Summary of Judgment

1. Introduction

This matter concerned an application for a provisional winding-up (liquidation) order brought in the KwaZulu-Natal High Court, Durban. The applicant was Firstrand Bank Ltd and the respondent was Samgram Holdings (Pty) Ltd.

The proceedings were instituted as an application for liquidation on two alternative statutory grounds, namely that the respondent was unable to pay its debts and/or that it was just and equitable that the respondent be wound up. The applicant relied on section 344(f) and/or (h) read with sections 345(1)(a) and/or 345(1)(c) of the Companies Act 61 of 1973, read with item 9 of Schedule 5 to the Companies Act 71 of 2008.

The general subject-matter of the dispute was whether the respondent’s indebtedness to the applicant (arising from two loan facilities and a suretyship) and its admitted lack of liquidity justified provisional liquidation, and whether the respondent had established a bona fide and reasonable dispute of the relevant indebtedness sufficient to resist winding-up.

2. Material Facts

A number of facts were treated as common cause between the parties and formed the factual foundation for the court’s decision.

The parties concluded an FNB corporate property finance loan facility on 4 March 2005. An amount of R1 911 245,40 remained due, owing and payable by the respondent to the applicant under that facility. They also concluded a Rand Merchant Bank loan facility on 4 August 2005, in respect of which R2 257 866,94 remained due, owing and payable by the respondent to the applicant.

The respondent further bound itself as surety and co-principal debtor with Halflyn (Pty) Ltd in relation to Halflyn’s indebtedness to the applicant under a commercial property finance loan facility, in respect of which R48 150 934,26 remained due by Halflyn to the applicant. The respondent concluded the relevant suretyship agreement on 31 July 2007.

On 11 April 2011, Halflyn concluded an agreement with the applicant that included an acknowledgment of indebtedness in the sum of R39 734 132,95. Halflyn was placed into provisional liquidation on 2 July 2013 by order of the same court (per Moodley J).

It was also common cause that the respondent breached the corporate property finance loan facility (and, for the same reasons, the Rand Merchant Bank facility). The breaches included that the respondent failed to satisfy a judgment obtained against it by the South African Revenue Services within seven days of becoming aware of it, with the judgment becoming effective on 23 July 2012. In addition, the respondent committed an act of insolvency in terms of the Insolvency Act 24 of 1936 by instituting business rescue proceedings that included written notice to creditors that it was unable to pay its debts, and by compromising or attempting to compromise or defer payment of its debts through business rescue.

The loans advanced by the applicant to the respondent and to Halflyn were for the purpose of facilitating a development project intended to create a private residential township. The period for repayment of those loans had lapsed entirely.

The respondent sought to resist liquidation by advancing contentions relating to its solvency and its alleged defences. In relation to factual solvency, it relied on annual financial statements for the 2009 tax year, but those statements were drawn in circumstances where the auditors could not certify their accuracy or reliability. The respondent did not put up proper or current valuations of its properties to support an assertion that its assets exceeded its liabilities.

In relation to commercial solvency, the respondent’s director, Mr Kay, conceded that the company was short of liquid assets and unable to repay the debt owed to SARS and the debts owed to the applicant.

The respondent’s principal disputed contention was that its inability to repay the applicant under the two loan facilities was caused by the applicant’s wrongful failure to advance agreed drawdown amounts to Halflyn in terms of Halflyn’s commercial property finance loan, and that this breach affected the respondent’s position. However, the respondent ultimately accepted (through argument) that the addenda concluded in respect of Halflyn’s loan would stand, and that this would negate reliance on the exceptio non adimpleti contractus, shifting the focus to an alternative defence that the addenda were signed under duress.

3. Legal Issues

The central questions the court was required to determine were whether the applicant had established grounds for a provisional liquidation order under the Companies Act 61 of 1973, and whether the respondent had shown that its indebtedness to the applicant was disputed on bona fide and reasonable grounds sufficient to defeat or postpone liquidation at the provisional stage.

A further issue concerned the respondent’s contention that the Companies Act 71 of 2008 should apply because, it was argued, the respondent was a solvent company. This required the court to consider the respondent’s attempted distinction between solvency measured by a balance-sheet approach (assets exceeding liabilities) and solvency in a commercial sense (ability to pay debts as they fall due), and whether the factual foundation for solvency had been established.

In substance, the dispute involved a combination of issues of fact (whether there was a genuine dispute of indebtedness; whether duress existed; whether assets exceeded liabilities), issues of application of law to fact (the standard for resisting liquidation by showing a bona fide and reasonable dispute), and an assessment of commercial insolvency on the admitted facts.

4. Court’s Reasoning

The court approached the matter on the basis that, where a creditor seeks winding-up and the debtor company contends that the debt is disputed, the debtor bears an evidentiary burden to show on a balance of probabilities that the indebtedness is disputed on bona fide and reasonable grounds. The court recorded that the respondent accepted that it bore this onus, with reference to Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A).

On the respondent’s contention that the “new” Companies Act should apply because the respondent was solvent, the court examined what the respondent had put forward to demonstrate solvency. The respondent relied on 2009 annual financial statements, but the court treated it as significant that the auditors could not certify their accuracy or reliability. The court further noted that, beyond a general suggestion that finance could be raised and that properties were valuable, no proper or current valuation evidence had been provided. On this basis, the court found that the respondent had not begun to demonstrate that its assets exceeded its liabilities.

On the question of commercial insolvency, the court had regard to the respondent director’s concession that the company lacked liquidity and was unable to repay SARS or the applicant. This concession, coupled with the common-cause indebtedness and repayment periods having lapsed, supported the applicant’s case that the respondent was unable to pay its debts in the relevant sense.

The respondent’s attempt to resist liquidation on the basis of the applicant’s alleged breach of Halflyn’s loan agreement was narrowed during argument. It was conceded that the addenda to the Halflyn facility would stand, and that this position undermined reliance on the exceptio non adimpleti contractus. The respondent therefore sought to avoid the effect of the addenda by alleging that they had been concluded under duress, characterised as economic pressure arising from the consequences of not receiving further funding while the development had incurred obligations to service providers.

The court evaluated this duress contention by reference to authority on the requirements for establishing economic duress. The applicant relied on Hendricks v Barnett 1975 (1) SA 765 (N), as approved and followed in Kapp v T C Valuta (Pty) Ltd 1975 (3) SA 283 (T). The court distilled from these authorities the requirement that, where duress of goods or improper pressure is alleged, the party relying on duress must show that it expressly reserved rights at the time, including an unequivocal protest, and that an unexpressed mental reservation is insufficient.

Applying these requirements to the facts as presented in the affidavits, the court found an absence of evidence of any protest by the respondent when the addenda were agreed. The court also considered correspondence showing that allegations regarding non-release of funds were raised only later (in a letter from the respondent’s attorney dated 17 December 2010), following which the parties negotiated through attorneys and ultimately agreed to the acknowledgment of debt signed on 11 April 2011. The court regarded this sequence as inconsistent with a claim that the respondent was compelled by duress when agreeing to the contractual variations.

The court concluded that there could be no suggestion of duress on the facts presented. It reasoned that the respondent’s director may have faced difficult commercial choices because of project difficulties, sales not materialising, and pressure from creditors, but that choosing to sign further agreements in those circumstances did not amount to being forced in the legally relevant sense. On that basis, the respondent failed to establish that its indebtedness was disputed on bona fide and reasonable grounds.

Having rejected the respondent’s defences and having accepted that the applicant had established the statutory requirements for provisional winding-up, the court was satisfied that a provisional liquidation order should be granted.

5. Outcome and Relief

The court granted a rule nisi calling upon interested persons to show cause on 27 September 2013 why the respondent should not be finally wound up and why the costs should not be costs in the liquidation.

The order operated with immediate effect as a provisional winding-up of the respondent.

The court directed service of the order by publication in the Government Gazette and a daily newspaper circulating in KwaZulu-Natal on or before 13 September 2013, and further service as required by the Companies Act 61 of 1973.

As to costs, the court ordered that the rule nisi would call upon parties to show cause why the costs of the application should not be costs in the liquidation, reflecting that costs were to stand over to be dealt with in the liquidation context if the winding-up were confirmed.

Cases Cited

Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A)

Hendricks v Barnett 1975 (1) SA 765 (N)

Kapp v T C Valuta (Pty) Ltd 1975 (3) SA 283 (T)

Legislation Cited

Companies Act 61 of 1973, section 344(f)

Companies Act 61 of 1973, section 344(h)

Companies Act 61 of 1973, section 345(1)(a)

Companies Act 61 of 1973, section 345(1)(c)

Companies Act 71 of 2008, Schedule 5 item 9

Insolvency Act 24 of 1936

Rules of Court Cited

No specific rules of court were cited in the judgment.

Held

The court held that the applicant had established the requirements for a provisional liquidation order against the respondent under the Companies Act 61 of 1973, on the basis of the respondent’s inability to satisfy its debts and the absence of a bona fide and reasonable dispute of indebtedness.

It further held that the respondent failed to demonstrate either factual solvency (assets exceeding liabilities) on reliable evidence, or commercial solvency (ability to pay debts as they fall due), particularly given the concession that it lacked liquidity and could not pay SARS or the applicant.

The court held that the respondent’s alleged defence based on the applicant’s failure to advance drawdown amounts to Halflyn was not sustained in light of the addenda and that the respondent’s alternative reliance on duress was not supported by evidence meeting the requirements set out in the cited authorities, particularly the absence of any contemporaneous unequivocal protest or reservation of rights.

LEGAL PRINCIPLES

A respondent company resisting winding-up on the basis that the debt is disputed bears the burden of showing, on a balance of probabilities, that the indebtedness is disputed on bona fide and reasonable grounds, as applied with reference to Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A).

Assertions of solvency require proper factual support. Reliance on outdated or unreliable financial statements, without current valuations or substantiating material, may be insufficient to demonstrate that assets exceed liabilities. A concession of inability to meet debts as they fall due supports a finding of commercial insolvency for purposes of liquidation.

A defence of economic duress (in the form considered in the cited authorities) requires clear evidence of improper pressure and, critically, a contemporaneous and unequivocal protest or reservation of rights. An unexpressed mental reservation is insufficient, as reflected in Hendricks v Barnett 1975 (1) SA 765 (N) and Kapp v T C Valuta (Pty) Ltd 1975 (3) SA 283 (T).