SCA says ex-directors can waive right to reclaim debts, even if there is a contract

In a landmark case, the Supreme Court of Appeal (SCA) said creditors through their conduct can “waive” their rights to reclaim debts even in the millions, regardless of a written loan agreement.

The SCA also confirmed such “waiver” behaviour can be performed by company directors who are no longer at the company. This has large implications for companies, since it means directors’ conduct towards companies’ debtors can later lead to companies being unable to reclaim debt.

The matter began in 1994, when the Lubavitch Foundation of SA, a Johannesburg-based Jewish organisation found itself unable to pay a R5.2m mortgage loan to Nedbank. Facing foreclosure, twin brothers Abraham and Solomon Krok came to Lubavitch’s aid, taking over the Nedbank loan through their shelf company Phoenix Salt Industries.

Instead of owing the bank, Lubavitch and Phoenix Salt devised a complex scheme that would settle the foundation’s debts.

Primarily, they signed a written loan agreement, which stipulated Lubavitch would pay Phoenix Salt, rather than Nedbank, at a later date. Phoenix Salt helped Lubavitch sell R2.5m of the property to pay back the debt.

However, the Krok twins told Lubavitch on numerous occasions that the foundation “would never be required to settle the debt”. One of the Krok twins confirmed this in an affidavit.

In 2003, the Krok twins resigned as directors of Phoenix Salt and their role was replaced by younger family members.

Almost two decades later, however, Phoenix Salt — under the new Krok directors — demanded payment from Lubavitch. This led to a dispute between all the parties and a high court fight.

In 2023, the Johannesburg high court ruled that Phoenix Salt — through the previous directors, the Krok twins — “clearly waived its right” to claim back any remaining debt.

Phoenix Salt appealed to the SCA.

Acting SCA Judge Nobulawo Mbhele dismissed Phoenix Salt’s appeal, noting courts must consider “circumstances surrounding the contract”. This means looking beyond the written words of a contract.

“A waiver,” Mbhele said, “is an abandonment ... of a right ... in a contract which is expressed through an explicit statement or conduct that indicates a voluntary decision to give up that right ... without modifying the contract’s terms.”

When a waiver can be proved, such as when it is “expressly communicated to the affected party, [that party] is entitled to act upon it”. This is what the Lubavitch Foundation did when it was told by the Kroks any debt would not be called on.

Mbhele said it was clear the Kroks had “waived” their right to ask for the debt. Though new directors took over Phoenix Salt, the Kroks were acting as heads of Phoenix Salt. This meant the company could not now try to revive a debt that its own previous directors had waived.

This finding applies to every company in SA and implicates the actions of directors and other heads of companies, since their conduct becomes the conduct of the company.

Mbhele dismissed Phoenix Salt’s case with costs and Lubavitch does not have to pay this debt.

moosat@businesslive.co.za