ALERT BANKING LAW UPDATE 28 FEBRUARY 2014 IN THIS ISSUE SECTION 129 OF THE NATIONAL CREDIT ACT REVISITED

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1 ALERT 28 FEBRUARY 2014 BANKING LAW UPDATE IN THIS ISSUE SECTION 129 OF THE NATIONAL CREDIT ACT REVISITED The Constitutional Court of South Africa delivered a judgment on 20 February 2014 in the matter of Kubyana v Standard Bank of South Africa Ltd (CCT 65/13) [2014] ZACC 1 (20 February 2014). Kubyana applied to that court for leave to appeal an earlier judgment of the North Gauteng High Court. THE EFFECT OF FRAUD ON THE REGISTRATION OF IMMOVABLE PROPERTY The subject matter of the relationship between Kubyana and Standard Bank was an Instalment Sale Agreement in respect of a motor vehicle. Kubyana had fallen into arrears with his payments in terms of that agreement. Standard Bank, acting in accordance with its obligations in terms of the National Credit Act, No 34 of 2005 (Act), sent a notice to Kubyana in terms of s129(1) of the Act, per registered mail and to Kubyana's chosen domicilium address, setting out, as it is required to do, Kubyana's statutory rights and also requesting him to pay his outstanding debt. The Post Office, on receipt of the registered letter, duly notified Kubyana that an item had been sent to him by registered mail and was awaiting his collection. No evidence was presented that Kubyana did not receive the Post Office's notification. Kubyana failed to collect the registered item. After the notice remained unclaimed at the Post Office, it was returned to Standard Bank. Standard Bank then proceeded to issue summons against Kubyana for the cancellation of the Instalment Sale Agreement and the return of the motor vehicle. Kubyana filed a special plea and alleged that the High Court had no jurisdiction to entertain the matter due to Standard Bank's alleged failure to comply with s129 of the Act. The High Court upheld Standard Bank's claim and found that it had no obligation to use additional means to THE LIMITS OF IMPLIED AUTHORITY - ABSA BANK LTD V MAHOMED (876/12) [2012] ZASCA 1 (20 JANUARY 2014) ensure that Kubyana received the s129 notice, over and above what Standard Bank did. The Supreme Court of Appeal dismissed Kubyana's application for leave to appeal against the judgment of the High Court. The Constitutional Court had to interpret s129 of the Act. It did so by looking at the purpose of the Act and by having due regard to the ordinary meaning and clear language of the relevant sections. It held that although the Act is directed at consumer protection, this does not mean that the Act is relentlessly one sided without any regard for the interests of credit providers. The promotion of equity in the credit market is to be achieved by balancing the respective rights and responsibilities of both credit providers and consumers. The application to the Constitutional Court was dismissed, with no order as to costs. Standard Bank did what was required of it. It brought the default of the Instalment Sale Agreement to the notice of continued

2 Kubyana in writing. There is no duty on a credit provider to bring the contents of the s129 notice to the consumer's subjective attention. To hold a credit provider to a higher standard would be to impose an excessively onerous standard of performance. Eugene Bester WHAT TO CONSIDER BEFORE ENFORCING AN ACCELERATION CLAUSE The recent judgment of Combined Developers vs Arun Holdings & 2 Others (6105/2013) [2013] ZAWCHC 132 (5 August 2013) is of critical importance in considering the enforceability of acceleration clauses in loan and other agreements. The applicant, Combined Developers, contended that the respondent, Arun, had committed a specified event of default as provided for in a written loan agreement concluded between them (Agreement). The Agreement contained an acceleration clause, which provided that all amounts owing by Arun would become due and payable to Combined Developers in the event of a 'specified event of default'. In terms of the Agreement, Arun's monthly repayment of instalments was due, together with interest, on the last day of each calendar year. It provided further that if Arun failed to pay Combined Developers any amount when due then Combined Developers would be entitled to demand payment and levy mora interest on amounts outstanding. In the event that no payment was forthcoming within three days of demand, a 'specified event of default' would have been deemed to have occurred, which would entitle Combined Developers to invoke the provisions of the acceleration clause. Combined Developers notified Arun three days prior to the due date for payment that payment was due in an amount R Arun failed to pay the instalment on the due date and three days later, Combined Developers sent an to Arun in which it is alleged they demanded payment of the amount. Arun immediately attended to payment but failed to pay mora interest, in an amount of R86.57, which had accrued as a result of its default. Accordingly, Combined Developers contended that Arun's failure to pay mora interest entitled it to recover all amounts owing - which had become immediately due and payable in terms of the acceleration clause as a result of Arun's default - in a total amount of R together with interest. The court considered whether Combined Developers' demand was in accordance with the provisions of the Agreement and found that it was ambiguous and did not constitute proper demand as contemplated by the Agreement. In addition, the court went on to consider whether the demand, if properly made, would be in accordance with public policy viewed through the prism of the Constitution. As part of its investigation, the court referred to the seminal decision of Sasfin (Pty) Ltd vs Beukes 1989 (1) SA 1 (A), in which the following was stated: "No court shall therefore shrink from the duty of declaring a contract contrary to public policy when the occasion so demands. The power to declare contracts contrary to public policy should, however, be exercised sparingly and only in the clearest cases lest uncertainty as to the validity of contracts resulted from arbitrary and indiscriminate use of the power. One must be careful not to conclude that a contract is contrary to public policy merely because of its terms (or some of them) offend one's individual sense of proprietary and fairness." While the court recognised the parties' respective contractual rights to include an acceleration clause in the Agreement concluded between them, it held that the implementation of the acceleration clause was 'draconian' and was in breach of public policy having regard to the Constitution. This was especially so having regard to the fact that only the applicant's interest claim for R86.57 (delivered in terms of an ambiguous demand) had not been paid, leading to the invocation of the acceleration clause for the full amount outstanding, a substantially larger amount. The judgment is a cautionary reminder to consider all relevant factors before electing to enforce one's rights in terms of an acceleration clause. Importantly, the judgment did not declare acceleration clauses per se unconstitutional; it merely found that Combined Developers had exercised their contractual right in conflict with public policy. The judgment is also a sober reminder to ensure that letters of demand comply with the provisions of the Agreement reached between the parties. Callum O'Connor THE EFFECT OF FRAUD ON THE REGISTRATION OF IMMOVABLE PROPERTY The case of Nedbank Ltd. v Mendelow NO (686/12) [2013] ZASCA 98 (5 September 2013) 2 Dispute Resolution Alert 28 February 2014 continued

3 reaffirms the principle that where there is no real intention to transfer ownership on the part of the owner or one of the owners, then a purported registration of transfer of immovable property has no effect. Mrs Emily Valente (Valente) was the owner of immovable property in Gauteng. In terms of her will, drawn up in 1994, her estate, which included the property, was left in equal shares to her two sons, Evan and Riccardo. On 23 January 2001, the property was sold to a company, U Valente Africa (Pty) Ltd, in which all three Valentes were directors. Valente died a week later. A bond was registered over the property in favour of Imperial Bank Ltd (which was acquired by Nedbank Ltd). It was common cause that Valente s signature on the deed of sale, and Evan s signature on a document entitled consent to sale, were both forged by Riccardo. The executors of Valente s estate sought to set aside the transfer of the property to the company and the mortgage bond registered in favour of Nedbank Ltd. Initially, the application was based on s341(2) of the Companies Act, No 61 of 1973, and s42(2) of the Administration of Estates Act, No 66 of The executors argued that the company had mortgaged its property while in the process of being wound up, and that the Master had signed a certificate permitting the transfer as a result of the fraudulent misrepresentation by Riccardo that the deed of sale was genuine. The High Court held that the Master had been fraudulently induced to sign a certificate permitting the transfer of the property to the company. The Master s certificate was therefore set aside and the Registrar of Deeds was ordered to transfer the property to the estate and to cancel the bond. The Supreme Court of Appeal stated that it is trite that where registration of a transfer of immovable property is effected pursuant to fraud or a forged document ownership of the property does not pass to the person in whose name the property is registered after the purported transfer. The court confirmed that there must be intention on the part of the owner/s to transfer ownership in order for the purported registration of transfer to have an effect. The court referred to and applied Legator McKenna Inc v Shea 2010 (1) SA 35 (SCA). In this latter case the court held that the abstract theory of transfer of ownership applies to immovable property, and, if there is any defect in the real agreement, ie the intention of the transferor to transfer and the intention of the transferee to acquire ownership of a thing, then ownership will not pass despite registration. The effect of this is that whilst a valid underlying agreement to pass ownership is not strictly required, there must be a genuine intention to transfer ownership. If the underlying agreement is however tainted by fraud or obtained by some other means that vitiates consent; so the court said, ownership will not pass. The court in this case found that when Riccardo forged Evan s signature on the consent to sale, it was clear that Evan did not intend to transfer ownership of the property and the power of attorney signed by the Master to permit the registration of transfer was vitiated by the fraud and the forgery. It was held that ownership did not pass to the company and accordingly the bonds registered in favour of the bank were not valid due to the fact that the company was not the owner of the property mortgaged. The court ordered that the executors were entitled to reregistration of the property in the name of the deceased estate and the bank s appeal failed. It must be noted that while the mortgage bond was cancelled, the court did not find that the loan agreement was tainted by the fraud, and therefore the bank would likely have a claim against the liquidated company to recover the amount outstanding on the loan. Hayley Laing THE LIMITS OF IMPLIED AUTHORITY - ABSA BANK LTD V MAHOMED (876/12) [2012] ZASCA 1 (20 JANUARY 2014) During 2009, it came to Absa's attention that one Mistry, with whom Absa had concluded an agency agreement, had perpetrated fraud at two Absa agencies. The respondents, who had purportedly concluded investment agreements with Mistry, were among Absa's clients claiming to be victims of the fraud and seeking compensation from Absa. 3 Dispute Resolution Alert 28 February 2014 continued

4 The respondents, in cahoots with Mistry, used fictitious names in concluding the investment agreements to conceal taxable funds which the respondents failed to declare to SARS. The respondents sought to hold Absa liable on the principle of ostensible authority (in that Mistry was purportedly acting as an agent of Absa). The court explained that the pertinent question before it was whether Mistry was authorised to represent Absa in concluding the unlawful investment agreements. In this regard, the court held that Mistry lacked both express authority (in terms of his agency agreement) and implied authority to conclude the unlawful investments agreements. The court's finding that Mistry had no implied authority was based on an enquiry into whether or not Mistry's conduct fell within his ordinary duties as agent of the bank. The court referred to the case of Glofinco v Absa Ltd t/a United Bank 2002 (6) SA 470 (Glofinco) where the Supreme Court of Appeal held: "The appointment by a bank of a branch manager [or, in this case, an agent] implies a representation to the outside world that the branch manager [or agent] is empowered to represent the bank in the sort of business (and transactions) that a branch of the bank and its manager [or agent] would ordinarily conduct." The court explained that the respondents could not have reasonably believed that engaging in fraudulent conduct fell within Mistry's functions or that Absa had authorised him to represent it in unlawful activity. The court has, through its decision, articulated the test which should be applied in determining whether a bank can be held responsible for an act of its agent (purportedly taken on its behalf). In this regard, a court will consider whether the agent has express or implied authority to conclude the transaction concerned. In the absence of express authority, a court will consider whether there is implied authority - in the sense that the transaction in question is one which the agent would ordinarily conclude in the scope of business. The court in the abovementioned case of Glofinco cautioned that internal limitations, of which third parties are unaware, will not negate liability of the bank. The court in Glofinco also explained that a bank cannot escape liability on the basis that despite the existence of implied authority, the bank would not have entered into the specific transaction in light of the specific circumstances of the case. Iram Hayath 4 Dispute Resolution Alert 28 February 2014 continued

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