The respondent was the sole shareholder, director and loan account creditor of a company that owned immovable property intended for development. The appellant lent money to the company secured by a mortgage bond. When development conditions were not met, repayment became due. An extension agreement was concluded under which the respondent pledged his shares and loan account in the company, together with other documents, as security. Clause 9 of the agreement entitled the appellant, upon default, either to acquire the company by taking transfer of the shares and cession of the loan account, or to take transfer of the immovable property at a market value determined by an expert. The company defaulted, became insolvent and was wound up. The appellant exercised the option to take transfer of the shares. The respondent sought to have the transfer set aside, contending that clause 9 constituted an invalid pactum commissorium.
The appeal was dismissed with costs. The order of the court a quo declaring the relevant portion of clause 9 invalid and setting aside the transfer of shares to the appellant was upheld.
The case authoritatively confirms in South African law that a pactum commissorium in a pledge is invalid regardless of whether the pledgor is the debtor or a third party. It reinforces the principle that clear common-law rules apply generally and cannot be limited by ad hoc policy reasoning, thereby promoting certainty in the law of security. The judgment also clarifies the distinction between an invalid pactum commissorium and a permissible agreement allowing a creditor to retain pledged property at a fair valuation.