[Civil Trial HH 225-16]

February 24 and March 30, 2016


Contract law  –  Scheme of arrangement  –  A compromise  –  Effect of.

Contract law  – Surety  –  Circumstances under which extension to principal discharges surety  –  Effect of contrary provision in contract  –  Unlimited guarantee  –  What amounts to.

Contract law  –  Surety  –  Excussion of principal debtor  –  When court will not insist on.

Defendants stood surety in respect of a loan advanced to a company in which they were directors. The company defaulted in its obligations. After the default, the company approached the High Court and asked it to sanction a scheme of arrangement with its creditors. The order was granted and a scheme instituted.

The scheme comprised the terms and conditions in the facility letter in terms of which the company had been advanced the loan. The effect of the compromise was that the banking facility was substituted with the scheme of arrangement. The terms of the facility letter were incorporated into the scheme terms. The terms of the agreement were carried forward. Under the scheme of arrangement, the security was reinstated and the terms of the facility letter did not alter the debt. The outcome of the scheme was that a joint venture agreement between the company and two South African registered companies came into existence. The reorganisation and the scheme of arrangement resulted in the continued existence of the company albeit in a different form. The major changes made were with respect to the joint venture and the extension of time within which the obligation was to be met. The guarantees given by the defendants provided that they could be called upon even in the face of a compromise, set-off and/or novation.

The company however, defaulted on its obligations in terms of the scheme of arrangement. Plaintiff brought an application to set aside the scheme on the basis of fundamental breach. At the same time it sued the directors on the basis of the guarantees and suretyship deeds they had given. In defence to the claim, the directors argued inter alia that the compromise had novated the old debt and they had consequently been discharged of their obligations.

Held, that a scheme of arrangement is a court approved compromise or arrangement. A compromise arrangement may result in a reorganisation of the structure, operations and/or financial obligations of a company.

Held, further, that an extension of time to pay granted by the creditor to the principal debtor may in appropriate circumstances discharge the surety. If the agreement between the creditor and principal debtor amounts to a novation, the surety is discharged. An extension of time granted however, after the debt has become due cannot be regarded as novation and the surety is not discharged. Where the extension is granted by agreement of the creditor and principal debtor before the debt has become due, without the consent of the surety, the surety is usually released.

Held, further, that in a case where a debt has novated and a court is faced with a surety or guarantee agreement which contains a clause with an undertaking by the surety to be bound in the event of novation, set-off or any other defense, it becomes unnecessary for the court to consider what the effect of the novation is. The duty of the court remains simply to interpret the clause to see if it has the effect of binding the surety or guarantee in the face of novation, set-off or in those particular circumstances.

Held, further, that there is nothing in our law that precludes an agreement where parties to a guarantee exclude the right to novation. This approach embodies the concept of freedom of parties to contract. The right of novation can be excluded by agreement between the parties. The law allows parties to include any terms in a contract that they consider appropriate for as long as they are not illegal. This means that a guarantor’s common law right of novation may be expressly excluded by the terms of a guarantee. A creditor seeking to rely on the terms of a guarantee to exclude a guarantor’s right to novation is required to show that the parties agreed and intended to exclude that right. A guarantor cannot successfully plead novation when the right to novation has been explicitly excluded under the terms of the guarantee. The court cannot interfere with the terms of the contract, to do so will have the effect of defeating the commercial objective and purpose of the guarantee and would be out of touch with business practice and reality.

Held, further, that an unlimited guarantee is one where the guarantor is asked to guarantee all amounts due and owing in connection with the debt or other indebtedness owed to the lender. It is not limited as to time or amount. A guarantee covers either general indebtedness or may be a once off cover for a single advancement of a specific loan advanced to the principal debtor, in which case it is a single transaction guarantee and covers no others. A guarantee may cover the past, future and present liabilities of a principal debtor. Such a guarantee is an unlimited guarantee and covers a continuing debt. It is wide enough to cover not only facilities existent at the time of the execution of the guarantee but also facilities to be entered into in the future.

Held, further, that the purpose of the benefit of excussion is not to make matters difficult for the creditor but to oblige him in the first instance to seek payment from the principal debtor. If the debtor cannot pay, it would be harmful to the creditor to require him to spend money and incur delay in excussing the debtor. If the objective facts point to an inability by a principal debtor to pay, the courts will not insist on excussion.

Cases cited:

Ballenden v Salisbury City Council 1949 (1) SA 240 (SR), referred to

Beer v Roach 1950 (4) SA 370 (C), referred to

Coca Cola Financial Corporation v Finstat International Ltd [1998] QB 43, referred to

Continental Illinois National Bank and Trust Company of Chicago v Papanicolaou (“The Fedora”) [1986] 2 Lloyds Rep 441, referred to

Estate Liebenberg v Standard Bank of South Africa Ltd 1927 AD 502, referred to

Lange Accessories (Pvt) Ltd v Fisher and Another 1974 (1) SA 61 (R), referred to

Mothle v Mathole 1951 (1) SA 785 (T), referred to

Muchabaiwa v Grab Enterprises (Pvt) Ltd 1996 (2) ZLR 691 (S), referred to

United Asian Bank Bhd v Negeri Sembilan Development Corp [1989] 1 MLJ 230, referred to

Zimbabwe Football Association v Mufurusa 1985 (1) ZLR 244 (H); 1985 (3) SA 1050 (ZH), discussed

Legislation considered:

Companies Act [Chapter 24:03], s 191

Article cited:

1985 Annual Survey of South African Law 160, 169-171

Books cited:

Caney LR, Forsyth CF and Pretorius JT Caney’s Law of Suretyship (4th edn, Juta & Co Ltd, Cape Town, 1992)

Christie RH Business Law in Zimbabwe (1st edn, Juta & Co Ltd, Cape Town, 1998)

Forsyth CF and Pretorius JT Caney The Law of Suretyship (6th edn, Juta & Co Ltd, Cape Town, 2010)

Harms LTC Amler’s Precedents of Pleadings (7th edn, Lexis Nexis, Durban, 2009)

Visser, C (General Editor), Pretorius JT, Sharrock R, Van Jaarsveld M Gibson’s Mercantile and Company Law in South Africa (8th edn, Juta & Co Ltd, Cape Town, 2004)

T Mpofu, for the plaintiff

A Mugandiwa, for the defendants


The facts of this matter are common cause. At the hearing of the matter, the parties agreed that their dispute does not depend for its resolution on the making of findings of fact. They agreed to proceed by way of stated case.

The plaintiff issued summons against the defendants claiming monies lent and advanced to United Builders Merchants (Pvt) Ltd (“UBM”) in respect of which the defendants acted as guarantors and co-principal debtors. On 26 August 2013,the plaintiff and UBM entered into a composite loan facility and guarantee agreement in terms of which the plaintiff granted a medium term loan facility of US$ 937 000 together with a medium term bank guarantee facility of US$ 63 000 to provide UBM with working capital. Mortgage bonds were registered over properties belonging to the defendants to secure the facilities. The bank guarantee would expire on 31 December 2013 with the loan facility expiring on 31 December 2016 and all outstanding amounts would become due and payable on 31 December 2013. The first to fifth defendants who were directors of UBM signed guarantees in favor of UBM.

Subsequent to the signing of the loan facility and guarantee facility, the plaintiff which was insolvent and struggling to service its creditors, made an application in terms of s 191 of the Companies Act [Chapter 24:03] for leave to convene a scheme of arrangement meeting. An order was granted on 27 November 2013 and a scheme meeting held on 16 December 2013. A scheme of arrangement between UBM, its members, and creditors was approved with the plaintiff as the secured creditor. An operational and turnaround plan was agreed to. It was agreed at the scheme meeting that the terms of the secured creditor’s scheme of arrangement were to be the terms contained in the facility letter dated 26 August 2013. The plaintiff would grant UBM a composite facility in the sum of US$ 1 000 000. The banking facility was to expire on 31 December 2016. The terms of payment were extended from 31 December 2016 to 31 December 2019. The main features of the scheme of arrangement were a joint venture agreement between UBM and P and L Hardware (Pty) Ltd and the Zimbabwe Conglomerate through a vehicle called UBM P and L (Pvt) Ltd (The Joint Venture Company). The scheme of arrangement was essentially a restructuring and reorganisation of UBM’s debts. UBM proceeded to draw down on the facility in the sum of US$ 1 000 000 and failed to pay back the amounts so drawn down. The plaintiff has applied for the setting aside of the scheme of arrangement. The plaintiff has also instituted proceedings against the defendants for the discharge of their obligations as guarantors and seeks payment of US$ 1 141 260.36 jointly and severally against all the defendants.

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