SIGNATURE DATE AND PRINCIPLE OF RECIPROCITY KEY IN ENFORCING SECURITY DOCUMENTS

SIGNATURE DATE AND PRINCIPLE OF RECIPROCITY KEY IN ENFORCING SECURITY DOCUMENTS

Agreements Must Be Honoured

In the recent Supreme Court of Appeal case, ABSA Bank Limited v Rosenburg and Another, the Court had to determine the appeal launched by ABSA Bank (ABSA) against the dismissal by the High Court of its main application to enforce the guarantee agreement against the respondents.

The dispute arose from a deed of agreement executed by the respondents during August 2019 and countersigned on behalf of the appellant in March 2020. The contemplated agreement was a contract in terms of which the respondents guaranteed payment on demand of the debts owed to the ABSA by Uwoyela Environmental Services (Pty) Ltd (UES). The first respondent is the second respondent’s son. The second respondent is the majority shareholder in UES’s holding company.

UES had approached ABSA to apply for overdraft facilities to fund a tender project to recover and reprocess oil sludge from an underground storage facility. On 10 August 2018, an agreement was concluded between ABSA and UES, the terms of which were recorded in a Facilities Letter. In terms of the Facilities Letter, ABSA made a primary lending facility of US$2,5 million available to UES, and a commercial asset finance facility of R199 000. In March 2019, UES approached ABSA Bank for additional funding to finance an escrow account in the amount of US$14 653 500 and for operational finance in the amount of US$8,5 million.

In May 2019, ABSA undertook a due diligence investigation of the UES project to confirm its viability. As a result of the due diligence, the originally contemplated bridging loan was revised and reduced from US$23 153 500 million to US$18,5 million to be effected by way of an increase to the existing facility under the Facilities Letter. ABSA indicated that the envisaged increase would only be effected upon the fulfilment of several conditions precedent including the provision of a guarantee by the respondents. The respondents signed the guarantee agreement on 7 August 2019.  The principal operative clause of the guarantee agreement was clause 3, which provided that “with effect from the Signature Date, the Guarantors hereby irrevocably and unconditionally, on a joint and several basis, as a principal and primary obligation in favour of the Lender…”. The Signature Date was defined to mean ‘the date of signature of this Guarantee by the Party last signing’.

In determining the appeal, the SCA considered the contextual significance of the Signature Date in order to determine whether the guarantee agreement was enforceable on the respondents. The Court considered that ABSA provided the deed of agreement to the respondents for them to sign first, which they signed on 7 August 2019. This was immediately followed by the formal application for an increase of the then existing facility on 6 September 2019, which ABSA declined on 6 March 2020. Notwithstanding declining the application, ABSA counter-signed the guarantee agreement on 19 March 2020. The Court found that ABSA’s conduct in so doing was incapable of rendering the agreement legally effective. The Court held that ABSA ought to have first rendered complete performance of its contractual obligation by approving UES’ application for the increase of the latter’s existing facility of US$2,5 million to the aggregate amount of US$18,5 million. Upon the approval of such application by ABSA, the respondents would consequently have become contractually bound to perform their reciprocal obligation as guarantors of UES’ indebtedness. On a proper interpretation of the guarantee agreement, only then would the respondents’ liability arise, not just in respect of the additional amount advanced but also the existing debt prior to the execution of the guarantee agreement on 19 March 2020.

It is for these reason that the SCA concluded that the High Court had not erred in dismissing ABSA’s application and dismissed the appeal with costs.

 

Tel:+27 31 570 5459;  Email: sakhile.mbele@gb.co.za

BLOG

Related News and Articles