Structured Mezzanine Investments (Pty) Ltd v Bestvest 153 (Pty) Ltd and Others (22698/2009) [2013] ZAWCHC 61 (31 January 2013)

Key Facts

Transaction Type

Issues

• Bestvest alleged that SMI breached the mezzanine agreement by refusing to advance the full R6.5m loan. The Court found no unreasonable exercise of SMI's contractual discretion under clause 5.2, which allowed it to withhold advances if unsatisfied with compliance (e.g., pre-sales targets). SMI's decision to halt funding during Bestvest's financial difficulties was deemed prudent and lawful, with no breach established.
• The sureties argued that the NCA applied to the accessory suretyship obligations, rendering them unenforceable due to SMI's lack of registration as a credit provider. The Court rejected this, citing precedents (e.g., Carl Beck Estates, Wizard Holdings) which established that the NCA does not apply to suretyships where the principal debtor is a juristic person with an annual turnover exceeding R1m. The suretyships were deemed separate from the mezzanine loan, which was a 'large agreement' exempt under the NCA.
• A factual dispute arose regarding the quantum of SMI's claim against Bestvest. The Applicant alleged that R5,205,994.97 was advanced, while the sureties contended only R5,080,594.93 was received. The difference of R125,400.04 was attributed to additional charges under the mezzanine loan (e.g., legal costs, bond registration, administration fees). The Court noted that the sureties challenged the conclusiveness of the Applicant's certificate, necessitating a resolution of the disputed amount as part of the payment application.

Holdings

• The court held that the National Credit Act (NCA) does not apply to the suretyships because the principal debtor (Bestvest) is a juristic person with an annual turnover exceeding R1 million, making the loan a 'large agreement' under the NCA. This was supported by case law, including Carl Beck Estates and Wizard Holdings, which confirmed that accessory obligations (suretyships) are subject to the NCA only if the principal obligation is a credit facility or transaction under the Act.
• The court dismissed the sureties' claim that SMI's breach of the mezzanine loan exempted Bestvest from liability. It emphasized that the sureties failed to demonstrate SMI acted unreasonably or that Bestvest suffered damages attributable to SMI's actions. No counter-claim for damages was lodged by Bestvest or the sureties.
• The court found that SMI's refusal to advance the full mezzanine loan amount was a reasonable exercise of its contractual discretion. SMI's decision was based on Bestvest's failure to comply with pre-disbursement conditions, including pre-sales requirements, and its financial instability. The court rejected the argument that SMI acted unreasonably or breached the agreement.

Remedies

• Interest on the amount of R153 160,00 at the rate of 1.25% per week, calculated from 24 October 2008 to 10 July 2009.
• Judgment is granted for payment of the sum of R153 160,00.
• Interest on the amount of R881 779,61 at the rate of 1.25% per week, calculated from 7 October 2008 to 10 July 2009.
• Costs of this application on the scale as between attorney and own client, including wasted costs from postponements on 16 May 2011, 12 August 2011, 19 October 2011, and 27 February 2012.
• Interest on the amount of R2 684 543,96 at the rate of 1.25% per week, calculated from 11 July 2008 to 10 July 2009.
• Judgment is granted for payment of the sum of R98 515,03.
• Judgment is granted for payment of the sum of R1 262 596,33.
• Interest on the amount of R98 515,03 at the rate of 1.25% per week, calculated from 11 November 2008 to 10 July 2009.
• Judgment is granted for payment of the sum of R881 779,61.
• Interest on the total at the rate of 1.5% per week, calculated from date of judgment to date of final payment, limited to R10 161 189,86.
• Judgment is granted in favour of the Applicant against the Second, Third and Fourth Respondents, jointly and severally, for payment of the sum of R2 684 543,96.
• Interest on the total at the rate of 1.5% per week, calculated from 2 November 2009 to date of judgment, limited to R10 411 989,94.
• Interest on the amount of R1 262 596,33 at the rate of 1.25% per week, calculated from 21 August 2008 to 10 July 2009.
• Interest on the total of the individual amounts at the rate of 1.5% per week, calculated from 11 July 2009 to 1 November 2009, limited to R10 161 189,86.

Contract Value

Legal Principles

• The court reiterated that sureties' obligations are accessory to the principal debtor's contract and share the same defences. This was confirmed by referencing precedents like Carl Beck Estates and Project Law Prop, which held that suretyship agreements are distinct from credit facilities and do not independently trigger National Credit Act (NCA) obligations.
• The court determined that the National Credit Act (NCA) does not apply to the suretyship because the principal debtor (Bestvest) is a juristic person with annual turnover exceeding R1 million, and the mezzanine loan qualifies as a 'large agreement' under the NCA. Consequently, the suretyship's enforceability was not subject to NCA provisions, despite being a credit guarantee under s8(5).
• The court emphasized that SMI's contractual discretion under the mezzanine loan must be exercised 'arbitrio bono viri' (the discretion of a good man), requiring reasonable and prudent decision-making. This principle was central to determining whether SMI's refusal to advance further funds constituted a breach. The court found SMI's actions were reasonable given Bestvest's financial instability and failure to meet pre-disbursement conditions.

Precedent Name

• Standard Bank of SA Ltd v Adam Essa and 2 Others
• NBS Boland Bank Ltd v 1 Berg River Drive CC; Deeb and Another v ABSA Bank Limited; Friedman v Standard Bank of S.A Limited
• Firstrand Bank Ltd v Carl Beck Estates (Pty) Ltd and Another

Key Disputed Contract Clauses

• Clause 5.2 explicitly stated SMI’s discretion to accept or reject notifications for further advances, with no right to challenge the decision. Clause 5.3 reinforced this by stating SMI was not obligated to advance funds if it was unsatisfied with the Borrower’s compliance. The court held these clauses valid, emphasizing that SMI’s discretion was not unfettered but required reasonable exercise under 'arbitrio bono viri'.
• Clause 5.1.1 required SMI to pay specific amounts to Bestvest on the signature date, while clause 5.1.2 permitted further advances only if Bestvest met conditions (e.g., pre-sales targets, written notification). Clause 5.2 granted SMI sole discretion to accept or reject notifications, and clause 5.3 clarified that SMI had no obligation to advance funds if unsatisfied with compliance. The court analyzed these clauses to determine whether SMI’s refusal to advance the full R6.5m constituted a breach.

Cited Statute

• National Credit Act, No. 34 of 2005
• General Law Amendment Act 50 of 1956

Judge Name

Passage Text

• Judgment is granted in favour of the Applicant against the Second, Third and Fourth Respondents, jointly and severally, the one paying the other to be absolved, for: [detailed sums and interest rates].
• In the circumstances I am of the view that it has not been shown that SMI exercised its discretion unreasonably thereby breaching the agreement. Having regard to the aforegoing there is therefore no basis to refuse SMI relief against the sureties in terms of their deed of suretyship executed on 1 July 2008.
• I am satisfied that there is no merit in the argument on the NCA point advanced in this matter by the sureties.

Damages / Relief Type

• Interest on total at 1.5% weekly from 2 November 2009 to judgment date, limited to R10 411 989,94
• Interest on total at 1.5% weekly from judgment date to final payment, limited to R10 161 189,86
• Interest on total amount at 1.5% weekly from 11 July 2009 to 1 November 2009, limited to R10 161 189,86
• Interest on R98 515,03 at 1.25% weekly from 11 November 2008 to 10 July 2009
• Judgment for R1 262 596,33 and interest at 1.25% per week from 21 August 2008 to 10 July 2009
• Judgment for R98 515,03 and interest at 1.25% per week from 11 November 2008 to 10 July 2009
• Judgment for R153 160,00 and interest at 1.25% per week from 24 October 2008 to 10 July 2009
• Costs of application on attorney-own client scale, including wasted costs from postponements
• Judgment for payment of R2 684 543,96 and interest at 1.25% per week from 11 July 2008 to 10 July 2009
• Judgment for R881 779,61 and interest at 1.25% per week from 7 October 2008 to 10 July 2009
• Interest on R1 262 596,33 at 1.25% weekly from 21 August 2008 to 10 July 2009
• Interest on R153 160,00 at 1.25% weekly from 24 October 2008 to 10 July 2009
• Interest on R881 779,61 at 1.25% weekly from 7 October 2008 to 10 July 2009
• Interest on R2 684 543,96 at 1.25% weekly from 11 July 2008 to 10 July 2009