Sekepe Investments Pty Ltd and Others v Government Employees Pension Fund and Another (2643/2018) [2018] ZAGPPHC 785 (15 October 2018)

HIGH COURT OF SOUTH AFRICA

(GAUTENG DIVISION, PRETORIA)

(1) NOT REPORTABLE

(2) OF INTEREST TO OTHER JUDGES

(3) REVISED

CASE NO: 2643/2018

15/10/2018

In the matter between:

SEKEPE INVESTMENTS PTY LTD

First Applicant

ALCHAMY PTY LTD

Second Applicant

MAROBALO INVESTMENTS PTY LTD

Third Applicant

and

GOVERNMENT EMPLOYEES PENSION FUND

First Respondent

MAGAE MAKHAYA HOUSING (RF) PTY LTD

Second Respondent

JUDGMENT

1. In this application the applicants claimed from the first respondent payment to the second respondent of different amounts allegedly owed by the first respondent to the second respondent and owed by the first respondent to themselves in terms of a shareholders' agreement and three separate term loan facility agreements. The first respondent denied any obligation to pay the aforesaid amounts, inter alia, due to the fact that the applicants have failed to show that the conditions to which the payment of the loans were subject, have been fulfilled.

2. The background to the matter is briefly the following. On 23 December 2015 the first, second and third applicants and the first respondent entered into a shareholders' agreement to record and regulate the

terms and conditions applicable to their relationship as shareholders of the second respondent. The business of the second respondent was the development of affordable housing in South Africa.

3. Paragraph 10 of the shareholders' agreement provides for the financing of the second respondent. It was determined that all funding required by the company in respect of its activities or for purposes of developing its business or for any other working capital requirement, shall, firstly, be out of the profits generated by the second respondent from its business and other activities if applicable (clause 10.1.1.1); secondly, by way of loans to the company from financial institutions, commercial terms loans from any shareholder or its subsidiary or any other third party (clause 10.1.1.2); or, thirdly, and only insofar as may be agreed by the shareholders, by way of shareholder's loans to the second respondent in proportion to their shareholding in the second respondent (clause 10.1.1.3).

4. On 12 January 2016 the first, second and third applicants concluded three separate term loan agreements with the first respondent as lender. Save for the identity of the borrower in each instance and the amounts of the loans, the loan agreements were in identical terms. The purpose of the loans was to enable the applicants, as shareholders, to fund the aforesaid activities of the second respondent as envisaged in clause 10.1.1.3 of the shareholders agreement. The total amount earmarked by the first respondent for the funding of the second respondent's business was the amount of R500 000 000,00 which included the loans to the applicants.

5. The agreement was that each of the shareholders, i.e. , the three applicants and the first respondent, would contribute to the funding of the second respondent proportionally to their shareholding in the second respondent. The first respondent holds 25% of the shares in the second respondent and would thus fund the second respondent in the total amount of R125 000 000,00, being 25% of the aforesaid amount of R500 million. The first applicant holds 55% of the shares in the second respondent and would thus fund the second respondent in the total amount of R275 000 000,00, being 55% of the aforesaid R500 million. The second and the third applicants each holds 10% of the shares in the second respondent and would thus each fund the second respondent in the total amount of R50 000 000,00, being 10% of the aforesaid R500 million.

6. As mentioned, the applicants' contributions were to be funded by the first respondent from the aforesaid amount of R500 000 000, 00. In order to enable the applicants to fund the second respondent as aforesaid, the separate loan agreements were entered into between the first respondent, as lender, on the one hand, and the respective applicants, as borrowers, on the other hand. The first respondent would thus lend the aforesaid amounts to the respective applicants as their "contribution" of the funding of the second respondent. The applicants consequently did not use their own money to fund the second respondent. All the money that would be made available to fund the second respondent's business, i.e., the amount of R500 000 000.00, would therefore come from the first respondent. The amount so lent to the applicants would, however, not be paid to the respective applicants but by the first respondent directly to the second respondent.

7. If and when the second respondent requires capital to conduct its business, it looks to its four shareholders, being the applicants and the first respondent, and makes a loan call which is then utilised for its business operations. The applicants and the first respondent would contribute to the amount of such a loan call proportionally to their shareholding. In respect of a loan call the first respondent would thus contribute its 25% from its own pocket, although this part would be part of the total amount of R 500 million earmarked for the funding of the second respondent. The applicants would contribute their share of the loan call from the loans advanced by the first respondent to them in terms of the loan agreements, which make up the balance of the R500 million.

8. The present dispute between the parties relates to several shareholder loan calls made by the second respondent during September 2017. The first respondent refused to adhere to the loan calls and also refused

to advance the loan amounts to the applicants so that they were put in a position to adhere to the loan calls made.

9. The terms of the loan agreements are not in dispute between the parties.

Clause 6 of the loan agreements deals with the loan itself and the advance of the loan amounts to the applicants. Clause 6.2 of the loan agreements provides that the loan amount shall be available to be advanced to the applicants subject to clause 7.

10. In terms of clause 6.5 of the loan agreements the applicants, as borrowers, shall provide the first respondent with utilisation notices accompanied by a payment certificate or invoice and other documents which the first respondent, as lender, may reasonably require from time to time demonstrating the purpose for which the commitment will be used. According to clause 6.6, drawdowns in terms of the utilisation notice may only be made upon written confirmation to the satisfaction of the first respondent that all of the conditions precedent have been fulfilled.

11. As mentioned, clause 6.2 of the loan agreements provides that the loan amount shall be available to be advanced to the applicants subject to clause 7. Clause 7 contains the "Conditions for Utilisations".

12. Clause 7.1.1 contains a condition to the payment of the loan or any part thereof. The clause provides that a utilisation notice may not be given, and the first respondent shall have no obligation to advance a loan "unless the lender (the first respondent) has received all of the documents required for that particular utilisation as provided

for in the finance documents in the form and substance satisfactory to the lender. The lender shall notify the borrower (the applicants)

in writing as soon as reasonably practicable upon being so satisfied."

13. Clause 7.3 provides further conditions for the utilisation notice. The clause reads as follows:

"7.3 Further Conditions to Utilisation

7.3.1 Subject to the terms of this Agreement the Lender will only be obliged to advance the Loans if, in the opinion of the Lender, on the date of the Utilisation Notice and on the Utilisation Date:

7.3.1.1 the Repeating Representations are correct in all material respects;

7.3.1.2 no default is continuing or would result from the proposed Utilisation;

7.3.1.3 no Material Adverse Change (or event which is likely to result in a Material Adverse Change) in the Business or financial condition of the Borrower has occurred since the acceptance by the Borrower of the term sheet and the Utilisation Date that represented in its latest financial statements;

7.3.1.4 no investigation, proceeding or material litigation or litigation pending against the borrower;

7.3.1.5 no circumstance, change or condition (or continuation of any circumstance, change or condition) in the international or domestic debt, bank or capital markets, which in the Lender's reasonable opinion may prejudice the Lender's rights and obligations under the Finance Documents; or

7.3.1.6 no circumstance, change or condition which in the Lender's reasonable opinion, may materially change the ability of the Borrower to perform their obligations under the Finance Documents or causes invalidity or unenforceability or ineffectiveness or variation in the ranking of the Security granted or purported to be granted under the Finance Documents.

7.3.2 the Lender will only be obliged to advance the Commitment or portion thereof and the Borrower will only be entitled to submit a Utilisation Notice, in accordance with this Agreement if:

7.3.2.1 the provisions of clause 7.3 (Further Conditions to Utilisation) have been fulfilled and that on the proposed Utilisation Date;

7.3.2.2 the Utilisation Date (as applicable) shall be a date not less than 10 (ten) Business Days after receipt by the Lender of the Utilisation

Notice (as applicable); and

7.3.2.3 the proposed Utilisation Notice (as applicable) is within the Availability Period."

14. The repeating representations referred to in clause 7.3 are the warranties and representations provided for in clause 15 of the loan agreements. The following may be referred to. Clause 15.4 provides that the warranties and representations contained in clause 15 shall not in any way absolve the applicants from disclosing any fact that may affect the loan agreements. In this regard the first respondent submitted that in casu the applicants were in law required to disclose to the first respondent the fact that they have not prepared their financial statements and that they cannot continue to warrant and represent that their financial statements fairly represent their respective financial

positions.

15. Clause 15.17 of the loan agreements provides as follows:

"15.17 Financial Standards

15.17.1 The borrower has prepared its financial statements in accordance with generally acceptable accounting principles or in accordance with the IFRS as consistently applied.

15.17.2 The borrower's financial statements fairly represent the financial condition and operations of the borrower for the relevant financial year."

16. Clause 15.20 provides that the borrower has not breached any laws or regulations which breach has or might reasonably be expected to result in a material adverse change. A "material adverse change" is defined in the loan agreement as "an event, circumstance or matter (or combination of events, circumstances or matters) which, in the reasonable opinion of the lender, has or is likely to have a material adverse change on: the business, operations, property,

assets, condition (financial or otherwise) or prospects of the borrower; or the ability of the borrower to perform any of its obligations under any of the finance documents; or the validity or enforceability of any of the finance documents and/or the rights

and/or remedies of the lender under any of the finance documents; or the legality, validity and/or enforceability of any of the finance documents.

17. Clause 15.21 provides that no insolvency event has occurred or is threatened.

18. On a proper interpretation of clause 7.3 of the loan agreement the borrower (the applicants), is under an obligation to satisfy the first respondent that the repeating representations are correct in all material respects and that no default is continuing or would result from the proposed utilisation. It is only when the first respondent is of this opinion, that it will be obliged to advance the loans to the applicants.

19. It is clear that on the date of the utilisation notice and on the utilisation date, as required by clause 7.3.1, the first respondent was not of the opinion that the repeating representations were correct in all material respects. This resulted, inter alia, from the fact that the first respondent had not been provided with the applicants' financial statements; it had not been supplied with any information on the basis of which it could form the opinion that the applicants' financial statements had been prepared in accordance with generally acceptable accounting principles or in accordance with IFRS; it had not been provided with any information on the basis of which it could form the opinion that the applicants' financial statements fairly represented the financial condition and operations of the applicants for the financial year on which the utilisation notice was delivered; it had no information on the basis of which it could form the opinion that an insolvency event as defined in the loan agreements had not occurred in respect of each of the applicants; and the first respondent had not been provided with all the documents required for each of the utilisation notices in the form and substance satisfactory to it.

20. According to the first respondent it was also not of the opinion, as required in terms of clause 7.3.1 read with clause 7.3.1.3, that on the date of the utilisation notice, no material adverse change in the business

or financial condition of the applicants had occurred and that it was consequently not obliged to advance any loan amount to the

applicants. Although the utilisation notices delivered by the applicants confirmed, amongst others, that as at the date of each of the notices, no event of default has occurred which is continuing; all the warranties and representations recorded in the loan

agreements are and remained true and correct; and no change of circumstances exists which is reasonably likely to constitute a

material adverse event and no material deterioration has occurred in relation to the financial affairs or business prospects of the applicants, the first respondent regarded such statements to be factually incorrect and, consequently, that the first respondent was therefore not obliged to advance the loan amounts sought by the applicant.

21. The first respondent also referred to certain of the "Information Undertakings" contained in clause 16 of the loan agreements. Clause 16.2 provides that the applicants must provide the first respondent with copies of audited financial statements within 120 days of the date of each financial year. As on the date of the utilisation notices, the applicants had not provided the first respondent with their audited financial statements. This failure constituted a breach of the loan agreements.

22. Clause 16.3 of the loan agreements provide as follows:

"16.3 As soon as the same become available, but in any event within 30 days after the quarter end the borrower and/or the borrower's agent shall provide the lender with quarterly management accounts and quarterly Environmental, Social and Governance ("ESG") report as may be prescribed by the lender from time to time."

23. There was some dispute between the parties regarding the interpretation of clause 16.3. In my view it is clear that the reference to the words "as may be prescribed by the lender from time to time" would refer to the contents of the report and possibly the specific time of presentation thereof but that it does not affect the general obligation as stated in the first part of the clause.

24. Clause 16.4 requires the applicants to notify the first respondent of any default or material adverse change, and the steps, if any, being taken to remedy it promptly upon becoming aware of its occurrence and the steps, if any, taken to remedy it. It was submitted on behalf of the first respondent that despite the applicants' failure to comply with the aforesaid provisions of the loan agreements, they did not notify the first respondent of their failure in that regard.

25. It was submitted on behalf of the first respondent that the applicants have clearly not complied with their own obligations in terms of the loan agreements under which they seek specific performance. As such they have not fulfilled the conditions that may have entitled them to demand payment from the first respondent.

26. It was submitted on behalf of the applicants that the case of the first respondent hinges on two defences. The first is that the second respondent should have been an applicant in the application and that, in order to achieve this, the applicants ought to have employed the provisions of section 165 of the Companies Act, 71 of 2008, to bring a derivative action on behalf of the second respondent. The second defence is that because the applicants have failed to provide the first respondent with annual financial statements and quarterly management statements (including environmental, social and governance reports), they have not complied with their reciprocal duties in terms of the agreements of loan and, accordingly, the first respondent is not obliged to advance any amount to the applicants under the loan agreements.

27. It is only necessary to deal with the second alleged defence. I have already referred to the first respondent's reasoning for not acceding to the claim for payment. It was submitted on behalf of the applicants that the defence that the applicants did not comply with the conditions as set out in the loan agreements, does not accord with the true facts. In this regard reference was made to the response to a letter of demand by the applicants' attorney. It was submitted that the present defence was not raised at the time and that the issue of a lack of financial statements was only raised after the applicants had already launched the present application. The applicants also submitted that previous advances had been made

without being preceded by the first respondent considering the financial affairs of the applicants for the reason that the first

respondent had not been placed in possession of the financial statements of the applicant prior to requesting the previous advances. Consequently, so it was submitted, the first respondent by implication conceded that the provision of financial statements is not a requirement or precondition to the advancement of loans.

28. It was also submitted that the first respondent raised the defence of exceptio non adimpleti contractus but that the first respondent cannot succeed with this defence. It was submitted that this defence applies only to reciprocal obligations

which have to be performed simultaneously or to agreements where a plaintiff or applicant, by necessity, has to perform its obligations

first. Furthermore that the reciprocal duty must constitute a material obligation in relation to the counter obligations sought to be enforced. It was submitted that in casu no request for financial statements was made and that the financial statements of the applicants have no bearing upon any of the first respondent's risks.

29. The applicants further submitted that they have, subsequent to the first respondent's notice of intention to oppose this application, and on 9 February 2018, submitted their financial statements. Furthermore, that non-compliance by them with the provisions of the loan agreement does not excuse the first respondent from complying with its obligations under the shareholders agreement, i.e., to pay its portion to the second respondent.

30. The applicants also submitted that quarterly management statements as well as environmental, social and governance reports were only required to be provided to the first respondent in terms of clause 16.3, as may be prescribed by the first respondent from time to time, and which had not been done. Consequently, so it was submitted, the applicants were never in breach of that clause.

31. It was further submitted on behalf of the applicants that since the money are not paid to the applicants, but directly to the second respondent, there can be no question of any material adverse change in the position of any of the applicants. Furthermore that for the same reason the request for environmental, social and government reports makes no sense and is opportunistic. Also that the financial statements of each of the applicant are largely immaterial.

32. The claims by the applicants are all claims for specific performance. However, the applicants would only be entitled to such performance in the event of them having complied with all preconditions for the performance. It is clear from clause 7 of the loan agreement that the parties have agreed on very stringent conditions to be met before the first respondent becomes legally obliged to advance monies to the applicants and the second respondent.

33. The applicants have not complied with the initial conditions to utilisation in terms of clause 7.1 with the further conditions to utilisation in terms of clause 7.3 of the agreements of loan. In their replying affidavit the applicants suggest that the first respondent is not entitled to insist on full and proper compliance with the aforesaid obligations before it advances loan amounts to the applicants. The applicant suggest that this is so because previous advances had been made without the first respondent insisting that such preconditions be met.

34. In my view there is no merit in this submission. It has not been shown that the first respondent had waived the need for the applicants to comply with the relevant provisions of the loan agreements. Furthermore, clause 32 of the loan agreements provides as follows:

"No latitude, extension of time or other indulgence which may be given or allowed to by the lender in respect of the performance of any obligation hereunder or enforcement of any right arising from any finance document and no single or partial exercise of any right by the lender shall under any circumstances be construed to be an implied consent by the lender or operate as a waiver or a novation of, or otherwise affect any of the lender's rights in terms of or arising from any finance document or estop the lender from enforcing, at any time and without notice, strict and punctual compliance with each and every provision or term of any finance document."

35. The fact that the first respondent may not have insisted on some of these requirements in respect of the first advance, is irrelevant because the first respondent was entitled to dispense with such a requirement in respect of any particular advance.

36. The provisions of clause 7.4 of the loan agreements was inserted for the sole benefit of the first respondent and it is consequently entirely up to the first respondent to decide, from time to time, whether to strictly enforce all of the prerequisites for the advancement of the loan amounts. The same would apply to the repeating representations

referred to in clause 7.3 of the loan agreements which refer to the warranties and representations provided for in clause 15. On a proper interpretation of clause 7.3 it follows that it is the applicants' obligation to satisfy the first respondent that the repeating representations are correct in all material respects and that no default is continuing or would result from the proposed utilisation.

37. In addition, it remains the applicants' obligation to establish that the first respondent had been placed in possession of all the necessary information and documents to enable it to form the opinion that it is required to form, as contemplated in clause 7.3.

38. The applicants did not say that the first respondent had in fact been provided with all the documents and information that could have formed the basis for the first respondent forming the opinion that the repeating representations were correct in all material respects. Without the applicants having alleged that the first respondent had, as on the date of the utilisation notice been in possession of the aforesaid information and documents, it necessarily follows that

there can be no basis on which it could be contended that the first respondent had no reason not to form the requisite opinion.

39. There has also not been compliance with the provisions of clauses 16.2, 16.3 and 16.4 of the loan agreements which relate to the financial statements, the quarterly environmental, social and governance reports and notification of default or material adverse change. Regarding the financial statements the applicants submitted that they had delivered same on 9 February 2018. This is, however, a date long after the utilisation notices were issued. The representations had thus been made about financial statements which had in fact not yet been finalised. The quarterly reports had also not been supplied as required by clause 16.3. It was also not for the first respondent to have demanded performance in this regard. The onus is on the applicants to prove the satisfaction of preconditions before any amount can be claimed.

40. The submissions on behalf of the applicants that insistence on compliance with the preconditions makes no sense, is irrational, is immaterial, or would in the circumstances not show that compliance with the preconditions would have affected the first respondent in forming the required opinion, beg the question. The manner in which the applicants' case had been put before this court by way of Notice of Motion, does not allow for such a finding. The first respondent's denial of these allegations on behalf of the applicants is sufficient in the circumstances of this case, for the reasons put forward by the first respondent, to require strict compliance with the agreements between the parties. It is thus not possible for this court to adjudicate the merits or demerits of the preconditions set by the parties for the payment of the loans to the applicants. Factors such as the financial future of the applicants and their ability to repay the loans have, inter alia, to be considered by the first respondent. The applicants have not made out a case that the first respondent's insistence on strict

compliance with the agreements, can be ignored.

41. I agree with the submission on behalf of the first respondent that if the shareholders agreement is read with the loan agreements, the first respondent would not have an obligation to respond to a loan call unless and until it is obliged to pay the loan amounts to the applicants. The shareholders' loans shall be made simultaneously as provided for in clause 10.1.2.1 of the shareholders agreement.

42. For the applicants to have claimed successfully against the first respondent, it was for them to prove that the preconditions for the obligations which they seek to enforce, have been fulfilled. This the applicants have, in my view, failed to do. See Kate's Hope Game Farm Pty Ltd v Terblanchehoek Game Farm Pty Ltd 1998 (1) SA 235 (SCA) at 241C. Consequently, the conditions which must be satisfied before the first respondent becomes obliged to make the advancement of loan amounts to the applicants have not yet been satisfied and had not been satisfied as on the date on which the utilisation notices were delivered. That being the case, there is no basis upon which the claims of the applicants can succeed.

43. As far as costs are concerned, there is no reason why costs should not follow the event. The costs of two counsel should also be allowed.

44. In the result, the following order is made:

1. The application is dismissed with costs which costs shall include the costs of two counsel.

C.P. RABIE

JUDGE OF THE HIGH COURT