Silvermoon Investments 278 CC v Slipknot Investments 777 (Pty) Ltd and Another (2142/2012) [2012] ZAECGHC 106 (28 December 2012)

IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE DIVISION – GRAHAMSTOWN)

CASE NO: 2142/2012

DATE HEARD: 20/12/2012

DATE DELIVERED: 28/12/2012

SILVERMOON INVESTMENTS 278 CC ....................................................APPLICANT

and

SLIP KNOT INVESTMENTS 777 (PTY) LTD ...................................1st RESPONDENT

THE REGISTRAR OF DEEDS,

KING WILLIAMS TOWN ...................................................................2nd RESPONDENT

JUDGMENT

ROBERSON J:-

[1] On 19 July 2012 Pickering J granted the following order against the first respondent:

“1. Respondent is ordered within 3 days of the date of this order to take all steps necessary and to sign all documents necessary to cancel the first covering mortgage bond B1793/2008 in favour of the Respondent and to take all steps and to sign all documentation to effect such cancellation, against the provision by or on behalf of the Applicant of an irrevocable bank guarantee for payment to the Respondent of the sum of R2,540,757,05.

2. In the event of Respondent failing to comply with paragraph 1 above within such period as set out therein, the deputy sheriff for East London be and is hereby authorized to take all steps and to sign all documentation necessary to effect the cancellation of the first covering mortgage bond B1793/2008 in favour of the Respondent.

3. Respondent is ordered to pay the costs of this application including such wasted costs as were occasioned by the application standing over on 10 July 2012 to 11 July 2012 and such wasted costs as were occasioned by the postponement of the application on 11 July 2012, and including also the costs of two counsel.”

[2] On 27 July 2012 Pickering J dismissed the first respondent’s application for leave to appeal against his order. On 23 October 2012 the Supreme Court of Appeal dismissed the first respondent’s application for leave to appeal against the order. The first respondent has now applied to the Constitutional Court for condonation for the late bringing of an application for leave to appeal, and for leave to appeal against the order. This application was served on the applicant on 4 December 2012.

[3] The present application is brought by the applicant in terms of Uniform Rule 49 (11), for leave to execute the order. In this judgment I shall refer to the applicant as “Silvermoon” and to the first respondent as “Slipknot”.

[4] In the application before Pickering J, it was common cause that during 2007 Silvermoon and Slipknot entered into a loan agreement, in terms of which Silvermoon borrowed, as bridging finance, the sum of R2 059 000.00. As security for this loan, a mortgage bond was registered in favour of Slipknot, over certain immovable property owned by Silvermoon. It was further common cause that Silvermoon failed to repay the loan within the time stipulated in the agreement.

[5] Silvermoon is presently developing these mortgaged immovable properties as a residential township, with the purpose of developing freehold housing units for onward sale, at a profit, to individual home buyers. The development is at an advanced stage. According to Silvermoon, since December 2011 it wished to settle the amount outstanding on the loan and required from Slipknot a calculation of such amount, in order that the mortgage bond could be cancelled and so that Silvermoon could “explore and finalise” a loan agreement for the sale of its immovable property and the development thereon.

[6] A dispute arose about the amount owing by Silvermoon, the essence of the dispute being whether or not the in duplum rule applied to the calculation of the amount owing. According to Silvermoon, the amount owing at the time of the hearing was R2 540 757.05, an amount calculated by a chartered accountant. According to Slipknot, the amount owing was in excess of R94 million.

[7] Anxious to achieve cancellation of the mortgage bond, Silvermoon approached this court on an urgent basis, seeking the relief which Pickering J ultimately granted. It alleged that on 12 June 2012 its sole member had entered into an agreement of sale of its interest in Silvermoon, and that a portion of the purchase price was payable on cancellation of the bond, by way of a bank guarantee in favour of Slipknot. It was a term of this sale agreement that if the bond was not cancelled by 31 July 2012, the guarantee would be withdrawn and the agreement would be null and void ab initio. On 25 June 2012 Slipknot’s former attorney informed Silvermoon that Slipknot intended enforcing its claim in full.

[8] A number of points in limine were raised by Slipknot, in which Pickering J found no merit. His judgment in respect of the substantive defence was as follows:

“In this regard Mr. Ford submitted, with copious reference to authority that the in duplum rule had now become a true anachronism the original role of which, namely the protection of small-scale individual borrowers, had been taken over by the National Credit Act 34 of 2005. He submitted, inter alia, that the rule clearly offended against the right to freedom of contract and that, in view of the general

development of the in duplum rule and the changes in society in general, the historical reasons behind the adoption of the rule no longer applied and the purpose of its limitation had in effect fallen away. He stated that the rule had been designed to protect ordinary, powerless and often ignorant credit seekers against greedy credit providers. In the modern context, and in particular in the present context where one commercial entity borrowed money from another, both in pursuit of profit, the original purpose of the rule was no longer being served. He submitted, with reference to the Constitution, that the common law should be developed by refusing to allow debtors such as the applicant to hide behind the provisions of the rule in order to avoid their contractual obligations. He submitted, if I understood him correctly, that if I was prima facie of the view that there was merit in his submissions then respondent should be entitled to hold onto its security in the form of the mortgage bond against the reasonable possibility that a Court would in due course declare the rule to be in conflict with the

Constitution or otherwise redundant.

Interesting as these submissions may be, it is not necessary to deal with them. Even were such submissions eventually to be upheld in another forum Mr. Smuts, in my view, is correct in his submission that it is inconceivable that any court, in abolishing the rule, would order that it be struck down retrospectively. To do so would be to create utter chaos in the commercial world. The fact remains that the rule is presently of application and that I am obliged to give effect to it. Respondent’s contrary contention is untenable.”

[9] After dealing with a number of further issues, Pickering J found as follows:

“I am indeed satisfied that applicant has established a clear right to the relief sought by it. It has tendered to furnish respondent with an irrevocable bank guarantee for the full amount of its indebtedness to respondent which respondent refuses without any legal

justification to accept. Applicant has no other adequate alternative remedy nor does respondent suggest it does other than to contend that applicant should pay the “correct amount due by it” of R94 million.”

[10] Rule 49 (11) provides as follows:

“Where an appeal has been noted or an application for leave to appeal against or to rescind, correct, review or vary an order of a court has been made, the operation and execution of the order in question shall be suspended, pending the decision of such appeal or application, unless the court which gave such order, on the application of a party, otherwise directs.”

[11] At the outset, Mr. Smuts SC, who appeared for the applicant, submitted that because the application for leave to appeal to the Constitutional Court is out of time, there was in fact no application for leave to appeal, and consequently, as I understood the argument, execution is not suspended. I prefer not to decide this point, but would merely observe that the application to the Constitutional Court, although two-fold, is still an application for leave to appeal as contemplated in Rule 49 (11).

[12] In South Cape Corporation (Pty) Ltd v Engineering Management Services (Pty) Ltd 1977 (3) SA 534 (AD), Corbett JA said the following at 545C-G:

“The Court to which application for leave to execute is made has a wide general discretion to grant or refuse leave and, if leave be granted, to determine the conditions upon which the right to execute shall be exercised (see Voet, 49.7.3; Ruby's Cash Store (Pty.) Ltd. v Estate Marks and Another, supra at p. 127). This discretion is part and parcel of the inherent jurisdiction which the Court has to control its own judgments (cf. Fismer v Thornton, 1929 AD 17 at p. 19). In exercising this discretion the Court should, in my view, determine what is just and equitable in all the circumstances, and, in doing so, would normally have regard, inter alia, to the following factors:

(1) the potentiality of irreparable harm or prejudice being sustained by the appellant on appeal (respondent in the application) if leave to execute were to be granted;

(2) the potentiality of irreparable harm or prejudice being sustained by the respondent on appeal (applicant in the application) if leave to execute were to be refused;

(3) the prospects of success on appeal, including more particularly the question as to whether the appeal is frivolous or vexatious or has been noted not with the bona fide intention of seeking to reverse the judgment but for some indirect purpose, e.g., to gain time or harass the other party; and

(4) where there is the potentiality of irreparable harm or prejudice to both appellant and respondent, the balance of hardship or convenience, as the case may be.”

[13] The founding affidavit in the present application was deposed to by Attorney Malcolm Webb, duly authorised by Silvermoon. He pointed out various delays in the further steps taken following Pickering J’s dismissal of the application for leave to appeal. Slipknot initially omitted to include this latter order in its application to the Supreme Court of Appeal, and only requested a transcript of the oral judgment some 41 days after it lodged its application. The Supreme Court of Appeal condoned the late filing of the order. Owing to a delay in the office of the Registrar of the Supreme Court of Appeal, notification of the dismissal of the application for leave to appeal only reached Silvermoon on 13 November 2012. On that day Webb wrote to Slipknot’s attorneys, seeking implementation of Pickering J’s order. On 16 November 2012 Slipknot’s attorneys informed Webb that they had been instructed to apply to for leave to appeal to the Constitutional Court and were not to hand over the various documents required to effect cancellation of the bond. As already mentioned, the application for leave to appeal to the Constitutional Court was served on Silvermoon on 4 December 2012. Webb expressed the view that Slipknot’s conduct in approaching the Constitutional Court is mala fides, vexatious, and merely for the purpose of delay, in order to render nugatory the effect of Pickering J’s order.

[14] In my view, the time periods mentioned are not sufficient to support an inference that Slipknot’s conduct is male fide or vexatious. While it could have acted with more expedition in requesting a transcript of Pickering J’s order, this delay was to some extent explained by the fact that the application for leave to appeal was heard in Port Elizabeth, and the court file had accordingly moved from Grahamstown. It is significant that the Supreme Court of Appeal condoned this omission. The delay between the notification of the Supreme Court of Appeal’s decision and the service of the application to the Constitutional Court, is also not unduly long. Slipknot’s explanation for this delay was that its Counsel, who had represented it all along, was not immediately available to draw the papers, owing to existing commitments.

[15] In dealing with the prejudice to Silvermoon, Webb stated as follows:

“The urgency referred to in the Applicant’s previously filed affidavits has not been alleviated, and has in fact been compounded.

After the application for special leave to appeal to the Supreme Court of appeal had been filed, the investors to whom the member’s

interest in the Applicant had been sold, undertook on legal advice to await the outcome of the application for special leave before seeking to terminate the agreement of purchase and sale. Understandably, once that application had failed, they expected to receive transfer of the member’s interest and the cancellation of the bond over the property, which the suggestion of a further court process now threatens to delay, and they have furnished strong indications of their wish to withdraw from the existing contractual arrangement. In addition, by virtue of the delay occasioned by the litigation to the development of the property, the Applicant has had to undertake to pay rental on behalf of two prospective purchasers, to refund three deposits to prospective purchasers, and to deal with attempts on behalf of ten purchasers to cancel their agreements of purchase and sale with the Applicant, six of whom have effected such cancellation. Furthermore, telephone calls are received daily from angry purchasers who have not received transfer on their properties, while the viability of the development is increasingly threatened by virtue of the fact that fresh calls for tenders in respect of civil engineering and other infrastructural work have to be sought by virtue of the passage of time, and these are all under pressure by virtue of inflation, the increase in the fuel price and the reduction in the value of the rand. The quotation for the civil engineering work and electrical reticulation has increased to R1 139 516.67, and

that only if the work were to proceed immediately.”

[16] Webb further stated that following Pickering J’s order, Silvermoon transferred the amount determined as owing into Slipknot’s

attorneys’ trust account. The payment was returned but Slipknot is in possession of a bank guarantee for this amount.

[17] It was submitted on behalf of Slipknot that Silvermoon’s assertions of prejudice were not sufficiently supported by evidence. For example, there was no copy of a communication from the purchaser of the member’s interest threatening to withdraw from the agreement, no date was mentioned by which withdrawal would take place, no indication was given of the existing quotations for engineering and electrical work, and there was no indication of how suspension of execution had caused cancellations, or threats of cancellation, of sales of units.

[18] There is some merit in these submissions. However I am of the view that cumulatively all these factors mentioned by Webb are sufficient to indicate considerable prejudice. It was not in dispute that the sale of the member’s interest took place in June 2012, with a time limit imposed for the cancellation of the bond. Webb is dealing with Silvermoon’s affairs and would have knowledge of the purchaser’s attitude. He knew that the purchaser followed legal advice in agreeing to wait for the decision of the Supreme Court of Appeal. If the development cannot be completed, and transfer of individual units cannot take place, inherent in such a situation is the risk of purchasers of units becoming impatient and threatening to cancel, and in fact cancelling.

[19] On the other hand, Slipknot has the security of a guarantee for the amount which was decided as owing. Of course, if the bond is cancelled, and it is ultimately decided that the in duplum rule did not apply to the calculation of the amount owing, then Slipknot would lose its security for at least a portion of the R94 million it claims is owing. The value of the immovable property now exceeds the amount of the guarantee.

[20] This brings me to the prospects of success of an appeal to the Constitutional Court. The founding affidavit in the application for leave to appeal to the Constitutional Court contains Slipknot’s argument concerning the in duplum rule. The constitutional issue raised is that the rule offends the right to equality contained in s 9 of the Constitution. Slipknot’s argument (a repetition to some extent of the submissions made before Pickering J) can be summarised as follows: the rule applies to all transactions, regardless of the identity of the borrower, and a party cannot waive the benefit of the rule. The rule accordingly constitutes an absolute and complete limitation on the right to equality and to contract freely insofar as interest is concerned. Historically the rule was designed to protect ordinary, powerless and often ignorant credit seekers against greedy credit providers. In the modern context, and in particular, as in the present case, when one commercial entity borrows from another, both in pursuit of profit, the original purpose of the rule is no longer being served. The court a quo should have exercised its powers in terms of ss 8, 39 and 172 of the Constitution and struck the rule down, thereby not allowing debtors such as Silvermoon to hide behind the provisions of the rule in order to avoid their contractual obligations. Silvermoon is not one of the class of persons whom the rule was designed to protect. It was aware of the rule when it entered into the loan agreement and intended to take advantage of the rule, notwithstanding that to do so would defeat the parties’ contractual intentions. Furthermore, the person acting on behalf of Silvermoon, in concluding the contract with Slipknot, used his friendship with a director of Slipknot to obtain extensions of time for repayment of the loan. This was a deliberate scheme to escape Silvermoon’s obligations in terms of the loan.

[21] If this latter part of the argument means that it was never intended that the in duplum rule would apply to the loan, then I disagree. At the time the loan agreement was entered into, the rule applied. As was said by Maya AJA (as she then was) in Ethekwini Muncipality v Verulam Medicentre (Pty) Ltd [2006] 3 All SA 325 (SCA) at paragraph [23]:

“Furthermore, whilst it may be so that the in duplum rule is founded on public policy considerations, it now forms part of positive law. Consequently, public policy is not the criterion in deciding whether or not the rule applies. As was correctly submitted on the appellant’s behalf, the rule is not qualified so that it applies only where the debtor cannot cope with the burden of interest exceeding the capital sum. The Woulidge case1 (supra) should accordingly not be understood to mean that the identity of the debtor (ie whether the debtor requires protection from exploitation)

determines whether or not the in duplum rule is to be applied.”

[22] This reference to public policy not being the criterion, effectively deals with Slipknot’s further argument to the effect that public policy is a question of fact and that a finding that a dispute of fact had been raised in the application before Pickering J, would have had the result that Silvermoon had failed to establish a clear right.

[23] I am therefore in respectful agreement with Pickering J’s conclusion that he was bound to apply the rule.

[24] While there has been criticism of the rule, its purpose is not only to protect debtors but is also to enforce “sound fiscal discipline on creditors”.2 Moreover the rule only applies to arrear interest, and its operation is suspended pendente lite. Slipknot’s assertions of inequality before the law are not persuasive in the light of these factors. It is also significant that the Legislature saw fit to amend and extend the rule by enacting s 103 (5) of the National Credit Act 34 of 2005.3

[25] However I prefer not to express myself further on the prospects of the Constitutional Court declaring the rule to be constitutionally

invalid. I intend to deal only with the prospect of that Court declaring the rule to be constitutionally invalid without restricting

the retrospective effect of such declaration. I am in respectful agreement with Pickering J’s view that if a court were to

abolish the rule, it is inconceivable that it would do so retrospectively.

[26] With regard to retrospectivity, Slipknot found support in the decision in Masiya v Director of Public Prosecutions, Pretoria and Another (Centre for Applied Legal Studies and Another, Amici Curiae) 2007 (5) SA 30 (CC). In that case the Court developed the common law by extending the definition of the common law crime of rape to include non-consensual penetration of a penis into the anus of a female. This development of the common law was applicable only to conduct which took place after the date of judgment.

[27] As stated by Nkabinde J in Masiya, the Court was not dealing with its powers under s 172 of the Constitution because no order of constitutional invalidity was made.

S 172 (1) of the Constitution provides:

“(1) when deciding a constitutional matter within its power, a court

(a) must declare that any law or conduct that is inconsistent with the Constitution is invalid to the extent of its inconsistency; and

(b) may make any order that is just and equitable, including-

(i) an order limiting the retrospective effect of the declaration of invalidity; and

(ii) an order suspending the declaration of invalidity for any period and on any conditions, to allow the competent authority to correct the defect.”

[28] In the present matter, an order of constitutional invalidity is sought. In my view a retrospective order would not be just and equitable. It must be remembered that the in duplum rule is based on public policy and seeks to prevent the exploitation of debtors by creditors. I mention again that it is significant that s 103 (5) of the National Credit Act has extended the rule. The rule is therefore not one which should be struck down retrospectively because it is inherently unjust.4

[29] The rule will have been implemented in the past to serve its purpose of preventing exploitation of debtors. Persons, including those in the position of Slipknot, will have regulated their affairs in the knowledge that the rule applied and would have concluded transactions accordingly. Innumerable transactions presently subject to the rule are concluded daily throughout the country. Judgments will have been given and matters settled, based on the application of the rule. A declaration of invalidity with retrospective effect only on transactions such as the one in the present matter, namely between persons of equal bargaining power pursuing a profit, would be arbitrary and difficult to implement. In all these circumstances, Pickering J’s use of the word “chaos” was no exaggeration. Retrospective application of a declaration of invalidity would in my view not be in the interests of justice.

[30] Taking into account the relative prejudice to the parties if leave to execute is not granted, as well as the prospects of success on appeal, in the exercise of my discretion I am of the view that it would be just and equitable to grant leave to execute.

[31] The general rule in these applications is that costs should be costs in the appeal. It was submitted on behalf of Silvermoon that I should grant a punitive order of costs against Slipknot because of the delays in the matter and because Slipknot is in de facto contempt of a court order. I have already expressed my views on the delays and am not inclined to depart from the general rule. I am however of the view that the costs of two counsel are justified.

[32] The following order is made:

[32.1] The Applicant is granted leave to implement and execute forthwith, the order granted in the court a quo under case no. 2142/2012 on 19 July 2012.

[32.2] The First Respondent is compelled to deliver to the Applicant’s attorneys of record the title deeds and bond registration documentation relating to and contemplated in the first covering mortgage bond B1793/2008, within 24 hours of service of this order.

[32.3] The costs of the application are to be costs in the appeal, such costs to include the costs of two counsel.

______________

J M ROBERSON

JUDGE OF THE HIGH COURT

Appearances:

For the Applicant: Adv I Smuts SC, together with Adv G Dugmore, instructed by Whitesides Attorneys, Grahamstown.

For the Respondent: Adv B L Boswell, instructed by Wheeldon Rushmere & Cole, Grahamstown.

1Commissioner, South African Revenue Service v Woulidge [2002] 2 All SA 199 (SCA)

2Ethekweni Municipality v Verulam Medicentre (Pty) Ltd (supra) at paragraph [9]

3Nedbank and Others v National Credit Regulator and Another 2011 (3) SA 581 (SCA) at paragraph [38]

4Compare for example Gumede v The President of the Republic of South Africa and Others 2009 (3) SA 152 (CC) where one of the reasons for not limiting the retrospective effect of an order confirming a declaration of invalidity of ss 7 (1) and (2) of the Recognition of Customary Marriages Act 120 of 1998 was: “The discrimination they spawn is so egregious that it should not be permitted to remain on our statute books by limiting the retrospective operation of the order we are to make, or even by suspending the order of invalidity to allow parliament to rectify the error.” (Per Moseneke DCJ at paragraph [51])