Brief Summary

Winding-up — Provisional and final winding-up orders — Appellant placed under provisional winding-up despite contesting indebtedness — Respondent alleged breaches of loan agreements and invoked acceleration clause — Appellant contended it was not in default and that debts were bona fide disputed — Court found that winding-up proceedings should not be used to enforce disputed debts — Final winding-up order set aside as it was determined that the Appellant had reasonable grounds for disputing the debt and that the Respondent had not established that the Appellant was unable to pay its debts.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned an appeal against the grant of both a provisional and a final winding-up order in respect of a close corporation. The matter originated as an application for winding-up brought by a creditor, and culminated in a final order placing the close corporation in liquidation.

The appellant was World Focus 754 CC (the close corporation that was wound up in the court a quo). The respondent was Business Partners Limited (the applicant for winding-up in the court a quo).

Procedurally, a provisional winding-up order was granted on 21 May 2010 by Skinner AJ, despite opposition. A final winding-up order was granted on 10 December 2010 by Ngwenya AJ. Leave to appeal was refused by Skinner AJ, but on 13 September 2011 leave to appeal was granted by the Supreme Court of South Africa. The appeal before Pillay J (with Kruger J and Schaupp AJ concurring) was directed at setting aside both winding-up orders.

The general subject matter of the dispute was whether the respondent was entitled to proceed by way of winding-up (under the Close Corporations Act) in circumstances where the underlying indebtedness was disputed, where action proceedings had been instituted arising from the same agreements, and where the appellant contended that winding-up was being used improperly as a debt-collection mechanism.

2. Material Facts

On 18 July 2005, the parties concluded three agreements: a First Loan Agreement, a Second Loan Agreement, and a “Royalty Agreement” (the latter annexed to both loan agreements). Under the First Loan Agreement the respondent advanced R1 070 000, and under the Second Loan Agreement R430 000.

Under the Royalty Agreement, the appellant was required to pay a “Royalty” calculated at 0.5% of the higher of the actual monthly turnover or the projected monthly turnover (the projected amounts being those reflected in documentation submitted to the respondent during the loan application process).

On 15 May 2007, the respondent instituted action in the Durban High Court (case number 5300/2007) arising from these agreements. The action was defended and had reached the awaiting trial roll after close of pleadings.

The respondent’s case (in broad terms) was that the appellant breached the loan agreements by failing to pay instalments for specified periods (including December 2005 to September 2006, and further instalments since June 2007), and that it failed to pay any royalty fees. Relying on those alleged breaches, the respondent invoked an acceleration clause and pursued liquidation.

The appellant disputed the alleged indebtedness. It contended that there had been delays in the respondent granting necessary finance to purchase business premises and that vandalism at the premises necessitated major renovations before trading could begin. On the appellant’s version, the respondent—aware of these setbacks—agreed to extend due dates for instalments under both loan agreements and agreed to extend enforcement of the Royalty Agreement. On that basis, the appellant denied being in breach, and disputed that the respondent was entitled to invoke the acceleration clause or seek winding-up.

It was also placed before the court that the respondent held substantial security, including unlimited deeds of suretyship and mortgage bonds over properties in the amount of R4 637 500. After the provisional winding-up order, the appellant filed a supplementary affidavit setting out valuations and equity in bonded properties; these supplementary factual allegations were recorded as undisputed in the appeal judgment.

Skinner AJ found (in the provisional winding-up judgment) that by 1 March 2006 the respondent had advanced all amounts due under the loan agreements save for a small amount advanced later, and he concluded that the appellant’s failure to make payments after June 2007 placed it in default from that date. He concluded that the full balance had become due and payable and that the respondent had the necessary standing to seek winding-up.

When the matter returned for finalisation, Ngwenya AJ confirmed the provisional order and granted a final winding-up order, finding no additional facts had been adduced to displace the provisional order. In the appeal court, it was expressly noted that Skinner AJ’s finding that a dispute existed as to whether any amount was owing under the Royalty Agreement was not challenged on appeal.

3. Legal Issues

The central legal questions were whether the respondent had established grounds for winding-up under section 68(c) of the Close Corporations Act 69 of 1984, namely that the corporation was unable to pay its debts, and whether the respondent had shown, on the required standard, that it was a creditor entitled to such relief.

A further central issue was whether the appellant had demonstrated that the indebtedness relied upon was bona fide disputed on reasonable grounds, such that winding-up proceedings should not be used to enforce payment of that contested debt.

The appeal also raised the issue of whether the winding-up application constituted an abuse of process, particularly where the respondent was the only creditor relied upon, and where the dispute was already the subject of action proceedings (engaging the doctrine of lis pendens / lis alibi pendens). In addition, the court considered the differing standards of proof applicable to provisional versus final winding-up orders, and the court’s discretion even where statutory grounds are otherwise satisfied.

These issues involved a mixture of legal principle (the proper use of winding-up proceedings; the Badenhorst rule; the requirements for lis pendens), application of law to fact (whether the dispute was bona fide and reasonable; whether the process was being used primarily for debt collection), and discretionary evaluation (whether to grant or refuse winding-up even if inability to pay were shown).

4. Court’s Reasoning

The court located the winding-up application within section 68(c) of the Close Corporations Act 69 of 1984, under which a corporation may be wound up if it is unable to pay its debts, and within the statutory deeming provision requiring proof to the satisfaction of the court that the corporation is unable to pay its debts. The court emphasised that the respondent bore the onus to establish, on a balance of probabilities, both that it was a creditor and that the appellant was unable to pay its debts.

Where indebtedness is disputed, the court restated the established principle that a respondent in winding-up proceedings does not bear an onus to prove it is not indebted; rather, it must show that the indebtedness is bona fide disputed on reasonable grounds. The court reiterated the well-established approach that winding-up proceedings should not be used as a means to enforce payment of a debt that is bona fide disputed, instead of resorting to ordinary litigation. In this context, the court referred to authority and commentary (including Henochsberg and English law) describing the presentation of winding-up proceedings in such circumstances as an abuse of the process of court.

Applying these principles to the matter, the court considered it significant that the respondent’s application did not rely on the existence of other creditors, notwithstanding an assertion that liquidation would produce a concursus creditorum. In the appeal court’s assessment, this had not been established and reinforced the concern that winding-up was being used as a form of debt collection.

The court further took into account the respondent’s own version that the appellant had substantially complied with its payment obligations under the loan agreements (save for a small shortfall) until it stopped payment after action was instituted. The appeal court held that Skinner AJ failed to consider undisputed evidence that payment stopped after June 2007 because action had been instituted, not because of an inability to pay debts. This omission was material to whether the statutory ground of inability to pay had genuinely been engaged and to whether the discretion should have been exercised against granting the provisional order due to abuse of process.

Regarding the final winding-up order, the court stressed that the standard of proof is more stringent than for a provisional order. A provisional order requires only a prima facie case, whereas a final order requires proof on a balance of probabilities that the provisional order should be confirmed. The court noted that, after the provisional order, the appellant filed a supplementary affidavit setting out further facts (including security and valuations), and that these supplementary facts were not disputed.

The court held that Ngwenya AJ appeared to attach little or no weight to the undisputed supplementary affidavit. On the basis of the security held and the additional assets described, the appeal court considered that these were sufficient to discharge the liability, if any, to the respondent. In addition, the court reasoned that it ought to have been clear that the respondent’s claims were disputed on bona fide and reasonable grounds, and thus—on the court’s approach—the question whether the appellant was able to pay its debts became irrelevant to the propriety of winding-up relief.

The appeal court also considered the argument based on lis pendens. A factual issue arose during the appeal as to whether the respondent had withdrawn the Durban action at the time it brought the winding-up application. With leave, the parties provided a memorandum and a notice of withdrawal. The court found it instructive that the withdrawal notice was dated 3 July 2008 and served 4 July 2008, while the notice of motion in the liquidation proceedings was dated 3 July 2008. The court concluded it was therefore clear that winding-up proceedings were instituted before the action was withdrawn.

The court then set out the requisites for a valid plea of lis pendens: the proceedings must be between the same parties, on the same cause of action, and in respect of the same subject matter. It held that the issue of substance in both cases was whether the debt was owed, and that it was immaterial that the form of relief differed. Relying on the principle of finality in litigation as articulated in Nestlé (South Africa) (Pty) Ltd v Mars Incorporated, and acknowledging that a lis pendens plea is not necessarily an absolute bar (the court has a discretion), the court nonetheless concluded that the plea was sound on these facts and should have been upheld. It also invoked broader systemic concerns about congested court rolls, referenced through Socratous v Grindstone Investments, as reinforcing the undesirability of duplicative proceedings.

Finally, the court underscored that even if inability to pay debts were established, a court retains a discretion whether to grant winding-up. On the facts before it, the court concluded that winding-up was resorted to primarily to enforce a debt the existence of which was bona fide disputed on reasonable grounds. It characterised the application as an abuse of the court’s process, and held that both Skinner AJ and Ngwenya AJ should have treated it as such.

5. Outcome and Relief

The appeal was upheld.

The orders of the court a quo dated 21 May 2010 (provisional winding-up) and 10 December 2010 (final winding-up) were set aside and substituted with an order dismissing the winding-up application.

The respondent was ordered to pay the appellant’s costs, including the costs consequent upon the employment of two counsel.

Cases Cited

Machanick Steel & Fencing (Pty) Ltd v Wesrhodan (Pty) Ltd; Machanick Steel & Fencing (Pty) Ltd v Transvaal Gold Rolling (Pty) Ltd 1979 (1) SA 265 (W)

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

Helderberg Laboratories CC v Sola Technologies 2008 (2) SA 627

Re a Company (No 0012209 of 1991) (1992) 2 All ER 797

William v Shub 1976 (4) SA 567

Nestlé (South Africa) (Pty) Ltd v Mars Incorporated (2001) 4 All SA 315 (SCA)

Socratous v Grindstone Investments 2011 (6) SA 325 (SCA)

Legislation Cited

Close Corporations Act 69 of 1984, section 68(c)

Rules of Court Cited

No specific rule of court was expressly cited in the judgment.

Held

The court held that the winding-up proceedings should not have been used to enforce payment of a debt that was bona fide disputed on reasonable grounds, and that the application constituted an abuse of process. The court further held that the doctrine of lis pendens was applicable because the action proceedings and liquidation proceedings were substantially founded on the same cause and concerned the same underlying subject matter, namely whether the debt was owed.

It held that the provisional order should not have been granted in the exercise of discretion, and that the final order was not justified on the more stringent standard required for final winding-up, particularly in light of undisputed supplementary material concerning security and the existence of a bona fide dispute.

Accordingly, the appeal was upheld, the winding-up orders were set aside, and the liquidation application was dismissed with costs.

LEGAL PRINCIPLES

A court will not ordinarily grant winding-up relief where the applicant seeks, in substance, to use liquidation proceedings as a means of enforcing payment of a debt that is bona fide disputed on reasonable grounds. In such circumstances, the use of winding-up proceedings may constitute an abuse of the court’s process, and the court may refuse relief in the exercise of its inherent jurisdiction and statutory discretion.

In winding-up proceedings under section 68(c) of the Close Corporations Act 69 of 1984, the applicant bears the onus of proving, on a balance of probabilities, that it is a creditor and that the corporation is unable to pay its debts. Where the respondent disputes the indebtedness, it is required to show not that it is not indebted, but that the indebtedness is genuinely and reasonably disputed.

The standard of proof differs between provisional and final winding-up orders. A provisional order requires only a prima facie case, while a final winding-up order requires proof on a balance of probabilities that the provisional order should be confirmed.

The requisites for lis pendens (lis alibi pendens) are that the proceedings are between the same parties, on the same cause of action, and in respect of the same subject matter. Even where those requisites are satisfied, the court retains a discretion whether to uphold the plea, informed by the principle that litigation should reach finality and should not be duplicated in a manner that is prima facie vexatious or contributes to unnecessary congestion of court rolls.

World Focus 754 CC v Business Partners Ltd (8275/2008, AR: 513/11) [2013] ZAKZPHC 10 (25 January 2013)