SUMMARY
| In 2009, Roberto Carlos De Freitos De Vasconcelos (the “First Appellant”) acting on behalf of Eastprop Property Trust (the “Trust”), obtained a loan purposes of raising working capital for one of his 3 close corporations which was a sham. The close corporations performed their business activities from a property owned by the Trust (the “Property”). The Property was bonded to ABSA Bank for an amount of R25 000 000.00, which bond was reduced to R18 000 000.00 and subsequently triggered the Trust’s need for more finance. As such, the First Appellant, on behalf of the Trust, approached Business Partners Limited (the “Respondent”) for financial assistance. On 08 December 2011, the Trust and the Respondent concluded a loan agreement and a “royalty” agreement”. In terms of the loan agreement, the Respondent advanced a R8 000 000.00 loan to the Trust, as a principal debtor.  The loan would be repayable in 84 instalments, over a period of 7 seven years at an interest rate of prime plus 1%. The First Appellant together with the 3 close corporations signed as sureties and bound themselves jointly and severally as co debtors in respect of the loan. The second agreement was structured as a “royalty” agreement which required the Trust to the Respondent a royalty. The royalty was calculated at a greater rate between R12 896 964 or 24% of the future market value of the Property, which royalty would become due on 01 August 2019 upon the expiration of the 7 year loan period. Further, the loan agreement had an acceleration clause to the effect that should the Trust fail to make the loan repayments, the royalty would be payable in addition to the loan repayment and interest thereto. The Trust failed to make its monthly payment in terms of the loan agreement. Subsequently, the Respondent launched action proceedings claiming payment of R6 985 926.44 and R12 896 964 outstanding in terms of the loan agreement and the royalty agreement, respectively. During or about September 2015, an outstanding amount of R5 239 115.94, in terms of the loan agreement, was settled by the Trust. Accordingly, the trial proceeded only against the First to Fourth Appellants as sureties (collectively referred to as the “Appellants”). The Appellants’ defence was that the royalty agreement charged an excessive interest payment in respect of the loan over and above the interest which was payable in terms of the loan agreement, which was extortionate, oppressive or similar to fraud and therefore, contrary to public policy and unenforceable.  The Appellants’ defence was that the royalty agreement was structured to extort an exorbitant amount of interest from the Trust with a view to evading the application of the National Credit Act 34 of 2005 (the “NCA”). This defence was rejected on the basis that the NCA does not apply to large agreements whereby the principal debt is more than R250 000.00, and that the evidence furnished did not prove any dishonesty or fraud on part of the Respondent when concluding the Agreement. In the Court a quo, it had to determine whether the loan agreement and the royalty agreement were indivisible parts of a one agreement or two separate agreements, the former in respect of an advancement of a loan and the latter to charge additional interest structured as a royalty. The Respondent contended that its royalties are structured in various way such as holding shareholding in a company, profit sharing or percentage of the value of property. The royalty was, therefore, a return for the additional risk which the Respondent took for its investment (i.e. the loan) and not an additional interest charge. The First Appellant admitted that the royalty structure was explained to him which he was satisfied with and accepted the obligation by signing the agreements.  The court also had to determine whether the transaction was contra bonos mores in that the Respondent failed to disclose that the royalty was in fact an obligation on the Trust to pay additional interest on the loan. In this regard, the Appellants relied on the common law rule against unsurious contracts which effect is to declare a contract or transaction extortionate and void if proven to be influenced by oppression or extortion or fraud. Further to the above, the Appellants relied on the in duplum rule which prohibits one from claiming interest in excess of the outstanding principal amount. They pleaded that the Respondent was not entitled to claim interest on the principal amount over and above the amount equal to the outstanding capital amount as the principal amount had been settled. The Gauteng Division of the High Court, Pretoria, upheld the Respondent’s claim and dismissed all of the Appellants’ defences which gave rise to this appeal.  |
HELD
| The SCA held that the royalty agreement was not structured to hide the true purpose of the agreement which was, in the Appellants’ view, to evade the application of the NCA. In terms of Section 4(1) read with Section 9(4) and Section 7(1)(b), the Act does not apply to large agreements whereby the principal debt is more than R250 000.00 and the debtor is a juristic person which the loan agreement did. Also, the evidence furnished by the Appellants does not prove any fraud or dishonesty by the Respondent. Accordingly, the Court found that the court a quo was correct in dismissing the Appellants’ defence. The Court further held that the loan agreement and the royalty agreement formed part of one indivisible transaction and that the structure of the “royalty” was not an issue before the Court. There is no limitation on the amount of interest one may charge for repayment of a loan. A fixed high interest amount was not found to be unlawful, contrary to public policy or akin to fraud.  The real issue to be determined was not how the royalty agreement was structured but whether the Trust comprehended the nature of the obligation. The Court found that, in light of the evidence provided, the First Appellant was not induced to conclude the two agreements, and he was aware of the higher interest rate which would be payable on the loan together with the rationale behind the repayment of the royalty. It made commercial sense for the Respondent to charge a higher interest together with an additional payment (i.e. the royalty) given the risk the Respondent took in lending the Appellants money. The in duplum rule also did not apply in that the two agreements drew a distinction between the loan and the royalty. The royalty payment could not be added to the interest in terms of the loan agreement. In light of the above, the appeal was dismissed with costs. |
VALUE
There is no statutory limitation on the amount of interest which may be charged on a repayment of a loan on a large credit agreement which is not subject to the NCA. Charging a high interest rate is, therefore, not unlawful or contra bonos mores. It does not matter how a royalty agreement is structured but whether one comprehends the nature of the obligation that comes with agreement. One is, therefore, entitled to claim an additional obligation for the risk undertaken in providing credit.
Written by Mohau Ledwaba and supervised by Jasvir Sewnarain
