Nedbank Limited v Khoza and Another (31321/2018) [2019] ZAGPJHC 171 (17 May 2019)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 31321/2018

In the matter between:

NEDBANK LIMITED APPLICANT

AND

KHOZA, CHILTON DUMISANI FIRST RESPONDENT

SIFIKILE MANAGEMENT SOLUTIONS (PTY) LTD SECOND RESPONDENT

JUDGMENT

LEECH, AJ:

Introduction

1 The applicant, Nedbank Limited, is a public company and a commercial bank, duly registered and carrying on business as such. It is also a registered credit provider for purposes of the National Credit Act, 34 of 2005 (the NCA).

2 During 2009 the applicant concluded a written loan agreement (the Agreement) with the first respondent, Mr Chilton Dumisani Khoza, for the loan by the applicant to the first respondent of an amount of R7 600 000. The loan was extended to the first respondent for purposes of facilitating the purchase by the first respondent of a property in Hurlingham, Johannesburg (the Property). It is common cause between the Parties that this was indeed what the loan was used for and that the first respondent paid an additional amount of R2 million by way of a deposit on the purchase price.

3 As security for the loan the first respondent registered a first covering mortgage bond over the Property in favour of the applicant in the capital sum (the Mortgage Bond). The applicant was also provided with a cession and pledge by the first respondent of all right title and interest in and to a share portfolio account (the Cession) and a deed of suretyship executed by the second respondent in favour of the applicant for an amount up to the capital amount (the Suretyship).

4 The applicant alleges that the first respondent has breached the Agreement and that an Event of Default has occurred as contemplated under the Agreement. The applicant contends that as a consequence of the breach or Event of Default the full amount outstanding under the Agreement has become due and payable, together with interest as calculated under and in terms of the Agreement.

5 Having made demand upon the respondents inter alia as required under the NCA without its claim having been satisfied, on 24 August 2018 the applicant caused a Notice of Motion to be issued out of this Court in which it sought as against the respondents, jointly and severally, an order in the following terms:

5.1 Payment of the outstanding amount under the Agreement, being R6 660 958.30,

5.2 Payment of interest on the above amount at the prime lending rate of the interest charged by the applicant from time to time less 1%, calculated on a daily basis on the outstanding amount and compounded monthly in arrears from 2 May 2018 to date of final payment,

5.3 Declaring the Property to be specially executable,

5.4 Directing the Registrar of this Court to issue a Writ of Execution in the terms set out in sub-paragraphs 1 to 3 above,

5.5 Declaring that the applicant is entitled to execute on the Cession in satisfaction of the judgment debt, interest and costs, and

5.6 Costs of the application on the attorney and client scale.

6 The application was opposed by the respondents, who filed an answering affidavit in opposition, to which the applicant replied. Thereafter heads of argument were filed on behalf of the applicant, the matter was set down for argument, heads of argument were filed on behalf of the respondents, and the matter was argued before me.

7 I am of the view that the applicant is entitled to succeed in its application for the relief sought and in what follows I set out the reasons for my so finding.

8 In their answering affidavit the respondents made reference to and attached correspondence reflecting various settlement negotiations that took place as between the Parties and their representatives. The applicant objected to the inclusion of these references and gave notice that they wished to have the references and the attached documentation struck out of the answering affidavit. That application to strike was also opposed by the respondents and, in consequence, was argued before me together with the main application.

9 I am of the view that the reference to the settlement negotiations and the associated documentation falls to be struck from the papers. This judgment also sets out my reasons for upholding the application to strike out. It is with this interlocutory application to strike that I deal first.

The Application to Strike Out

10 It is appropriate that I deal first with the application to strike out, given that the outcome of this application determines the evidential material that is properly before me and on which I am required to base my decision.

11 It is common cause that the negotiations in question were held between the Parties and their representatives with a view to resolving the dispute between them and satisfying the applicant’s claims. In the answering affidavit the first respondent says as much. The material to the inclusion of which in the answering affidavit the applicant objects are either allegations pertaining to what was discussed and the outcome of the settlement negotiations or correspondence and documentation that passed between the Parties and their representatives in the course of these negotiations.

12 Ms Pillay, who appeared on behalf of the respondents, submitted that the respondents alleged that these negotiations were not carried on in good faith. Upon inquiry, however, she acknowledged that the respondents accepted that the applicant entertained the negotiations with the genuine intent of reaching a settlement of the dispute, but that the terms they insisted on were onerous and unacceptable to the respondents. The applicant’s refusal to relax the terms they stipulated is what the respondents consider to have been a manifestation of bad faith, but this does not detract from the fact that the settlement negotiations constituted a genuine attempt to settle.

13 As a matter of public policy parties to a dispute must be afforded every latitude to try and settle the dispute between them. In furtherance of and in order so as to promote this policy the content of those negotiations are protected from disclosure except where it is necessary to prove any settlement agreement reached, or with the consent of both parties, or otherwise in very limited circumstances.

[20] In argument, both counsel accepted as correct the formulation in The South African Law of Evidence (2 ed, 2010 at 703) that a statement which forms part of genuine negotiations for the compromise of a dispute is inadmissible as

privileged. This is so, irrespective of whether or not the words 'without prejudice' have been used. There are two essential requirements. First is the existence of the dispute. Secondly, is that the statement is part of negotiations for the settlement or compromise of such dispute (Millward v Glaser 1950 (3) SA 547 (W) at 554; Gcabashe v Nene 1975 (3) SA 912 (D) at 914E; Jili v South African Eagle Insurance Co Ltd 1995 (3) SA 269 (N) at 275B; Lynn & Main Inc v Naidoo and Another 2006 (1) SA 59 (N) para 22).[1]

14 The respondents do not suggest that the allegations pertaining to and the correspondence emanating from the settlement negotiations fall into any of the recognised categories of exception that would allow their introduction into evidence. In the circumstances, they are inadmissible and ought not to have been included at all.[2]

15 It follows that the application to strike out the inadmissible contents of the answering affidavit must succeed and accordingly I rule in favour of the applicant as follows:

1. The applicant’s application to strike out material from the answering affidavit, contained in the Applicant’s Notice in terms of Rule 6(15) dated 4 February 2019, is upheld;

2. The following paragraphs in the respondents’ answering affidavit of 20 January 2019 are inadmissible and are struck out:

· paragraphs 44 – 46, 48 – 60, and 72.2 – 72.4, and

· annexures “AA9” and “AA11” – “AA23”;

3. The respondents are to pay the applicant’s costs consequent upon the application to strike out on the scale as between attorney and client.

16 The merits of the main application thus fall to be determined without reference to the inadmissible portions of the answering affidavit and annexures thereto.

The Common Cause Facts

17 The conclusion of the Agreement and of the associated security in the form of the Mortgage Bond, the Cession, and the Suretyship are all common cause between the Parties. So too are the terms of those instruments, inasmuch as those terms are all contained in writing and the relevant documents are admitted.

18 It is also common cause that the Property is not the first respondent’s primary residence, in circumstances where it is presently an unfinished building site that is not inhabited by the first respondent. In his answering affidavit the first respondent alleges that he resides at another property situate in Bramley, Johannesburg.

19 Subsequent to the conclusion of the Agreement the first respondent caused a perimeter wall to be built around the Property. The relevance of this lies in the fact that the first respondent alleges that he informed his personal banker of the construction of this wall. The personal banker, an employee of the applicant, offered no objection and did not require that the first respondent seek permission in writing from the applicant before proceeding to do so.

20 In 2012 the first respondent was informed that due to the ingress of water into the foundations of the existing buildings on the Property, the structure had become unstable. The first respondent thereafter caused the existing structures to be demolished and for new buildings to be erected on the Property.

20.1 It is common cause that the first respondent did not seek the prior written approval of the applicant for the demolition of the existing structures or for the construction of new buildings.

20.2 I can also accept the respondents’ version that at all material times the first respondent kept his personal banker apprised of these demolition and building works and, once again, there was no objection raised.

20.3 On that basis it is alleged that the applicant had actual knowledge of the demolition and building works, albeit that its permission to undertake these works was not sought and no written consent to those works was given prior to the first respondent undertaking same.

20.4 The demolition and rebuilding works were initiated and paid for by the first respondent utilising his personal funds, not drawn from the applicant. At a point some years back, however, the first respondent experienced financial constraints that prevented him from continuing with the rebuilding works. The works therefore sit incomplete and have been incomplete for a number of years as at the date of the filing of the answering affidavit.

21 It is also common cause between the Parties that during the first half of 2017 the second respondent was deregistered as a result of its failure to submit annual financial statements.

21.1 In June 2017 the applicant brought an application in the Western Cape High Court for the reregistration of the second respondent—an application that was not opposed by or on behalf of the respondents.

21.2 On 7 September 2017 the applicant succeeded in its application and an order was granted by the Western Cape High Court reregistering the second respondent.

22 On 17 October 2017 the applicant caused a notice in terms of the Agreement and as required under section 129 and 130 of the NCA to be served upon the first respondent. In the notice the applicant advised the first respondent that there had been an Event of Default as contemplated in the Agreement, with the result that the full outstanding balance of the loan was due and payable and

the applicant demanded payment as such. The first respondent was advised that, failing payment of the sum of R7 041 008.38 as claimed,

the applicant would take appropriate steps under the Agreement, which might include cancelling the agreement and the applicant instituting proceedings against the first respondent.

23 Settlement discussions ensued between the Parties, but these settlement discussions proved to be unsuccessful.

24 In August of last year the applicant instituted these proceedings in which it sought the relief set out in paragraph 5 above.

The Applicant’s Causes of Action

25 The application was premised on the two undisputed factual averments regarding, in the first place, the demolition and rebuilding of the existing buildings on the Property and, secondly, the deregistration of the second respondent.

26 In relation to the first of these two, the applicant alleged that there had been a number of breaches of the Agreement, all of which can broadly be categorised as amounting to a diminution in the value of the existing property and hence an abrogation of the security held by the applicant in recompense for the loan.

26.1 Mr van Tonder (who appeared for the applicant) prepared very helpful heads of argument in which he neatly categorised these complaints under separate headings, which reflect the tenor of each of the applicant’s complaints. These headings are Prior written consent, Diminished value of the immoveable property, and Building progression.

26.2 In particular, the applicant relied on the first of these, being the first respondent’s failure to obtain the applicant’s prior written consent before he embarked on the demolition and rebuilding works.

26.3 The other two were, in short, that the value of the Property had been diminished as a realisable security because the building works were incomplete and the fact that the building works had apparently stalled for a number of years and showed no sign of being resumed.

26.4 The provisions of the Agreement relied upon by the applicant for these aspects of its claim are clauses 9.2, 9.9, 12.1, and 21.1 including 12.1.6 and 12.1.14.

27 As far as concerns the second event, being the deregistration of the second respondent, the applicant alleges that the fact of deregistration constituted a breach of the warranty given by the first respondent under clause 6 of the Agreement, more particularly clauses 6.1.2 and 6.1.10 thereof, which read as follows:

6.1 The Borrower represents that and warrants to the Bank as at the Effective Date and each day thereafter for the duration of the Term, each representation and warranty being material, that:

6.1.1 General: In regard to the Borrower and any Security Provider

. . .

6.1.1.2 It is, in the case of a company or close corporation, duly incorporated under the laws of the jurisdiction of its registered office and/or constituted under the laws of the jurisdiction of its creation (in the case of a trust) (the “Relevant Jurisdiction”) and this Agreement and each Security Document imposes legally binding obligations on the Borrower or relevant Security Provider, has (to the extent required by and possible in law) been perfected and is enforceable in accordance with its terms and is legal and enforceable in the Relevant Jurisdiction.

6.1.1.10If the Borrower and/or the Security Provider is a company that:

6.1.1.10.2 It is and remains registered with the Registrar of Companies in the Republic of South Africa and no proceedings have been instituted or are pending for its judicial management; . . .

28 The claim advanced by the applicant is that the fact of deregistration of the second respondent constituted a breach of the material warranty and undertaking as well as of the Suretyship which, when read together with clause 12.1 constitutes an Event of Default entitling it to call up the full amount of the loan.

29 For the sake of completeness, the relevant sub-clauses of 12.1 relied on by the applicant read as follows:

12.1 In relation to both the Borrower and/or Security Provider each of the events set out below is an Event of Default:

. . .

12.1.3 any representation, warranty, or statement made by or on behalf of the Borrower and/or Security Provider herein or in any Finance Documentation or in any certificate, statement, notice, opinion or other document given pursuant hereto or in connection herewith is not complied with or is or proves to have been incorrect in any respect when made or, if it has been made on any later date by reference to the circumstances then existing, would have been incorrect in respect of that later date;

12.1.4 the Borrower and/or Security Provider defaults in the due performance or observance of any of its covenants, undertakings, obligations, terms or conditions under the Finance Documentation or any other agreement to which the Borrower is a party, irrespective of whether the Bank is a party thereto or not;

30 These provisions are to be read with clause 12.3, which provides that

Subject to the provisions of the [National Credit] Act, on the occurrence of an Event of Default the Outstanding Amount will automatically,

without the need for notice, become immediately due and payable. Any failure by the Borrower to effect payment of the Outstanding Amount shall constitute a further Event of Default and to the extent permitted by the Act, the Bank shall thereon exercise all rights available to it under the Finance Documentation or at law.

31 The applicant argues, with reference to these provisions, that upon the deregistration of the second respondent there was an Event of Default under the Agreement both by virtue of the express provisions of clauses 6.1.12 and clauses 6.1.1.10 read with 12.1.3 as also because this constituted a breach of the Surety and thence also an Event of Default under 12.1.4.

32 The applicant argues further that upon the happening of an Event of Default the provisions of clause 12.3 are triggered, automatically setting in motion a chain of events that ultimately entitle the applicant to seek the relief that it does in the Notice of Motion.

33 When he moved the application before me on behalf of the applicant, Mr Van Tonder did so only with reference to the grounds set out in paragraphs 27 to 32 above. He refrained from asking for the relief on the basis of any of the grounds set out in paragraph 26 above. The relevance of this appears more fully below.

The Case for the Respondents

34 The respondents filed an answering affidavit in which they raised a number of arguments why the application should not be granted.

35 A significant portion of the answering affidavit contained reference to the settlement negotiations, which was relied on in support of certain settlement-specific defences, but also in support of other defences. Shorn of reference to the settlement negotiations and associated documents, the defences on which the respondents may permissibly rely are dealt with below.

36 Principal amongst these defences was a contention that provisions of the Agreement offended against public policy and the protection of property and dignity provisions contained in sections 25 and 10 respectively of the Constitution of the Republic of South Africa, 1996 (the Constitution). The impugned clauses are also said to offend against public policy because they give rise to gross unfairness and violate the principle that all contracts are concluded and are to be carried out in good faith.

37 The argument that was advanced in the written heads of argument filed on behalf of the respondents as well as in oral argument before me was that whilst the clauses impugned did not prima facie appear to violate public policy and the Constitution, the manner of their application or enforcement as against the first respondent did. With reference inter alia to decisions of the Constitutional Court[3] and the Supreme Court of Appeal[4] and the provisions of the Constitution, the respondents argued that this court could not permissibly grant relief that hinged upon the exercise of these impugned clauses.

38 I have absolutely no doubt that the respondents are correct in this respect. If relief claimed is premised on a contractual clause in circumstances where either the clause per se or the application or enforcement of that clause would offend against the Constitution, then the relief cannot be granted. Judicial

officers undertake to uphold and enforce the Constitution and to allow the enforcement of a contract in violation of its terms or in violation of public policy is thus impermissible.

39 In the answering affidavit and the heads of argument filed on behalf of the respondents, as well as in a very dignified argument presented to me by Ms Pillay, the respondents identified clauses 12.1.6 and 12.1.14 as being the offending clauses. The respondents impugned these clauses alone on the basis as set out above.

40 The two impugned clauses relate to the applicant’s alleged entitlement to cancel and call up the Agreement for the reasons described in paragraph 26 above. These two clauses are not, however, implicated in the application insofar as the relief claimed is premised on the deregistration of the second respondent.

41 Indeed, in the answering affidavit the respondents fail to deal with the issue of whether or not the applicant was entitled to exercise its rights under clause 6 read with clauses 12.1.3, 12.1.4, and 12.3. The applicant’s case in this regard has gone unanswered and unchallenged.

42 Similarly in both the respondents’ heads of argument and in oral argument before me, there was no attempt made to argue that the exercise of these clauses in these circumstances would offend against public policy or the Constitution. Save in very limited respects, which I set out below, the applicant’s case with regard to the deregistration issue is unanswered.

43 The respondents also advanced factual allegations with regard to the relief as described in paragraph 26 above, including the allegations that the applicant had prior knowledge of and, through the first respondent’s personal banker had impliedly consented to, the building works. The respondents also disputed the factual underpinning of the applicant’s allegations to the effect that the value of the security held by the applicant had been diminished as a consequence of the building works undertaken at the instance of the first respondent or that the applicant could reasonably have formed the view that it had. The respondents alleged that there had been no breach of the Agreement or any of the associated securities on the basis of the complaints advanced by the applicant in these regards.

44 In the heads of argument and in oral argument before me a number of these defences were elaborated upon, including with reference to decided cases and the principles applicable to the determination of claims for final relief in motion proceedings.

45 It bears repeating once again that, save in the limited respects dealt with below, there was no consideration of the deregistration arguments.

46 As interesting as all of these different issues are, once there is an unanswered basis for the relief sought, especially in circumstances where the applicant did not press the other bases before me, there is no need for me to consider any of these interesting issues or to make any finding thereon. That is because whichever way I might find in relation thereto it will have no effect on the outcome of the application.

47 In the premises, the legal issues with which these defences engage are entirely moot. I accordingly decline to address any of these legal arguments or defences.

48 I have referred above to how the deregistration issue was addressed in only very limited respects and those are these:

48.1 First, it was contended that the applicant had, in the proceedings before the Western Cape High Court, misrepresented the second respondent’s position in relation to ownership of the share portfolio account and the Cession. This may be so, I express no views on it, but it is wholly irrelevant to the cause of action now placed before me.

48.2 Secondly, it was argued that because the legal effect of the reregistration of the second respondent was that all rights and obligations were restored as though the deregistration never occurred, there had been no prejudice caused to the applicant and I should ignore the deregistration for purposes of this application.

48.2.1 This argument, which is not advanced in the answering affidavit, ignores the distinction between fact and law: it cannot be gainsaid that as a fact the deregistration occurred which, on the wording of the Agreement, constituted a breach and triggered an Event of Default and the concatenation of contractual consequences that followed.

48.2.2 I was concerned as to what was contained in the affidavits filed in the Western Cape High Court application with regard to whether or not the applicant might have said anything that constituted a waiver or abandonment or peremption of its right to rely on this basis for claiming. For that reason I raised the issue with counsel for the Parties and took the respondents up on their undertaking to place before me the affidavits in that application. I have since read the affidavit filed in that application and am satisfied that nothing of the like occurred: in the affidavit the applicant made clear that it was seeking the reregistration of the second respondent in order so as to be able to realise its security under the Agreement.

48.3 Thirdly, Ms Pillay argued that because the notice given under the NCA never mentioned deregistration the applicant could not now rely on it. It seems to me, with respect, that this argument equates a notice under the Act with a notice of cancellation under the Agreement, but it is plainly not the same thing. The statutory notification serves a very different purpose under section 129 read with section 130, which is to advise the consumer of the default and his/her rights to refer the credit agreement to a debt counsellor, alternative dispute resolution agent, consumer court or ombud with jurisdiction, with the intent that the parties resolve any dispute under the agreement or develop and agree on a plan to bring the payments under the agreement up to date.

49 It follows, from what I have said in response to these limited grounds of opposition that I do not consider there to be any merit in them and that, therefore, there is no good defence to the applicant’s claims under the Notice of Motion.

Rules 46 and 46A

50 There is only one other aspect that I was asked to consider on behalf of the respondents, which was an argument premised on Rules 46 and 46A of the Uniform Rules of Court.

51 In essence, what the respondents asked me to do was to exercise a discretion akin to that mandated under Rule 46A of the Uniform Rules of Court in considering whether or not to order the Property executable under the ambit of Rule 46. This in circumstances where it was common cause that, because the Property was not the first respondent’s (or anyone else’s, for that matter) primary residence Rule 46A did not apply.

52 The argument, as I understand it, is that because property rights are implicated I should apply to the inquiry before me the same considerations identified in the judgment of the Full Bench in FirstRand Bank Ltd v Folscher and Similar Matters 2011 (4) SA 314 (GNP).

53 I respectfully disagree with this submission. The considerations identified in the Folscher judgment, which flowed from the judgments of the Constitutional Court in Jaftha v Schoeman; Van Rooyen v Stoltz [2004] ZACC 25; 2005 (2) SA 140 (CC) and Gundwana v Steko Development 2011 (3) SA 608 (CC), are expressly limited to properties that are the primary residence of a respondent.[5]

54 The first respondent is not in the same position as the persons who the Constitutional Court in its judgments was concerned to protect. He is not someone who is needing of protection in the same way those persons are.

55 On his own reckoning, the first respondent is a man of not inconsiderable wealth. He has paid out of his own pocket amounts totalling many millions of Rands, both to purchase the Property as well as to erect a perimeter wall and thereafter to undertake building works totalling R15 million. He has done all of this at a leisurely pace and without requiring the Property as a primary residence.

56 Apartheid, as pernicious and thoroughly discreditable and discredited a system as it was, is not presently a factor in this application. Nor are sections 25 and 26 of the Constitution implicated by the application.

57 The total amount that he owes to the applicant is said in the answering affidavit to be no more than R5 947 083.20, of which an amount of R1.9 million stands available to be realised immediately to reduce this indebtedness to a little over R4 million. The first respondent has given no explanation for why he cannot secure a loan for this amount against the security of the Property, which he says is valued at R15.6 million.

58 Having considered carefully the allegations advanced on behalf of the respondents, I can see no good reason why the Property should not be declared executable under Rule 46 and in accordance with the rights ordinarily exercisable by a litigant in the position of the applicant.

59 I am accordingly not inclined to exercise any discretion under Rule 46 to refuse the relief prayed for by the applicant in this regard.

Conclusion

60 In all of the circumstances it is apparent that the applicant has succeeded before me in demonstrating an Event of Default entitling it to the primary relief that it claims in the Notice of Motion.

61 This entitles the applicant, in addition, to call upon the security provided by the respondents pursuant to the conclusion of the Agreement, including the realisation by the applicant of its rights under the Cession, the Suretyship, and the Mortgage Bond.

62 The Agreement read with the Mortgage Bond as well as the Suretyship provides for costs to be payable on the scale as between attorney and client. There is no reason for this stipulation not to be applied in the circumstances of this case.

63 Accordingly, I make the following order:

1. The application is granted;

2. The applicant is entitled to an order in terms of prayers 1 to 5 of the Notice of Motion dated 23 August 2018;

3. The respondents are ordered to pay the defendant’s costs, including the costs referred to in paragraph 15 (3) above, on the scale as between attorney and client.

Signed at Johannesburg on this the 16TH day of May 2019

BE LEECH AJ

ACTING JUDGE OF THE HIGH COURT, JOHANNESBURG

APPEARANCES

DATE OF HEARING: 14TH MAY 2019

DATE OF JUDGMENT: 17TH MAY 2019 2019

APPLICANTS’ COUNSEL: ADV L VAN RHYN van TONDER

APPLICANTS’ ATTORNEYS: LOWNDES DLAMINI ATTORNEYS

JOHANNESBURG

TEL: (011) 292-5777

RESPONDENT’S COUNSEL: ADV PILLAY

RESPONDENT’S ATTORNEYS: MKHABELA HUNTLEY ATTORNEYS INC

TEL: (011) 783-8020

[1] Venmop 275 (Pty) Ltd v Cleverlad Projects (Pty) Ltd 2016 (1) SA 78 (GJ).

All quotations are rendered verbatim, except to the extent that square brackets or ellipses are used to indicate an omission or insertion. Furthermore, footnotes have been omitted from quotations.

[2] Naidoo v Marine & Trade Ins Co Ltd 1978 (3) SA 666 (A).

[3] Barkhuizen v Napier [2007] ZACC 5; 2007 (5) SA 323 (CC) at [73] and [87].

[4] Sasfin (Pty) Ltd v Beukes 1989 (1) SA 1 (A) at 8I – 9B; Brisley v Drotsky 2002 (4) SA 1 (SCA) at [91]; Bredenkamp v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA) at [47] – [48].

[5] See Nkola v Argent Steel Group (Pty) Ltd 2019 (2) SA 216 (SCA) at [14].