Absa Bank Limited v Kernsig 17 (Pty) Ltd

Kernsig 17 (Pty) Ltd owned a farm which was leased to a partnership conducted by its two directors/shareholders. Absa Bank provided overdraft and loan facilities to the partnership, secured by six covering mortgage bonds over Kernsig’s property. A sale agreement was concluded in terms of which the purchasers (the Barnards) would acquire the shares in Kernsig and, as part of the purchase price, take over the partnership’s debts. A loan of R1.1 million was approved by Absa in Kernsig’s name, secured by the existing covering bonds, and the proceeds were used to settle the partnership’s indebtedness. The sale later failed and was cancelled. Kernsig then demanded cancellation of the bonds, contending that the partnership’s debts had been extinguished and that any loan to Kernsig was unauthorised and unlawful. After Absa refused, Kernsig sought cancellation of the bonds. The High Court full bench upheld Kernsig’s appeal on the basis that the loan contravened s 38 of the Companies Act 61 of 1973. Absa appealed to the Supreme Court of Appeal.

The appeal by Absa Bank succeeded with costs, including the costs of two counsel. The order of the Western Cape High Court full bench was set aside and replaced with an order dismissing Kernsig’s appeal with costs.

The case is significant for clarifying that alleged contraventions of section 38 of the Companies Act 61 of 1973 are fact-specific and must be properly pleaded. It reinforces procedural principles in motion proceedings, particularly that courts cannot determine illegality without all relevant facts being before them, and that parties must clearly raise and define a section 38 defence or cause of action.