pressed in oral argument was the
following. Palmer and MacRobert told Lambrechts
that upon expiry of
the initial term the parties would restructure the loan so that
Muscat would not be obliged to repay the capital.
It was only on this
basis that Muscat was willing to conclude the first and second loan
agreements. Investec in its replying papers
has not only denied that
Palmer and MacRobert said what Lambrechts claims but has also alleged
that what they are claimed to have
said did not accord with
Investec’s attitude to these types of loans. There is a
bona
fide
dispute, which
is not unreasonable, as to whether or not Palmer and MacRobert said
what Lambrechts alleges. If it could be the case
that they made the
alleged oral statements, Investec’s own replying affidavit
shows that Palmer and MacRobert deliberately
misrepresented their own
state of mind as to what would occur upon expiry, because according
to Investec neither they nor anyone
else at Investec viewed a
restructuring upon expiry as an automatic event. There was thus a
fraudulent misrepresentation, as a
result of which the loan
agreements are void or voidable. Although this might give rise to
reciprocal claims for restitution or
unjust enrichment, Investec has
not based its claim on such causes of action.
[20]
I do not intend to
comment on all of the convoluted features of this reasoning. In my
opinion, its factual substratum does not rise
to the level
constituting a reasonable
bona
fide
dispute. Both
loan agreements were perfectly clear as to their period and as to the
contractual obligation to make the balloon payment
on the final date.
The loan agreements contained no hint of the regime which, on
Muscat’s case, formed the basis of its concluding
the
agreements. It is commercially implausible, to the point of
absurdity, to suppose that Investec’s representatives would
have said, or that Lambrechts could have believed, that there would
be an automatic restructuring upon the expiry of the loan agreement.
[21]
Muscat did not allege,
and Mr van Riet did not argue, that Muscat was entitled to
rectification of the loan agreements. Although
rectification usually
occurs where parties honestly make the same mistake in the recordal
of their contract, rectification can
also be granted where a party
knows that the other is under a misapprehension as to the content of
the document and fraudulently
induces the other party to sign the
document (Christie
The
Law of Contract in South Africa
6
th
Ed at 335-336 and cases there mentioned). That, I emphasise, is not
Muscat’s case. It is difficult to see how such a claim
could
plausibly have been advanced. The terms of the loans were, as I have
said, perfectly clear. Lambrechts does not say that
he was unaware of
the terms and their meaning. Furthermore, an agreement automatically
to restructure a loan appears to me to be
void for vagueness. For how
long would it be extended and on what terms as to interest and
capital? Would the capital ever need
to be repaid or would it be a
loan in perpetuity?
[22]
Given the absence of a
claim for rectification, these rhetorical questions do not arise
directly here but they bear heavily on an
assessment of the
plausibility of Lambrechts’ assertion that Investec’s
representatives said what was alleged and of
Lambrechts’
supposed basis for concluding the agreements.
[23]
I am prepared to accept
that there were discussions along the lines that loans of this kind
would often be rolled over. However,
no experienced business person
would have said or understood that such a consequence would be
automatic. Lambrechts may have expected
that Investec would agree to
restructure the loan but he could not reasonably have believed that
Investec would be obliged to do
so notwithstanding the clear terms of
the loan agreement.
[24]
Mr van Riet submitted
that Lambrechts’ version as to what was said and what he
understood was not implausible, having regard
to certain other facts
alleged by Lambrechts of which Investec was said to have been aware.
These were that Muscat had been established
for the specific purpose
of buying the property, that its only source of income would be rent
from leasing the property, that the
rent would not initially have
been enough to pay the full monthly instalments and that Muscat would
have to make up the difference
from other sources, that Muscat’s
intention was to keep the property rather than sell it and that
unless the property were
sold or new finance raised Muscat would not
be in a position to make the final payment.
[25]
An acceptance of these
facts does not, to my mind, make Lambrechts’ version any more
plausible. If Muscat was only willing
to purchase the property on the
basis that it would have a loan of indefinite or lengthy duration
under which it was essentially
required only to service interest, it
is difficult to understand why it did not insist on concluding an
agreement on those terms
rather than an agreement which so plainly
stated the opposite. I can well imagine that a bank would not have
been willing to lend
on the terms Lambrechts may have desired but
that fortifies me in my view that the bank would not have represented
or been understood
as representing that it would act in that way by
repeatedly rolling over the agreement.
[26]
In terms of the initial
loan agreement Muscat had a five-year period during which it could
try to persuade Investec to renew the
loan agreement or try to raise
finance from another bank or sell the property. The second loan
agreement was concluded against
the background of Muscat’s
having defaulted on its monthly instalments. Although there was a
restructuring of sorts, Investec
did not agree to extend the period
agreed at the outset. This would have reinforced the understanding
that, come November 2013,
Muscat was obliged to make the balloon
payment. The five-year loan afforded Muscat the opportunity of
acquiring the property and
establishing it as a profitable rental
enterprise. One would expect that, if it succeeded in doing so and
had rentals sufficient
to service its debt, it would have been able
to raise new finance or sell the property profitably. I have no doubt
that this was
the business judgement which Lambrechts made and the
business risk he accepted.
Insolvency
[27]
There having been no
alleged act of insolvency, the question is whether Investec has
shown, on a balance of probabilities on the
affidavits, that Muscat’s
liabilities exceed its assets, both fairly valued (
Ohlsson’s
Cape Breweries Ltd v Totten
1911
TPD 48
at 50;
Venter
v Volkskas Ltd
1973
(3) SA 175
(T) at 179A;
Uys
NO
en
ʼn Ander v CMW Lewendehawe
(Edms) Bpk h/a CMW Elite
[2011]
ZAFSHC 205
paras 3-6). Investec averred in its founding papers that
the property, which was Muscat’s sole asset of any
significance,
had an open market value of R11 million and a
forced-sale value of R7,6 million. Investec relied in that regard on
a valuation
performed by Mr Richardt Snyman of
WesternPro
Valuers. Since Investec’s claim at the time the application was
issued was about R12.14 million, Muscat’s
liabilities were said
to exceed its assets by at least R1,14 million.
[28]
Muscat did not include
an independent valuation as part of its opposing papers. Lambrechts
denied, however, that the property was
worth only R11 million. He
expressed this opinion based on his years of experience in commercial
property and with reference to
certain circumstances mentioned below.
[29]
Lambrechts annexed to
his answering affidavit Muscat’s balance sheet as at 30 June
2014. For some reason this reflected the
amount owing to Investec as
R11 989 722 rather than the amount alleged by Investec but
I did not understand Muscat to
dispute Investec’s computation
(assuming the existence of a valid debt). The balance sheet indicated
a loan indebtedness
of R2 158 743 to an unidentified
lender. Investec did not refer to this indebtedness as part of its
founding papers but
pointed out its existence in reply. After the
hearing Muscat filed a supplementary affidavit stating that this was
a loan advanced
to Muscat by Huganel, the latter being Muscat’s
sole income beneficiary. According to the affidavit, the loan is a
‘friendly’
one which is not presently due and payable.
[30]
Leaving aside for the
moment the insider loan indebtedness of R2 158 743 to
Huganel, it is apparent, even on Investec’s
case, that the
margin by which Muscat’s liabilities exceed its assets is
relatively modest if the property is valued at its
open market value
rather than at a forced-sale value. I see no reason not to use an
open market value. That is the ordinary way
in which value is
determined (see
Uys
NO supra
).
Furthermore, in the context of benefit to creditors Mr Manca said
that an important reason why a bank in Investec’s position
would prefer sequestration to judicial execution is that the property
does not have to be sold by public auction but can be realised
to
best advantage by the trustee.
[31]
There are a number of
circumstances which cause me to question Snyman’s valuation and
to regard it as unduly conservative.
[32]
The first is that
Muscat bought the property in April 2008 for R17,1 million. In
addition, it thereafter effected renovations or
improvements, R2
million of the Investec loan being apparently earmarked for this
purpose. It appears from Investec’s replying
papers that
renovations or improvements were indeed carried out. In the balance
sheet previously mentioned, the property is carried
at a figure of
R18 388 746, which is likely to be the total cost of
purchase and improvements.
[33]
There has been no
suggestion that Muscat’s purchase of the property in April 2008
was not an arm’s length transaction.
Lambrechts, an experienced
businessman, evidently thought at that time that the property was
worth R17,1 million and that expenditure
on renovations and
improvements was commercially justified. It would be most surprising
if the property had, in the six years since
2008, lost 35% of its
2008 value. While the global financial crisis which struck in the
last quarter of 2008 may have placed a
brake on the large annual
increases in property values which South Africa had for some years
seen, one’s experience tells
one that property, if it is
reasonably maintained, will generally show a modest increase in value
or at least not lose value. Snyman’s
valuation report did not
deal with the 2008 purchase price nor attempt to explain it. Even
after Lambrechts highlighted the 2008
purchase price in his answering
affidavit, Investec did not as part of its replying affidavits file a
supplementary report or affidavit
by Snyman.
[34]
Related to this point
is the further circumstance that Investec agreed to lend Muscat
R19 225 720 on the security of the
property, over which it
registered a mortgage bond of R20 million. One would not have
expected Investec to lend this amount
unless it were satisfied that
the property was worth somewhat more than the sum advanced. Indeed,
one knows that it was an express
condition of the first loan
agreement that an Investec-appointed valuer should give an as-is
valuation of R24 880 000
and an improved valuation of R26,5
million. This suggests that Investec was willing to lend about 70% of
the market value (which
would be consistent with what Lambrechts said
in his answering affidavit in the context of the Nedbank finance to
be mentioned
hereunder). The valuations were duly obtained in 2008.
[35]
Once again, Snyman did
not in his valuation report deal with Investec’s 2008
valuations and its willingness to lend R19 225 720
on the
strength of the security afforded by the property. These features
were highlighted by Lambrechts in criticising the Snyman
valuation.
No supplementary valuation report or affidavit from Snyman was filed
as part of Investec’s replying papers.
[36]
Another factor to which
Lambrechts pointed in disputing Snyman’s valuation was a
transaction concluded between Muscat and
Rain Mile Blue Properties
(Pty) Ltd (‘Rain Mile’) on 25 October 2013. Rain Mile is
a subsidiary of Freedom Property,
which was intended to be
listed on the JSE and which was subsequently so listed during June
2014. It appears that Huganel concluded
a similar agreement in
respect of its property with another subsidiary of Freedom Property,
Lily Pride Properties (Pty) Ltd. In
terms of the contract between
Muscat and Rain Mile, Muscat sold the property to Rain Mile for a
price of R22,5 million (excluding
VAT). The price was to be paid by a
transfer to Muscat of Freedom Property shares at an agreed value of
R1,00 per share.
[37]
Clause 15 of the sale
agreement referred to the existing mortgage bond. It was recorded
that the proceeds from the sale of the Freedom
Property shares would
be applied first to settle the mortgage bond. Muscat agreed to
instruct brokers nominated by Rain Mile to
execute this provision on
its behalf. The shares were to be kept in trust by an attorney
nominated by Rain Mile until the bond
was settled in full, whereafter
the remaining shares would be released to Muscat. The property was to
be transferred to Rain Mile
as soon as possible after the settlement
of the bond. Clause 4.4 imposed restrictions on Muscat’s sale
of and trading in
the Freedom Property shares. Although the point was
not canvassed in the papers before me, it appears to me that these
restrictions
must have been intended to apply only to the remainder
of the Freedom Property shares which were to be released to Muscat
after
settlement of the mortgage bond.
[38]
Lambrechts relied on
the Rain Mile transaction as an indication that the property was
worth considerably more than Snyman’s
valuation. Investec’s
reply on this aspect was to observe that as at late October 2014
Freedom Property shares were trading
on the JSE at only 36 cents per
share, meaning that the consideration to be received by Muscat was in
truth only worth R8,1 million.
[39]
I do not think
Investec’s reply on the Rain Mile transaction renders that
transaction irrelevant as an indicator of the property’s
value.
The transaction was concluded in October 2013, not October 2014. It
has not been suggested that Lambrechts and Rain Mile/Freedom
Property
were not at arm’s length or that the price of R22,5 million and
the value ascribed to the Freedom Property shares
(though not
guaranteed) were not genuine. The current value of Freedom Property
shares is a reflection of the stock market’s
current assessment
of the value of the Freedom Property business as a whole, ie its
entire property portfolio (which does not as
yet include Muscat’s
property, since the sale has not been implemented). It makes no more
sense to say, based on the current
share price of 36 cents per share,
that Muscat’s property is worth only R8,1 million than it would
be to say, if the current
share price were R1,50 per share, that
Muscat’s property is worth R33,75 million.
[40]
I am willing to accept
that a price payable in cash is more attractive than a price payable
in so many shares at a specified value
per share, though it is also
conceivable that, if Lambrechts thought that Freedom Property shares
would open upon listing at a
premium to R1,00 per share, he would
have regarded the manner of settlement of the price as an attractive
business opportunity.
Be that as it may, the transaction is one to
which I ascribe some weight in assessing whether Snyman’s
valuation of R11 million
is unduly conservative. Investec did not
file, as part of its replying papers, a supplementary report or
affidavit by Snyman dealing
with the Rain Mile transaction.
[41]
I mentioned earlier
that during November 2013 MacRobert was party to correspondence in
connection with the Freedom Property transactions.
From this
correspondence it appears that the transactions between Lambrechts’
interests and Freedom Property, which had already
been signed, were
to be modified so as better to secure Investec’s position. As
applied to Muscat’s transaction with
Rain Mile, the
modifications would have amounted to the following. Upon transfer of
the property, Rain Mile would sign a suretyship
for Muscat’s
indebtedness to Investec and the suretyship obligation would be
secured by a mortgage bond in favour of Investec
in substitution for
the existing Muscat mortgage bond. The Freedom Property shares would
be sold to settle the Investec debt. Investec
would only release Rain
Mile from its suretyship and mortgage bond upon settlement of the
Investec debt in full. In an email of
20 November 2013 MacRobert
asked Lambrechts to confirm that his understanding of these
modifications was correct. Lambrechts gave
this confirmation after
checking with Freedom Property’s Mr Stavridis.
[42]
Lambrechts did not say
in his answering affidavit what had become of these proposed
modifications. Investec in its replying papers
also did not elaborate
except to deny that the email correspondence reflected an agreement
on MacRobert’s part to extend
the date for repayment by Muscat
on the strength of the modified transaction. I do not think there is
any merit in Muscat’s
reliance on the email exchange as a
defence to Investec’s claim. However, the correspondence does,
in the absence of further
explanation from Investec, suggest the
latter was taking the Freedom Property transactions seriously and did
not regard the price
or manner of its discharge as self-evidently
artificial.
[43]
Another circumstance
mentioned by Lambrechts in relation to the value of the property was
Nedbank’s willingness to lend Rain
Mile R12 million on the
security of the property. It seems that, with the institution of the
sequestration application, Muscat
and Freedom Property must have
concluded that the transaction they had signed in October 2013, with
the proposed modifications
in the email correspondence of November
2013, could not proceed, since it depended on Investec’s
cooperation. Freedom Property
thus sought to raise hard cash. On 29
July 2014 Nedbank wrote to Rain Mile to say that the bank was
considering the merits of Rain
Mile’s funding request for R12
million in relation to the acquisition of the property. This would be
subject to confirmation
of the open market value of the property.
Lambrechts made his answering affidavit about a week later. He said
that Nedbank had
now indeed approved the loan of R12 million and that
although he had not seen Nedbank’s valuation he knew from
personal experience
that no bank would make an advance secured by
commercial property in excess of 70% of the value of commercial
property, meaning
that Nedbank’s valuation must have exceeded
R17 million.
[44]
Lambrechts added that,
in view of Nedbank’s approval of the loan, the transfer of the
property to Rain Mile was likely to
take place within the next six
weeks, at which point the amount owing to Investec would be paid in
full. He also said that due
to time constraints he had been unable to
obtain written confirmation from Rain Mile or Nedbank regarding the
approval of the loan.
Investec pointed out, in its replying
affidavit, that more than ten weeks had passed without such payment.
Mr Manca added by way
of submission that Lambrechts had not sought to
place written confirmation of the Nedbank loan before court by way of
a supplementary
affidavit.
[45]
However, I do not think
I can reject as untrue Lambrechts’ assertion that Nedbank
approved a loan of R12 million and for that
purpose valued the
property at considerably more than R12 million. I should perhaps add
that Rain Mile’s obtaining of a loan
of R12 million from
Nedbank is not, on my understanding, an indication that Rain Mile
would now be buying the property from Muscat
at a reduced price of
R12 million. Rather, Rain Mile wished to raise so much of the
purchase price in cash as was necessary to
discharge the debt to
Investec.
[46]
I have thus far alluded
to various indications of market value which call Snyman’s
conclusion into doubt. I have not analysed
Snyman’s
methodology. In general, he described Saxenburg Park as a ‘fairly
popular industrial node’. Demand for
similar accommodation in
the immediate area was ‘average to good’. His open market
value of R11 million was arrived
at by applying a capitalisation rate
to a market-related annual rent net of expenses. He provide
particulars of five comparable
rental properties and four comparable
sales. The most recent comparable sales had been concluded at
capitalisation rates of 8%
to 9,5% (the lower the capitalisation
rate, the higher the resultant value). His valuation of R11 million
was based on a capitalisation
rate of 9%. Given that insolvency here
is marginal even on Investec’s version, I point out that,
accepting all of Snyman’s
other assumptions, the market value
of the property would be R12,34 million if one used a capitalisation
rate of 8% and R10,39
million if one used a capitalisation rate of
9,5%. This, on Snyman’s approach, provides the fair range of
market value.
[47]
The key assumption is,
however, the market rent. Snyman regarded the rent paid by the
primary tenant as somewhat below market value
and made a modest
upward adjustment. He took the office, workshop and wash bay areas at
R35/m
2
and
the paved areas at R12 and R11,85/m
2
.
This yielded a gross monthly rent of R99 397,50. However, in the
case of two of Snyman’s four comparable rental properties,
office space was let at R40/m
2
and R50/m
2
,
and the yard space of one of these properties was let at R12,50/m
2
.
If one were to take the office/workshop areas of Muscat’s
property at R45/m
2
,
the gross monthly rent rises to R117 593. Using Snyman’s
assumptions regarding the vacancy factor, expenditure and
capitalisation rate, the property would have a value of R12,94
million. If the capitalisation rate were 8% rather than 9%, the
market value rises to R14,56 million.
[1]
[48]
The question may be
asked why one should assume that the market rent for the property is
significantly higher than the actual rent
paid by the current two
tenants. There are several answers.
[49]
Firstly, one knows from
Snyman himself that the actual current rents are somewhat below
market value.
[50]
Second, Lambrechts has
provided a not implausible explanation. He says that Muscat has for
some time been focusing on selling the
property into the Freedom
Property portfolio. To this end, he wanted to ensure that the current
tenants could be given a month’s
notice. Because the current
tenants do not have security of tenure, they are paying substantially
below market rates. (Snyman confirms
that the current leases are by
the month.)
[51]
Third, the tenant as at
2008, Van Zuydam Holdings (Pty) Ltd (‘Van Zuydam’), was
at that time paying a monthly rent of
R212 500, which increased
by about R20 000 after the renovations and improvements carried
out by Muscat. Investec, which
itself referred to this lease and
amounts in its replying papers, did not say that Muscat and Van
Zuydam were not at arm’s
length. On the contrary, Investec says
that the valuations it obtained for the property in 2008, namely
R24,88 million as is and
R26,5 million as improved, were based on the
Van Zuydam lease, so the Investec valuer must have regarded the rent
as market-related.
Snyman did not allude to this lease in assessing a
market rent for the property. It may well be that Van Zuydam was
‘paying
over the top’ because according to Investec the
reason Muscat fell into default during September 2010 was Van
Zuydam’s
demise. Nevertheless, the fact that an arm’s
length tenant was willing in 2008 to pay more than R230 000 per
month for
the improved premises calls into doubt a supposed market
rent in 2014 of less than R100 000 per month.
[52]
Fourth, Lambrechts
annexed to his answering affidavit a lease in respect of the property
concluded on 4 June 2014 between Muscat
and Shipwreck Beach (Pty) Ltd
(‘Shipwreck’). The lease is for five years commencing 1
July 2014 at R160 000 per
month escalating at 8,5% annually.
Although not so stated in the contract, Lambrechts explained in the
answering affidavit that
Shipwreck would only take occupation upon
transfer of the property to Rain Mile. Lambrechts says that the
shares in Shipwreck are
held by a Mr Gerhard Erasmus, a businessman
who is involved in a joint venture with a partner who specialises in
the management
of business premises similar to Muscat’s
property and who operates a number of such businesses throughout
South Africa. Erasmus
is connected with Freedom Property, and
according to Investec’s replying affidavit Shipwreck’s
sole director, Sean
Rule, is also a director of Freedom Property. For
these reasons the new lease may be said not to be an arm’s
length transaction.
Nevertheless, I cannot brush it aside as a sham.
Although Muscat is a party to the lease, the lease, it seems, is
intended to operate
only after transfer of the property to Rain Mile,
so that the transaction in substance is to apply between the Freedom
Property
group and Shipwreck. I have no reason to think that the
persons associated with Freedom Property and Shipwreck would contrive
a
bogus lease to help Muscat.
[53]
In all the
circumstances, I do not have sufficient confidence in the correctness
of Snyman’s valuation to regard it as establishing,
on a
balance of probability on the papers, that Muscat’s property is
worth less than the amount owing to Investec or even
that amount
together with the insider loan from Huganel.
Benefit to
creditors
[54]
In the light of the
conclusion I have reached on insolvency, it is not strictly necessary
to deal with the questions of benefit
to creditors and the court’s
residual discretion. I content myself with the following brief
observations.
[55]
If I had been satisfied
on a balance of probability on the papers that Muscat’s
liabilities exceeded the value of its property,
the shortfall would
only have been marginal. Investec, as the holder of a mortgage bond,
would on this hypothesis be the only creditor
who could recover
anything in the estate. Sequestration would seem in the circumstances
not to hold any material advantage over
ordinary execution following
upon judgment. Mr Manca referred me in that regard to the judgment of
Didcott J in
Gardee
v Dhanmanta Holdings & Others
1978
(1) SA 1066
(N), which he sought to distinguish on the basis that the
learned judge was dealing with a single creditor who already had
judgment
in his favour. In those circumstances, the petitioning
creditor would need to demonstrate some reasonable expectation that
sequestration
would yield more than the likely proceeds of ordinary
execution: ‘Unless he does that, the laborious and
substantially more
expensive remedy of sequestration can hardly be
thought advantageous’ (at 1070A). In the present case, by
contrast, so Mr
Manca argued, Investec did not yet have judgment.
[56]
I accept that, in the
absence of sequestration, Investec would have to incur costs and time
in obtaining judgment against Muscat.
However, the cost and time in
doing so would, particularly given my view on the lack of merit in
Muscat’s opposition to Investec’s
claim, not be greater
than in the case of getting opposed provisional and final
sequestration orders. (In this case, opposition
by Muscat on the
return day is a real possibility, particularly regarding the value of
the property, a question on which Muscat
might adduce further
evidence and which will need to be judged by a different test.)
Although it is sometimes said that sequestration
is always urgent,
there is in truth no particular urgency here, Investec being the only
external creditor and enjoying the security
of a mortgage bond. The
costs Didcott J presumably had in mind were the fees of the Master
(here they would be capped at R25 000)
and trustee (mainly the
3% fee on the gross proceeds from the sale of the property –
R330 000 on Snyman’s valuation).
[2]
These fees would be additional to any commission paid by the trustee
to a property broker engaged to market the property. (The
fee which a
sheriff can charge for the sale in execution of immovable property
is, by contrast, capped at R9 655.)
[3]
[57]
Mr Manca submitted that
one of the reasons that banks prefer sequestration to ordinary
execution is the greater flexibility enjoyed
by a trustee in
realising the property to best advantage. This was not stated in the
founding affidavit as one of the reasons for
believing that
sequestration would be to the benefit of creditors. I also do not
think it is correct in the circumstances of the
present case. The
only creditor apart from Investec is Huganel, another of Lambrechts’
vehicles. Lambrechts would have as
much interest as Investec in
ensuring that the property were sold to best advantage. Indeed,
Lambrechts would have a keener interest
than Investec in maximising
the price, because Huganel and Muscat could only derive benefit from
a sale if it yielded more than
the amount owing to Investec. In
achieving a good price Investec would, of course, be entitled to
cause the property to be attached
and sold by the sheriff in
execution but it would not be bound to follow that course. Given its
mortgage bond, Investec would not
need the comfort of an attachment
in order to obtain legal preference over Huganel and any other
creditors who might emerge. A
sale by private treaty in discharge of
the judgment debt would be perfectly feasible; there would be no need
to incur the costs
either of the sheriff or a trustee.
[58]
Mr Manca mentioned,
without overemphasising, the proposition that creditors can be taken
to be the best judge of their own interests.
However, it is the court
which must ultimately be satisfied that sequestration is to the
benefit of creditors; the
ipse
dixit
even of a
sole creditor cannot be decisive
.
I simply add that although Huganel’s attitude as a creditor has
not formally been placed before the court, it is reasonable
to
suppose that Huganel, represented by Lambrechts, does not regard
Muscat’s sequestration as being to its advantage.
[59]
I would thus have
concluded, if it were necessary, that sequestration here is not to
the benefit of creditors.
Discretion
[60]
In regard to the
court’s residual discretion, Mr Manca referred me to
FirstRand
Bank Ltd v Evans
2011
(4) SA 597
(KZD) where the court observed that there was little
authority on how the court’s discretion should be exercised,
‘which
perhaps indicates that it is unusual for a court to
exercise it in favour of the debtor’. The learned judge
considered that
the discretion could be described as a power combined
with a duty, so that once the grounds for provisional sequestration
have
been established the court must grant an order unless the debtor
shows special circumstances which warrant the refusal of an order
(para 27). In that case the court declined to exercise its discretion
in favour of the debtor. There, however, the debtor did not
dispute
the petitioning creditor’s claim or that sequestration would be
to the benefit of creditors. The court found that
there were matters
worthy of investigation. Although the debtor disputed that he had
committed an act of insolvency, the court
found that he had indeed in
writing admitted his inability to pay his debts. The plea for a
discretionary refusal of sequestration
was based on the existence of
a provisional debt rearrangement order in terms of the National
Credit Act. In other words, that
was a case where the mandatory
requirements for a provisional order were clearly present and where,
if sequestration were to be
refused, it would have to be based on
some extraneous circumstance.
[61]
In the present case, by
contrast, the case for provisional sequestration, if it has been
established, is marginal insofar as the
extent of the insolvency and
the benefit to creditors are concerned. A marginal excess of
liabilities over assets coupled with
an at best modest benefit to
creditors might combine, it seems to me, to justify the exercise of a
discretion against sequestration.
One knows from experience that
provisional orders for sequestration and liquidation tend to become
self-fulfilling prophecies.
In borderline cases decided purely on the
affidavits justice might better be done by leaving a creditor to his
usual remedies.
However, in view of my conclusion on the question of
insolvency and benefit to creditors, I am not in the position of
having finally
to decide this issue or to exercise my discretion.
Conclusion
[62]
Both sides engaged two
counsel and sought the costs of two counsel if they succeeded.
[63]
I thus make the
following order: The application is dismissed with costs, including
those attendant on the employment of two counsel
where employed and
including the costs reserved by the order of 2 May 2014.
ROGERS
J
APPEARANCES
For Applicant: Mr BJ Manca SC and Ms K Reynolds
Instructed by:
De Klerk & Van Gend Inc
3
rd
Floor, Absa Bank Building
132 Adderley Street
Cape Town
For Respondents: Mr RS van Riet
SC and Mr W van Niekerk
Instructed
by:
Van
der Spuy and Partners
4
th
Floor, 14 Long Street
Cape
Town
[1]
See annexure “A” to Snyman’s
report at record 104. The office and workshop areas affected by the
assumed higher
market rent are 1150m
2
and 666m
2
.
[2]
See the tariffs reproduced in Meskin
Insolvency
Law
Appendix at 112-113.
[3]
Erasmus
Superior
Court Practice
at B1-414 tariff item
(xiv).