Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd

• Jurisdiction: South Africa
• Judge: Mogoeng CJ, Moseneke DCJ, Cameron J, Jafta J, Khampepe J, Leeuw AJ, Madlanga J, Nkabinde J and Van Der Westhuizen J
• Judgment Date: 24 March 2015
• Docket Number: CCT 61/14 [2015] ZACC 5
• Hearing Date: 16 September 2014
• Counsel: WG Burger SC (with JC Swanepoel) for the applicants. R Stockwell SC (with JF Pretorius) for the respondent.
• Court: Constitutional Court

Madlanga J (Jafta J and Nkabinde J concurring):

Introduction E

[1] This is an application for leave to appeal against an order of the Supreme Court of Appeal [1] upholding the validity of a R12 million loan agreement and finding sureties to that agreement liable for up to R72 million, made up of the capital sum of R12 million and accrued interest. A whopping R60 million difference between capital and interest! F The application arises from the Supreme Court of Appeal's rejection of arguments by the applicants, Ms Margaretha Paulsen and her husband Mr André Paulsen (the Paulsens), that: the loan agreement was invalid because the respondent, Slip Knot Investments 777 (Pty) Ltd (Slip Knot), was not registered as a credit provider in terms of the National Credit Act [2] (NCA or Act); and the in duplum [3] rule limited interest G payable under the loan agreement to a maximum of R12 million.

Background

[2] In 2006 Winskor 139 (Pty) Ltd (Winskor), a company involved in the business of property development whose shares are held by the H trustees of the Paulsen Family Trust, [4] sought to purchase a portfolio of properties in Brooklyn, Pretoria, and resell them at a handsome profit. It

Madlanga J (Jafta J and Nkabinde J concurring)

A was able to obtain funding for the bulk of the purchase price. There was a shortfall of R12 million. Winskor concluded a loan agreement with Slip Knot. [5] In terms of this agreement Slip Knot advanced R12 million to Winskor on 10 July 2006 (commencement date). The R12 million was payable within 12 months from the commencement date. Winskor was B liable to pay interest at 3 % per month on the outstanding capital amount from the seventh month after the commencement date to the date of final payment. [6] The interest was to be capitalised monthly.

[3] As security for the loan, the Paulsens, acting in their personal capacities and as trustees of the Paulsen Family Trust and Keurbos C Beleggingstrust, bound themselves jointly and severally as sureties and co-principal debtors with Winskor for its indebtedness to Slip Knot under the loan agreement.

[4] As fate would have it, an economic downturn commenced in 2007. D It wreaked havoc throughout the world. Winskor was not spared. As a result, by the due date, 9 July 2007, Winskor had defaulted on its obligation to settle its indebtedness in terms of the loan agreement, including interest. Slip Knot instituted an application against the Paulsens, the Paulsen Family Trust and the Keurbos Beleggingstrust to E recover what was owed to it by Winskor, in the Western Cape High Court, Cape Town (the High Court). The application was served on 10 January 2010. Since litigation for the liquidation of Winskor was already afoot, Slip Knot cited it without seeking any relief from it.

[5] In relevant part the claim was for (a) the capital sum of R12 million; (b) interest on the capital sum which, as at the date of commencement F of litigation, had accumulated to R12 million and been limited to that amount by the in duplum rule; (c) further interest on the capital sum at

Madlanga J (Jafta J and Nkabinde J concurring)

the rate of 3% per month from the date of institution of proceedings to A date of judgment; and (d) interest on the sum of the amounts set out in (a) – (c) at the rate of 3% per month from the date of judgment to date of payment, subject to the interest being limited by the in duplum rule to an amount equal to that sum.

[6] The Paulsens defended the suit. Their defences, which mutated B somewhat as the litigation progressed, eventually concretised to three. The first was that, because Slip Knot was not registered under the NCA, the loan agreement was invalid. [7] The second was that even if the loan agreement was valid, the amount of interest payable under it was limited to an overall total of R12 million by the in duplum rule. The third was C that, if the institution of proceedings had the effect in law of suspending the operation of the in duplum rule, interest in this matter could not exceed R12 million as no proceedings had been instituted against Winskor, the principal debtor. [8]

[7] The High Court upheld all of Slip Knot's claims, but against the D Paulsens only. [9] An appeal by the Paulsens to the full court, based on the same core issues, was partially successful. That court upheld the Paulsens' third defence. [10] The Paulsens, who were intent on invalidating the entire liability based on their first defence, further appealed to the Supreme Court of Appeal. Unhappy with the full court's capping of E interest at R12 million, Slip Knot cross-appealed.

[8] In a majority decision authored by Wallis JA, the Supreme Court of Appeal dismissed the Paulsens' appeal with costs. The majority commenced by pointing out that if the agreement is invalid, this would be F

Madlanga J (Jafta J and Nkabinde J concurring)

A due to the provisions of s 89(2)(d) of the NCA. [11] This was because, as directed by s 40(4), [12] in order to determine whether the loan agreement is invalid, regard must be had to s 89. The majority held that s 89(2)(d) only operates in respect of those credit agreements to which the NCA applies. Therefore, to determine whether this specific loan agreement is B invalid, the starting point is s 4 of the NCA, which sets out 'excluded agreements' or agreements to which the Act does not apply. [13] The majority thus found that the loan agreement between Slip Knot and the Paulsens was not invalidated because the loan agreement fell under the s 4 exclusions. The majority thus found no need to consider whether or not Slip Knot was required to register as a credit provider in terms of C the Act.

[9] The majority upheld the cross-appeal and reversed the partial success of the Paulsens before the full court. It concluded that —

'(i)f the duplum has been reached prior to litigation commencing, D interest will accumulate afresh on the capital debt from the date of service of the summons or application papers'. [14]

For this position the majority relied on Oneanate, [15] where Zulman JA held that —

'the in duplum rule is suspended pendente lite [during the pendency of E litigation], where the lis [litigation] is said to begin upon service of the initiating process'. [16]

The majority also held that when proceedings were instituted, the Paulsens became liable for further interest on that debt, just as Winskor F would have been if it had been sued. Interest accrues because of the surety's failure, upon the institution of proceedings, to meet its own obligation — which was equivalent to the principal debtor's. If the surety

Madlanga J (Jafta J and Nkabinde J concurring)

does not pay, it should not be able to shelter behind the fact that A proceedings were not taken against the principal debtor. [17]

[10] The minority [18] disagreed with the conclusion that the in duplum rule must be lifted when litigation begins. [19] It held that 'it cannot have been the intention of the court in Oneanate to enfeeble the in duplum rule almost entirely' [20] and that the context of its application plays an B important consideration. [21] It held that a residual discretion must remain for a court, in appropriate circumstances, to apply the in duplum rule even after proceedings have been instituted. [22] As the suspension of the in duplum rule in this case would be 'inordinately onerous' upon the debtor, the minority would have exercised the court's discretion not to suspend the operation of the in duplum rule even during the course of C litigation. [23]

In this court

[11] The Paulsens persist in the arguments that: (a) the loan agreement was invalid due to Slip Knot's failure to register as a credit provider; (b) D if the loan agreement is valid, due to the in duplum rule the Paulsens cannot be held liable for any interest above the capital amount of R12 million; and (c) even if the institution of proceedings does have the effect in law of suspending the operation of the in duplum rule, interest in this matter is limited to R12 million as no proceedings had been instituted against Winskor, the principal debtor. These, together with E whether leave to appeal should be granted, are the issues for determination.

Leave to appeal

[12] The Paulsens apply for leave to appeal on the basis that the issues F sought to be determined raise arguable points of law of general public importance that ought to be considered by this court. Slip Knot argues the opposite. Significantly, the Paulsens have not alleged that the application raises any constitutional matters. [24]

[13] The court's jurisdiction is governed by s 167(3) to (7) of the G Constitution. Whereas previously s 167(3) conferred jurisdiction on the court to 'decide only constitutional matters and issues connected with

Madlanga J (Jafta J and Nkabinde J concurring)

A decisions on constitutional matters', the section has been amended by the Constitution Seventeenth Amendment Act [25] to make the Constitutional Court the highest court in all matters. The amended s 167(3) provides:

'The Constitutional Court —

(a)

B is the highest court of the Republic; and

(b)

may decide —

(i)

constitutional matters; and

(ii)

any other matter, if the Constitutional Court grants leave to appeal on the grounds that the matter raises an arguable point of law of general public importance which ought to be considered by that C Court; and

(c)

makes the final decision whether a matter is within its jurisdiction.' [Emphasis added.]

[14] At first glance it would seem obvious to base this court's jurisdiction on the claim that this matter raises a constitutional issue. That is so D because this court has previously found that the interpretation of the NCA implicates...