J C Da Silva v Ribeiro and Another v Slip Knot Investments 777 (Pty) Ltd

The respondent (Slip Knot Investments) had granted two loans to R.B. Merit Investments (Pty) Ltd in May and July 2007 for a hotel development. The appellants (Da Silva and Boshoff) had bound themselves as sureties for these loans. When R.B. Merit and the sureties failed to repay the loans, the parties negotiated a settlement agreement on 10 January 2008. Under this agreement: (i) the outstanding amount was R35,641,117.69; (ii) R.B. Merit would pay R7.6m immediately and provide a bank guarantee of R20.4m; (iii) the appellants would be liable for the balance of R28,196,336.48, payable in instalments by May and December 2008; (iv) R.B. Merit fulfilled its obligations but the appellants paid only R158,754.88 in September 2008. The respondent then claimed payment of the outstanding amount of R10,659,157.18 in the South Gauteng High Court.

• Whether the settlement agreement of 10 January 2008 constituted a 'credit agreement' as contemplated by section 8 of the National Credit Act 34 of 2005 (NCA)
• Whether the agreement was void under section 89(2)(d) read with section 89(5) of the NCA because the respondent was not a registered credit provider
• Whether the agreement was a 'credit guarantee' to which the NCA did not apply by virtue of sections 4(2)(c) and 8(5) of the NCA
• Whether the appellants became principal debtors under a new credit transaction once R.B. Merit discharged its obligations, or whether their obligations remained accessory in nature as guarantors

The appeal was dismissed with costs. The order of the South Gauteng High Court (Van der Walt AJ) granting judgment against the appellants jointly and severally for payment of R10,659,157.18 and ancillary relief was upheld.

Where an initial loan agreement is a credit transaction to which the National Credit Act does not apply, and the parties subsequently enter into an agreement whereby guarantors undertake to satisfy obligations under the initial loan agreement, that new agreement constitutes a credit guarantee to which the NCA does not apply by virtue of sections 4(2)(c) and 8(5). The characterization of an agreement as a credit agreement or credit guarantee is determined at the time the agreement is concluded, based on the parties' intentions as expressed in the agreement, and cannot subsequently change based on the discharge of obligations by one party. Where parties expressly record that an agreement does not constitute a novation and that obligations under the new agreement have their origin in obligations under earlier agreements, the obligations under both agreements are interdependent and the new agreement is properly characterized as a continuing guarantee rather than a new credit transaction.

The court observed that it would be absurd if an agreement that was valid and not void at the time it was concluded could subsequently become void merely because one party (R.B. Merit) discharged its obligations under the very same agreement. The court also noted that the fact that parties recorded that 'this agreement shall be the sole record of the subject matter contained herein' (an integration or merger clause) does not detract from or override their express intention not to extinguish but rather to confirm obligations arising from initial agreements, particularly where they explicitly stated the agreement does not constitute a novation.

This case clarifies the application of the National Credit Act to credit guarantees and settlement agreements. It establishes important principles regarding when the NCA applies to guarantees given for credit transactions. The judgment confirms that where an initial credit transaction falls outside the scope of the NCA (for instance, because it is a large agreement to a juristic person exceeding the threshold), a subsequent credit guarantee relating to that transaction will also fall outside the NCA's ambit. The case also reinforces the principle that courts will give effect to the parties' express intentions as recorded in their agreements, particularly where they state that an agreement does not constitute a novation and that obligations have their origin in earlier agreements. It demonstrates that the characterization of an agreement as either a credit agreement or credit guarantee depends on substance rather than form, and that this characterization is determined at the time the agreement is concluded, not by subsequent events.