ZACC 42
Date of Hearing: 01 August 2019
Judgement Date: 29 October 2019
Post Judgment Media Summary
The following explanatory note is provided to assist the media in reporting this case and is not binding on the Constitutional Court or any member of the Court.
On Tuesday, 29 October 2019 at 10h00, the Constitutional Court handed down judgment in an application for leave to appeal against the judgment and order of the High Court of South Africa, Gauteng Division, Pretoria (High Court). The High Court had ordered the applicant (Mr Shabangu) and the third to eighth respondents to pay, jointly and severally, an amount of R82 million to the first respondent, the Land and Agricultural Development Bank (Land Bank).
In July 2006, the Land Bank and Westside Trading 570 (Pty) Ltd (Westside) entered into a loan agreement in terms of which the Land Bank would advance an amount of R100 million to Westside for the purpose of acquiring and developing certain identified properties. Since the loan agreement required Westside to provide security for the loan, the Land Bank concluded a mortgage bond and a written deed of suretyship with Mr Shabangu and other shareholders of Westside (collectively, the sureties), who are the third to eighth respondents in this matter.
In 2007, the Land Bank became aware that it was not entitled to loan money to Westside for the intended project, and it became common cause that the loan agreement was invalid. Negotiations between the parties resulted in an acknowledgment of debt being entered into in February 2009 in terms of which Westside agreed to pay R82 million to the Land Bank by the end of April 2009. At that stage, however, the amount advanced together with interest was in fact closer to R92 million. When the Land Bank brought an initial action against Westside, as the principal debtor, the company had been placed under provisional liquidation and was subsequently wound up in September 2012
The Land Bank therefore brought a claim against the sureties in the High Court for the outstanding debt. The legal question to be decided by the High Court was whether a deed of suretyship can survive in circumstances where a principal loan was invalid. Relying on the Supreme Court of Appeal judgment of Panamo, the High Court held that it did not necessarily follow that the invalidity of the principal loan agreement meant that the deed of suretyship, as an ancillary agreement, was also invalid. The High Court held that, on a proper interpretation, the concept of indebtedness in the deed of suretyship contemplated the acknowledgment of debt. In the result, the sureties were held to be jointly and severally liable for the R82 million owed in terms of the acknowledgement of debt.
The applicant’s application for leave to appeal to the Supreme Court of Appeal was dismissed on the grounds that there were neither reasonable prospects of success nor compelling reasons why it should hear the appeal.
Mr Shabangu then applied for leave to appeal to the Constitutional Court against the judgment and order of the High Court, with the fifth and ninth respondents aligning themselves with the relief requested. Mr Shabangu argued that an acknowledgment of debt cannot validate the alleged indebtedness under the invalid loan agreement, irrespective of whether the acknowledgment of debt is characterised as a novation (the replacement of one valid contract with another valid contract) or a compromise (an agreement for the purpose of preventing, avoiding or terminating a dispute). He sought to distinguish Panamo on the basis that it concerned a mortgage bond rather than a deed of suretyship in the context of an unjustified enrichment claim.
The Land Bank argued that the acknowledgment of debt constituted a compromise rather than a novation and thus constitutes a valid agreement. It supported the High Court’s reliance on Panamo to find that the invalidity of the loan agreement does not invalidate the deed of suretyship. Further, the Land Bank contended that the indebtedness contemplated in the deed of suretyship can be interpreted to include the acknowledgment of debt. The Land Bank therefore argued that the appeal should be dismissed because the High Court correctly found that the sureties are jointly and severally liable on the basis of the deed of suretyship read together with the acknowledgment of debt.
In a unanimous judgment penned by Froneman J (with Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring), the Constitutional Court held that the acknowledgment of debt related to the amount advanced by the Land Bank to Westside in terms of the invalid loan agreement. The Court distinguished the matter from Panamo on the basis that it concerns the question of whether a deed of suretyship (rather than a mortgage bond) can establish accessory liability in respect of the compromise of an unlawful principal obligation (rather than a valid enrichment claim). While the acknowledgment of debt could have entailed a valid compromise, such as the compromise of an enrichment claim, the Court found that it was invalid in this case because the acknowledgment of debt sought to perpetuate the original invalidity of the loan agreement. The Court accordingly held that there is no valid claim against Westside in terms of the acknowledgment of debt, and thus also no valid claim against the sureties. In the result, the appeal was upheld with costs.
The Full judgment here