|BACKGROUND AND SUMMARY
In July 2016, the Land and Agricultural Development Bank of South Africa (the “First Respondent”) and Westside Trading 570 (Pty) Ltd (“Westside”) entered into a loan agreement (the “Principal Agreement’), in terms of which the First Respondent would advance an amount of R100 Million to Westside for the purpose of acquiring and developing certain properties. The Principal Agreement required Westside to provide security for the loan to be advanced by the First Respondent and as such, the First Respondent concluded a mortgage bond and a written deed of suretyship with Mr. Shabangu (the “Applicant”) and other shareholders of Westside, the Second to Ninth Respondents (the “Sureties”).
During 2007, the First Respondent was advised that the Principal Agreement was invalid and therefore void ab initio in light of the fact that the First Respondent was not entitled to loan capital to Westside for the intended project, as the Principal Agreement concluded reached beyond the scope of the statutory powers conferred upon the First Respondent in terms of the Land and Agricultural Development Bank Act, 15 of 2002 (the “Act”).
The issue was that, by this time, an amount of approximately R95 Million had apparently been advanced by the First Respondent to Westside. Westside disputed this amount, however, the financial director of Westside subsequently signed an acknowledgment of debt (the “AOD”) in which Westside accepted liability in the amount of R82 Million, to be repaid to the First Respondent in full and final settlement of its indebtedness.
Westside failed to repay the amount owed to the First Respondent, which led to the First Respondent instituting proceedings against Westside and the Sureties for payment. Westside was subsequently liquidated which resulted in the First Respondent amending its claim to pursue payment against the Sureties only. The basis for the First Respondent’s amended claim was based on the Sureties’ alleged liability for the R82 Million per the AOD, rather than the original principal debt under the Principal Agreement.
The High Court of South Africa, Gauteng Division, Pretoria ( the “Court a quo”) granted an order in favour of the First Respondent, where it had to decide whether a deed of suretyship could survive in circumstances where the loan in terms of the Principal Agreement was invalid. The Court a quo held that, the fact that the Principal Agreement was invalid does not mean that it necessarily followed that the deed of suretyship was also invalid, basing its decision on the case of Panamo Properties 103 (Pty) Ltd v Land and Agricultural Development Bank of South Africa  ZASCA 70 (“Panamo”). The court a quo further held that the AOD was properly proved and that the debt it acknowledged was properly covered by the deed of suretyship. After unsuccessful attempts to obtain leave to appeal to the Supreme Court of Appeal, the Applicant sought leave to appeal to the Constitutional Court (the “Court”).
The Applicant submitted that an AOD could not validate the alleged indebtedness under the invalid Principal Agreement, irrespective of whether the AOD is characterized as a novation or a compromise as the Sureties’ liability was limited in terms of Westside’s accessory obligations under the Principal Agreement, which was invalid. Consequently, the AOD was polluted by the very same invalidity of the Principal Agreement. The Applicant submitted further that Panamo should be distinguished from the circumstances at hand, as the facts in Panamo dealt with a mortgage bond, rather than that of a deed of suretyship, in the context of an unjustified enrichment claim.
The First Respondent submitted that the AOD constituted a compromise as opposed to that of a novation and in light of same, constituted a valid subsequent Agreement. It further submitted its support of the Court a quo’s reliance on Panamo. The First Respondent maintained that the indebtedness considered in the deed of suretyship could be interpreted to include the AOD.
The Court held that the AOD related to the amount advanced by the First Respondent to Westside in terms of the invalid Principal Agreement and moreover that the AOD was signed after the First Respondent had become aware that the Principal Agreement was invalid. The Court further distinguished the current matter from the circumstances in that of Panamo, as in the current matter, the question was whether a deed of suretyship (as opposed to that of a mortgage bond) could establish accessory liability in respect of the compromise of an unlawful principal obligation (rather than that of an invalid enrichment claim). Additionally, the mortgage bond in Panamo would be passed to cover “in general … any existing or future debt that Panamo owes or may owe to the [Land] Bank”. The scope of the mortgage bond in Panamo was therefore wide enough to cover any other liability to be incurred by the debtors, as opposed to the deed of suretyship in the present matter which provided solely for the indebtedness in terms of the Principal Agreement.
The Court held that whilst the AOD could have constituted a valid compromise, such as the compromise of an enrichment claim, same was found to have not found application in these circumstances as the AOD sought to perpetuate the original invalidity of the Principal Agreement.
The court held that in light of the fact that there was no valid claim against Westside in terms of the AOD, there is similarly no valid claim against the Sureties. The Court granted judgement in favour of the Applicant, upholding the appeal with costs.
|Invalidity of Principal Agreements have an effect on the validity of subsequent Agreements, such as an acknowledgement of debt. The invalidity of a subsequent Agreement can be overcome, provided that the claim is based on unjustified enrichment and further that the deed of suretyship in question provides a wide enough scope so as to include liability for unjustified enrichment. Subsequent Agreements, such as AOD’s, will not overcome invalidity if the wording limits the debt of parties to the sole indebtedness that is established in terms the invalid Principal Agreement.
Written by Courtney Altmuner Checked by Andrew Lawrie