Hippo Quarries (Tvl) (Pty) Ltd v Eardley

• Jurisdiction: South Africa
• Judge: Joubert JA, Nestadt JA, Nienaber JA, Preiss AJA and Kriegler AJA
• Judgment Date: 28 November 1991
• Citation: 1992 (1) SA 867 (A)
• Hearing Date: 12 November 1991
• Court: Appellate Division

Nienaber JA:

The issue is whether a document, ostensibly the cession of a trading debt from one associated company to another, was in truth a cession or a sham.

Hippo Quarries (Pty) Ltd ('Hippo') and Hippo Quarries (Transvaal) C (Pty) Ltd (now the appellant and the plaintiff in the Court below) are subsidiaries of the same holding company. At all material times the plaintiff has been dormant though not defunct. Hippo, on the other hand, has been trading actively. Its business consisted, in the words of a former director of both companies, Allen Jones, 'of manufacturing and D supplying aggregates to the construction and other civil engineering industries'. Rietfontein Sand and Stone (Pty) Ltd ('Rietfontein') bought, sold and transported building materials. It was a customer of Hippo. Its directors were Keith Eardley and his wife, Sandra Margot Eardley. Keith Eardley was the defendant in the Court below and is the present respondent. I shall refer to him as the defendant.

E On 7 May 1984 the defendant signed a printed form in which he bound himself as surety and co-principal debtor for the payment of the debts of Rietfontein. The suretyship, surprisingly, was not in favour of Hippo, the company with which Rietfontein was trading, but in favour of the plaintiff

'. . . for the due payment on demand by the debtor of all and any moneys which the debtor may now or from time to time hereafter owe to the F creditor from whatsoever cause and howsoever arising and whether as principal debtor, guarantor, or otherwise, and whether severally or jointly or trading alone or in partnership or under any other name, as well as for the due and punctual performance and discharge by the debtor of his obligations under any and all contracts or agreements now or G hereafter entered into by the debtor with the creditor'.

On 24 September 1986 the defendant completed and signed a further document, termed 'application for credit' on behalf of Rietfontein, clause 20.10 of which reads as follows:

'In the event of the customer being a company, the person whose H signature appears on the contract as representing the company, hereby specifically binds himself as surety and co-principal debtor for payment of all moneys which may now or in the future be due and owing by the customer to the company.'

On this occasion the document was executed in favour of 'Constone Reef (Pty) Ltd, trading as "Hippo Quarries" '. Constone Reef (Pty) Ltd had by then changed its name to Hippo Quarries (Pty) Ltd, ie Hippo.

I The position, then, was that by 1987 the plaintiff and Hippo each held a deed of suretyship in which the defendant assumed liability for the future indebtedness of Rietfontein, howsoever arising.

Such indebtedness arose during 1987. Hippo sold and supplied goods to Rietfontein to the value of R71 257,14.

J On 19 May 1987 Rietfontein was placed in final liquidation.

Nienaber JA

A On 27 May 1987 Hippo instituted action against Rietfontein, as debtor, and the defendant, as surety, for payment of the amount of R71 257,14. The action against the defendant was based on the suretyship agreement which the defendant had signed on 4 May 1984. When it eventually dawned on Hippo that that suretyship was not drawn in its favour but in favour B of the plaintiff, the action was withdrawn with a tender of costs. It was then resolved, on legal advice and after a review of the options open to them, that the plaintiff rather than Hippo would take the initiative in recovering Rietfontein's debt from the defendant; and that to enable the plaintiff to do so Hippo would cede its claim against Rietfontein to the plaintiff 'for collection'.

C This happened on 14 October 1987. The cession read as follows:

'Cession

Hippo Quarries (Pty) Ltd hereby cedes, assigns and makes over to Hippo Quarries (Transvaal) (Pty) Ltd all its rights, title and interests in and to its claim against Rietfontein Sand and Stone (Pty) Ltd in the sum of R71 257,14, being in respect of goods sold and D delivered by Hippo Quarries (Pty) Ltd during 1987.'

Jones, to whom reference was made earlier, signed the document on behalf of both cedent and cessionary. Rietfontein and the defendant were duly advised of the cession.

The plaintiff thereupon instituted the present action against the E defendant in the Witwatersrand Local Division. It relied on two causes of action: firstly, on the suretyship which the defendant completed in its favour and which, so it was alleged, was activated by the cession of the claim; alternatively, on clause 20.10 of the document the defendant completed in Hippo's favour and the benefit of which, so it was alleged, passed to the plaintiff conjointly with the cession of the claim. F

Both causes of action failed. The Court a quo (M J Strydom J) held that no true cession was intended and that the so-called cession was a mere pretext to enable the plaintiff to recover a debt on behalf of Hippo which Hippo itself was unable to recover. The plaintiff's claim G was accordingly dismissed with costs. An application for leave to appeal to this Court was, however, granted. Hence this appeal.

Jones was called by the plaintiff. He was the only witness to give evidence on either side. He testified as follows:

'And what would be the position should you be successful in this action, where would that money go? - The money would go into Hippo Quarries H Transvaal, which would then pay off its inter-company account with Hippo Quarries (Pty) Ltd.

So it will just, the money will eventually end up with Hippo Quarries? - It would flow through indeed, yes.

So that Hippo Transvaal is nothing but a conduit to get the money back to Hippo Quarries (Pty) Ltd? - That is correct.'

I And again:

'And you will see that it says it was noted that Hippo Quarries (Pty) Ltd had supplied certain crushed aggregate to Rietfontein Sand and Stone (Pty) Ltd for a consideration of R71 257,14 and then (2) it says that Hippo wished to cede this debt to the company, in other words to Hippo J Transvaal for collection? - Ja.

Nienaber JA

A Is that correct? - That is correct.

Is that indeed what was decided. I see that you signed at the bottom there? - Ja.

Once again, Mr Jones, this confirms what you told me yesterday that this was a cession purely to enable Hippo Transvaal to collect the debt owing to Hippo, is that correct? - That is correct.'

These passages, so it was held, demonstrated that Hippo's right of action against Rietfontein never vested in the...