Standard Bank of South Africa Limited v Mogapi and Others  [2024] ZAGPJHC 133 (15 February 2024)

This case revolves around a legal dispute between Standard Bank of South Africa Limited (the Applicant) and Dikeleloi Mogapi and Nineteen Others (the Respondents). The core of the dispute is the Applicant's attempt to enforce guarantees provided by the Respondents in favour of the Applicant, related to various banking facilities made available to Force Fuel Proprietary Limited ("Force Fuel").

Key Background Facts:

1. Banking Facilities to Force Fuel: The Applicant had extended various banking facilities to Force Fuel, including overdraft, medium-term loan facilities, and a fleet management facility. These facilities were guaranteed by the Respondents, who were shareholders or ultimate shareholders of Force Fuel.

2. Guarantees Issued: The guarantees, identically worded and issued by the Respondents, were in respect of Force Fuel's indebtedness to the Applicant. Despite the Respondents' claims of having no actual knowledge of Force Fuel's indebtedness, they could not dispute the quantum of the Applicant's claims, which was accepted as common cause between the parties.

3. Sale of Shares to Labat: The entire issued share capital of Force Fuel was acquired by "Labat" effective from 1 September 2018. This sale occurred after the Applicant, as Force Fuel's lender, insisted on the appointment of a new shareholder. The Applicant was involved in the process that replaced the Respondents as shareholders and consented to the sale of shares to Labat.

4. Business Rescue Proceedings: Proceedings to place Force Fuel under business rescue commenced around 5 May 2020, indicating financial distress within the company.

5. Respondents' Defences: The Respondents raised several defenses against the Applicant's claims, including:
 - The argument that they were released from their obligations under the guarantees upon the sale of shares to Labat.
 - The contention that the guarantees are unenforceable on public policy grounds, particularly emphasising the role of the guarantees in the Applicant's Enterprise Development Programme and the Broad-Based Black Economic Empowerment (BBBEE) initiative.
 - Allegations that the Applicant had breached its duties and obligations towards the Respondents, as expressed in the BEE Act and the Applicant's own Enterprise Development Programme, which was prejudicial to the Respondents.

This case encapsulates the tension between contractual freedom, constitutional rights, commercial interests, and the upliftment of previously disadvantaged individuals within the South African business sector, highlighting the complex interplay of principles that the court must navigate in reaching its decision.

The core legal principles underlying the decision are as follows:

1. Enforceability of Guarantees: The court found that the guarantees provided by the Respondents in favour of the Applicant were enforceable. This conclusion was reached after considering the arguments and defenses presented by the Respondents, including claims of being released from the guarantees upon the sale of shares to Labat, the guarantees being unenforceable on public policy grounds, and allegations of the Applicant's breach of duties and obligations.

2. Public Policy and Contractual Obligations: The court carefully balanced the principle of freedom of contract against considerations of public policy, particularly in the context of the Broad-Based Black Economic Empowerment (BBBEE) initiative and the Applicant's Enterprise Development Programme. The court concluded that the Respondents failed to establish that enforcing the guarantees would be contrary to public policy or that the Applicant had breached a legal duty that would render the guarantees unenforceable.

3. Validity of the Guarantees Despite Alleged Assurances: The court rejected the Respondents' defense that they were assured by the Applicant's representatives that the guarantees would not be enforced. The court emphasised the lack of documentary evidence to support this claim and highlighted specific clauses within the guarantees that precluded reliance on any such assurances not recorded therein.

4. No Release from Guarantees Without Substitution: The court found no evidence of an agreement to release the Respondents from their obligations under the guarantees without a substitution by Labat. It was noted that even if such an agreement existed, it was conditional upon Labat providing a guarantee in substitution, which did not occur.

5. Refusal to Refer the Matter to Trial: The court determined that there was no basis to refer the matter to trial or to hear oral evidence, as the defenses raised by the Respondents did not establish a valid defense to the Applicant's claims. The court held that a referral to trial is not warranted merely to search for a defense.

In summary, the ratio decidendi of the case is that guarantees provided by shareholders in favour of a bank concerning banking facilities extended to a company are enforceable, provided that the guarantees are in accordance with the terms agreed upon and there is no valid legal basis established by the guarantors to render them unenforceable, including claims of release, public policy considerations, or alleged breaches of duty by the bank.

One of the foundational legal principles discussed in the reasoning was the concept of "pacta sunt servanda," which is the principle that contracts freely entered into must be honored. This principle is central to contract law and was applied by the court in determining the enforceability of the guarantees.

Another key aspect of the court's reasoning involved the application of public policy considerations, particularly in relation to the Broad-Based Black Economic Empowerment (BBBEE) initiative. The court examined whether enforcing the guarantees would be contrary to public policy.