Brief Summary

Liquidation — Final liquidation order — Application for final liquidation of close corporation — Respondent's failure to pay admitted debt — No bona fide dispute raised regarding indebtedness — Statutory presumption of inability to pay debts not rebutted — Intervention by creditor justified. Respondent, Coalition Trading 561 CC, was placed under provisional liquidation on 11 November 2021 due to failure to pay R2 495 329.73 owed to applicant, Karien Catherine Maria Marx, following a sale agreement. Respondent did not appear or contest the application at the extended return date. Court confirmed the rule nisi for final liquidation, finding no genuine dispute over the debt and that the respondent was commercially insolvent.

Comprehensive Summary

Summary of Judgment

1. Introduction

This was an application for the final liquidation of a close corporation in the High Court of South Africa, Free State Division, Bloemfontein. The proceedings arose from an unpaid creditor’s attempt to obtain a final winding-up order after a provisional order had already been granted.

The applicant was Karien Catherine Maria Marx, a creditor of the respondent. The respondent was Coalition Trading 561 CC, the close corporation sought to be liquidated. Nedbank Limited participated as an intervening creditor after being granted leave to intervene.

Procedurally, the respondent was provisionally liquidated on 11 November 2021, and a rule nisi was issued calling upon interested parties to show cause on the return date why a final liquidation order should not be made. The respondent delivered a notice of intention to oppose and filed an answering affidavit. Nedbank launched an unopposed intervention application and was admitted as an intervening creditor on 24 February 2022. On the extended return date, the respondent filed no heads of argument and made no appearance, and its attorneys withdrew as attorneys of record during the hearing.

The dispute concerned whether the respondent should be placed under final liquidation on the basis of its alleged inability to pay its debts, in circumstances where the applicant alleged a liquidated indebtedness arising from a business sale agreement and relied on statutory deeming provisions following service of a demand.

2. Material Facts

The applicant’s claim arose from a written agreement (subject to a non-variation clause) in terms of which the applicant sold a business as a going concern, known as Pop Snax, to the respondent on 9 September 2019. The purchase price was R3 500 000.00, payable by a deposit of R750 000.00 and thereafter by 10 monthly instalments of R247 500.00 each, the first being due on or before 9 October 2019 and thereafter on or before the 9th of each successive month.

It was common cause on the papers that the respondent paid the deposit and a further amount of R403 487.91, but thereafter failed to make further payments as contemplated by the agreement. The court treated the respondent’s failure to pay as a material breach, and noted that the respondent admitted being in breach.

In addition to the unpaid balance of the purchase price, the applicant alleged further indebtedness connected to the respondent’s conduct after the sale. The respondent acquired goods on the applicant’s accounts from suppliers, and the applicant was constrained to pay those suppliers; the judgment recorded that at least one supplier had obtained judgment against the applicant for indebtedness incurred by the respondent. The applicant also alleged that the respondent failed to reimburse it for stock and raw materials sold to the respondent, which the respondent utilised and sold without paying.

On 3 August 2021, the applicant caused the sheriff to serve a statutory demand in terms of section 69 of the Close Corporations Act 69 of 1984 at the respondent’s registered office, and also served the demand on the respondent’s auditors. The sheriff’s return recorded unsuccessful attempts to reach the respondent’s sole member telephonically. The respondent did not pay, secure, or compound for the amount claimed to the applicant’s satisfaction within the stipulated period, and did not dispute the claim after service of the demand.

Although the respondent attempted to resist liquidation, the court found that the bases advanced (insofar as they could be discerned) were vague. The respondent appeared to suggest that the applicant’s conduct after breach, including repossession of certain equipment to which ownership had been reserved, made it impossible for the respondent to trade, and it also appeared to invoke the notion that the applicant was enforcing a “penalty” by repossessing while still claiming the full outstanding purchase price. The court recorded that the respondent did not clearly articulate a counterclaim and did not provide concrete financial information demonstrating solvency or the ability to pay.

The intervening creditor’s affidavit was treated as supporting the conclusion that the respondent was commercially insolvent.

3. Legal Issues

The primary legal question was whether the applicant had established grounds for a final liquidation order against the respondent close corporation, including whether the respondent was unable to pay its debts within the meaning of the applicable statutory framework.

A central issue concerned the application of the “Badenhorst rule”, namely whether the respondent’s indebtedness was disputed on bona fide and reasonable grounds, such that liquidation proceedings should not be used as a mechanism to enforce payment of a genuinely disputed debt. This required the court to evaluate whether any dispute raised by the respondent was genuine and sufficiently articulated to meet the applicable threshold.

A further issue concerned the statutory mechanism by which inability to pay is established, particularly the use of the section 69 demand procedure (read with the winding-up provisions in the companies legislation) and whether the respondent had rebutted the resulting inference or presumption of inability to pay. This involved an application of law to fact, informed by an evaluative assessment of the respondent’s explanations and the absence of financial evidence.

Finally, the court had to determine costs consequences, including the appropriate treatment of costs in liquidation administration and whether the intervening creditor’s further costs should be awarded on the attorney and client scale.

4. Court’s Reasoning

The court approached the matter on the footing that section 69 of the Close Corporations Act 69 of 1984 creates circumstances in which a close corporation is deemed unable to pay its debts, and that it is settled that section 69 must be read together with sections 344 and 345 of the Companies Act 61 of 1973. On the facts, the court accepted that the debt claimed in the statutory demand was due and payable, and that the demand had been served, with the respondent having failed to pay, secure, or compound for the debt to the creditor’s reasonable satisfaction within the prescribed period.

The court applied the Badenhorst principle that winding-up proceedings should not be used to enforce payment of a debt that is genuinely disputed on bona fide and reasonable grounds. However, once prima facie indebtedness is established, the evidential burden shifts to the respondent to demonstrate that the indebtedness is indeed disputed on bona fide and reasonable grounds. The court considered the respondent’s version and found that, on the respondent’s own account, it had materially breached the sale agreement by failing to make the required payments. The court concluded that the respondent’s grounds for disputing the indebtedness were neither bona fide nor genuinely advanced, particularly because the allegations were expressed in vague terms and were not supported by a coherent counterclaim or a properly articulated defence.

In dealing with the respondent’s apparent reliance on a “penalty” argument associated with repossession of equipment (in respect of which ownership had been reserved), the court held that the respondent was required to deal with this contention with sufficient clarity to show that the liability was genuinely disputed. The respondent failed to do so. The court treated the absence of particularity and the vagueness of the “penalty” allegation as undermining any attempt to show a bona fide dispute for purposes of resisting final liquidation.

The court also relied on authority confirming that the discretion to refuse a winding-up order where an unpaid creditor applies for liquidation is narrow and exercised only in special or unusual circumstances. The court referenced the reaffirmation that an unpaid creditor generally has a right, ex debito justitiae, to a winding-up order where the debt has not been discharged, and noted that a counterclaim, even if invoked, must be shown to be genuine and does not automatically preclude winding-up.

On insolvency, the court found that the respondent had not rebutted the statutory inference or presumption of inability to pay debts. Despite conducting several businesses, the respondent provided no meaningful evidence of its financial position. The court further accepted the intervening creditor’s evidence as supporting the conclusion that the respondent was commercially insolvent, and treated commercial insolvency as an established ground justifying liquidation. In that connection, the court relied on authority holding that the deeming provisions concerning inability to pay debts may be used to establish insolvency and that factual solvency is not, in itself, a bar to winding-up where commercial insolvency is shown, although factual solvency remains a relevant factor.

Finally, on procedure and the evidential record, the court applied the practical approach that, in opposed sequestration matters, an applicant may rely on all papers before court, including those of an intervening creditor, and similarly an intervening creditor may rely on allegations made by an applicant. The court regarded these principles as equally applicable to liquidation proceedings and proceeded on the combined record, including Nedbank’s intervention material, particularly given the respondent’s non-appearance and failure to advance argument.

5. Outcome and Relief

The court confirmed the rule nisi issued on 11 November 2021 and placed the respondent under final liquidation.

The court ordered that the costs of the application, including any reserved costs, would be costs in the administration of the liquidation of the respondent.

The court further ordered that the intervening creditor’s costs, over and above the costs order previously granted by Mathebula J on 24 February 2022, would also be costs in the administration of the liquidation, awarded on the attorney and client scale, including all costs orders that had stood over.

Cases Cited

Badenhorst v Northern Construction Enterprises (Pty) Ltd 1956 (2) SA 346 (T).

Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A) ([1987] ZASCA 156).

Afgri Operations Ltd v Hamba Fleet (Pty) Ltd 2022 (1) SA 91 (SCA).

Uys and Another v Du Plessis (Ferreira Intervening) 2001 (3) SA 250 (C).

Nathan & Co v Sheonandan 1963 (1) SA 179 (N).

Orestisolve (Pty) Ltd t/a Essa Investments v NDFT Investment Holdings (Pty) Ltd and Another 2015 (4) SA 449 (WCC).

Steinberg v Lazard 2006 (5) SA 42 (SCA).

Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA).

The judgment also referred to Fullard v Fullard (citation not set out in the provided text).

Legislation Cited

Close Corporations Act 69 of 1984, in particular section 69 and the reference to section 66 as the conduit for the application of relevant companies winding-up provisions to close corporations.

Companies Act 61 of 1973, in particular sections 344 and 345.

Companies Act 71 of 2008, in particular Schedule 5 item 9(1), and a contextual reference to Chapter 6 Part A (business rescue) as a consideration noted as not relevant on the facts.

Rules of Court Cited

No specific rules of court were cited in the judgment text provided.

Held

The court held that the applicant established a proper case for final liquidation because the respondent’s indebtedness was prima facie established and the respondent failed to demonstrate a bona fide and reasonable dispute as contemplated by the Badenhorst rule. The respondent’s attempts to characterise the applicant’s post-breach conduct as a “penalty” were found to be inadequately particularised and insufficient to create a genuine dispute of liability.

The court held further that the respondent failed to rebut the statutory basis for concluding that it was unable to pay its debts, and that the evidence, including that of the intervening creditor, supported a finding of commercial insolvency, which justified liquidation even if factual solvency were assumed.

The intervention by Nedbank was held to have been justified, and costs were ordered to follow the liquidation-administration approach, with the intervening creditor’s further costs awarded on the attorney and client scale as costs in the administration of the liquidation.

LEGAL PRINCIPLES

The judgment applied the principle that liquidation proceedings are not to be used as debt-collection mechanisms where the alleged indebtedness is genuinely disputed on bona fide and reasonable grounds (the Badenhorst rule). Where indebtedness is prima facie established, the respondent bears an evidential burden to show that the dispute meets this standard.

The judgment reaffirmed that an unpaid creditor generally has a right, ex debito justitiae, to a winding-up order where the debt remains unpaid, and that the court’s discretion to refuse such relief is narrow and only exercised in special or unusual circumstances.

The judgment applied the principle that a counterclaim (or an asserted set-off-type contention) does not, merely by being raised, defeat liquidation; it must be shown to be genuine, and the court retains a limited discretion in the face of an admitted or clearly established unpaid debt.

The judgment applied the statutory approach that a close corporation may be deemed unable to pay its debts under section 69 of the Close Corporations Act 69 of 1984, read with the winding-up provisions in companies legislation, and that the deeming or inability-to-pay provisions may be used to establish insolvency for liquidation purposes.

The judgment applied the principle that commercial insolvency constitutes a ground justifying liquidation and that factual solvency is not, in itself, a bar to winding-up where commercial insolvency is shown, although factual solvency remains relevant to the overall evaluation.

Marx v Coalition Trading 561 CC (Nedbank Limited) (4889/2021) [2022] ZAFSHC 125 (26 April 2022)