THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case no: 98/10

DESERT STAR TRADING 145 (PTY) LTD
First Appellant
BRIDGING ADVANCES (PTY) LTD
Second Appellant

and

NO 11 FLAMBOYANT EDLEEN CC
First Respondent
CHRISTIAAN SCHOEMAN
Second Respondent
____________________________________________________________

Neutral citation:
Desert Star Trading v No 11 Flamboyant Edleen

(98/10) [2010] ZASCA 148 (29 November 2010)

BENCH:

NAVSA, CLOETE AND PONNAN JJA, EBRAHIM

AND K PILLAY AJJA

HEARD:

10 NOVEMBER 2010
DELIVERED:

29 NOVEMBER 2010

SUMMARY: Winding-up – locus standi of applicant as creditor – indebtedness disputed on bona
fide and reasonable grounds – winding-up order correctly refused.

______________________________________________________________________

ORDER

______________________________________________________________________

On appeal from:
North Gauteng High Court (Pretoria)(B van den Heever AJ sitting
as court of first instance)

The appeal against paragraphs 3 and 4 of the order of the court below is allowed
and the order is amended by the deletion of those paragraphs. Subject thereto
and paragraphs 5 and 6 being renumbered 3 and 4 respectively, the order of the
court below is confirmed.
Save as is set out in paragraph 1 hereof the appeal is dismissed.
The appellants are ordered to pay the respondents’ costs jointly and severally,
the one paying the other to be absolved.
______________________________________________________________________

JUDGMENT
______________________________________________________________________

PONNAN  JA
(NAVSA and CLOETE JJA and EBRAHIM and K PILLAY AJJA

concurring):

[1] ‘Neither a borrower nor a lender be’ is Polonius’ counsel to his son Laertes in
Shakespeare’s Hamlet (Act 1 Scene 3). ‘For loan’ as Polonius explains ‘oft loses both
itself and friend, [a]nd borrowing dulls the edge of husbandry’. Increased consumption,
a desire-based need for credit, attractive borrowing options and alluring methods of
repayment have all contributed to many of us not living our lives by that aphorism. Our
modern consumer driven society does however come at a cost. As recently as 2005 it
was reported that South Africa’s consumer debt crisis was costing the country around
R12 billion annually and that 40 per cent of households nationally were experiencing
financial difficulty as they were unable to meet loan repayments to micro lenders and

other service providers.1 The protection of the consumer has become a common feature
in many legal systems. Many countries have adopted consumer protection legislation to
regulate credit grantor–credit consumer relationships because they can and do give rise
to abuse and exploitation.2 Given the borrower’s weaker economic position3 (that is
usually why a loan is being sought), he or she is often helpless in the face of contracts -
particularly standard form contracts presented by the lender. To borrow from Voet:4
‘A needy debtor, pressed by tightness of ready cash, will readily allow any hard and inhuman terms to be
written down against him. He promises himself smoother times and better fortune before the day put into
the commissary term, and thus hopes to avert the harshness of the agreement by payment; though such
a hope, quite slippery and deceptive as it is, not seldom finds nothing at all to encourage it in the
aftermath.’

[2] Consumer credit legislation is usually the means by which credit grantor–credit
consumer relationships are regulated. The main purpose of consumer legislation is said
to be the protection of the consumer from exploitation.5 But as Monica L Vessio points
out:
‘What is equally, if not more important, is an actual balancing of the interests of both credit consumers
and credit grantors. The reason for the emphasis on this balance is that over-protecting the consumer
may result in the investor (credit grantor) withdrawing his funding from the consumer credit market, due to
the fact that the general administrative expenses of making credit available, no longer proves a lucrative
venture due to stringent consumer laws. Another feature of the over-protection of the consumer may be
the passing-on of administrative costs to the consumer. A subtle balance needs to be obtained. The risk
of over-protecting the consumer could prove detrimental.'6
That balance has been sought to be achieved in this country by the enactment of the
relatively recent National Credit Act 34 of 2005 (the NCA), which seeks, according to its
Preamble, inter alia to: ‘provide for the general regulation of consumer credit and
improved standards of consumer information; . . . prohibit certain unfair credit and

1 S Renke & M Roestoff ‘The Consumer Credit Bill – A Solution to Over-Indebtedness?’ 2005 (68)
THRHR 115.
2 Monica L Vessio ‘The Preponderance of the Reckless Consumer – The National Credit Bill 2005’ 2006
(69) THRHR 649.
3 R Zimmerman The Law of Obligations: Roman Foundations of Civilian Tradition (1990) 166.
4 Cited in Graf v Buechel 2003 (4) SA 378 (SCA) at 384A.
5 NJ Grové & JM Otto The Basic Principles of Consumer Credit Law 2ed (2002) 4.
6 Monica L Vessio op cit p 650.

credit-marketing practices; and to promote responsible credit granting and use and for
that purpose to prohibit reckless credit granting’.

[3] Against that backdrop I turn to the facts in this case. Unable to raise a loan from
any of the established banking institutions, but being desperately in need of financial
assistance, Mr George Ehlers (Ehlers) turned to small private lenders although as he
put it, he knew he 'was going to pay a heavy price for the loan'. One such private lender
to whom Ehlers turned during 2007 was Desert Star Trading 145 (Pty) Ltd (Desert Star),
the first appellant. Not being creditworthy he did not qualify for the loan that he sought.
The loan application was then revised and re-submitted in the name of his son, Mr
Eugene Ehlers (Eugene). The amount lent and advanced together with interest and
costs by Desert Star to Eugene was the sum of R859 600. On 8 June 2007 Eugene
acknowledged his indebtedness in writing to Desert Star and undertook to effect
repayment of that sum within twelve months of that date. The agreement provided that
in the event of the loan remaining unpaid after 8 June 2008 then the interest would be
recalculated with effect from the date of the agreement at the rate of 1.5% per week
compounded. As security for the loan, Ehlers in his capacity as the sole member of the
first respondent, No 11 Flamboyant Edleen BK (the CC), bound it as a surety and co-
principal debtor in favour of Desert Star in respect of the indebtedness of Eugene. And
as further security a security bond was registered in favour of Desert Star over an
immovable property, the sole asset of the CC. Eugene failed to repay the loan and as at
30 May 2008 his indebtedness to Desert Star stood at R1 253 000.

[4] In the meanwhile on 29 January 2008 Ehlers approached another small private
lender, the second appellant, Bridging Advances (Pty) Ltd (Bridging) for a loan. This
time the application was made in the name of his wife, Lèone Ehlers. A written
agreement was concluded in terms of which Bridging loaned and advanced the sum of
R160 053 (being R150 000 plus interest and costs) to Ms Ehlers. Here as well Ehlers
bound the CC as a surety and co-principal debtor in favour of Bridging for the
indebtedness of Ms Ehlers. And as further security a mortgage bond was registered in
favour of Bridging over the Ehlers family home which was registered in the name of Ms

Ehlers. Sporadic payments in the total sum of R41 000 were effected by the Ehlers to
Bridging, but given the annual interest rate of 42.2% applicable to the loan, the
outstanding balance had grown by 6 February 2009 to R205 363.55.

[5] On 30 May 2008 Desert Star caused a notice in terms of s 697 of the Close
Corporations Act8 to be served on the CC claiming payment of the outstanding amount
within 21 days. Bridging took a similar step on 3 February 2009. In each instance the s
69 notice pointed out that a failure to timeously comply with the statutory demand would
have the result that the CC would be deemed to be unable to pay its debts. In that event
each of the notices threatened as a consequence an application for the winding-up of
the CC. The notices went unanswered.

[6] On 17 July 2008 Desert Star launched the winding-up application threatened in
its s 69 notice. The CC took no steps to oppose the application and on 21 November
2008 the North Gauteng High Court (Pretoria) granted a provisional order of winding-up
and a rule nisi calling upon all persons concerned to show why a final order should not
issue. Thereafter Christiaan Schoeman (Schoeman), the second respondent, sought
leave to intervene in the application with a view to setting aside the provisional order. In
his affidavit he stated that Ehlers was a long-standing business associate, who had
advanced R 2.5 million to the CC for the purchase of its sole asset, the immovable
property and that the loan to the CC constituted Ehlers’ loan account in the CC which
had been ceded to him (Schoeman). He said:
'To assist G Ehlers I have taken cession of his loan account for value received and consequently I am a
creditor of the respondent in an amount of R 2.5 million. The Deed of Cession [is] annexed hereto marked
CS1.’
That was confirmed by Ehlers in his affidavit. I should perhaps add that neither the
existence nor the validity of the cession was disputed by either appellant.

7 Section  69 provides:
‘

(a) a creditor, by cession or otherwise, to whom the corporation is indebted in a sum of not less than two
hundred rand then due has served on the corporation, by delivering it at its registered office, a demand
requiring the corporation to pay the sum so due, and the corporation has for 21 days thereafter neglected
to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; . . .’
8 Act 69 of 1984.

[7] On 9 April 2009 Bridging also launched an application for the winding-up of the
CC, but given the fact that a provisional winding-up order had already issued at the
instance of Desert Star, took no further steps to advance its application. Instead on 3
August 2009 Bridging sought leave to intervene in Desert Star's application.

[8] On 25 November 2009 after certain further affidavits had been filed by the parties
and after hearing argument, Van den Heever AJ:
granted Schoeman leave to intervene in the winding-up application;
dismissed Bridging's application to intervene in the winding-up application;
declared the deed of suretyship concluded between Desert Star and the CC on
26 September 2007 unlawful and ab initio void;
cancelled Desert Star's rights arising from the deed of suretyship;
set aside the provisional winding up order; and
ordered Desert Star and Bridging to pay the CC’s and Schoeman's costs jointly
and severally such costs to include those occasioned by the employment of two
counsel.

[9] With the leave of the court below the appellants appeal to this Court against the
whole of the judgment and order of Van den Heever AJ.

[10] It can hardly be in dispute that, if the appellants are to qualify as persons having
locus standi to apply for the winding-up of the CC, it can only be on the ground that
each was a creditor (including a contingent or prospective creditor) of the CC within the
meaning of s 346(1)(b) of the Companies Act.9  Each of the appellants alleges that it is
indeed such a creditor. That is disputed. It thus becomes necessary to consider the
nature of the debt secured by the CC.

[11] The appellants in each instance relied upon a deed of suretyship. It is so that a
contract of suretyship is a separate contract from that of the principal debtor and his or

9 Act 61 of 1973 read with s 66(1) of the Close Corporations Act.

her creditor. It is however accessory to that main contract.10 Thus for there to be a valid
suretyship there has to be a valid principal obligation. Put differently, every suretyship is
conditional upon the existence of a principal obligation.11 For, as Nienaber JA put it
‘[g]uaranteeing a non-existent debt is as pointless as multiplying by nought’.12 It follows
that a surety is not liable to a person to whom the principal debtor is not liable.13 It is
well settled that the general rule is that a surety may avail himself or herself of any
defences that the principal debtor has save for those defences that are purely personal
to the principal debtor.14

[12] It is common cause that each of the underlying principal agreements is a credit
agreement as defined in s 8(4)(f) of the NCA and that the Act applies to them. The
thrust of the respondents’ case is that the deed of suretyship is ineffectual inasmuch as
the debtor identified therein is not indebted to the creditor by virtue of the fact that the
principal debt that it sought to secure is, in terms of the NCA, either ab initio void (solely
in the case of Desert Star) and in addition one that is liable to be set aside or
suspended.

[13] It is undisputed that when Desert Star contracted with Eugene it was not a
registered credit provider. The NCA required it to be. The effect of it not being so
registered according to Schoeman is that the agreement concluded between it and
Eugene is void ab initio. In that regard he states:
'It is clear from the provisions of Section 40(1)(a) and (b) read with Section 42(1) of the Act and
Government Gazette 28893 dated the 1st of June 2006 that [Desert Star] was required to register as
credit provider before or within 30 days from the date of the transaction between [it] and [Eugene].
I respectfully submit that considering the provisions of Section 4(1) read with Section 8(1)(a) of the Act
the credit transaction between [Desert Star] and [Eugene] concluded on the 8th of June 2007 is a credit
agreement within the Act and subject thereto.

10 Kilroe-Daley v Barclays National Bank Ltd 1984 (4) 609 (A) at 622I.
11 CF Forsyth & JT Pretorius Caney’s Law of Suretyship in South Africa 6ed (2010) 30.
12 African Life Property Holdings (Pty) Ltd v Score Food Holdings Ltd 1995 (2) SA 230 (A) at 238F.
13 Digest 46.1.16; Voet 46.1.3; Pothier Law of Obligations (Translated by WD Evans) 4.1.393-394.
14 Worthington v Wilson 1918 TPD 104 at 105; Standard Bank of SA Ltd v SA Fire Equipment (Pty) Ltd
1984 (2) SA 693 (C) at 695F-H.

The implication of not being registered is simple; the principal agreement of debt concluded between
[Desert Star] and [Eugene] is void. In this regard I draw the Honourable Court's attention to Section
40(4)15 and Section 89(1)(d) read with 89(5)(a) of the Act.
In terms of the Provisions of Section 89(5)(a)16 of the Act I submit that the Honourable Court is obliged to
declare that the credit agreement concluded between [Eugene] and [Desert Star] on the 8th June 2007 is
void ab initio.
The enforceability of the instrument of suretyship, which forms the basis of this application, is conditional
upon the existence of an enforceable debt in favour of [Desert Star] by [Eugene].
On this basis alone I submit that the application must fail and the Provisional Order be discharged.'

[14] In support of the additional contention that the agreements are liable to be set
aside or suspended, the respondents assert that both Desert Star and Bridging are in
common parlance ‘loan sharks’ and that each of the principal agreements constitutes
'reckless credit agreements in terms of the [NCA]'. The prevention of the granting of
reckless credit is an important lodestar of the NCA. Section 81(3) of the NCA precludes
a credit provider from entering into a reckless credit agreement with a prospective
consumer. To determine when exactly a credit agreement is a reckless one it is to s 80
that one must turn, which provides that:
‘(1)
A credit agreement is reckless if, at the time that the agreement was made . . .
(a)
the credit provider failed to conduct an assessment as required by section 81(2), irrespective of
what the outcome of such an assessment might have concluded at the time; or

15  Section 40(4) reads: 'A credit agreement entered into by a credit provider who is required to be
registered in terms of subsection (1) but who is not so registered is an unlawful agreement and void to the
extent provided for in section 89.'
16 Section 89(5) reads:‘If a credit agreement is unlawful in terms of this section, despite any provision of
common law, any other legislation or any provision of an agreement to the contrary, a court must order
that -
(a)
the credit agreement is void as from the date the agreement was entered into;
(b)
the credit provider must refund to the consumer any money paid by the consumer under that
agreement to the credit provider, with interest calculated -

(i)
at the rate set out in that agreement; and

(ii)
for the period from the date on which the consumer paid the money to the credit provider,

until the date the money is refunded to the consumer; and
(c)
all the purported rights of the credit provider under that credit agreement to recover any money
paid or goods delivered to, or on behalf of, the consumer in terms of that agreement are either -

(i)
cancelled, unless the court concludes that doing so in the circumstances would unjustly

enrich the consumer; or

(ii)
forfeit to the State, if the court concludes that cancelling those rights in the circumstances

would unjustly enrich the consumer.'

(b)
the credit provider, having conducted an assessment as required by section 81(2), entered into
the credit agreement with the consumer despite the fact that the preponderance of information available
to the credit provider indicated that─

(i)
the consumer did not generally understand or appreciate the consumer's  risks, costs or

obligations under the proposed credit agreement; or

(ii)
entering into that credit agreement would make the consumer over-indebted.’
Sections 81(2) and (3) in turn provide that:
'(2)
A credit provider must not enter into a credit agreement without first taking reasonable steps to
assess -
(a)
the proposed consumer's -

(i)
general understanding and appreciation of the risks and costs of the proposed credit, and

of the rights and obligations of a consumer under a credit agreement;

(ii)
debt re-payment history as a consumer under credit agreements;

(iii)
existing financial means, prospects and obligations; and
(b)
whether there is a reasonable basis to conclude that any commercial purpose may prove to be
successful, if the consumer has such a purpose for applying for that credit agreement.
(3)
A credit provider must not enter into a reckless credit agreement with a prospective consumer.'
In terms of s 83 (1) of the NCA a court, in any court proceedings in which a credit
agreement is being considered, may declare it to be a reckless one. If it does do so it
may in terms of s 83(2) set aside all or part of the consumer's rights and obligations
under that agreement or suspend the force and effect of it.

[15] Eugene is a student, with no employment or fixed earnings, who is not
possessed of any assets. Ms Ehlers stands on much the same financial footing. She is
a housewife, who also has no fixed employment, earns no salary and aside from the
matrimonial home, which is now the subject of a mortgage bond registered in favour of
Bridging, is possessed of no assets.  It is accordingly submitted by the respondents that
both Desert Star and Bridging failed to make any assessment of the financial status of
Eugene and Ms Ehlers respectively. Accordingly, so the submission goes, their ability in
each instance to service the loan was not investigated. Had such an assessment been
made as is required by s 81(2)(a)(i)-(iii) and (b) of the Act, so the submission proceeds,
Desert Star and Bridging would ineluctably have concluded that there was no
reasonable prospect of either repaying the amount loaned. In those circumstances it is

contended that the agreement was a reckless credit agreement which is hit by s 81(3) of
the NCA.

[16] On the view that I take of the matter it is not necessary that any firm conclusion
be reached at this stage on the respondents’ contentions. It suffices that the
indebtedness is disputed on bona fide and reasonable grounds for, as Corbett JA made
plain in Kalil v Decotex (Pty) Ltd:17
'In regard to locus standi as a creditor, it has been held, following certain English authority, that an
application for liquidation should not be resorted to in order to enforce a claim which is bona fide disputed
by the company. Consequently, where the respondent shows on a balance of probability that its
indebtedness to the applicant is disputed on bona fide and reasonable grounds, the Court will refuse a
winding-up order. The onus on the respondent is not to show that it is not indebted to the applicant: it is
merely to show that the indebtedness is disputed on bona fide and reasonable grounds.'

[17] Desert Star had caused a provisional sentence summons to be issued against
Eugene. In those proceedings Eugene challenged the validity and enforceability of the
acknowledgment of debt on which Desert Star sues. Bridging has also instituted
proceedings against Ms Ehlers. In her plea to Bridging’s summons Ms Ehlers contends
that the agreement upon which Bridging relies constitutes a reckless credit agreement.
She has also filed a claim in reconvention in which she seeks, inter alia, an order that
the agreement be declared a reckless credit agreement and that it be set aside. It goes
without saying that the correctness of the respondents’ contentions can be determined
in those proceedings. It follows that the appellants will not be remediless, for if those
proceedings were to be decided in their favour they could thereafter take steps to
enforce their rights flowing from the respective suretyship agreements.

[18] One final aspect remains. It has been conceded on behalf of the respondents
that the learned Judge erred in declaring the suretyship void ab initio and cancelling
Desert Star's rights flowing therefrom. It follows that that part of the order of the court
below cannot stand and it accordingly falls to be set aside. It was agreed before us that
that did not constitute substantial success on appeal and that the costs should follow

17 1988 (1) SA 943 (A) at 980B-D.

the result. For the rest the appeal is devoid of any substance and is accordingly
dismissed.

[19] In the result:
The appeal against paragraphs 3 and 4 of the order of the court below is allowed
and the order is amended by the deletion of those paragraphs. Subject thereto
and paragraphs 5 and 6 being renumbered 3 and 4 respectively, the order of the
court below is confirmed.
Save as is set out in paragraph 1 hereof the appeal is dismissed.
The appellants are ordered to pay the respondents’ costs jointly and severally,
the one paying the other to be absolved.

_________________
V M  PONNAN
JUDGE OF APPEAL

APPEARANCES:

For First Appellant:

F H Terblanche SC

J E Smit

Instructed by:

Strydom & Bredenkamp Inc

Pretoria

EG Cooper & Majidt Inc

Bloemfontein

For Second Appellant:

M C Erasmus SC

Instructed by:

Ben McDonald Attorney

Pretoria

Hill, McHardy & Herbst Inc

Bloemfontein

For First Respondents:

A Bester

Instructed by:

Wynand Viljoen Attorneys

Pretoria

Honey Attorneys

Bloemfontein

For Second Respondent:

A Bester

Instructed by:

Buurman Stemela Lubbe Inc

Pretoria

Honey Attorneys

Bloemfontein

SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

29 November 2010

STATUS

Immediate

Please note that the media summary is for the benefit of the media and does not form part of
the judgment.

Desert Star Trading v No 11 Flamboyant Edleen
(98/10) [2010] ZASCA 148 (29 November 2010)

Media Statement

Today the Supreme Court of Appeal (SCA) dismissed appeals by Desert Star Trading 145 (Pty) Ltd
(Desert Star) and Bridging Advances (Pty) Ltd (Bridging) against a judgment of the Pretoria High
Court refusing to place No 11 Flamboyant Edleen BK (the CC) under winding-up.

Unable to raise a loan from any of the established banking institutions, but being desperately in need
of financial assistance, George Ehlers turned to small private lenders although, as he put it, he knew
he 'was going to pay a heavy price for the loan'. One such private lender to whom Ehlers turned
during 2007 was Desert Star, the first appellant. Not being creditworthy he did not qualify for a loan.
The loan application was then revised and re-submitted in the name of his son, Eugene. The amount
lent and advanced together with interest and costs by Desert Star to Eugene was the sum of
R859 600. On 8 June 2007 Eugene acknowledged his indebtedness in writing to Desert Star and
undertook to effect repayment of that sum within twelve months. The agreement provided that in the
event of the loan remaining unpaid after 8 June 2008 then the interest would be recalculated with
effect from the date of the agreement at the rate of 1.5% per week compounded. As security for the
loan, Ehlers in his capacity as the sole member of the first respondent, the CC, bound it as a surety
and co-principal debtor in favour of Desert Star in respect of the indebtedness of Eugene. And as
further security a security bond was registered in favour of Desert Star over an immovable property,
the sole asset of the CC. Eugene failed to repay the loan and as at 30 May 2008 his indebtedness to
Desert Star stood at R1 253 000.

In the meanwhile on 29 January 2008 Ehlers approached another small private lender, the second
appellant, Bridging, for a loan. This time the application was made in the name of his wife, Lèone
Ehlers. A written agreement was concluded in terms of which Bridging loaned and advanced the sum
of R160 053 (being R150 000 plus interest and costs) to Ms Ehlers. Here as well Ehlers bound the
CC as a surety and co-principal debtor in favour of Bridging for the indebtedness of Ms Ehlers. And as
further security a mortgage bond was registered in favour of Bridging over the Ehlers family home
which was registered in the name of Ms Ehlers. Sporadic payments in the total sum of R41 000 were
effected by the Ehlers to Bridging, but given the annual interest rate of 42.2% applicable to the loan,
the outstanding balance had grown by 6 February 2009 to R205 363.55.
The SCA considered the nature of the debt secured by the CC. In each instance the appellants’ relied
upon a deed of suretyship. The SCA held for there to be a valid suretyship there had to be a valid
principal obligation. It follows that a surety is not liable to a person to whom the principal debtor is not
liable. It was common cause that each of the underlying principal agreements was a credit agreement
as defined in s 8(4)(f) of the National Credit Act. On behalf of the CC it was contended that when
Desert Star contracted with Eugene it was not a registered credit provider as required by the Act and
that in consequence the agreement concluded with him was ab initio void. In addition, it was
contended that both Desert Star and Bridging are in common parlance ‘loan sharks’ and that each of
the principal agreements constitutes reckless credit agreements that are liable to be set aside or
suspended in terms of the Act. The SCA held that an application for liquidation should not be resorted
to in order to enforce a claim which is bona fide disputed by a company. Consequently, where it is
shown on a balance of probability by a company that its indebtedness to the applicant is disputed on
bona fide and reasonable grounds, the Court will refuse a winding-up order.

--- ends ---