The Supreme Court of Appeal (“SCA”) recently handed down a judgement in what has been cited as a ‘landmark case’ in respect of the waiver of directors’ rights and the impact of such waiver on a company. In this article, we look at what a ‘waiver’ of rights in terms of a contract entails and what the effect of such a waiver by directors may have on a company, specifically concerning debts owed to the company.

In the matter of Phoenix Salt Industries (Pty) Ltd v The Lubavitch Foundation of South Africa (330/2023) [2024] ZASCA 107 (3 July 2024) (hereinafter referred to as the “Phoenix case”), the court had to determine if former directors could waive their right to reclaim debt owed to the company in terms of a written loan agreement. The Phoenix case dates back to 1994 when the Lubavitch Foundation of South Africa (“Lubavitch Foundation”) owed Nedbank a mortgage bond of R5,2 million which it was unable to repay. The Lubavitch Foundation was approached by the Krok brothers who took over the loan through their shelf company, Phoenix Salt Industries (“Phoenix Salt”). 

Instead of settling the loan, however, the parties concluded a written loan agreement, in terms of which the Lubavitch Foundation undertook to repay the loan amount to Phoenix Salt instead of Nedbank. Subsequent to the loan agreement, Nedbank’s rights and claims against the Lubavitch Foundation in respect of the mortgage bond were ceded to Phoenix Salt. Another company, namely Golden Hands Property Holdings (Pty) Ltd (“Golden Hands”) signed as a surety and co-principal debtor in solidum with the Lubavitch Foundation for its obligations in terms of the loan agreement.  

One of the essential terms of the agreement was that the loan was advanced by Phoenix Salt to the Lubavitch Foundation, subject thereto that the Lubavitch Foundation sold several specified properties to Golden Hands, against a purchase price equal to the loan amount. A separate written sale agreement was concluded between the Lubavitch Foundation and Golden Hands to this effect, in terms of which the purchase price was payable upon transfer of the properties. Golden Hands intended to erect cluster houses on the properties. In terms of the loan agreement Golden Hands ceded its right to receive the proceeds from the sale of the cluster houses to Phoenix Salt, in order to reduce Lubavitch’s indebtedness. Golden Hands never paid Lubavitch the purchase price for the properties.

The Lubavitch Foundation averred that Phoenix Salt had at the time and on numerous occasions stated that the Lubavitch Foundation would never be required to settle the debt, and one of the Krok brothers also signed an affidavit to this effect. In 2003, the Krok brothers resigned as directors of the company and were replaced by their younger family members who, many years later, proceeded to demand repayment of the loan from the Lubavitch Foundation. The Lubavitch Foundation contended that the Krok Brothers while acting as directors of Phoenix Salt, had waived their right to recover the debt owed by the Lubavitch Foundation.  

Phoenix Salt contended that the loan agreement contained a non-variation clause, which read, inter alia, as follows:

“9.2 Neither party shall be bound by any representation, express or implied term, warranty, promise or the like not recorded herein or reduced to writing and signed by the parties or their representatives.

9.3 No addition to, variation or agreed cancellation of this agreement or the annexure thereto shall be of any force or effect unless in writing and signed by or on behalf of the parties.”

A waiver of rights entails the decision by a party to an agreement not to enforce a right conferred upon such party in terms of the agreement. The waiver of a right conferred by law takes place when the waiving party, through words or conduct, has indicated an intention not to enforce one or more or all of the rights conferred to it in terms of an agreement. Normally, a party relying on a waiver only has to demonstrate that it has accepted and need only show that it has the other party's express or tacit offer to release it from its obligations in terms of an agreement. 

The Phoenix case was first heard in the High Court where the court ruled that it was evident that the former directors of Phoenix Salt had waived their right to reclaim any debt owing to them by the Lubavitch Foundation. Phoenix Salt then appealed to the SCA which confirmed the High Court’s decision that, although Phoenix Salt had been taken over by new directors, the former directors had waived their right to reclaim the outstanding debt and subsequently, the company could not now reclaim the debt. 

The question before the court was therefore, whether Phoenix Salt had waived its right to claim repayment of the balance of the loan from the Lubavitch Foundation and, if so, whether such waiver was valid in light of the non-variation clause. The court found that the non-variation clause expressly precluded any additions, variations, and cancellations of the agreement. However, it did not preclude a waiver of the terms of the agreement. Accordingly, the non-variation clause relied on by Phoenix Salt did not prevent the directors of Phoenix Salt from waiving their rights to claim repayment from the Lubavitch Foundation. The court reasoned that the waiver did not amount to a variation of the terms of the loan agreement, but rather an abandonment of Phoenix Salt’s right to enforce repayment of the loan amount from the Lubavitch Foundation. 

The judgement handed down by the SCA in the Phoenix case applies to all South African companies and affects the conduct of directors and other company heads since their conduct constitutes the conduct of the company. Directors should, therefore, be cautious when electing to waive their rights, as such waiver will still be applicable even if they cease to be directors of the company and may have detrimental effects on the company.


Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).