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Bonds, Covering Bonds and wonky Agreements

Panamo Properties 103 v Land and Agricultural Development Bank of SA [2015] JOL 33259 (SCA)

It started off as a Loan

Panamo Properties 103 (Pty) Limited, Panamo ("Panamo") had approached the Land and Agricultural Development Bank of South Africa, the respondent ("LandBank") for a loan for the purpose of acquiring and developing property. In 2007, the parties entered into a loan agreement whereby LandBank lent Panamo the money sought, which would allow Panamo to acquire certain agricultural properties and then develop a township.

In 2010, LandBank instituted action against Panamo, claiming enforcement of the contract, but after Panamo launched a counter-claim, LandBank amended its particulars of claim, seeking a declaration that the contract was invalid. It contended that the loan was unauthorized and void in that it did not comply with section 3 of the Land and Agricultural Development Bank Act 15 of 2002. It contended further that the agreement was in contravention of the provisions of section 23 which prohibits the investment of funds by LandBank in unlisted companies, trusts, business undertakings or ventures without the prior written approval of the Minister responsible for agriculture; and that it was in contravention of section 66 of the Public Finance Management Act 1 of 1999.

The Loan was concluded in breach of the governing Legislation

However, LandBank contended that despite the invalidity of the loan agreement, the mortgage bond over Panamo’s property remained valid and enforceable. On the basis that it was not within the power of LandBank to conclude a transaction for the development of a township on agricultural land, the court a quo held that the loan agreement was invalid, the court concluded that the bond was valid despite the fact that the contract pursuant to which it was passed was not. The bond agreement was held to be a separate agreement of hypothecation whose validity was not dependent upon the validity of the anterior transaction.

Lewis, JA, writing for the supreme Court of Appeal, held that the acquisition of agricultural land for the purpose of transforming it into an urban township was not in keeping with the objects of the Act. The loan was therefore clearly invalid in terms of the Act. While not every contravention of a statute results in invalidity of the contravening act or contract, where its recognition would defeat the purpose of the statute, the act or contract will be void. Sections 66 and 68 of the Public Finance Management Act provide that where a public institution, as LandBank is, enters into a transaction that is not authorised by legislation governing the institution, it will not be bound by the transaction. As a result, the loan agreement between the parties could not be enforced.

Unlawful conduct does not always invalidate an obligation

While LandBank contended for invalidity, it nonetheless argued that the mortgage bond registered in its favour was valid and constituted real security for a possible enrichment claim.

The question of whether the bond secured a claim for enrichment was to be determined by construing the terms of the bond itself, and was dealt with in a concurring judgment under the hand of GORVEN AJA. In that judgment, it was confirmed that the mortgage bond was registered pursuant to the loan agreement. The issue was whether it was enforceable in the face of a finding that the underlying loan was void.

Was the bond accessory to the Loan, or merely to an obligation?

Because the fundamental nature of a mortgage bond is the provision of security for an underlying obligation, all mortgage bonds are accessory to another obligation. The bond was initially passed to secure the performance of Panamo under the loan. Its terms made it accessory to the loan. Once the loan was set aside as invalid, unless the bond was accessory to a different obligation than the loan, it had to suffer the same fate as did the loan and be subject to cancellation. However, even though the loan was void, that did not in itself mean that there was no obligation secured by the bond.

LandBank stated that it had a claim for unjust enrichment under one of the condictiones. While this Court did not have to make a finding in that regard, it was held that an enrichment claim gives rise to indebtedness, and there seemed no reason why a mortgage bond cannot secure a debt arising from an enrichment claim. The question was whether that kind of debt was secured by this particular bond. The bond was a covering bond, and could therefore afford security for more than obligations arising under the loan. It was not necessarily extinguished merely because the loan was void. Undertaking an interpretation of the relevant clauses of the bond, the court held that the bond afforded security for a claim for money due under one of the condictiones.

The appeal was dismissed with costs.

With thanks to LexisNexis

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

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