THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case No: 603/2017

In the matter between:

MADIBENG LOCAL MUNICIPALITY                                                      APPELLANT

and

PUBLIC INVESTMENT CORPORATION LTD                                    RESPONDENT

Neutral citation:  Madibeng Local Municipality v Public Investment Corporation Ltd
(603/2017) [2018] ZASCA 93 (1 June 2018)

Coram:
Ponnan, Wallis and Willis JJA, Plasket and Makgoka AJJA

Heard:
17 May 2018

Delivered:
1 June 2018

Summary: Local government – defence that loans raised by a municipality
unenforceable for want of prior written consent of Administrator of province – raising
of loans to repay other loans not requiring consent – procedure – rule 38(2) – too
late for appellant to object to agreement to determine separate issue on affidavit.

___________________________________________________________________

ORDER

On appeal from: Gauteng Division of the High Court, Pretoria (Jansen J sitting as
court of first instance):

1 The order of the court below is set aside and substituted with the following order:
‘1 It is declared that the loans raised by the defendant from the plaintiff are not
unenforceable for want of compliance with s 52(2) of the Local Government
Ordinance 17 of 1939.
2 The defendant is ordered to pay the plaintiff’s costs on an attorney and client scale,
such costs to include the costs of two counsel.’
2 The appeal is otherwise dismissed with costs, including the costs of two counsel.

JUDGMENT

Plasket AJA (Ponnan, Wallis and Willis JJA and Makgoka AJA concurring)

[1] The central issue in this appeal is whether, when the respondent, the Public
Investment Corporation Ltd (the PIC)1 lent money to the Brits Town Council (Brits),
the predecessor of the appellant, the Madibeng Local Municipality (Madibeng), Brits
was authorised to raise the loans. The argument raised by Madibeng is that Brits
acted without authorisation, with the result that the loans are unenforceable. In the
trial court, the Gauteng Division of the High Court, Pretoria, Jansen J found that
there was no merit in this argument. This appeal is before this court with the leave of
the court below.

1 The PIC was established by the Public Investment Corporation Act 23 of 2004. It is a company that
is wholly owned by the government, with the Minister of Finance being the shareholder
representative. Its main object, in terms of s 4, is to be a financial service provider.

The facts

[2] During the late 1980s and early 1990s, Brits raised a number of short term
loans at favourable interest rates from a number of institutions. Its plan was to invest
the funds on the capital market in the hope that the returns would outperform the
cost of the loans. The profits could then be used for future capital projects.

[3] Matters did not turn out as planned. By 1993, Brits found itself in deep trouble
as minutes of its council meetings and reports, that form part of the record, attest.
Urgent remedial action was required, not only to deal with the looming fiscal crisis,
but also to deal with what appears to have been a serious breakdown in accountable
administration in Brits’ treasury.

[4] To address the fiscal problem, it became necessary to re-schedule a number
of loans, as the loans were of a short-term nature while the underlying investments
matured at later dates. To this end, Brits borrowed a large amount of money from the
PIC in order to pay its existing short-term loans. On 11 January 1994, in order to
repay the loans it had taken from the PIC, Brits issued to the PIC a series of zero
coupon stock certificates – essentially promissory notes. It also pledged a number of
insurance policies to the PIC.

[5] When Madibeng, which by now had succeeded Brits, failed to timeously repay
the PIC, the latter first exercised its rights in terms of the pledged policies. Those
were insufficient to cover the full extent of Madibeng’s indebtedness. The PIC then
proceeded to institute proceedings against Madibeng on the strength of the zero
coupon stock certificates.

[6] Three zero coupon stock certificates are in issue in this case. The first, BR 25,
is in respect of a loan of R29 306 987.70. With an interest rate of 12.47 percent, it
had a face value on maturity of R93 million. The second, BR20, is in respect of a
loan of R10 219 836.60. With an interest rate of 13.29 percent, it had a face value on
maturity of R37 million. The third, BR26, is in respect of a loan of R26 072 786.40.
With an interest rate of 12.47 percent, it had a face value on maturity of R87 million.
The value of the others, namely BR17 to BR32, were paid to the PIC upon maturity.

The pleadings

[7] In its particulars of claim, the PIC pleaded that, on 11 January 1994, Brits
issued to the PIC three zero coupon stock certificates – BR25, BR20 and BR26 –
which were to be redeemed by payments of R93 million, R37 million and R87 million
on 30 June 2003, 30 November 2003 and 30 November 2003 respectively.

[8] The PIC pleaded that when the zero coupon stocks fell due, Madibeng failed
to honour them. When amounts received as a result of the pledge and part payments
made by Madibeng were taken into account, the capital amounts that the PIC
claimed to be outstanding and to be due were R65 086 208.30 in respect of BR25,
R28 993 449.70 in respect of BR20 and R68 560 304.24 in respect of BR26.

[9] The PIC claimed payment of these amounts plus interest at the reduced rate
of 10 percent per annum from 1 February 2010 to date of payment.

[10] Madibeng filed a special plea and a plea over. The special plea was a plea of
prescription to which the PIC replicated on the basis that the part payments and
other unequivocal admissions of liability had interrupted prescription.

[11] In the plea over, Madibeng admitted that it had failed to pay the PIC when the
zero coupon stocks fell due. It pleaded that Brits was ‘not duly authorised to issue
the zero coupon stock certificates and that it is for this reason not in law liable to the
plaintiff’; that they were ‘invalid, unlawful and unenforceable . . . due to the fact that
the defendant was not in law duly authorised to issue them to the plaintiff’; that Brits’
authority to issue them derived from the Local Government Ordinance 17 of 1939
(the Ordinance) and that they were issued in contravention of the Ordinance with the
result that they were ‘invalid, unlawful and unenforceable against the defendant’.

[12] The precise terms of the defence are set out in paragraph 20 of the plea,
which states:
‘The defendant further pleads that –
20.1 at all material times, and in particular, on 11 January 1994, when the zero coupon
certificates were issued, the defendant was a municipality to which the Ordinance applied;

20.2 the zero coupon certificates upon which the plaintiff relies purport to have been issued
in terms of section 52 of the Ordinance;
20.3 the issuing of the zero coupon certificates to the plaintiff amounted to raising a loan;
20.4 in terms of section 52(1)(a) and (b) of the Ordinance, the defendant could only raise a
loan for purposes of defraying expenditure in the execution of its powers; or repaying an
existing loan; or to finance temporarily loan expenditure or expenditure on revenue account
incurred in anticipation of receipt of revenue estimated in terms of section 58 and from which
the expenditure would have been defrayed;
20.5 In terms of section 52(2) of the Ordinance, the defendant could only raise a loan
contemplated in section 52(1) with the prior approval of the Administrator appointed in terms
of section 68 of the South Africa Act, 1909;
20.6 the loans allegedly raised by the issuing of the certificates were not raised for any of the
purposes contemplated in section 52(1) of the Ordinance and were not raised with the prior
written approval of the Administrator. The Administrator could not have validly and lawfully
approved the raising of the loans in view of the fact that the purpose of such loans would in
any event have been unlawful;
20.7 in the event that it is found that the Administrator gave written approval, such approval
would have been ultra vires due to the fact that the purpose for which the loans were
purportedly raised is not a purpose for which the Administrator could in law have validly and
lawfully approved;
20.8 the raising of the loans by the issuing of the zero coupon certificates was accordingly
ultra vires, did not and could not have created a valid and lawful obligation capable of giving
rise to any of the claims upon which the plaintiff relies in these proceedings;
20.9 there is, accordingly, no valid debt owing by the defendant to the plaintiff due to the fact
that the basis of the plaintiff’s claims is invalid and of no force and effect in law for the
reasons stated above.’

[13] The PIC filed a replication in which it pleaded, inter alia, that the raising of the
loans was not subject to the Ordinance, that s 52 did not apply and that Madibeng
was ‘in law liable to make good and repay all the amounts advanced to it by the
Plaintiff as a result of the loan agreements/transactions concluded and effected by
the parties’.

[14] Madibeng also counter-claimed an amount of R15 million plus interest on the
basis of unjust enrichment. The quantum it claimed was the amount it had paid to the
PIC in respect of what it termed its ‘purported obligations’ towards the PIC in respect

of the zero coupon stocks. The counter-claim is not relevant to the issues that arise
in this appeal and no more need to be said of it but that it must have felt to the PIC
that, in light of the defence raised, insult was being added to injury.

The separation of issues

[15] Two days before the trial was to commence, Madibeng gave notice that it
wished to have the issues – namely the enforceability of the loans, prescription and
the counter-claim – separated, with only the enforceability of the loans being
decided.

[16] At first, the PIC was opposed to the separation of issues. It was, however,
persuaded to agree to the separation. It was also agreed, apparently at the
suggestion of Jansen J, that rather than oral evidence being tendered, the parties
would each file affidavits in which they would set out their contentions. They were
both free to refer to documents in the trial bundle, which is now part of the appeal
record. On this basis, the issue of the enforceability of the loans was determined,
with the other issues being postponed sine die.

[17] In Madibeng’s affidavit, deposed to by Mr N E Mmbengwa, its manager for
legal services, the defence that was pleaded in respect of the separated issue was
set out fully and consistently with the plea: the loans were unenforceable because
they were raised without the written consent of the Administrator in terms of s 52(2)
of the Ordinance. The PIC dealt with the issue in its answering affidavit, deposed to
by its attorney, Mr M P C Manaka. Madibeng had the opportunity to, and did, reply.

[18] In her judgment, Jansen J concluded that ‘the zero coupon certificates issued
by the defendant are valid and that the defence of the defendant is without merit and
a mere dilatory defence’.2 She agreed with counsel for the PIC that a ‘punitive costs
order’ should be made against Madibeng ‘given the fact that it knew that the point of
authority was without merit, and a mere delaying tactic’.3 She accordingly made the
following order:

2 Paragraph 37.
3 Paragraph 39.

‘The separate issue regarding the alleged invalidity of the zero coupon certificates is
dismissed with a punitive costs order, such order to include the costs of two counsel.’

The issues

[19] While I said in the opening paragraph of this judgment that the principal issue
in this appeal is whether the loans are enforceable, two further issues also require
consideration. The first is Madibeng’s contention that the procedure adopted by the
high court was irregular with the result that the proceedings should be set aside and
remitted to the high court. The second is the propriety and form of the costs order. I
shall deal with them after considering the principal issue.

The enforceability of the loans

[20] It is clear from the plea that the point that Madibeng took in order to sustain
the defence of the unenforceability of the loans was that the loans required the
written consent of the Administrator of the Transvaal and that consent was never
granted, with the result that Brits acted without authority when it raised the loans.

[21] In what follows, I shall assume (without deciding), in favour of Madibeng that
the Ordinance applies.

[22] Section 52 of the Ordinance provides:
‘(1) Subject to the provisions of this Ordinance, a council may by special resolution –
(a) raise a loan for –
(i) defraying expenditure incurred in the execution of its powers; or
(ii) repaying an existing loan: Provided that –
(aa) the loan shall not exceed the amount outstanding on the original loan; or
(bb) the period within which the loan is redeemable shall not exceed the
unexpired portion of the period within which the original loan is redeemable;
(b) raise a short term loan, including a loan at call, in order to finance temporarily –
(i) loan expenditure; or
(ii) expenditure on revenue account incurred in anticipation of the receipt of revenue
estimated in terms of section 58 and from which the expenditure would have been
defrayed; or

(c) obtain overdraft facilities from a bank.
(2) A council shall not raise a loan contemplated in paragraph (a)(i) or (b) of subsection (1)
without the prior written approval of the Administrator or obtain overdraft facilities as
contemplated in paragraph (c)  of that subsection without such approval, and the
Administrator may grant such approval subject to such terms and conditions as he may
determine . . .
(3) Where a loan contemplated in subsection 1(a) is raised by the issue of stock, the
provisions of the Johannesburg Municipal Borrowing Powers Ordinance, 1903 (Ordinance 3
of 1903), except section 51, shall apply mutatis mutandis.’

[23] The point can be disposed of easily. The facts establish that the loans that
Brits raised were for the purpose of paying back other loans. They are loans
contemplated by s 52(1)(a). In terms of s 52(2), such loans do not require the prior
written approval of the Administrator. There is, accordingly, no merit in the point. This
means that in respect of the separated issue, Jansen J arrived at the correct
conclusion.

The procedural point

[24] It was argued on behalf of Madibeng that the procedure adopted by Jansen J
was irregular and that, as a result, her order should be set aside and the matter
remitted to the High Court. In my view, there is no merit in this argument for the
following reasons.

[25] First, rule 38(2) of the uniform rules allows for evidence to be adduced by
affidavit in trial proceedings. The rule provides:
‘The witnesses at the trial of any action shall be examined viva voce, but a court may at any
time, for sufficient reason, order that all or any of the evidence to be adduced at any trial be
given on affidavit or that the affidavit of any witness be read at the hearing, on such terms
and conditions as to it may seem meet: Provided that where it appears to the court that any
other party reasonably requires the attendance of a witness for cross-examination, and such
witness can be produced, the evidence of such witness shall not be given on affidavit.’

[26] The approach to rule 38(2) may be summarised as follows. A trial court has a
discretion to depart from the position that, in a trial, oral evidence is the norm. When

that discretion is exercised, two important factors will inevitably be the saving of
costs and the saving of time, especially the time of the court in this era of congested
court rolls and stretched judicial resources. More importantly, the exercise of the
discretion will be conditioned by whether it is appropriate and suitable in the
circumstances to allow a deviation from the norm. That requires a consideration of
the following factors: the nature of the proceedings, the nature of the evidence,
whether the application for evidence to be adduced by way of affidavit is by
agreement, and ultimately, whether, in all the circumstances, it is fair to allow
evidence on affidavit.4

[27] In this case, the parties agreed to place evidence on affidavit before the court
on the separated issue. It was, in essence, a law point, and the facts were never in
dispute: Madibeng either admitted or did not deny the payment of the loans to it and
the issuing of the zero coupon stock certificates. In its plea, no facts were alleged to
place in dispute anything that appears in the trial bundle. In these circumstances, I
can see no basis upon which it can be suggested that Jansen J exercised her
discretion injudiciously.

[28] Once Madibeng agreed to the procedure, it was no longer open to it to object
on appeal. I also cannot see what possible prejudice it could have suffered. Indeed,
in its reply, it took issue with none of the facts adduced by the PIC in its answering
affidavit.

Conclusion and order

[29] In turning to consider the propriety of Jansen J’s costs order it is,
unfortunately, necessary to say something about the way in which Madibeng
conducted its case. It took the money on offer from the PIC in order to avert a crisis
of Madibeng’s own making. It agreed to a means of repayment. When its debts fell
due, it made certain payments. Then, after it had reneged and summons was issued
against it, it raised the unenforceability of the loans as a defence.

4 See New Zealand Insurance Co Ltd v Du Toit 1965 (4) SA 136 (T); Havenga v Parker 1993 (3) SA
724 (T); Abraham v City of Cape Town 1995 (2) SA 319 (C); Colarrosi v Gerber ECG 29 July 2004
(case no. 613/03) unreported. See too D R Harms Civil Procedure in the Superior Courts (Vol 1) B-
278 to B-279.

[30] The conduct of Madibeng was beyond the pale. As an organ of state, it is
required to act ethically, and has failed dismally to do so in this matter. Litigation,
said Harms DP in Cadac (Pty) Ltd v Weber-Stephen Products Co & others,5 ‘is not a
game’; organs of state should act as role models of propriety;6 and they may not
behave in an unconscionable manner.7

[31] The unconscionable approach taken by Madibeng appears to be the basis for
Jansen J granting a ‘punitive costs order’. By that, I presume she meant an order of
costs on the attorney and client scale. While it was within her discretion, on the
strength of Madibeng’s unconscionable conduct to award a punitive costs order
against it, her order conduces to confusion and cannot be endorsed in its original
form.

[32] Jansen J’s order in respect of the merits also requires reconsideration. She
ordered that the ‘separate issue regarding the alleged invalidity of the zero coupon
certificates is dismissed’. In my view, it would have been more appropriate for a
declaratory order to have issued to the effect that the loans were not unenforceable
for want of the Administrator’s consent. Thus, despite the appeal failing, both orders
cannot stand. They must be set aside and replaced with the orders set out below.

[33] In the result:
1 The order of the court below is set aside and substituted with the following order:
‘1 It is declared that the loans raised by the defendant from the plaintiff are not
unenforceable for want of compliance with s 52(2) of the Local Government
Ordinance 17 of 1939.
2 The defendant is ordered to pay the plaintiff’s costs on an attorney and client scale,
such costs to include the costs of two counsel.’
2 The appeal is otherwise dismissed with costs, including the costs of two counsel.

5 Cadac (Pty) Ltd v Weber-Stephen Products Co (Pty) Ltd & others [2010] ZASCA 105; 2011 (3) SA
570 (SCA) para 10.
6 S v Makwanyane & another 1995 (3) SA 391 (CC) para 222.
7 MEC: Department of Police, Roads and Transport, Free State Provincial Government v Terra
Graphics (Pty) Ltd t/a Terra Works & another [2015] ZASCA 116; 2016 (3) SA 130 (SCA) paras 17-
18.

___________________
C Plasket
Acting Judge of Appeal

APPEARANCES

For appellant
K Tsatsawane and X Mofokeng

Instructed by

Gildenhuys Malatji Inc, Sandton

Honey Attorneys, Bloemfontein

For respondent

P L Mokoena SC and P Khosa

Instructed by

Werksmans Attorneys, Sandton

Symington & De Kok Attorneys, Bloemfontein