Shabangu v Land and Agricultural Development Bank of South Africa

• Jurisdiction: South Africa
• Court: Constitutional Court
• Judge: Mogoeng CJ, Cameron J, Froneman J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ
• Judgment Date: 29 October 2019
• Citation: 2020 (1) SA 305 (CC)
• Hearing Date: 29 October 2019
• Docket Number: CCT 215/18 [2019] ZACC 42
• Counsel: M Chaskalson SC (with C Avidon) for the appellant. V Soni SC for the first respondent. M Snyman for the third and fifth to seventh respondents. L de Beer (with R Raubenheimer) for the fourth, eighth and ninth respondents.

Froneman J (Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring):

Introduction

[1] The applicant and second to ninth respondents [1] (sureties) stood written surety for loans advanced by the first respondent (Land Bank) to the principal debtor, Westside Trading 570 (Pty) Ltd (Westside), for the development of urban property. The Land Bank was subsequently advised that the transaction (loan agreement) was beyond its statutory powers in terms of the Land and Agricultural Development Bank Act (the Act), [2] because these powers were confined to promoting, facilitating and supporting the equitable ownership and development of agricultural land by historically disadvantaged persons. [3]

Froneman J (Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring)

[2] Upon receipt of this advice, the Land Bank stopped advancing funds to Westside. By then R51 million had been spent by Westside on purchasing properties and approximately R11,5 million of the planned R49 million for township establishment and professional fees as envisaged. The Land Bank asserted that together with interest, Westside owed it some R95 million. Westside disputed this amount. Its financial director then signed an acknowledgment of debt in which Westside accepted liability to repay R82 million to the Land Bank in full and final settlement of its indebtedness.

[3] Westside failed to repay the amounts claimed by the Land Bank. The Land Bank then instituted proceedings against Westside and the sureties on various bases for payment, as well as for an order declaring the development properties executable in terms of a covering mortgage bond in its favour.

[4] After the institution of proceedings, Westside was liquidated. The Land Bank then amended its claim. It did not pursue its claim against Westside but persisted in a claim against the sureties — not directly based on the original principal debt under the loan agreement for payment of R82 million, but on the sureties' alleged liability for the R82 million acknowledgement of debt.

High Court

[5] The Land Bank succeeded in its claim against the sureties in the High Court. [4] Basson J approached the matter on the basis that the fact that the loan agreement was invalid did not mean that it necessarily followed that the deed of suretyship was also invalid:

'I should pause here and point out that the fact that the loan agreement is invalid, does not mean that it necessarily follows that the deed of suretyship, being an ancillary agreement, is likewise invalid. In this regard the Supreme Court of Appeal in Panamo held (albeit in the context of a mortgage bond) that it does not necessarily follow that, because the principal agreement is invalid, the ancillary agreement is also invalid.' [5]

[6] She then disposed of the matter on the basis that the acknowledgment of debt was properly proved and that the debt it acknowledged was covered by the suretyship:

'I am satisfied on the evidence and on an interpretation of the relevant documents that [the sureties] are liable to pay the plaintiff R82 million jointly and severally, the one paying the other to be absolved, on the

Froneman J (Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring)

basis of the suretyship read together with the acknowledgment of debt.' [6]

[7] After unsuccessful efforts to obtain leave to appeal to the Supreme Court of Appeal, the applicant sought leave to appeal to this court.

In this court

Submissions

[8] The sureties submitted that the only debt acknowledged in the acknowledgement of debt was the alleged liability of Westside under the invalid loan agreement. It did not cover any possible enrichment claim. The acknowledgment of debt thus suffered from the same taint as the invalid loan agreement, especially so as the Land Bank is an organ of state. No ancillary obligation under the suretyship could accordingly extend to any obligation arising from the similarly invalid acknowledgement of debt. The Supreme Court of Appeal's decision in Panamo did not assist the Land Bank because that case concerned the question whether the mortgage bond in issue was capable of covering a valid enrichment claim, which was not the case here. [7]

[9] Two of the sureties raised a further issue not dealt with in the High Court judgment. It related to the defence raised by them in their plea, amended shortly before trial, to the effect that the Land Bank's failure to perform in terms of the loan agreement caused them substantial prejudice that they had not been prepared to risk and that this released them from their surety obligations.

[10] The Land Bank contended that the acknowledgment of debt constituted a compromise and not a novation and was thus not tainted by the invalid loan agreement. In accordance with the approach of the Supreme Court of Appeal in Panamo, the deed of suretyship, like the mortgage bond there, covered the debt contemplated in the acknowledgement of debt and the sureties are thus liable.

The second to ninth respondents

[11] The second to ninth respondents were cited in the application for leave to appeal to this court by the applicant. They did not themselves originally seek leave to appeal. The first respondent requested clarity on the status of the other respondents. In light of their direct and substantial interest, we determined that they should remain as parties but that it made no difference whether they were cited as applicants or respondents. The fourth and eighth respondents submitted written arguments and raised a separate ground of appeal. [8] Shortly before the hearing, the third, fifth, sixth and seventh respondents sought leave to intervene as applicants. We indicated that these applications would be dealt with at the hearing and in this judgment.

Froneman J (Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring)

[12] The citation of the second to ninth respondents by the applicant was necessary to ensure that the outcome was binding on all. No costs were sought against them. The later application of the third, fifth, sixth and seventh respondents to intervene as applicants was opportunistic in view of their earlier failure to apply for leave to appeal. Materially, they brought little of value to the issues already raised by the applicant and the first respondent. Granting them leave to intervene as applicants will have no additional effect on the binding nature of this judgment on all the parties concerned. The applications to intervene must therefore be dismissed.

Issues

[13] The issues for determination are:

(a)

Jurisdiction and leave to appeal;

(b)

If leave is granted, the merits of the appeal, namely the effect of the invalidity of the principal agreement on —

(i)

the validity of the acknowledgement of debt; and in turn

(ii)

the liability of the sureties under the suretyship agreement in respect of the acknowledgment of debt.

Jurisdiction and leave to appeal

[14] The question whether the Supreme Court of Appeal's decision in Panamo governs a situation where a suretyship, not a mortgage bond, is alleged to cover the principal obligation is not yet settled in our law. Nor is the question whether it covers not the original principal agreement, but one entered into after recognition of the invalidity of the original principal agreement. These issues are interlinked arguable points of law of general public importance. Clarity on them will not only affect the immediate parties, but also many others in similar positions. [9] That the invalidity in question here stems from exceeding statutory powers adds a constitutional dimension to the issues, as does the complaint that the failure to deal with a pleaded defence involves a denial of access to justice. [10]

[15] And as we will see, there are reasonable prospects of success. It is in the interests of justice to grant leave to appeal.

Froneman J (Mogoeng CJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Mathopo AJ, Mhlantla J, Theron J and Victor AJ concurring)

Merits of the appeal

Validity of the acknowledgment of debt

[16] As noted earlier, [11] the High Court, with reliance on Panamo, approached the matter on the basis that the fact that the loan agreement was invalid did not mean that it necessarily followed that the deed of suretyship was also invalid. But that approach missed a crucial step, namely whether the debt in the acknowledgment of debt was not itself tainted by the invalid loan agreement. Panamo did not address that issue. It merely held that if the terms of a security agreement (in that case a mortgage bond) establish accessory liability for principal debts untainted by the original invalidity, and those untainted debts are sought to be enforced, the...