THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

Case no:  120/2001
REPORTABLE

In the matter between:

CAPE PRODUCE CO (PORT
ELIZABETH) (PTY) LTD

Appellant

and

DAL MASO, RM, NO

First respondent

SCHOEMAN, PN, NO

Second respondent

Before:
Smalberger ADP, Harms, Cameron, Navsa and
Mpati JJA
Appeal heard: Monday 11 March 2002
Judgment:
Wednesday 27 March 2002
_______________________________________________________
Subordination agreement – Effect on liability of surety – Available to
surety even though neither a ‘defence in rem’ nor a ‘defence in
personam’ – Wording of suretyship however excluding reliance upon
agreement – In addition, agreement inapplicable because no other
creditors in favour of whose claims main creditor’s claim could be
subordinated

JUDGMENT

_______________________________________________________

CAMERON JA:

[1] This appeal concerns amongst other issues the effect on a
surety’s liability of an agreement that subordinates a creditor’s
claims against a principal debtor to those of other creditors by
postponing its enforceability.  At issue is a debt of  R15 million.  It
is owed to a company associated with the appellant, which took
cession of its claim against two sureties (for brevity I refer to the
appellant itself as ‘CPC’, and to the respondents in the appeal, the
executors of the estates of the sureties, who both died after the
action was instituted, as ‘the sureties’).  The suretyships at issue
date from October 1988 and July 1996.  In them, the sureties
bound themselves jointly and individually as sureties and co-
principal debtors in full for the debts of the principal debtor, a
private company called Alberti Livestock (‘Alberti’).  In about
October 1996, CPC became the sole shareholder in Alberti.  At
that stage, Alberti was hugely indebted to CPC, which had over a
period of years in effect been keeping it solvent.  In December
1996, CPC and Alberti concluded an agreement in which CPC’s
claims against Alberti were subordinated to those of other
creditors.  The agreement starts by recording Alberti’s substantial
liability to CPC, and that CPC has ‘agreed to assist’ it by
subordinating its claims in favour of Alberti’s other creditors.  Its
further material terms are:
‘2.
In order to assist [Alberti], CPC, agrees, subject to the limitation imposed in 4,
that –
2.1
It subordinates for the benefit of the other creditors of [Alberti], both

present and future, so much of its claim(s) against [Alberti] as would
enable the claims of such other creditors to be paid in full;
2.2
The claims of such other creditors of [Alberti], both present and future,
will rank preferent to the subordinated claim of CPC against [Alberti].
2.3
…
3.  It is the intention of the parties that this agreement constitutes a contract for the
benefit of other creditors of [Alberti], both present and future, and that the benefit
shall be capable of express or implied acceptance by any or all such creditors who
may then enforce any term of this agreement.
4.  The [subordination] referred to in 2 shall remain in force and effect for so long only
as the liabilities of [Alberti] exceed its assets, fairly valued, and shall lapse
immediately upon the date that the assets of [Alberti] exceed its liabilities and shall
not, except by further agreement in writing, be reinstated if thereafter the liabilities of
[Alberti] again exceed its assets, provided that the liabilities of [Alberti] shall be
deemed to continue to exceed its assets unless and until the auditor of [Alberti] has
certified in writing that he has been furnished with evidence which reasonably
satisfies him that the liabilities do not exceed the assets.
5. CPC hereby agrees that until such time as the assets of [Alberti] fairly valued exceed
its liabilities, and the auditor’s certificate referred to in 4 has been issued, it shall not
be entitled to demand or sue [for] repayment of the whole or any part of the said
amount owing to it by [Alberti] and set-off shall not operate in relation to the
subordinated claim in respect of any debts owing by it now or in the future, provided
that if the auditor of [Alberti] shall certify in writing that he has been furnished with
evidence which reasonably satisfies him that the amount by which the liabilities of
[Alberti] exceed its assets, such excess portion of the subordinated claim as is
specified in the said certificate shall be released from the operation of this
agreement”

[2] CPC instituted action against the sureties for payment of some
R24 million.  The first defendant opposed the action; the second
abided the court’s decision.  At the trial it was agreed that if the
action succeeded judgment should be in the amount of R15
million.  In the trial court the action was dismissed; and an appeal
to the Full Court was unsuccessful.  The defence that succeeded

at first instance before Joffe J as well as before the Full Court
(van Oosten J, Claassen and Mlambo JJ concurring)1 was that
the subordination agreement deferred CPC’s right to claim against
Alberti, with a corresponding benefit to the sureties.  Hence CPC’s
claim against them was premature.  CPC’s argument that the
subordination agreement was inapplicable because there were no
liabilities to be subordinated – a fact the evidence clearly
established – was rejected in both courts.  This Court granted
CPC special leave for a further appeal in terms of s 20(4)(a) of the
Supreme Court Act, 59 of 1959.

Does a subordination agreement create either a defence in rem or
a defence in personam?
[3] In both the trial court and on appeal to the Full Court it was held,
invoking the common law distinction between defences relating to
the principal debtor personally (defences in personam), and those
relating to the nature, validity or existence of the debt itself
(defences in rem), that the subordination agreement constituted a
defence available to the sureties.  This Court considered the
distinction in Ideal Finance Corporation v Coetzer,2 where it held
that a surety was not entitled to the protection from certain types
of execution orders that a statute extended to a ‘buyer’ under
legislation regulating hire purchase transactions because the
protection the statute afforded the principal debtor was personal,
and did not affect the nature, validity or existence of the creditor’s
[1] 1 Reported:  2001 (2) SA 182 (W).
2 1970 (3) SA 1 (A).

claim or cause of action.3  In Standard Bank of SA Ltd v SA Fire
Equipment (Pty) Ltd and Another,4 Rose-Innes J analysed the
distinction, in my view accurately, in a passage that has often
been cited and followed, thus:
‘The contrast between defences in rem and in personam thus is that those in rem attach
to the claim or cause of action or the obligation itself and arise from the invalidity,
extinction or discharge of the obligation itself, whoever the debtor may be; those in
personam arise from a personal immunity of the debtor from liability for an otherwise valid
and existing civil or natural obligation. In the case of a defence in personam the obligation
and debt remain in existence – the creditor may prove his claim in the insolvency or
liquidation, the creditor may await the end of the moratorium, the minor's obligation
remains a natural obligation, but in each case the debtor is personally immune from a
claim. In the case of a defence in rem the law does not recognise the obligation or debt
even as a natural obligation (illegality) or no obligation in fact came into existence or it
was vitiated on a ground justifying its termination (mistake, misrepresentation, duress) or
the obligation has ceased because it has been discharged or otherwise extinguished
(payment, compromise, novation, judgment). It is in this sense that the defences in rem
are said to adhere to or arise upon the obligation itself, regardless of the person of the
debtor.’

[4] The distinction between defences in personam and in rem as
received from our common law authorities and interpreted and
applied in our case law does not, however, seem to me to be
helpful in determining the respective positions of creditor, principal
debtor and surety when a subordination agreement is at issue.
The reason is that the dichotomy between the two types of
defence does not seem readily applicable to the situation a
subordination agreement creates, which is not to extinguish the
creditor’s claim but to render it unenforceable during the
subsistence of a condition.  The present case illustrates the point.
At the time the subordination agreement was concluded in
December 1996, the debt was valid and enforceable against both
Alberti and the sureties.  What the subordination agreement did
[1] 3 1970 (3) SA at 8H and 10F, per Rumpff JA; at 12D-E, per Holmes JA.
4 1984 (2) SA 693 (C) 696C-F.

was to put the enforceability of the debt into abeyance subject to
certain conditions.  As Goldstone JA explained in Ex parte de
Villiers and Another NNO: in re Carbon Developments (Pty) Ltd
(in liquidation),5 the subordinated debt ‘continues to exist’, but ‘its
enforceability is made subject to the fulfilment of a condition’.  He
pointed out that the practical effect of such a condition depends
on the terms of the specific agreement.  But in creating a
moratorium for the benefit of other creditors, such a creditor
renders its own claim unenforceable unless other creditors
receive payment in full, with the result that in the event of the
principal debtor’s insolvency ‘the creditor has no claim’.6

[5] The inappropriateness of the received dichotomy to this situation
is evident.  On the one hand the subordinated debt is not
unenforceable because it is invalid7 or because it has been
extinguished or discharged.  On the contrary, although its
enforceability is made subject to a condition, until the occurrence
of which the creditor cannot claim repayment at all, the debt
remains in existence.  On the other hand, it would be wrong to
state that for this reason the unenforceability of the debt is purely
‘personal’ to the principal debtor, since it does not relate to any
capacity or attribute attaching to the person of the principal
debtor.  (Examples from our case law include a statutory
[1] 5 1993 (1) SA 493 (A) 504H-J.
6 1993 (1) SA 493 (A) 505E-H.
7 Croxon’s Garage (Pty) Ltd v Olivier 1971 (4) SA 85 (T) (hire purchase contract offending against
s 7 of Act 36 of 1942 renders also suretyship concluded in respect of it invalid).

moratorium for soldiers serving abroad,8 the fact that the debtor is
a buyer protected under a statutorily regulated transaction of hire
purchase,9 and the debtor’s insolvency.10)

[6] It seems an unnecessary and inappropriate pursuit of doctrinal
uniformity to try to pare or push the case of a subordination
agreement into either slot in the received dichotomy.  The debt is
unenforceable because while the condition subsists the creditor’s
cause of action itself is deficient.  The creditor has no valid claim
until the condition the subordination agreement spells out has
been fulfilled.  Until then the principal debtor has no need to
invoke either a defence personal to him- or herself, or the
extinction, discharge or invalidity of the debt:  the principal debtor
is immune from suit simply because the non-fulfilment of the
condition, so long as it endures, renders the creditor’s cause of
action incomplete.

[7] This incompleteness affects proceedings against not only the
principal debtor but also a surety, whose liability is accessory to
that of the principal debtor.11 The principle of the surety’s
[1] 8 Worthington v Wilson 1918 TPD 104 (Public Welfare and Moratorium Acts 1 of 1914 and 37 of
1917 disabled suit against soldiers on active service abroad for duration of their service; defence
personal to such soldiers and not available to sureties).
9 Ideal Finance Corporation v Coetzer 1970 (3) SA 1 (A).
10 Compare Jayber (Pty) Ltd v Miller and Others 1981 (2) SA 403 (W) (sureties liable for damages
arising from principal debtor’s inability to pay rental for full period of lease which arose because of
principal debtor’s liquidation); Barclays National Bank Ltd v von Varendorff and Others 1985 (2)
SA 544 (D) 549 (surety not entitled to rely on limitation for purposes of proof of interest from date
of sequestration on non-preferent claims against insolvent principal debtor in s 103 of Insolvency
Act 24 of 1936 on rates of interest orally agreed to by principal debtor, since provision inserted for
purposes of proof only and not invalidating underlying obligation to pay orally agreed interest).
11 Neon and Cold Cathode Illuminations (Pty) Ltd v Ephron 1978 (1) SA 463 (A) 471C–472F.

accessory liability was correctly applied in MAN Truck & Bus (SA)
(Pty) Ltd v Singh and Another (2) ,12 the criticism of which in the
judgment of the Full Court misses the point that the received
dichotomy was not applied because it was not applicable.13  In my
view therefore the conclusion the courts below reached, that the
sureties could invoke the subordination agreement, was correct,
though not for the reasons given.

[8] The relevance of this analysis to the present case is that the
judges in the courts below approached the problem as one
primarily of categorisation:  if the defence based on the suretyship
agreement was in rem, it was available to the sureties and that
disposed of the main burden of the case.  The attempt to press
the situation created by the subordination agreement into the slots
provided by the received dichotomy in my view diverted attention
from questions more pertinent to the resolution of the case.
Those were (a) whether the fact that the subordination agreement
rendered the debt conditionally unenforceable assisted the
sureties in the light of the wording of the suretyship agreement;
and (b) whether the subordination agreement was applicable at
all, given the fact – which was common cause at the trial – that
Alberti had no debts (other than that of CPC) to which that debt
could be subordinated.  I now consider these issues.

The terms of the suretyship agreement
[1] 12 1976 (4) SA 266 (N) 267H-268B.
13 See 2001 (2) SA 182 at 191G-H.

[9] It is trite that a surety’s liability depends on the terms of the
suretyship.14  In the present case, the suretyship concluded in
July 1996, so far as is relevant, reads:
‘It is further agreed and declared that … [CPC] shall be entitled without prejudice to its
rights hereunder to give time, compound with, release from liability or make any other
arrangements with [Alberti] … in respect of his indebtedness to [CPC]’.

In MAN Truck & Bus (SA) (Pty) Ltd v Singh and Another (2),15 the
suretyship provided merely that it was ‘in the absolute discretion
of the creditor’ to ‘grant time or other indulgences to the debtor’
and ‘to delay the date of repayment or to vary the terms of
repayment’.  The creditor was also empowered ‘to release the
whole or any portion of any security or to release any co-principal
debtor or co-surety [and] to compound or make any arrangements
with the debtor’.  It was held that the creditor’s giving of time to the
principal debtor did not affect its claim against the surety, but that
the claim could nevertheless be sued on only when the main debt
was due, namely when the principal debtor had failed to pay the
debt within the additional time granted.  In the present case, the
Full Court adopted this approach.  It held that the wording of the
suretyship ‘merely ensures that the surety is precluded from
contending that any of the creditor’s acts referred to has
prejudiced him thus entitling him to lawfully withdraw from the
suretyship’.16

[10] I cannot agree.  The suretyship at issue here differs in two
[1] 14 ABSA Bank v Davidson 2000 (1) SA 1117 (SCA) para 19.
15 1976 (4) SA 266 (D).

signal respects from that in the MAN Truck case.  First, the
agreement in MAN Truck did not empower the creditor to release
the principal debtor (in contrast to a co-principal debtor or another
surety).  More importantly, however, it did not expressly state
what consequences it precluded from being attached to the
granting of time or any other indulgence.  It merely recorded that
the creditor was empowered to grant time or indulgences, and to
release a co-principal debtor or surety.  The natural conclusion
was that the agreement was intended only to preclude the release
of the surety in the circumstances envisaged – a consequence
that at common law would otherwise have followed.17

[11] The agreement here expressly empowers CPC not only to give
time to Alberti, and to release it from liability, but stipulates that
these powers may be exercised ‘without prejudice to its rights
hereunder’.  Those rights were expressed to include ‘repayment
on demand’ of the sum owing by Alberti.  The natural and obvious
reading of these provisions is that CPC was entitled to
subordinate in favour of other creditors the debt of Alberti without
prejudicing its right to demand immediate repayment from the
sureties.  If CPC was empowered to release Alberti entirely
without prejudice to its right to demand repayment, then it was
similarly entitled to subordinate its debt in favour of Alberti’s other
creditors without affecting its entitlement against the sureties.  The
[1] 16 2001 (2) SA 193 (W) 192G-193C.
17 Compare French v Sterling Finance Corporation (Pty) Ltd 1961 (4) SA 732 (A) 738 (novation of
original agreement discharging surety); ABSA Bank v Davidson 2000 (1) SA 1117 (SCA) para 19
(prejudice to surety resulting from breach by creditor of legal or other obligation results in release

larger entitlement must include the lesser, and in this case that
the natural reading of the suretyship agreement is that CPC
acquired both, and that though the sureties were entitled to invoke
the subordination of Alberti’s debt, the terms of the agreement of
suretyship precluded them from doing so effectually.

[12] It follows that on this ground alone the trial court and the Full
Court in my view erred in dismissing CPC’s claim.

The interpretation of the subordination agreement
[13] The most signal reason for concluding that CPC’s claim was
erroneously dismissed lies in the evidence, which was not
disputed at the trial, that though the subordination agreement
would have put in abeyance the enforceability of CPC’s claim in
favour of Alberti’s other creditors, there were at all relevant times
no such creditors at all.

[14] At the trial before Joffe J, a chartered accountant was called
whom the CPC group of companies had until November 1997
employed ‘in-house’.  Thereafter he became a partner in the firm
of chartered accountants that prepared the audited statements
relating to Alberti, which were submitted without contest as
evidence during the trial.  It will be recalled that in October 1996
CPC acquired all the shares in Alberti, which was itself thus part
of the CPC group at the time the accountant in question was still
employed by it.  The accountant therefore had first-hand
[1] of surety).

knowledge, which was not put in issue at the trial, not only of the
group’s dealings and specifically of the financial standing and
liabilities of Alberti, but of its authenticated financial statements in
regard to the position of Alberti.

[15] He testified without controversion that all Alberti’s other
creditors had been paid in full in December 1996.  The sole
outstanding debt was for the audit fee in the amount of R5 002,00
for the financial year ending 30 June 1997.  That account was
presented for payment in December 1997 when it became due
(hence after summons was issued in March 1997).  It was paid in
full on presentation, as the auditor testified at the trial.  It was
therefore established that at the time the action was instituted
there were no creditors of Alberti other than CPC itself, and the
Full Court’s suggestion to the contrary18 is therefore erroneous.

[16] Despite this, both the trial court and the Full Court rejected
CPC’s contention that the subordination agreement was
inapplicable to the claim.  Both courts held that the subordination
agreement itself deemed the excess of liabilities over assets to
continue until the auditor certified otherwise in writing (clause 4),
and that until the certificate in question had been issued, CPC
was not entitled to demand or sue for repayment of the debt
(clause 5).

[17] I am unable to agree with this approach to the interpretation of

the agreement, which in my view flies in the face of the parties’
intentions at the time the agreement was concluded, offends
against elementary conceptions of commercial reality, and
disregards the purpose for which the contract was created.19  The
critical provision in the agreement is clause 2, and the courts
below in my respectful view omitted to focus on its effect in
contrast to that of clauses 4 and 5.  It is clause 2 that creates the
subordination.  That subordination is stated to be ‘for the benefit
of the other creditors of the company [Alberti]’.  Only so much of
CPC’s claim is subordinated ‘as would enable the claims of such
other creditors to be paid in full’.  It is this subordination – that is,
in favour of ‘the other creditors’ – to which clause 4 expressly
refers back.  It is in respect of this subordination that clause 4
deems an excess of liabilities over assets to exist until
certification, and it is this subordination that clause 5 erects as an
impediment to legal action in the absence of certification.

[18] How is clause 2 to be interpreted if it is established without
dispute that there are no other creditors at all?  In my view, quite
clearly the subordination it effects is entirely inoperative, and the
deeming provision of clause 4, and the impediment created by
clause 5, do not come into operation at all.  Clause 4 was plainly
designed to create a mechanism of proof to avoid disputes about
whether and in what measure Alberti’s assets exceeded its
liabilities.  Clause 5 was designed to impede legal action by CPC
[1] 18 2001 (2) SA 182 (W) at 189I
19 See Venter and Others v Credit Guarantee Insurance Corporation of Africa Ltd and Another

in the absence of such proof.  But where there are in fact no
disputes at all, and where no disputes are indeed feasible,
because of an absence of any question about the existence of
other creditors, the certification requirement is wholly inapplicable.

[19] In these circumstances the decision by the courts below that
the absence of appropriate certification vitiated the creditor’s claim
against the sureties is erroneous.

1.1 The appeal succeeds with costs, including the costs of two
counsel.
1.2 The decision of the Full Court is set aside.
1.3 In its place, the following order is substituted:
‘1. The appeal succeeds with costs, including the costs of two
counsel.
2. The judgment of the trial court is set aside.
3. In its place there is substituted:
(i)
Judgment is granted in favour of the plaintiff against
the first and second defendants, jointly and severally, the
one paying, the other to be absolved, in the amount of
R15 million.
(ii) Interest on this amount at the prime rate of Nedbank
Ltd from 1 October 1996 to date of payment.
(iii) Costs of suit, including the costs of two counsel.’

[1] 1996 (3) SA 966 (A) 973C-E; RH Christie The Law of Contract 4ed (2001) pages 243-244.

E CAMERON
JUDGE OF APPEAL

SMALBERGER ADP )
HARMS JA

)  CONCUR
NAVSA JA

)
MPATI JA

)