Cape Produce Co (Port Elizabeth) (Pty) Ltd v Dal Maso and Another NNO

• Jurisdiction: South Africa
• Judge: Smalberger Adp, Harms JA, Cameron JA, Navsa JA and Mpati JA
• Judgment Date: 27 March 2002
• Citation: 2002 (3) SA 752 (SCA)
• Docket Number: 120/2001
• Hearing Date: 11 March 2002
• Counsel: C Z Cohen SC (with him A Beyleveld) for the appellant. G Farber SC (with him S G Sawma) for the respondent.
• Court: Supreme Court of Appeal

Cameron JA: A

[1] This appeal concerns, amongst other issues, the effect on a surety's liability of an agreement that subordinates a creditor's claims against a principal debtor to those of other creditors by postponing its enforceability. At issue is a debt of R15 million. It is owed to a company associated with the appellant, which took cession of its claim against two sureties (for brevity I refer to the appellant B itself as 'CPC', and to the respondents in the appeal, the executors of the estates of the sureties, who both died after the action was instituted, as 'the sureties'). The suretyships at issue date from October 1988 and July 1996. In them, the sureties bound themselves jointly and individually as sureties and co-principal debtors in full for the debts of the principal debtor, a private C company called Alberti Livestock ('Alberti'). In about October 1996 CPC became the sole shareholder in Alberti. At that stage Alberti was hugely indebted to CPC, which had over a period of years in effect been keeping it solvent. In December 1996 CPC and Alberti concluded an agreement in which CPC's claims against Alberti were subordinated to D those of other creditors. The agreement starts by recording Alberti's substantial liability to CPC, and that CPC has 'agreed to assist' it by subordinating its claims in favour of Alberti's other creditors. Its further material terms are:

'2.

In order to assist [Alberti], CPC, agrees, subject to the limitation imposed in 4, that - E

2.1

It subordinates for the benefit of the other creditors of [Alberti], both present and future, so much of its claim(s) against [Alberti] as would enable the claims of such other creditors to be paid in full;

2.2

The claims of such other creditors of [Alberti], both present and future, will rank preferent to the subordinated claim of CPC against [Alberti]. F

2.3

. . .

3.

It is the intention of the parties that this agreement constitutes a contract for the benefit of other creditors of [Alberti], both present and future, and that the benefit shall be capable of express or implied acceptance by any or all such creditors who may then enforce any term of this agreement.

4.

The [subordination] referred to in 2 shall remain in force and effect for so long only as the liabilities of [Alberti] exceed its G assets, fairly valued, and shall lapse immediately upon the date that the assets of [Alberti] exceed its liabilities and shall not, except by further agreement in writing, be reinstated if thereafter the liabilities of [Alberti] again exceed its assets, provided that the liabilities of [Alberti] shall be deemed to continue to exceed its assets unless and until the auditor of [Alberti] has certified in writing that he has been furnished with evidence which reasonably H satisfies him that the liabilities do not exceed the assets.

5.

CPC hereby agrees that until such time as the assets of [Alberti] fairly valued exceed its liabilities, and the auditor's certificate referred to in 4 has been issued, it shall not be entitled to demand or sue [for] repayment of the whole or any part of the said amount owing to it by [Alberti] and set-off shall not operate in I relation to the subordinated claim in respect of any debts owing by it now or in the future, provided that if the auditor of [Alberti] shall certify in writing that he has been furnished with evidence which reasonably satisfies him that the amount by which the liabilities of [Alberti] exceed its assets, such excess portion of the subordinated claim as is specified in the said certificate shall be released from the operation of this agreement.' J

Cameron JA

[2] CPC instituted action against the sureties for payment of some R24 million. The first defendant opposed the action; the A second abided the Court's decision. At the trial it was agreed that if the action succeeded judgment should be in the amount of R15 million. In the trial Court the action was dismissed; and an appeal to the Full Court was unsuccessful. The defence that succeeded at first instance before Joffe J as well as before the Full Court (Van Oosten J, Claassen and Mlambo JJ concurring) [1] was that the B subordination agreement deferred CPC's right to claim against Alberti, with a corresponding benefit to the sureties. Hence CPC's claim against them was premature. CPC's argument that the subordination agreement was inapplicable because there were no liabilities to be subordinated - a fact the evidence clearly established - was rejected in C both Courts. This Court granted CPC special leave for a further appeal in terms of s 20(4)(a) of the Supreme Court Act 59 of 1959.

Does a subordination agreement create either a defence in rem or a defence in personam? D

[3] In both the trial Court and on appeal to the Full Court it was held, invoking the common-law distinction between defences relating to the principal debtor personally (defences in personam) and those relating to the nature, validity or existence of the debt itself (defences in rem), that the subordination agreement constituted a defence available to the sureties. This Court considered E the distinction in Ideal Finance Corporation v Coetzer, [2] where it held that a surety was not entitled to the protection from certain types of execution orders that a statute extended to a 'buyer' under legislation regulating hire-purchase transactions because the protection the statute afforded the principal debtor was personal, and did not affect the nature, F validity or existence of the creditor's claim or cause of action. [3] In Standard Bank of SA Ltd v SA Fire Equipment (Pty) Ltd and Another,[4] Rose Innes J analysed the distinction, in my view accurately, in a passage that has often been cited and followed, thus: G

'The contrast between defences in rem and in personam thus is that those in rem attach to the claim or cause of action or the obligation itself and arise from the invalidity, extinction or discharge of the obligation itself, whoever the debtor may be; those in personam arise from a personal immunity of the debtor from liability for an otherwise valid and existing civil or natural obligation. In the case of a defence in personam the obligation and debt remain in existence - the creditor H may prove his claim in the insolvency or liquidation, the creditor may await the end of the moratorium, the minor's obligation remains a natural obligation, but in each case the debtor is personally immune from...