THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT
JUDGMENT
Case No:  211/09

In the matter between:

FEDBOND PARTICIPATION MORTGAGE BOND                           APPELLANT
MANAGERS (PTY) LTD

v

INVESTEC EMPLOYEE BENEFITS LTD                           FIRST RESPONDENT
CAPITAL ALLIANCE LIFE LTD                                    SECOND RESPONDENT
CHANNEL LIFE LTD                                                          THIRD RESPONDENT

Neutral citation:
Fedbond Participation Mortgage Bond Managers v Investec
Employee Benefits (211/2009) [2010] ZASCA 42 (31 March
2010).
Coram:
Harms DP, Mthiyane, Mlambo, Cachalia JJA et Saldulker AJA
Heard:
25 February 2010
Delivered:
31 March 2010

Summary:
Contract – extrinsic evidence inadmissible to contradict written terms – evidence
of terms of alleged common understanding inconsistent with written terms.
Collective Investment Schemes Control Act – withholding of consent by manager
of a collective investment scheme – to be accompanied by reasons – failure to
respond to notice of withdrawal amounts to withholding of consent without reason
– does not relieve manager of obligations arising from agreement – relationship
between participant and manager does not exclude manager’s obligation to
make payment to a participant who has complied with the agreement.

________________________________________________________________

ORDER
________________________________________________________________

On appeal from:  South Gauteng High Court, Johannesburg (Malan J sitting as
court of first instance).

The following order is made:

The appeal is dismissed with costs including the costs consequent upon the
employment of two counsel.

________________________________________________________________

JUDGMENT
________________________________________________________________

MLAMBO JA

Introduction

[1] This appeal with the leave of this court, is against a judgment and order of
the South Gauteng High Court (Malan J). In terms of that order the appellant,
Fedbond Participation Mortgage Bond Managers (Pty) Limited (Fedbond), was
ordered to pay to the first and second respondents certain amounts of money
which were invested with it in terms of the Collective Investment Schemes
Control Act 45 of 2002 (the CIS Act). The funds were invested in a collective
investment scheme in participation bonds,1 called the Fedbond Participation

1 Section 52(1): ‘[A] scheme of which the portfolio, subject to the provisions of this Act, consists
mainly of assets in the form of participation bonds, and in pursuance of which members of the

Mortgage Scheme (the scheme) administered by Fedbond. The scheme is the
successor in title, in terms of the CIS Act, to the Participation Mortgage Bond
Scheme, previously operated by Fedbond in terms of the Participation Bonds Act
55 of 1981 (the Part Bonds Act) which was repealed by the CIS Act.

[2] The type of investment we are dealing with was aptly described by this
court in the following terms:

‘In broad, the Act is designed, inter alia , to enable financial institutions to offer to
investors, many of whom may wish to invest relatively small amounts of money, an
opportunity of participating with other investors in an investment secured by a registered
mortgage bond over immovable property and yielding a competitive rate of interest.
Each participant who holds such a participation in a participation bond becomes a
creditor of the mortgagor to the extent of the participation. The debt so created is owed
by the mortgagor to the participant and not to the nominee company in whose name the
bond is registered and the rights conferred by the bond are deemed to be held by the
participants (s 6(1)).’2

Background

[3] Before I consider the issues raised in the appeal it is necessary to traverse
the background circumstances of the matter in some detail. In July 1997
Fedbond concluded a written agreement with Fedsure Life Assurance Ltd
(Fedlife). In terms of the agreement Fedlife undertook to pay funds to Fedbond
from time to time and authorised the latter to invest those funds on its behalf
upon the security of a particular participation bond3 or bonds in the scheme. The
salient features of the agreement are briefly that:

public are invited or permitted to acquire a participatory interest in all the participation bonds
included in the scheme.’
2 Syfrets Participation Bond Managers v Commissioner, SARS 2001 (2) SA 359 at 363G-H.
Though the court there was dealing with the Part Bonds Act, this description remains true in
terms of the CIS Act.
3 Section 52(1) ‘Participation Bond’ means – ‘a mortgage bond over immovable property –

3.1
Fedbond was defined as ‘the Manager’4 and Fedlife as the ‘participant’;5

3.2
Fedbond Nominees (Property) Ltd (second respondent in the court a quo)
was formed and registered for the purpose of holding participation bonds,
included in the scheme, in trust as nominee for or representative of
participants in the scheme;

3.3
Fedlife authorised Fedbond to invest on its behalf, upon the security of a
particular participation bond or of any participation bonds, such funds as
Fedlife could pay to or held by Fedbond on its behalf with specific
instructions directing the investment of such funds upon the security of a
participation bond or participation bonds;

3.4
any money received by Fedbond from Fedlife would remain invested for a
period of not less than five years in a participation bond or bonds included
in the scheme.

[4] Pursuant to the conclusion of the agreement and from July 1997 to August
2000 Fedlife made 63 payments, totalling R46 030 000, to Fedbond for
investment in the scheme. Thereafter and during 2001 Fedlife was acquired by
the Investec Group and its name was, on 16 October 2001, changed to Investec
Employee Benefits Limited (IEB), the first respondent in this appeal.

[5] In that year and subsequent to the acquisition of Fedlife, Fedbond sent a
letter to Investec Asset Management (Pty) Ltd (IAM), IEB’s asset manager,
confirming the total amount of the investment (R46 030 000) in the scheme. In

(a)  which is described as a participation bond and is registered as such in the name of a
nominee company and is included in a collective investment scheme in participation bonds; and
(b)  which is a first mortgage bond or which ranks equally with another first participation bond and
has the same mortgagor.’
4 Section 1:  ‘A manager means a person who is authorised in terms of this Act to administer a
collective investment scheme.’
5 Section 52(1):  ‘A participant means a person who holds a participatory interest in all the
participation bonds included in a collective investment scheme in participation bonds.’

that letter Fedbond set out details of each investment, making up the total, as
well as the maturity dates thereof. The letter also stated:

‘The investment is for a period of five years and the said proceeds shall not be paid to
the participant before expiry of the five years. The investments will only be scheduled for
repayment on receipt of the required 3 (three) months’ written notice. Interest is paid
monthly in advance to the nominated bank account as per the participant.’

There is also email correspondence from Fedbond to IAM in which it was clarified
that the name change from Fedlife to IEB did not affect the maturity dates of the
investments.

[6] In July 2006 Deneys Reitz Attorneys, acting on the instructions of the
respondents, gave Fedbond three months’ notice of the withdrawal of the total
investment from the scheme. In response, Fedbond questioned the identity of the
respondents as being the correct investors in the scheme, stating that in its
records Fedlife had made the investments. Fedbond further requested the
attorneys to provide a basis on which the respondents claimed ownership of the
investments. This response was said to be necessary in terms of the Financial
Intelligence Centre Act6 (FICA) which was said to make it obligatory on a
manager of a scheme to have correct identities of its investors. The lawyers in
return referred Fedbond to Fedlife’s name change in 2001 and also tendered
delivery of any document required for FICA purposes relevant to IEB. The letter
concluded by stating that the July 2006 letter constituted formal notification to
Fedbond of IEB’s intention to withdraw the total investment.

[7] No further communication was received from Fedbond in this regard until
10 months later, in June 2007, when IEB requested Fedbond, in its capacity as
manager of the scheme, to note in its records that amounts of R 35 430 000 and
R5 245 000, of its investment in the scheme, were transferred to Capital Alliance

6 Act 38 of 2001.

Life Ltd (CAL) and to Channel Life Ltd (Channel), the second and third
respondents herein, in terms of a reinsurance agreement and a sale of business
arrangement, respectively. Fedbond was further requested to confirm within
seven days that it had noted CAL and Channel’s investments as well as
confirmation that all fees and charges were paid in full. Fedbond did not respond
to the notification and in October 2007 Werksmans Attorneys sent a demand to it
for payment of the amounts of R5 355 000, R35 430 000 and R5 245 000 to IEB,
CAL and Channel respectively. That demand was based on the July 2006
withdrawal notice and June 2007 notification of CAL and Channel’s investments.
When the demand evoked no response from Fedbond, proceedings were
initiated in the court a quo resulting in the order referred to at the beginning of
this judgment.

[8] The thrust of Fedbond’s opposition before Malan J, to the relief sought by
the respondents, was premised on a defence disavowing their entitlement to
withdraw the total investment on the basis of an alleged common understanding
amongst members of the Fedsure Group which is said to have included Fedllife.
Fedbond persists with that argument in this appeal amongst others.

The common understanding argument

[9] Primarily Fedbond contended that IEB was not entitled to withdraw the
total investment because from 1990 to 2000 there was a common understanding
by members of the Fedsure Group that Fedlife would continuously invest in
Fedbond and that those investments, would form part of the long term investment
arrangements between members of the group which would never be called up
simultaneously; that in the event of the investments being withdrawn, this would
be gradual and individual notices were required in relation to each investment at
intervals not shorter than those at which those investments had initially been
made. In this regard it was contended on Fedbond’s behalf that these terms were

incorporated, tacitly at least, into each investment made by Fedlife in the
scheme.

[10] In considering this argument the relevant regulatory framework which
governs the agreement concluded by the parties, should also be considered in
addition to the evidence. In this regard s 58 of the CIS Act provides:

‘Minimum investment period
An agreement in terms of which a manager accepts money for investment in a collective
investment scheme in participation bonds must provide that such money is invested in
such scheme for a period of not less than five years.’

[11] Furthermore, the agreement is subject to certain rules published in the
Government Gazette.7 The material provisions thereof are inter alia:

‘20.
Every participation bond must provide that the mortgagor must pay interest on
the principal debt secured by such bond to the manager as agreed upon by the
manager and mortgagor. Such interest, less the manager’s administration fee
and such other fees and charges as imposed and determined by the manager
from time to time must within 30 days after the date on which interest payments
have been received from the mortgagor, be paid by the manager to participants.
22(1) A participant may transfer, cede or encumber part or the whole of his or her
participatory interest without the consent of the mortgagor concerned provided
that –
(a)
the manager is not obliged to note such cession, transfer or
encumberance unless informed in writing thereof and such fees and
charges as may be determined by the manager have been paid by such
participant or his or her successor;
(b)
such cession, transfer or encumberance is only enforceable against the
manager if the manager has confirmed in writing that the cession, transfer
or encumberance has been noted and that the aforementioned fees and
charges have been paid in full; and

7 GN 577 in GG 24984 of 28 February 2003.

(c)
the manager may refuse to note such cession, transfer or encumberance
if such participatory interest is ceded or transferred to, or encumbered in
favour of, more than one person with the result that the extent of any
participatory interest held by any such person is less than the minimum
investment determined by the manager from time to time.
(2)
A participant may, upon the expiry of the 5-year period referred to in section 58 of
the Act, withdraw part or the whole of the funds invested by him or her in a
scheme, if –
(a)
the manager has consented to such withdrawal: Provided that the
manager may withhold such consent subject thereto that the manager
furnishes reasons for withholding such consent;
(b)
the participant has given the manager written notice, the period of which
must be determined by the manager and disclosed in the application
form, of his or her intention to withdraw such investment; and
(c)
the participant has paid such fees and charges as the manager may
impose.’

[12] Lastly the agreement was also subject to Fedbond’s terms and conditions,
contained in a document issued to investors. Some of the material terms are that:

12.1 Fedbond could accept money for investment in the scheme provided that
such money was invested in such scheme for a period of not less than five
years;
12.2 the Registrar had published rules consistent with the CIS Act for the
administration of a collective investment scheme in participation bonds;
12.3 the rules permit transfer, cession or encumberance by a participant of part
or the whole of his participatory interest;
12.4 a participant, by signature to the document agreed that upon the expiry of
the five year period, the participant could withdraw his investment subject
thereto that it had given Fedbond three calendar months’ written notice
and, in terms of rule 22(2) –
12.4.1
Fedbond had consented to such withdrawal;

12.4.2
the participant had given Fedbond three calendar months’ written
notice; and
12.4.3
the participant had paid such fees and charges as Fedbond may
impose.

The document containing the terms was signed as required therein.

[13] Counsel for Fedbond argued that IEB was aware of the common
understanding which, he said, was communicated to IAM, in a letter from
Fedbond dated 2 July 2003. That letter stated inter alia:

‘The investments were not placed as a five year investment but were part of the long
term funding arrangements of Fedsure for Fedbond.’

It is important to state that IAM questioned this statement, stating that it was not
aware that this was so and requested full details of the arrangement referred to.
No such details were forthcoming from Fedbond and when IAM persisted in its
request Fedbond stated that it would not litigate the issue through
correspondence.

[14] Properly viewed Fedbond’s argument in this regard suggests that the
written agreement does not contain all the terms agreed by the parties and seeks
the admission of facts that add to the terms thereof. This is referred to as the
integration rule in terms of which extrinsic evidence of additional terms of a
written agreement not embodied therein is admitted. See Union Government v
Vianini Ferro-Concrete Pipes (Pty) Ltd8 where the following was stated:

8 1941 AD 43 at 47. See also Johnston v Leal 1980 (3) SA 927 (A) at 944B-D:  ‘Furthermore, in
my view, an instructive and relevant analogy is provided by cases of what is termed a "partial
integration". Where a written contract is not intended by the parties to be the exclusive memorial
of the whole of their agreement but merely to record portion of the agreed transaction, leaving the
remainder as an oral agreement, then the integration rule merely prevents the admission of
extrinsic evidence to contradict or vary the written portion; it does not preclude proof of the
additional or supplemental oral agreement.’; Capital Building Society v De Jager & others; De
Jager & another v Capital Building Society 1963 (3) SA 381 (T) at 382B-C; Rielly v Seligson and

‘Now this Court has accepted the rule that when a contract has been reduced to writing,
the writing is, in general, regarded as the exclusive memorial of the transaction and in a
suit between the parties no evidence to prove its terms may be given save the document
or secondary evidence of its contents, nor may the contents of such document be
contradicted, altered, added to or varied by parol evidence . . . .’

[15] The terms of the common understanding imply that the investments were
for longer than five years and that there could be no lump sum withdrawal. These
terms clearly impugn the written terms which provide for the maturing of the
investments after five years. I point out further that the CIS Act, the rules and
Fedbond’s terms and conditions, which govern the agreement, all provide for an
investment period of five years after which the investments mature.  Clearly the
terms of the alleged common understanding are inconsistent with and contradict
the clear terms of the written agreement. They are for that reason inadmissible
and unenforceable.

[16] Furthermore, the evidence of the parties’ dealings with each other clearly
excludes the possibility of the parties having come to an agreement
encompassing the terms of the common understanding. I point out in this regard,
and this is not in dispute, that when notice was given to Fedbond of the
withdrawal of the total investment, it evoked no response from the latter asserting
the terms of the common understanding. In my view, and purely as a matter of
logic, receipt of the withdrawal notice should have impelled Fedbond to expressly
withhold consent to the withdrawal and to cite the existence of the terms of the
common understanding as a reason. As we all know the details of the common
understanding only came in the answering affidavit despite being requested by
IAM some three years before the onset of litigation.

Clare Ltd 1977 (1) SA 626 (A) at 628D-E; National Board (Pretoria) (Pty) Ltd v Estate Swanepoel
1975 (3) SA 16 (A) at 26A-C.

[17] The July 2003 letter is of no assistance to Fedbond’s argument. Quite
apart from the fact that this letter was not precipitated by a withdrawal notice,
IAM clearly did not accept that the investments were for a period longer than five
years, hence its insistence that details of the alleged long term ‘arrangement’ be
provided. The evidence we have vindicates IAM’s refusal to accept that the
investments were not for five years. Such evidence is in Fedbond’s August 2001
letter to IAM referred to in para 5 above as well as Fedbond’s email confirmation
also referred to above that the five year investment period was not effected by
the name change.

[18] Incidentally the August 2001 letter and its contents was not referred to nor
corrected in the July 2003 letter. Importantly, and as I state above, the latter letter
is inconsistent and contradictory to the clear terms one finds in the agreement,
whilst the earlier letter confirms these. I am not persuaded by the explanation in
the answering affidavit that the author of the August 2001 letter, Alet Horn (Horn),
was a ‘new’ employee who was unaware of the common understanding. If this
was indeed so, one can justifiably wonder why Horn, who must have been in
charge of the investment at the time, as is clear from the email correspondence,
was not aware of such important terms of what was probably a very large
investment.

[19] In my view the existence of the alleged common understanding was
correctly rejected by Malan J. It is clearly an ill-conceived attempt to avoid
honouring the withdrawal of the investment.

Withholding of consent in terms of rule 22(2)(a).

[20] The other basis advanced for disputing the respondents’ entitlement to
withdraw their investments is that Fedbond had not consented thereto within the
contemplation of rule 22(2)(a). As is apparent from the rule, referred to in para 11
above, the manager of a collective investment scheme may not unreasonably

withhold its consent to a withdrawal but it must provide a reason(s) if it does so.
As we know, Fedbond neither gave nor withheld consent when the requisite
notice was given to it. It simply did nothing. It cannot be argued that Fedbond’s
letter questioning the identity of the respondents as being the correct investors,
on receipt of the withdrawal notice, was a reason for withholding consent. Neither
can it be argued that Fedbond withheld consent due to non-compliance with
FICA requirements as the documents relevant in this regard were properly
tendered to it.

[21] Fedbond’s inaction amounts, I surmise, to a withholding of consent without
a reason. For this reason rule 22(2)(a) affords Fedbond no respite. It simply has
no legal basis in terms of that rule to frustrate the respondents’ legitimate
intention to withdraw their investments withholding consent without a reason. Its
inaction cannot, in my view, shield it from its obligations in terms of the
agreement, the rules and its terms and conditions. This conclusion applies
equally to Fedbond’s argument that it did not consent to the cession by IEB of
portions of its investment to CAL and Channel. In that regard too Fedbond simply
failed to respond to the notice requesting it to note the cessions.

Debtor and creditor relationship

[22] Counsel for Fedbond argued finally that the order issued by the court a
quo inclusive of the order for payment of interest was incompetent as it
presupposed a debtor-creditor relationship between Fedbond and IEB.
Reference was made in this regard to s 6(1) of the Part Bonds Act which
provides:

‘Rights of participant – (1) The debt secured by a participation bond shall to the extent of
the participation granted to any participant be a debt owing by the mortgagor to such
participant and not to the nominee company, and the rights conferred by the registration
of any such bond shall, notwithstanding the registration of the bond in the name of the
nominee company, be deemed to be held by the participants.’

Counsel argued that the relationship encapsulated in that provision, which was
not altered by the repeal of the Part Bonds Act, between a manager of a scheme
and a participant was not that of a debtor and creditor. It was further argued,
relying on the judgment of this court in Syfrets Participation Bond Managers Ltd v
Commissioner, South African Revenue Service9 that a participant can only claim
repayment of its investment in a scheme from the mortgagor, and not from the
manager. This argument is also reliant on the provisions of rules 1510 and 1611
which provides for the procedure when a participant seeks to claim its investment
from a mortgagor in a scheme.

[23] I am of the view that the relationship created when an investment is made
in such a scheme is tripartite in nature. Whilst the respondents, as investors, are
in fact creditors vis a vis the mortgagor(s), Fedbond remains in the picture as the
administrator of the investment scheme. Whilst it is further correct conceptually
that Fedbond as manager of the scheme does not become a debtor to a
participant, the agreement between them provides for certain obligations by
either. The agreement encompasses a relationship between Fedbond and the
respondents in terms of which once they have complied with the agreement and
the rules in terms of notice and payment of the relevant fees and charges,
Fedbond as manager must honour the withdrawal notice, unless it contends that
the funds are not available which will kick-start the process envisaged in rule 15
and 16. Those rules essentially provide for the procedure to be followed by a

9 (Supra) at 366A-B.
10 Rights of participants: Recovery of debts – Despite rule 14 a participant may in respect of a
participation bond instruct the manager to take all the necessary steps through and in the name
of the nominee company to recover from the mortgagor such portion of the principal debt as is
necessary to repay in full the participatory interest of such participant in such bond: Provided that
a participant may only so instruct the manager if – (a) the mortgagor has failed to comply with the
conditions of the bond; or (b) subject to the terms and conditions of the bond, the participants in
the scheme (excluding the manager) in which such participation bond is included, who hold a
majority in value of the participatory interests in such scheme, have instructed the manager in
writing to recover from the mortgagor such portion of the principal debt as is necessary to repay
in full the participatory interests of all such participants.
11 Rights of participants: Legal proceedings – A participant may not take any action, legal or
otherwise, in his or her own name to enforce the rights held by such participant in any
participation bond included in a scheme.

participant regarding the enforcements of its injusts against a defaulting
mortgagor.

[24] In this regard when one takes into account the agreement signed between
the parties that investments were placed for five years, it must follow that once a
participant gives notice to the manager to withdraw any portion of its investment
on maturity thereof, the manager must honour the withdrawal notice. It can avoid
honouring the requested withdrawal if for instance it cannot effect the withdrawal
in view of the fact that the funds have not yet been received from the mortgager.
This is not the case asserted here by Fedbond. The simple fact of the matter is
that Fedbond has not asserted that it cannot pay and in terms of the agreement it
must pay. The order of the court a quo was clearly correct including its order for
the payment of interest. Clearly IEB as investor relies on the agreement and the
terms thereof to say that on maturity of its investment it can withdraw it and that
is what it did in this matter. I also point out that my conclusion does not detract
from that in Syfrets, which in the main restated the general principles of the
relationship. In any event the circumstances of our case bear no relation to those
in Syfrets. Lastly, on this point, it is necessary to also point out that this case has
nothing to do with the situation envisaged in rules 15 and 16. Clearly the order
granted by Malan J was competent in all respects.

[25] In the final analysis I conclude that the respondents were perfectly within
their rights to withdraw their investment at the expiry of five years. At that time
the investments had matured in terms of the written agreement. The argument
that individual notices of withdrawal were required is misconceived. Nowhere in
the agreement, the rules and terms and conditions does one find such a
limitation. In the circumstances the appeal must fail.

[26] The following order is granted:

The appeal is dismissed with costs including the costs consequent upon the
employment of two counsel.

_______________
D MLAMBO
JUDGE OF APPEAL

HARMS DP (Mthiyane and Cachalia JJA and Saldulker AJA concurring):

[27] I have read the judgment of Mlambo JA, and while I agree with his
conclusion, I prefer to formulate my reasons somewhat differently.

[28] Malan J, in the high court, granted judgment in favour of the first
respondent, Investec Employee Benefits Ltd (‘Investec’), and the second
respondent, Capital Alliance Life Ltd for, respectively R10 696 122.57 and R35
333 877.43. The reason for the split award is that Investec, which was previously
known as Fedsure Life Assurance Ltd, had ceded part of its claim (which
consisted of a number of discrete claims) to Capital. Much time was wasted in
the court below on the validity of the cession but the issue was not argued in this
court because it would have made no difference to the outcome of the case: the
appellant, Fedbond Participation Mortgage Bond Managers (Pty) Ltd (‘Fedbond’)
is either liable for the whole amount or it is not. I shall, accordingly, not refer to
Capital any further. The third respondent, Channel Life Ltd, played no role in the
appeal and will be ignored.

[29] In addition to the costs order, Malan J ordered payment of interest at the
statutory rate. The correctness of this order relates to the nature of Fedbond’s

alleged liability, something to which I shall return during the course of the
judgment.

[30] Fedbond is a manager of a participation bond scheme. Investec invested
during the period 1 July 1997 and 13 August 2000 the sum of R 46 030 000 with
Fedbond in terms of the Participation Bonds Act 55 of 1981. The investment
consisted of a number of tranches, significantly 13 on 27 May 1998, 12 on 26
September 1999 and 17 on 13 August 2005. As manager of a participation bond
scheme, Fedbond had framed rules that were approved by the registrar and
these rules contained the form of agreement between a participant (Investec)
and the manager.

[31] The written agreement between Investec and Fedbond authorised the
latter to invest on Investec’s behalf, upon the security of a particular participation
bond, the amounts invested by Investec from time to time. It also provided that
the monies would remain invested for a period of not less than five years. This
accorded with the provisions of the Act which provided that money invested upon
the security of a participation bond included in a participation scheme ‘shall
remain invested for a period of not less than five years’ (s 3(3)(d)). The rules
stated that the period of five years would be calculated from the date on which
the funds were invested in a participation in the scheme; and that three months’
notice was required for repayment after the five year period. Based on this,
Investec’s investments matured between 2002 and 2005, and in spite of the
necessary notice, Fedbond refused to repay any amounts.

[32] Fedbond’s first defence is based on the so-called common understanding
between the parties which, according to the argument, overrode the written
agreement and the rules. The gist of the understanding was that the money could
not have been withdrawn after five years on three months’ notice. Malan J found
that this understanding was in conflict with the written memorial and could,
therefore, not be proved. I am prepared to go further and hold on the papers that

the evidence of deponent Field, the managing director of Fedbond, was
contrived. The basis of the understanding (and its main term) was that Investec’s
investment in the participation bond scheme would form part of a long-term
investment arrangement between the members of the Fedsure Group which, at
the time, included Fedbond and Investec (under its old name) to provide long
term funding for the Group. Counsel could not explain the basis of this
‘understanding’ and the consequent tacit agreement or how it could have existed
in the context of a participation bond investment unless Fedbond had
misappropriated the money. Once the foundation of the understanding collapses,
so does the whole structure.

[33] The second defence was based on the ‘rules’ or regulations issued under
the Collective Investment Control Act 45 of 2002.12 This Act repealed the
mentioned 1981 Act. The rules provide that a participant may, upon the expiry of
the 5-year investment period, withdraw part or whole of the funds invested in a
scheme ‘if the manager has consented to such withdrawal: Provided that the
manager may withhold such consent subject thereto that the manager furnishes
reasons for withholding such consent’ (rule 22(2)(a) – the other conditions are of
no moment for present purposes). I have some reservations about whether this
rule can apply to an investment made under the repealed Act. Section 117(2),
which deals with the effect of the repeal on things done under the repealed Act,
does not appear to me to affect existing contractual arrangements.13 In any
event, I do not accept that parties to a scheme may not agree on a fixed or other
regime in relation to the term of the investment, provided the statutory
requirement of a minimum of five years is adhered to. It is not conceivable that if
a participant wishes to invest for a period not exceeding, say, five years and
reaches an agreement with the manager to that effect when the investment is
made that the manager may, after the five years and after all other conditions
have been fulfilled, withhold his consent – even with good reasons – under the

12 Rules for the Administration of a Collective Investment Scheme in Participation Bonds GN 577,
GG 24984, 28 February 2003.
13 Compare Adampol (Pty) Ltd v Administrator Transvaal 1989 (3) SA 800 (A) at 811D-812I.

rule. The object of the rule is to regulate those cases where there is no
agreement about the term of the investment.

[34] Fedbond’s counsel submitted that the ‘understanding’ was the reason why
consent was withheld. Assuming that this ‘reason’ was conveyed when the
consent was withheld (which, on the facts, it was not) the word ‘reason’ in the
rule is not equivalent to ‘excuse’. A bad reason is no reason. A reason under the
rule must be objectively justifiable.

[35] This brings me to the major point on appeal which, according to
respondents’ counsel, was not argued below and did not feature in Malan J’s
careful analysis of the facts and law. The argument was this: because Fedbond
was the manager of the scheme and not Investec’s debtor, judgment for the
capital amount and mora interest at the prescribed rate could not have been
awarded against Fedbond even if it is assumed that Investec was entitled to call
up its investment.

[36] Fedbond relied in this regard on the following quotation from Syfrets
Participation Bond Managers v Commissioner, SARS:14
‘In broad, the Act is designed, inter alia , to enable financial institutions to offer to
investors, many of whom may wish to invest relatively small amounts of money,
an opportunity of participating with other investors in an investment secured by a
registered mortgage bond over immovable property and yielding a competitive
rate of interest. Each participant who holds such a participation in a participation
bond becomes a creditor of the mortgagor to the extent of the participation. The
debt so created is owed by the mortgagor to the participant and not to the
nominee company in whose name the bond is registered and the rights conferred
by the bond are deemed to be held by the participants (s 6(1)).’

14 2001 (2) SA 359 at 363G-H.

[37] The correctness of the quotation is not in doubt. It does not, however, deal
with the full picture. Participation bond schemes work as follows: Collective
investment schemes are managed by managers such as Fedbond. Managers
are appointed by nominee companies who act as nominee for or representative
of a participant (investor) in a participation bond. (The nominee company in this
case was a party in the court below but did not take part in the appeal.) The
nominee company lends money through the agency of a manager, against the
security of mortgages registered over the immovable property of borrowers in
favour of the nominee company.

[38] The manager is responsible for the operation of the scheme. A manager
may offer and grant participation in bonds under the scheme to any person and
accept money for investment on the security of participation bonds. These funds
must be kept on deposit by the manager in the name of the nominee company on
behalf of the investor.

[39] The manager is the person responsible for enforcement of the rights
against the mortgagors and must do so through and in the name of nominee
company (rule 14). A participant may not in his own name take any action to
enforce his rights in a participation bond (rule 16) but may instruct a manager to
do so if, for instance, the mortgagor has failed to comply with the conditions of
the bond (rule 15). The rights of a participant are limited to his pro rata interest in
the particular bond, and he has no other right of recovery against the manager or
the nominee company (rule 18).

[40] The problem in this case is something different and may be illustrated by
way of an example. Assume that the participant and manager had agreed that
the investment would be for ten years only. The manager, contrary to the terms
of the agreement, lends the money on a mortgage bond for a period of twenty
years. After the lapse of the ten years the participant gives due notice of
withdrawal of the investment. The manager is unable to call up the bond because

the mortgagor is not in default and, for the same reason, the participant cannot
instruct the manager to call up the bond. The participant has also no claim
against money held by the nominee company. Is the participant without remedy?
According to Fedbond’s argument the investor has to carry this risk because it
(Fedbond) is not the debtor of the participant. This means that the participant has
no remedy against anyone and that the manager would be entitled to ignore
investment agreements and keep the money of a participant bound up in a bond
for whatever period it pleases the manager.

[41] I believe that it is an over-simplification to say that the manager does not
stand in any debtor-creditor relationship with a participant. The manager
undertakes by necessary implication to manage and structure the portfolio in
such a manner that the bonds in which a particular participant has an interest
may be called up whenever the participant is entitled to call up his investment.
This obligation has nothing to do with the relationship between the manager, the
mortgagor and the participant. It is an obligation of the manager towards the
participant and it follows that there is in this regard a debtor-creditor relationship
between them. The manager is in other words obliged to pay a participant who,
under rule 22, is entitled to payment. If the dedicated funds are not in the account
of the nominee company the manager has to pay the money it has agreed to
pay. And if it fails to do so it is also liable for statutory mora interest which is
something different and distinct from the bond interest.

[42] I do not understand Fedbond’s dilemma and delaying tactics. On its own
version Investec could have called up the investments since July 2002, and that
the last call could have been made in August 2005. All that was required, it said,
was that the aggregate amount could not have been withdrawn on the same date
and that the intervals between withdrawals could not have been shorter than
between investments. Nearly five years later, and nothing has been paid or
offered.

[43] For these reasons I agree with the order proposed by Mlambo JA.

_____________
L T C HARMS
DEPUTY PRESIDENT

APPEARANCES

APPELLANTS:

J J Bret SC (with him E Kromhout)
Instructed by Oosthuizen Du Toit Berg & Boon,
Johannesburg
Van Der Merwe & Sorour, Bloemfontein

RESPONDENTS:

D M Fine SC (with him M M Antonie)
Instructed by Werksmans Inc, Johannesburg
Naudes Inc, Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF
APPEAL
From:  The Registrar, Supreme Court of Appeal
Date:   31 March 2010
Status: Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

FEDBOND PARTICIPATION MORTGAGE BOND MANAGERS V INVESTEC
EMPLOYEE BENEFITS

The Supreme Court of Appeal (SCA) today dismissed an appeal brought by
Fedbond Participation Mortgage Bond Managers against an order of the South
Gauteng High Court ordering it to make payment to Investec Employee Benefits
Limited (IEB) of certain monies invested in Fedbond in terms of the Collective
Investment Schemes Control Act 45 of 2002 (the CIS act).

Fedbond had resisted the IEB’s efforts to withdraw its investments upon their
maturity. Fedbond's primary contention was that IEB, who had under its initial name
of Fedsure Life Assurance Limited, made the investments was not entitled to
withdraw the investments because there was a common understanding underlying
the investment agreement that the investments were for longer than the five year
period stated in the agreement.

This argument was rejected by the high court on the basis that the terms of the
disputed common understanding were inconsistent with the written terms of the
written agreement and as extrinsic evidence was inadmissible to contradict terms of
a contract reduced to writing; this argument could not be accepted. The SCA upheld
this conclusion.

Fedbond had also argued that having withheld its consent to the withdrawal this also
forestalled any attempts to the withdrawal. The SCA also rejected this argument
holding that in terms of the CIS Act Fedbond, as the manager of the investment
scheme, could only withhold consent to pay out moneys to the investor if it gives
sufficient reasons for doing so. The SCA held that Fedbond's failure to respond to
the notice of withdrawal amounted to withholding of consent without a reason which
did not shield Fedbond from its obligation to respect the withdrawal notice.

The SCA also rejected Fedbond’s argument that its relationship as manager, to an
investor, arising in terms of the CIS Act was not that of debtor and creditor which
meant that an investor could not approach a court demanding payment of its
investment as was done in this case. The SCA reasoned that upon investments
maturing the manager could not refuse to pay out unless it alleged default by a
mortgagor who had taken out a loan linked to the investment.

---ends---