First Rand Bank Ltd v Lodhi 5 Properties Investments CC and Others (38326/11) [2013] ZAGPPHC 515 (9 December 2013)

IN THE NORTH GAUTENG HIGH COURT, PRETORIA

(REPUBLIC OF SOUTH AFRICA)

CASE NO: 38326.2011

DATE: 9 DECEMBER 2013

In the matter between:

FIRST RAND BANK LTD…………………………………………………................APPLICANT

and

LODHI 5 PROPERTIES INVESTMENTS CC…………....................................RESPONDENT IN

CASE NO: 38326/11

LODHI 4 PROPERTIES INVESTMENTS PTY LTD…………………….…RESPONDENT IN

CASE NO: 43043/11

MUHAMMED ISLAM LODHI…………………………………………………RESPONDENT IN

CASENO: 88376/11

JUDGMENT

MOLEFE. J:

[1] The applicant instituted three applications for the following relief:

1.1. As against Lodhi 5 Properties Investments (“Lodhi 5”) as a principal debtor, an order that it be placed under final winding up;

1.2. As against Lodhi 4 Properties Investments (“Lodhi 4”) as surety, an order that it be placed under final winding up;

1.3 As against Muhammed Islam Lodhi (“Lodhi”) as surety for money judgment.

[2] The three applications are opposed. In March 2012, the matter came before court for the first time and the respondents raised a point in limine in the winding-up applications of Lodhi 5 and Lodhi 4. The point in limine, related to the interpretation of the Companies Act, 71 of 2008 (“the Companies Act”). The point in limine was dismissed with cost.

[3] The applicant filed supplementary affidavits dealing with an alternative claim for restitution. The respondents in each matter filed supplementary answering affidavits and the applicant subsequently fifed supplementary replying affidavits.

[4] The facts in the three applications overlap and the respondents raise similar defences. In light thereof, the applicant and the respondents have agreed that the three applications be heard simultaneously in order to save time and costs and to avoid duplication of judgments.

Common Cause Facts in the Winding-Up Application

[5] It is not in dispute that Lodhi signed the loan and agency agreements on 7 May 2008 on behalf of Lodhi 5. In terms of the loan agreement the applicant lent and advanced R9,6 million to Lodhi 5 which was repayable in 120 monthly instalments of R80 000-00 each commencing July 2008. The loan was utilized to purchase the immovable property of Lodhi in the amount of R8 million and R1,6 million to pay Lodhi 4’s indebtedness to Standard Bank. This debt was paid in order for a surety bond to be registered in favour of the applicant over the property of Lodhi 4.

[6] It is also not disputed that a first mortgage bond was registered by Lodhi 5 over its immovable property which it obtained with the amounts lent by the applicant; and that Lodhi 4 and Lodhi personally executed suretyships in favour of the applicant securing the indebtedness of Lodhi 5 and that Lodhi 4 registered a surety bond in the applicant’s favour to secure its indebtedness by virtue of the suretyship.

[7] It is not disputed that Lodhi 5 failed to make the R80 000*00 monthly instalments and that at a meeting held between the applicant’s

deponent ("De Beer1’) and Lodhi on 10 February 2010, the respondent’s arrears were recorded to be in excess of R725 000-00 and that Lodhi 5 was unable to repay the arrears and was experiencing cash flow problems[1].

Lodhi 5 Winding Up

[8] The applicant contends that both Lodhi 5 and Lodhi 4 should be wound up as they have demonstrated their deeming inability to repay their debts.

The applicant relies on the provisions of Section 344 (f) and Section 345 of the old Companies Act and on Section 66 of the Close Corporations Act, 61 of 1984 (“the CC Act”).

Section 344 (f) of the old Companies Act reads as follows:

“344. Circumstances in which company may be wound up by Court- A company may be wound up by the court if-

a)

b)

c)

d)

e)

f) the company is unable to pay its debts as described in section 345;”

Section 345 of the old Companies Act reads as follows:

“345. When company deemed unable to pay its debts - 1) A company or body corporate shall be deemed to be unable to pay its debts if-

a) a creditor, by cession or otherwise, to whom the company is indebted in a sum not less than one hundred rand then due –

i) has served on the company, by leaving the same at its registered office, a demand requiring the company to pay the sum so due; or

ii) in the case of any body corporate not incorporated under this Act, has served such demand by leaving it at its main office or delivering it to the secretary or some director, manager or principal officer of such body corporate or in such other manner as the Court may direct, and the company or body corporate had for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;

or

b) any process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned by the sheriff or the messenger with an endorsement that he has not found sufficient disposable property to satisfy the judgment, decree or order or that any disposable property found did not upon sale satisfy such process; or

c) it is proved to the satisfaction of the court that the company is unable to pay its debts.

2) In determining for the purpose of subsection (1) whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company”.

[9] In order for the applicant to be entitled to the winding up of Lodhi 4 and Lodhi 5, the applicant has:

i) to be a creditor of Lodhi 4 and Lodhi 5 respectively ; and

ii) demonstrate that Lodhi 4 and Lodhi 5 are unable to pay their debts within the meaning of section 345 of the old Companies Act (and in the instance of Lodhi 5), as read with section 66 of the CC Act.

[10] Applicant’s counsel[2] submitted that the applicant has the required locus standi as creditor to seek the winding-up of Lodhi 5 and Lodhi 4. Counsel also relied on both the provisions of Section 345 (1) (c) and 345 (2) of the old Companies Act, namely the deeming inability and the demonstrated inability by the respondent to pay its debt.

[11] Counsel for the applicant further submitted that the applicant delivered a notice in terms of section 69 to Lodhi 5 which was served by the sheriff on 19 April 2011 at Lodhi 5’s registered address. The applicant also delivered a notice in terms of section 345 to Lodhi 4 which was served by the sheriff on 17 June 2011[3]. Neither Lodhi 5 nor Lodhi 4 responded to the notices, nor did they pay, secure or compound for their indebtedness to the applicant.

Counsel contends that under the circumstances, the deeming provisions of section 69 of the CC Act and of Section 345 of the old Companies Act became applicable and both Lodhi 5 and Lodhi 4 are deemed unable to pay its debts.

[12] In terms of clause 18 of the loan agreement, should Lodhi 5 commit a breach of the loan agreement (an event of default occurs) then the applicant may by written notice declare all outstanding amounts to be immediately due and payable. Applicant’s counsel submitted that a necessary written notice was on 21 February 2010 sent to Lodhi 5 by applicant’s attorneys’ Edward Nathan and Sonnenberg (‘ENS’) by means of a letter of demand wherein Lodhi 5 was afforded 10 days within which to make payment of the full arrears. Lodhi 5 failed to make payment as demanded and counsel’s submission is that the full outstanding amount became due and payable. Counsel further submitted that Lodhi 5 and Lodhi 4 failed the test whether they can pay their debts as an when they due, as they evidently cannot. In this regard, counsel referred the court to Absa Bank v Rhebokskloof (Pty) Ltd & Others 1993 (4) SA 436 (C), wherein Berman AJ held:

“Turning to the merits of the matter, Mr. Gauntiett contended that ABSA was entitied to a final winding-up order on the basis that Rhebokskloof was commercially insolvent. The concept of commercial insolvency as a ground for winding up a company is eminently practical and commercially sensible. The primary question which the Court is called upon to answer in deciding whether or not a company carrying on business should be wound up as commercially insolvent is whether or not it has liquid assets or readily realizable assets available to meet its liabilities as they fall due to be met in the ordinary course of business and thereafter to be in a position to carry on normal trading - in other words, can the company meet current demands on it and remain buoyant? It matters not that the company’s assets, fairly valued, far exceed its liabilities: once the Court finds that it cannot do this, it follows that it is entitled to, and should, hold that the company is unable to pay its debts within the meaning of Section 345 (1) (c) as read with Section 344 (f) of the Companies Act 61 of 1973 and is accordingly liable to be wound up”.

[13] Applicant’s counsel referred the court to Lodhi 5’s financial statements for the year ended February 2012; Lodhi 5 earned rental income of R308 372-00 whilst its operating expenses were R216 1 92-00[4]. This means that Lodhi 5 earned a net income of only R92 180-00 for the entire year, which equates to just over one month’s

repayment in terms of the loan agreement. It should be noted that the operating expenses exclude the R960 000-00 annual loan repayments.

According to Lodhi 4’s financial statement for the year ended February 2012, Lodhi 4 earned income of R741 648-00 whilst its operating expenses were R684 642-00, which equates to net annual income of R57 006-00[5]. Similarly Lodhi 4 is unable to pay the amount due to the applicant.

[14] Regarding the contention by the respondent that the applicant’s alternative claim based on restitution has become prescribed, it is applicant’s counsel’s submission that the debt is admitted and the debt due by Lodhi 5 is secured by a mortgage bond and therefore the period of prescription is 30 years. The liability of a surety as such, or as co-principal debtor in soiidium, continues to depend on the principal debt period of prescription. Lodhi 4 has also secured its surety obligations with a surety bond, which also militates against any possible prescription. Counsel relied on the cases of Bulsara v Jordan and Co Limited (Conshu Ltd[6] and Jaus v Nedcor Bank[7] in this regard.

I am agreeable to applicant’s counsel’s contention in this regard.

The money judgment against Lodhi

[15] Applicant’s counsel contends that the applicant is entitled to money judgment against Lodhi in the amount set out in the notice of motion. Lodhi does not dispute the fact that he executed a deed of suretyship on behalf of Lodhi 5 and in favour of the applicant. Counsel relied on clause 2.2 of the suretyship, in terms of which Lodhi would be liable to pay to the applicant all amounts owing in terms of the deed of suretyship inter alia upon Lodhi 5 being placed under winding-up. In the event of Lodhi 5 being placed under winding-up, Lodhi would have no defence to the applicant’s claim and he would be liable to make payment to the applicant without set-off or deduction[8].

The Respondents’ defences can be categorized as follows:

[16] Respondent’s counsel[9] submitted that it is admitted that Lodhi 5 had entered into the loan agreement and the “so-called" agency agreement with the applicant. Counsel however denied that any of the “fees" stipulated for in the agreement are due and payable. This because the suspensive conditions to which the whole agreement subject, had not been fulfilled, alternatively because the applicant is not entitled to payment as it had not rendered its own quid pro quo. The respondent essentially invokes the exception non adimpleti contractus. Counsel further argues that in the alternative, the “fees” are nothing but "riba" to which the applicant is not entitled to. The result is that only the instalments stipulated for in the loan agreement could have

become due and payable and only due on its own agreed due date.

[17] Respondent’s counsel secondly, submitted that about February 2010, the parties agreed that an insurance payment which was due would, if and when received, be applied towards arrear instalments. The insurance pay-out in the amount of R5 million was received by the applicant on 13 May 2010 for credit of Lodhi 5. It is counsel’s argument that the amount was sufficient to cover all arrear instalments (as at that date) plus future instalments in advance for at least another two years. Although the respondent do not deny that there is a balance owing in terms of the loan agreement, he argues that none is due and payable when the application was launched and/or heard. Lodhi 5 is, in terms of the loan agreement paid in advance until at least early 2014.

[18] The respondent’s counsel contends that the application for the winding-up of Lodhi 5 should be dismissed as it cannot be concluded that Lodhi 5 is commercially insolvent. Lodhi 5 had not only paid the instalments on the loan agreement as and when they fell due, but it is counsel’s contention that Lodhi 5 had paid many instalments in advance and at the hearing of this application, no instalment was due.

The same argument pertaining to Lodhi 5 also, according to counsel’s contention, applies to Lodhi 4 as surety, as the applicant relies on the allegation that the amounts owing by Lodhi 5 are due and payable.

Similarly, in respect of Lodhi personally as surety, the amount for which the applicant seeks judgment is the principal debt of Lodhi 5. Lodhi’s defence is again that the full outstanding balance in terms of the loan agreement is not yet due and payable and there are no instalments in arrears. Nothing is owing in terms of the agency agreement and the applicant is not entitled to judgment.

Shari’ah, riba (Islamic Law)

[19] Respondents’ counsel argued that the applicant and Lodhi 5 recorded in the loan agreement that their transaction should be compliant with Shari’ah (Islamic law). In particular, the Shari’ah imperative that no interest may be charged was expressly referred to in the loan agreement[10].

The loan agreement provided that the initial capital debt shall be repaid without any interest. Had this been the whole transaction between the parties, it would have been Shari’ah compliant. However, there was a second agreement which formed part of the total transaction called “Agency and Administration Service Agreement'. Lodhi 5 was in terms of this agreement to pay an additional 8% per year as an administration fee being “in consideration for FNB appointment as agent.”

[20] Respondents’ counsel submitted that the applicant had rendered no performance to Lodhi 5 to earn any fees in terms of the agency agreement. Furthermore, the administration fee amounts to interest or riba, which makes the whole transaction, not be Shari’ah compliant.

[21] Regarding Lodhi’s defence, respondents’ counsel contends that the applicant failed to meet its obligations in accordance with Shari’ah law; that the agreements were not explained to Lodhi, but that he assumed that it would be entered into on a basis of sharing the

benefits of profit and risk[11], and that the written agreements conflict with the understanding of Lodhi of the “intention of the loan transaction[12]”.

Suspensive Conditions

[22] It is also the respondent’s contention that the loan agreement was specificallysubject to inter alia the suspensive condition that the loan agreement “----- becomes unconditional in accordance with its terms by the fulfillment or waiver-------- of anysuspensive conditions provided for therein”

The loan agreement in turn was subject to inter alia the condition (clause 4.1.1) that each of the transaction documents be signed, which included the “Second Offer to Purchase ” concluded or to be concluded between the applicant (as agent on behalf of Lodhi 5) and the seller pursuant to which the applicant agrees to purchase both erven 24 and 29 Cramerville on behalf of Lodhi 5. This would have amounted to Musharakah. The respondents’ version is that there was no fulfillment of this condition and the parties did not implement this agreement as the applicant did not perform in terms of the agency agreement. Lodhi 5 never acquired Erf 29 and the applicant did not act as Lodhi 5’s agent in the acquisition of Erf 24. Consequently, the applicant cannot be entitled to any “administration fees'’ in terms thereof.

[23] Regarding the written notice dated 21 February 2011 sent by the applicant’s attorneys ENS to the respondents, counsel for the respondents argued that the notice did not declare the outstanding balance immediately due and payable. The notice only stated that the applicant “reserves the right to declare aii or part of the capital outstanding to be immediately due and payable after expiry of the notice period”. Counsel submitted that in terms of clause 18.2 of the loan agreement, the balance will only become due and payable if and when the applicant declares it is so by written notice. It’s my view that this contention is incorrect. The above-mentioned notice did declare that the outstanding balance is due and payable. The only right reserved was to declare whether part or all the capital

outstanding is due and payable. It is my view that the notice complies with clause 18.2 of the loan agreement.

Should Lodhi 5 and Lodhi 4 be wound-up

[24] The respondents admitted that an amount of R9,6 million was advanced by the applicant to Lodhi 5. The respondents further admit that there are amounts owing to the applicant although the amounts owing are not currently due and payable. It is therefore common cause that Lodhi 5 and Lodhi 4 are indebted to the applicant in a substantial amount. Lodhi 5 admits owing R2 682 627-00 to the applicant in its financial statements for the year ending February 2012[13]. Despite this, no payments have been made to the applicant since 2010.

[25] Applicant relies on Section 344 (f) of the old Companies Act that Lodhi 5 and Lodhi 4 should be wound-up as there is a deeming inability and the demonstrated inability by both Lodhi 5 and Lodhi to repay its debts which arose from the loan agreement. The respondents’ defence to the winding-up is that a payment made by the insurers of the Lodhi group effectively paid the arrears and pre-paid the monthly instalments for many years to come[14] and hence the full amount is not outstanding to the applicants by Lodhi 5 (and the sureties, Lodhi 4 and Lodhi personally).

[26] In my view, the two applications for the winding-up of Lodhi 5 and Lodhi 4 fall squarely on the ABSA Bank v Rheebokskloof (Pty) Ltd and Others (supra) and in what was said by Caney J in Rosenbach & Co (Pty) Ltd v Singh’s Bazaar (Pty) Ltd 1962 (4) SA 593 (D) at 597 E-F:

“If the company is in fact solvent, in the sense of its assets exceeding its liabilities, this may or may not, depending upon the circumstances, lead to a refusal of a winding-up order; the circumstances particularly to be taken into consideration against the making of an order are such as show that there are liquid assets or readily realizable assets available out of which, or the proceed of which, the company is in fact able to pay its debts”.

[27] The court has a limited discretion where a creditor has a debt which the company cannot pay; in such a case the creditor is entitled (ex debito justitiae) to a winding-up order. (See Henochsberg on the Companies Act 4th ed. Vol 2 at page 586).

[28] In casu, the applicant has proved that it is a creditor to both Lodhi 5 and Lodhi 4. The applicant has also demonstrated that both Lodhi 5 and Lodhi 4 are unable to pay their debts within the meaning of section 345 of the old Companies Act and in the instance of Lodhi 5 as read with section 66 of the CC Act.

[29] The respondent's defence that an insurance pay-out made to the applicant was in effect a pre-payment of some 62 instalments in terms of the agreements, is in my view incorrect.

In terms of clause 17.1 of the loan agreement it was recorded that Lodhi 5 had taken out an insurance in respect of its interest in the property and that all the proceeds of the insurance would be paid to the applicant as sole loss payee. Lodhi 5’s contractual

obligation to maintain its monthly payment is not to be affected by the insurance pay-out. I do not agree that the insurance pay-out has any effect on the liquidation applications of Lodhi 5 and Lodhi 4. The monthly payments which are in arrears, were to be made without set-off within the terms set out in the schedule.

The test is whether Lodhi 5 and Lodhi 4 can pay their debts as and when they fall due, I am satisfied that it has been demonstrated that the respondents are unable to pay their debts which are due and payable. In this respect, Lodhi 5 and Lodhi 4 fall to be wound up. In the event of Lodhi 5 being placed under winding-up, Lodhi would have no defence to the applicant’s claim.

[30] Concerning the respondent’s defence that the suspensive conditions to the agreements were not fulfilled, and that this makes the agreements void, it is noteworthy that Lodhi 5 received the benefits of the fund, made payments in terms of the agreements and even allowed payment to be made by insurance company to the applicant, yet he now contends that the suspensive conditions were not fulfilled. This version in this regard has in my view, no merit whatsoever. Furthermore, if the agreements are void, there is no basis for alleging that the amounts to be paid are not due and payable.

Sahri’ah compliance

[31] The respondents raised another defence that the applicant failed to meet its obligations in accordance with Shari’ah law. Lodhi argued that the agreements were not explained to him and that he assumed that the agreements would be entered into on a basis of sharing the benefits of profit and risk. The respondents implemented the entire transaction and accepted the benefits of it. Lodhi 5 obtained the benefits of the funds from the applicant and was enabled by the funds to purchase the property and to extinguish Lodhi 4’s debt with Standard Bank.

Lodhi, an astute business man, does not however explain why he knowingly and applying Islamic principles, read and signed the agreements without any protest and with an intention to be bound thereby if they were not compliant with his religious believes.

Lodhi’s defence of the agreements being non-compliant with the Shari’ah law, not having been explained to him and not being on his assumption that the agreement would be on a basis of sharing the benefits of profit and risk is in my view, far­fetched and untenable.

[32] When it comes to the agency agreement, the respondents’ contention is that the loan agreement and the agency agreements are void due to the fact that they do not comply with the Muslim requirements and that they are not Shari’ah compliant as the administration fee amounts to riba or interest.

[33] Applicant provides Islamic clients with Islamic Finance Residential Property offering which is Shari’ah compliant and caters for Islamic prohibition of the use of riba or interest. The Islamic client are given access to agency agreements

(Wakaiah) wherein the applicant acts as agent when the Islamic client purchase property in return for a fixed agency fee. Islamic Finance Loan has fixed instalments for the entire period of the loan.

[34] Shari’ah law prohibits any transactions which involve paying or receiving interest. South Africa only has only one fully-fledged Islamic bank and the big four South African banks (the applicant included) have existing Islamic finance offerings.

All banks offering Shari’ah compliant products have in place a Shari’ah supervisor board, made up of local and/or overseas based Islamic clerics and scholars who have the respect of the Muslim community and which overseas and monitors activities.

[35] One of the fundamental ethical principles of Shari’ah compliant finance is a shared responsibility for profit and loss between borrower and lender. A good example of this in conventional finance is buying shares in a company. As a shareholder, you enjoy a share of the company’s profits if it does well and bear a share of its losses if it does badly. Profit-sharing agreements traditionally occur between a lender and an entrepreneur. In a joint partnership or “musharakah”, the bank will help finance a company through establishing a joint venture. The bank’s return on the loan for the venture is an agreed percentage of the company’s profit.

[36] It is clear that in casu the transaction between the applicant and the respondents was not a profit-sharing agreement. The only party benefiting in this

transaction was the respondents. The transaction was a residential property offering with a fixed agency fee. In this regard, it is my view that the loan and agency agreement were Shari’ah compliant and the respondents’ defences in this regard are rejected.

[37] In the circumstances, no defence exists as concerns the liquidation application against Lodhi 5 and Lodhi 4. Accordingly, the defences raised by Lodhi in the money judgment application fall away on a legal basis.

[38] I therefore make the following order:

i) Lodhi 5 Properties Investments CC (“Lodhi 5”) is placed under final order of winding-up;

ii) Lodhi 4 Properties Investments PTY LTD (“Lodhi 4”) is placed under final order of winding-up;

iii) Muhammad Islam Lodhi (“Lodhi") to make payment to the applicant of the cumulative sum ofR10 328 574,25;

iv) Muhammad Islam Lodhi to make payment to the applicant of interest on the said sum of R10 328 574-25 at a rate of 15,5% per annum

calculated from 18 April 2011 until date of payment;

v) Lodhi to pay the costs of the applications.

D.S. MOLEFE

JUDGE OF THE HIGH COURT

APPEARANCES:

Counsel on behalf of Applicant: Adv. J E Smit

Instructed by: Edward Nathan Sonnenbers Inc.

Counsel on behalf of Respondent: Adv. J D Maritz SC

Instructed by: Savage, Jooste & Adams Inc

Date Heard: 27 March 2013

Date Delivered : 09 December 2013

[1] E-mail de Beer dated 10 February 2010, founding affidavit Lodhi 5, annexure "FA6"

[2] Adv. J.E. Smit

[3] Founding affidavit pages 24, 24, 32 and 33

[4] Annexure SA4 of the Supplementary Answering Affidavit at page 488

[5] Annexure SA7 of the Supplementary Answering Affidavit at page 541

[6] 1996 {1) SA 805(A) at811A-D

[7] [2003] 2 All SA 11 (SCA)

[8] Clause 8 of suretyship

[9] Adv. J D Maritz SC

[10] Clause 3,1

[11] Answering Affidavit Lodhi 5, para 4.1.6 page 131

[12] Answering Affidavit Lodhi 5, para 4.2.3 page 133

[13] Supplementary Answering Affidavit Lodhi 5 at page 495

[14] Answering Affidavit Lodhi 5, par 4.5.3.3 page 140-141