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IN THE HIGH COURT OF SOUTH AFRICA NOT REPORTABLE

EASTERN CAPE, GRAHAMSTOWN

Case No.: 682/10

Date heard: 6 May 2010

Date delivered: 20 May 2010

In the matter between:

SIGN AND SEAL TRADING 206 (PTY) LTD Plaintiff

and

M J BEEF (PTY) LTD First Defendant

MICHAEL HENRY CHARTERS Second Defendant

MARINDA CHARTERS Third Defendant

ELIZABETH CATHARINA VAN DER LINDE

ANDERSON NO Fourth Defendant

MICHAEL HENRY CHARTERS NO Fifth Defendant

MARINA CHARTERS NO Sixth Defendant

ELIZABETH CATHARINA VAN DER LINDE

ANDERSON NO Seventh Defendant

MICHAEL HENRY CHARTERS NO Eighth Defendant

MARINDA CHARTERS NO Ninth Defendant

JUDGMENT

EKSTEEN J:

[1] This is an application for summary judgment. In its summons the plaintiff alleges that it lent and advanced to the first defendant two sums of money in terms of two written loan agreements, being R500 000 and R150 000 respectively. Each of these written agreements contained, inter alia, the following terms:

“1. NATIONAL CREDIT ACT

The Borrower herein warrants that either its nett asset value or turnover exceeds R1 000 000,00 (One Million Rand) and that this transaction is consequently not governed by the National Credit Act. The Borrower hereby indemnifies the Lender from any future claims in this regard.

2. THE LOAN

Based upon the representations and information provided by the Borrower in his loan application, S & S hereby agrees to lend to the Borrower, who agrees to borrow from the Lender, the sum specified in the schedule hereto for the personal requirements of the Borrower (hereinafter referred to as “the Loan”).

3. …

4. INTEREST

4.1 The loan shall bear interest at the rate specified in the schedule hereto and shall be calculated from the date of payment to the repayment date. In the event of any payment of capital or interest not being effected on the due date, then interest on such overdue accounts will be calculated at the alternative rate stipulated in the schedule hereto. Interest shall be calculated on the balance of the capital sum outstanding from day to day and shall be weekly compounded.

4.2 …

5. …

6. …

7. …

8. …

9. …

10. …

11. SCHEDULE

The schedule annexed hereto shall be deemed to be an integral part of this agreement, as though the provisions thereof are set out herein.

12. …

13. CONDITIONS PRECEDENT

13.1 It shall be a condition precedent to any advance whatsoever under this agreement that:

13.1.1 the Directors/Members shall as collateral security for the loan sign a Deed of Suretyship in favour of the Lender securing payment of the capital sum and any interest that may become due in terms of this agreement:

13.1.2 the Trustees of the SM Trust, Number IT861/2003 shall as collateral security for the loan sign a Deed of Suretyship in favour of the Lender securing payment of the capital sum and any interest that may become due in terms of this agreement:

13.1.3 The Trustees of the Mike Charters Family Trust, Number IT 78/96 shall as collateral security for the loan sign a Deed of Suretyship in favour of the Lender securing payment of the capital sum and any interest that may become due in terms of this agreement.”

The second to ninth defendants duly signed the Deeds of Suretyship pursuant to the provisions of clause 13.

[2] The schedule referred to in clause 11, in each case, provided for the payment of a capital sum of money in respect of an administration fee and legal charges prior to the advance being made. The schedule in each case provided for the amount of the loan and in addition contained, inter alia, the following terms:

“4. Purpose of loan

Bridging finance.

5. Occupation/business of the 6. Rate of interest

Borrower of interest of the (not completed) loan

2,5% (calculated weekly, compounded weekly) (minimum loan period – 5 WEEKS)

7. Alternative rate

0,66% calculated daily, compounded weekly”

[3] Whilst the interpretation of the clauses relating to interest might be open to argument it is apparent from the particulars of the plaintiff’s claim that the plaintiff contends that it has stipulated for interest of 2,5% per week calculated and compounded weekly and an alternative rate of interest of 0,66% per day calculated daily and compounded weekly.

[4] It is common cause that the first defendant has been placed in liquidation since the institution of action and accordingly that all litigation against the first defendant has been suspended. The plaintiff, however, proceeds against the second to ninth defendants as their capacity as sureties.

[5] The significance of clause 1 of the agreement to the relief sought is fundamental in that it is common cause that the plaintiff has not complied with the provisions of the National Credit Act 34 of 2005 and accordingly, in the event that the Act does find application the plaintiff’s claim cannot be enforceable until such time as the provisions of the Act have been complied with.

[6] The second defendant has filed an affidavit on behalf of the defendants in opposition to the application for summary judgment. Second defendant claims that he personally negotiated the loans. The essence of the defence which he raises appears from paragraphs 8-11 of the affidavit in opposition to the summary judgment application. They read as follows:

“8. In paragraphs 15.2 and 25 of the Plaintiff’s Particulars of Claim it is pleaded that First Defendant (at all times material hereto I represented First Defendant) furnished certain warranties to wit that the First Defendant either had a nett asset value or turnover exceeding R1 000 000,00 (ONE MILLION RAND) and that compliance by Plaintiff with the provisions of the National Credit Act No 34 of 2005 was, therefore, not of application. These allegations I deny in the most strenuous terms.

9. Aside from the fact that no such warranties were given by me (representing the First Defendant as I have said at the time the loans were entered into) in accordance with what I assume to be good business practice, I was required, on each occasion, to submit to the Plaintiff a balance sheet of the First Defendant. This was duly done and a copy of such balance sheet is annexed marked “B”. It will be noted on page 2 of this balance sheet that there is clear reference to same being as at 28 February 2009. However, further to the left on the same page the years 2008 and 2007 appear. This is a patent error. The latter should read 2009 and 2008.

10. A corrected balance sheet (correcting the error that is) and which adds provision for audit fees not in the previous balance sheet is annexed marked “C”. It is my respectful submission that notwithstanding the error (which would have been apparent) it would have been evident to the Plaintiff, represented by Jacko Booysens who is, to my knowledge, a person of considerable financial acumen, that not only is the nett asset value of First Defendant or its annual turnover less that R1 000 000,00 but, perhaps more importantly, that the First Defendant was in fact insolvent at the time of the loan.

11. This, I am advised has two important consequences namely:-

(a) the Plaintiff, prior to instituting action, did not give the requisite notice in terms of Section 129 of Act 34 of 2005 (“the Act”);

(b) accordingly and in consequence of Section 130 of the Act, is not entitled to institute the present proceedings.”

[7] In addition to the aforegoing the second defendant complains that he was required on behalf of the first defendant to pay the administration fee in cash to the plaintiff prior to the plaintiff advancing money to him. He then concludes as follows:

“16. As there was a need (on the part of First Defendant) to obtain finance I was hardly in a position to debate or dispute the payments in question which I at the time and subsequently regarded as a gross irregularity and what appeared to be an endeavour on the part of the Plaintiff to defraud the fiscus.”

[8] Whilst there may not be merit in the contention that the alleged facts indicate an intention to defraud the fiscus, it is clear from the averments set out in this paragraph that the defendant contends that there was a gross inequality of bargaining power.

[9] The essence of the defendants contention is that clause 1 of the “loan agreements” does not correctly reflect the agreement between the parties in that the parties were plainly aware that the first defendant did not have an asset value or turnover exceeding R1 000 000,00 and the second defendant did not warrant the contrary. The second defendant does not explain the reason for the “loan agreements” being drafted as they are. Two possibilities present themselves, either the parties intentionally prepared the documents so as to disguise the true position, in which case the agreement amounts to a simulation, or clause 1 was inserted in error, in which case the agreement falls to be rectified.

[10] It is true that the defendant does not identify by name either of these defences, however, in the event that these facts are proved it seems to me to follow, as day follows night, that one or other of these phenomena would be established. The true agreement for which the defendants contend would then have the effect that the provisions of the National Credit Act would apply to the agreements and compliance with section 129 would be a pre-requisite for a successful action. It is common cause that there has been no compliance with section 129.

[11] At the summary judgment stage the issue is not whether the defence which is raised is likely to succeed but merely whether, upon proof of the facts alleged, the defence made out is bona fide. The court is not at this stage concerned with the probability or the credibility of the allegations made, provided that the defence made out is not seriously and inherently unconvincing. See Breitenbach v Fiat (Edms) Beperk 1976 (2) SA 266 (T) at 228D-E; and Muller v Botswana Development Corporation [2002] 3 All SA 663 (SCA) at 667-668(a).

[12] Mr De la Harpe, on behalf of the plaintiff, contends that the defence alleged is inherently unconvincing. He argues that the financial statements which the second defendant has annexed to his affidavit in defence of the application for summary judgment and which the second defendant alleges that he provided to the plaintiff prior to the conclusion of the loan shows that the first defendant does have an annual turnover in excess of R1 000 000,00.

[13] The financial statements show that the first defendant conducted a farming enterprise. It shows “gross farming income” of R409 585,00 in 2008 and R408 637,00 in 2009. Prima facie, it appears to me that first defendant therefore has a gross turnover of approximately R410 000,00 per annum. Mr De la Harpe, however, refers to the “cash flow statement” for the year ended 28 February 2009 which is contained in the financial statements. It reflects an amount of R2 507 318,00 as “nett cash generated from operating activities”. I am invited to find that this clearly represents the “annual turnover”.

[14] Ex facie the financial statements this figure is taken from a “reconciliation of nett loss before tax to cash generated from operating activities”. This exercise shows a nett profit of R31 496,00 for the year and a “change in working capital” of R2 475 822,00, thus yielding the figure of R2 507 318,00 to which reference is made above. The “change in working capital” is, in turn, comprised of a decrease in creditors of R20 325,00 and an increase in debtors of R2 455 497,00.

[15] The increase in debtors is, ex facie the financial statements, in fact an increase in “trade and other receivables”. It is not apparent from the financial statement what “other receivables” refers to nor is it apparent that “other receivables” arises from trading activities. The “trade and other receivables”, ex facie the financial statements, relates exclusively to the increase in an amount receivable from an entity reflected as “Copelands Beef (Pty) Limited”. The financial statements show that the amount constitutes a loan to “Copelands Beef (Pty) Limited”. It is apparent, ex facie the financials, that the additional sum loaned to “Copelands Beef (Pty) Limited” during the year of assessment could not have been derived from turnover. On the contrary, it appears more probable that it derives from an increase in interest bearing borrowings which increased by an amount of R2 952 638,00 during the year of the assessment.

[16] In the circumstances I do not consider that an inscription in the financial statements relating to “operating activities” renders the averments of the second defendant inherently unconvincing. Summary judgment is an extraordinary and stringent procedure which makes inroads on a defendant’s right to have his case heard in the ordinary course of events. It has been held, therefore, that a court would be reluctant to grant summary judgment unless it is satisfied that the plaintiff has an unanswerable case, and even then there is a discretion whether or not to grant it. See for example Maharaj v Barclays National Bank Ltd 1976 (1) SA 418 (A) at 423G and Soil Fumigation Services v Chemfit Technical Products 2004 (6) SA 29 (SCA) at 35C. I do not consider the financial statements on which the plaintiff seeks to build its argument render the defendants’ case unanswerable. In the circumstances I would be inclined to grant the defendants leave to defend.

[17] I have stated above, that even if I were to find that , on the papers, the plaintiff has an unanswerable case I still retain a discretion whether or not to grant summary judgment. During the course of argument I raised with counsel the effect of the amount of the interest claimed and the enforceability of the terms of the contract. This was a matter on which counsel had not prepared and appears to me to give rise to considerable complexity. I do not consider that it would be prudent for me to pronounce on the lawfulness of the interest rates claimed without having the benefit of full and considered argument on the subject. I would therefore, in any event, exercise my discretion in the defendants favour in the present matter and decline the application for summary judgment.

[18] In the result I make the following order:

1. The application for summary judgment is dismissed.

2. The defendants are granted leave to defend.

3. The costs occasioned by the application for summary judgment will be costs in the action.

__________________________

J W EKSTEEN

JUDGE OF THE HIGH COURT

Appearances:

For the Plaintiff: Adv D del la Harpe instructed by Dold & Stone, Grahamstown

For the Defendants: Adv J R Koekemoer instructed by Netteltons Attorneys, Grahamstown

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