Brief Summary

Winding-up — Application for winding-up of company — Body corporate seeking winding-up of member for non-payment of levies — Respondent alleged to be commercially insolvent and unable to meet debts — Court required to determine if debt is bona fide disputed — Holding that the Applicant established locus standi as creditor; however, the Respondent's bona fide dispute regarding the debt precluded the granting of a winding-up order.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an opposed application for the winding-up (liquidation) of a company brought by a sectional title body corporate. The applicant was The Body Corporate Elma Park and the respondent was Erf 195 Elma Park Ltd, a member of the body corporate and the developer which had opened the sectional title register for the scheme.

The application followed the delivery of a statutory demand under section 345 of the Companies Act 61 of 1973 for alleged arrear levies. The respondent opposed the liquidation and delivered an answering affidavit (together with a counter-application, which was not ultimately pursued at the hearing). Various further procedural steps occurred over time, including extensive exchanges of documents under Rule 35(12), the issue of separate civil summons proceedings by the applicant for payment of levies, and a separate arbitration-related application launched by the respondent in another division (in which judgment had been reserved). The court recorded that these parallel processes were not shown to bar the liquidation application from proceeding on the papers before it.

The general subject-matter was a dispute arising from a mixed-use sectional title scheme (commercial “retail” units and residential units) and, in particular, the respondent’s alleged non-payment of levies and related charges due to the body corporate. The body corporate alleged that the respondent was commercially insolvent and that liquidation was justified on that ground (and also advanced a “just and equitable” basis, though the court ultimately did not decide that aspect for purposes of the provisional order).

2. Material Facts

The respondent acquired the property comprising the scheme in 1996 and, as developer, opened the sectional title register in April 2008 for a mixed-use scheme in a 22-storey building known as the Orion Building in Edenvale. The scheme comprised a retail section (two non-residential units on two floors) and a residential section (20 floors of residential units occupied by approximately 200 tenants).

A material feature of the scheme was the registered participation quota allocation. On the papers accepted by the court, the two non-residential units (units 1 and 2) were each allocated 40% participation quota, while the residential units together made up the remaining 20% allocated across those units according to floor area. The respondent owned the retail units and additional units in the scheme, and on its own version this resulted in it being liable for approximately 84% of the total levies.

There were disputes between the parties about various matters (including revenue relating to an advertising wrap, use of common area for a car wash business, and branding display), but the court treated the monetary values of those disputes as not material to determining indebtedness for purposes of the winding-up application. The court instead focused on whether the applicant had established, at least prima facie, that the respondent was a creditor-debtor in respect of levies, and whether any defence raised a bona fide dispute on reasonable grounds.

A further material history concerned electricity charges. After a change in managing agent in July 2012, the respondent asserted it should be credited because it had paid electricity for common areas directly to the local authority. A settlement agreement was reached around August 2012 dealing with the calculation of electricity payments and permitting set-off against levies. Notwithstanding settlement attempts, the applicant’s evidence was that the respondent remained in arrears on its levy account and that the arrears increased over time due to intermittent or short payments.

The respondent’s defences, as relied upon in this application, were principally that the levy apportionment was disproportionate and inequitable because the scheme’s rules and participation quotas did not “ring-fence” expenses between the retail and residential components, and that the apportionment was said to stem from a “patent error” when the scheme was established. The court treated it as important that no effective steps had been taken by the respondent—despite having been the developer—to amend the management rules or participation quotas, and that the counter-application relating to calling a meeting (apparently aimed at changes to rules/quotas) was not pursued and, on the respondent’s concession, could in any event have been pursued without a court order.

The court also treated as material the respondent’s own documentation and statements regarding the quantum of levies potentially due. The respondent’s answering papers included a calculation reflecting “total levies potentially due” by the respondent of R2 920 227.84 as at the end of June 2014 (after certain deductions). Additionally, the respondent had averred in its answering affidavit that it was in a position to pay amounts it admitted were due and certain arrears owed to the municipality and that such amounts would be paid before the hearing, but it did not specify the admitted amount nor provide proof of payment.

On insolvency, the court relied on the respondent’s balance sheet for the year ended 30 June 2013 showing assets exceeding liabilities (suggesting balance-sheet solvency), but considered the cash-flow statement indicating minimal cash and that operating activities resulted in a net cash loss, with ending cash only being realisable due to loans from group companies. The court regarded this as supporting the applicant’s allegation that the respondent could not meet debts from its own income and was dependent on group financing.

3. Legal Issues

The central legal questions were whether the applicant had established a case for a provisional winding-up order on the basis that the respondent was unable to pay its debts in terms of the statutory liquidation regime, and in particular whether the applicant had shown locus standi as creditor in circumstances where the respondent contested indebtedness for levies.

A closely related issue was the application of the principle that liquidation proceedings should not be used to enforce payment of a debt where the debt is bona fide disputed on reasonable grounds (the so-called Badenhorst rule), and how this interacts with the applicant’s prima facie burden at the provisional stage.

The dispute therefore principally concerned the application of legal principles to the facts, namely whether the respondent’s asserted defences to the levy claims constituted a genuine and reasonable dispute, and whether the respondent was commercially insolvent notwithstanding apparent balance-sheet solvency. To a more limited extent, a value judgment was implicated in relation to the “just and equitable” ground; however, the court expressly did not decide that issue for purposes of granting the provisional order.

4. Court’s Reasoning

The court approached the matter on the basis that, for a provisional winding-up order, an applicant need only establish its case prima facie. It recognised that where a respondent denies the applicant’s status as creditor, liquidation is ordinarily inappropriate if the alleged debt is bona fide disputed on reasonable grounds, because winding-up proceedings are not designed for resolving genuine disputes about indebtedness. The court referred to authorities summarising the Badenhorst rule and also endorsed the more developed formulation that, even if locus standi as creditor is established, liquidation relief should not be granted where the respondent simultaneously shows a bona fide and reasonable dispute of the claim.

Against that legal framework, the court evaluated whether the respondent’s defences were both genuine and reasonable. The respondent’s primary contention was that the levy burden was inequitable due to the lack of ring-fencing between retail and residential expenses and that this arose from an original “patent error” not reflecting the intended apportionment. The court regarded this defence as undermined by several considerations apparent from the record. The respondent, as developer, had itself established the scheme and participation quotas, and had not taken steps over an extended period to procure amendments to the rules or participation quotas. The counter-application aimed at compelling a meeting was not pursued, and it was conceded that the rules themselves permitted the calling of such a meeting without court intervention. In that setting, the court treated refusal to pay levies calculated in accordance with the registered participation quotas and rules as neither a valid nor reasonable basis to deny liability for purposes of liquidation proceedings.

The court also relied on aspects of the respondent’s own conduct and documentation as inconsistent with a bona fide and reasonable dispute. It referred to an email in which the respondent’s legal services manager dealt with cost apportionment in a manner accepting that the respondent would contribute around 85% of a cost through its levy liability. It further emphasised that the respondent’s answering affidavit contained a broad assertion that it would pay amounts it admitted were due before the hearing, yet it did not identify the admitted amount and provided no proof of payment, notwithstanding that the answering affidavit was deposed to long before the hearing. The court considered that this manner of pleading and the absence of concrete payment evidence counted against the genuineness and substance of the dispute.

In addition, the court treated as significant that the respondent’s own calculation annexed to its answering affidavit reflected that levies “potentially due” amounted to R2 920 227.84, which exceeded the amount initially demanded under section 345. The court took this as further support for the applicant’s prima facie creditor status and as inconsistent with a position that no debt was due.

Regarding the special levy, the respondent contended it was invalid because (on its understanding) a special levy for “luxurious improvements” would require a unanimous resolution. The court recorded the applicant’s explanation (in correspondence placed before it) that the special levy was linked to implementing a rational fire design and meeting safety standards, amid threats of legal action by the local authority and withdrawal of insurance cover. While the judgment did not turn on a full determination of the special levy’s legal validity in isolation, the court treated the respondent’s stance (on the papers as presented) as part of the broader conclusion that the respondent had not shown a bona fide and reasonable basis to resist levy liability for purposes of the liquidation application.

On insolvency, the court distinguished between balance-sheet solvency and commercial insolvency. Even though the respondent’s 2013 balance sheet suggested assets exceeded liabilities, the court focused on the cash-flow statement showing very low cash at both beginning and end of the year, a net cash loss from operations, substantial finance costs, and that ending cash depended on loans from group companies. From this, the court inferred that the respondent could not pay debts as they became due from its own resources and was dependent on group funding, which the court characterised as effectively “borrowing from Peter to pay Paul.” It therefore found the respondent to be commercially insolvent within the meaning of sections 344(f) and 345(1)(c) of the Companies Act 61 of 1973.

As to the “just and equitable” ground, the court noted that the typical categories supporting such relief were not present on the facts as discussed. It recorded the applicant’s argument that the respondent’s non-payment impaired the body corporate’s ability to manage the scheme and maintain services, but stated that, given the findings already made on creditor status, lack of a bona fide dispute, and commercial insolvency, it was unnecessary to decide the just-and-equitable basis at that stage; that issue could be addressed on the return day if necessary.

5. Outcome and Relief

The court granted a provisional winding-up order placing the respondent under provisional liquidation. It issued a rule calling upon interested persons to show cause why a final winding-up order should not be granted on 24 November 2016.

The court ordered service of the provisional order on the respondent at its registered address and on the South African Revenue Service, and directed publication once in the Government Gazette and in The Star newspaper. The judgment, as provided, did not include a distinct costs order in the final order paragraphs.

Cases Cited

Orestisolve (Pty) Ltd v NDFT Investment Holdings (Pty) Ltd and Another 2015(4) SA 449 (WCC). Kalil v Decotex (Pty) Ltd 1988(1) SA 943 (AD). Hulse-Reutter v HEG Consulting Enterprises (Pty) Ltd 1998(2) SA 208 (C). Badenhorst v Northern Construction Enterprises (Pty) Ltd 1956(2) SA 346 (T). GAP Merchant Recycling CC v Goal Reach Trading 55 CC 2016(1) SA 261 (WCC). Sammel v President Brand Gold Mining Co Ltd 1969(3) SA 629 (A). Rand Air (Pty) Ltd v Ray Bester Investments (Pty) Ltd 1985(2) SA 345 (W). Express Model Trading 289 CC v Dolphin Ridge Body Corporate 2015(6) SA 224 (SCA).

Legislation Cited

Companies Act 61 of 1973, including sections 344(f), 345(1)(c), and the section 345 demand procedure. Sectional Titles Act (as referenced in relation to participation quotas, trustees’ obligations, and insurance requirements).

Rules of Court Cited

Uniform Rules of Court, Rule 35(12).

Held

The court held that the applicant body corporate had prima facie established locus standi as a creditor in respect of arrear levies calculated according to the scheme’s existing management rules and registered participation quotas. It held that the respondent’s defences—centred on alleged inequity and a purported original error in apportionment—did not amount to a bona fide dispute on reasonable grounds, particularly given the respondent’s longstanding failure to pursue amendment mechanisms and the indications in its own papers that a substantial amount of levies was potentially due.

The court further held that, despite apparent balance-sheet solvency, the respondent was commercially insolvent, because its cash flow and reliance on loans from group companies showed an inability to pay debts as they fell due. On that basis, the court granted a provisional winding-up order and issued a rule nisi for the return date.

LEGAL PRINCIPLES

A court considering a provisional winding-up application requires the applicant to establish its case prima facie, not on a final balance of probabilities. Where the respondent contests the applicant’s status as creditor on the basis that the debt is disputed, liquidation proceedings should not be used as a mechanism to enforce payment of a debt that is bona fide disputed on reasonable grounds; winding-up is not a forum designed to determine genuine disputes about indebtedness.

The “Badenhorst rule” operates as a controlling principle in liquidation proceedings: even where an applicant can show creditor status, winding-up relief may be refused where the respondent shows that the claim is genuinely and reasonably disputed. The interrelationship between genuineness (bona fides) and reasonableness is such that a substantial (reasonable) dispute will rarely coexist with an absence of bona fides, and the court is entitled to scrutinise the nature and support for the alleged dispute on the papers.

Commercial insolvency is distinct from balance-sheet insolvency. A company may be commercially insolvent where, notwithstanding that its assets exceed its liabilities, it is unable to pay its debts as they become due in the ordinary course of business. Evidence of minimal cash resources, operating cash losses, and dependence on ongoing external or group-company loans may support a finding of commercial insolvency for purposes of sections 344 and 345 of the Companies Act 61 of 1973.

Body Corporate Elma Park v Erf 195 Elma Park Ltd (22421/2013) [2016] ZAGPPHC 873 (22 September 2016)