Anthony Simon Bock and Others v Duburoro Investments (Pty) Ltd

The appellants stood surety for the obligations of L S Molope Holdings (Pty) Ltd, which had borrowed from three banks (Nedcor Bank Ltd, Mercantile Bank Ltd, and The Business Bank Ltd). One appellant, Dunbush Investments (Pty) Ltd, was also a debtor of Mercantile Bank and other appellants stood surety for its liabilities. As security for the loans, a large number of shares in Molope Group Ltd were pledged to the banks. When the principal debtors defaulted, the banks called up the loans and, acting in terms of the pledges, took over the pledged shares and credited the principal debtors with their value. The banks subsequently ceded their rights against the sureties to Duburoro Investments (Pty) Ltd, which instituted applications against the sureties. The sureties claimed they had been released from their obligations because the banks acted to their prejudice in taking over the shares, and alternatively that the amounts credited were insufficient.

• Whether the sureties were released from their obligations due to the banks' allegedly prejudicial conduct in taking over pledged shares
• Whether clauses permitting parate executie (immediate execution) and pactum commissorium (take-over of security) are constitutionally valid under section 34 of the Constitution
• Whether there is a general 'prejudice principle' that releases a surety if a creditor does anything prejudicing the surety
• Whether the banks properly valued and took over the pledged shares
• The nature and legal effect of parate executie clauses, pactum commissorium clauses, and conditional sale provisions in pledge agreements
• Whether the banks' arrangement with Rebhold/Rebserve affected the sureties' liability

Appeals dismissed with costs, including costs of two counsel.

A surety can only be released (whether totally or partially) if the prejudice suffered is the result of a breach of some legal duty or obligation by the creditor. No general 'prejudice principle' exists in South African law that automatically releases a surety whenever a creditor does anything having the effect of prejudicing the surety. The proper inquiry is whether the creditor breached contractual or other legal duties, and if so, whether this affected the quantum of the principal debt for which the surety is liable. Parate executie clauses in pledge agreements relating to movables lawfully in the creditor's possession are constitutionally valid and do not violate section 34 of the Constitution, as they do not involve seizure of property from a debtor's possession and the debtor may still seek court protection if the creditor acts prejudicially. A clause permitting a creditor to take over pledged property at a fair price determined at the time of default (quasi-conditional sale) is valid and distinct from a prohibited pactum commissorium.

The Court expressed disagreement with the obiter gloss added in Di Giulio v First National Bank that prejudice justifying release must be assessed 'with reference to all the relevant facts and circumstances, and with due regard to considerations of justice, fairness, reasonableness, good faith and public policy'. Harms JA stated he did not understand how this test would work in practice and found it irreconcilable with Brisley v Drotsky on the concept of bona fides in contract law. The Court also criticized the judgment in Findevco (Pty) Ltd v Faceformat SA (Pty) Ltd as wrongly finding parate executie of movables unconstitutional, noting it failed to distinguish between perfection clauses, statutory seizure measures, and summary execution clauses in pledge agreements. The Court noted that making all rules of law discretionary or subject to value judgments may be destructive of the principle of legality in a constitutional democracy. The Court expressed concern about the procedural approach of raising constitutional challenges in a single sentence in an answering affidavit without proper argument, especially where ramifications are difficult to envisage and questions of fact may be involved.

This case is significant in South African suretyship and security law for: (1) clarifying that parate executie clauses in pledge agreements for movables in the creditor's possession are constitutionally valid and do not violate section 34 of the Constitution; (2) reaffirming and applying the principle from Absa Bank Ltd v Davidson that there is no general 'prejudice principle' releasing sureties - release only occurs when prejudice results from breach of a legal duty or obligation; (3) distinguishing the Constitutional Court decisions on statutory parate executie provisions (Chief Lesapo and First National Bank) as relating to seizure of property from debtors' possession, not property lawfully held by creditors; (4) clarifying the distinction between parate executie, pactum commissorium, and conditional sale arrangements in pledge agreements; (5) confirming that questions about prejudicial conduct in realizing security are typically matters of quantum (extent of debt) rather than total release of sureties. The judgment also rejected the more expansive 'fairness and reasonableness' gloss on the Davidson principle suggested in obiter in Di Giulio v First National Bank.