Brief Summary

Winding Up — Provisional liquidation — Application by member of close corporation — Allegation of ulterior motive — Applicant's claim as creditor disputed — No evidence of financial inability to pay debts — Application dismissed. The applicant, a member and trustee of an inter vivos trust, sought provisional liquidation of the respondent close corporation, claiming it owed him a substantial loan. The corporation's financial statements indicated a reduction in the debt due to payments made from property sales and personal expenses covered by the corporation. The intervening respondents contended the application was made in bad faith to pre-empt ongoing litigation and disputed the applicant's standing as a creditor. The court found the applicant failed to establish a prima facie case for winding up, noting the corporation's ongoing rental income and the lack of evidence supporting the applicant's claims.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were an application in the High Court (Western Cape Division, Cape Town) for the provisional winding-up (provisional liquidation) of a close corporation. The applicant sought liquidation in his asserted capacity as a creditor of the close corporation, relying on a loan account reflected in the corporation’s annual financial statements.

The applicant, Gregory Paul Smith, was described as the sole member of the first respondent, Sofa Planet CC, holding the member’s interest in his capacity as a trustee of an inter vivos trust. The first respondent was the close corporation against which liquidation was sought. During the proceedings, three entities/persons connected to disputes involving the corporation’s remaining immovable property and its occupation were admitted to oppose the application as intervening respondents: Khayelitsha Cookies (Pty) Ltd (second respondent), Adri Williams (third respondent), and Thomkwa & Jabez Holdings (Pty) Ltd (fourth respondent).

Procedurally, the matter began as a creditor’s winding-up application by the applicant. The second to fourth respondents initially applied to intervene and, after contestation, were admitted by agreement; their intervention affidavits stood as their opposing affidavits in the winding-up proceedings. The application ultimately came before Binns-Ward J for determination, culminating in judgment delivered on 17 January 2023.

The general subject matter concerned whether the close corporation should be placed into provisional liquidation on the basis that it was allegedly unable to pay its debts, with a central dispute arising from allegations that the winding-up application was brought in bad faith and for an ulterior purpose, rather than to bring about a concursus creditorum and rateable distribution in liquidation.

Material Facts

It was common cause, and accepted on the papers as probable, that the applicant’s loan account was reflected in the corporation’s annual financial statements. The financial statements for the year ended 28 February 2021 recorded an indebtedness to the applicant of R7 956 821 in respect of monies lent and advanced. By the time the papers closed, the 2022 financial statements reflected a reduced indebtedness of R6 121 869, with the reduction apparently linked to payments received from sales of immovable properties and accounting entries relating to payment of a range of the applicant’s personal expenses (the detail of which the court described as obscure on the papers).

A note to the financial statements recorded that the loan was unsecured, bore no interest, and had no fixed terms of repayment. The applicant asserted that he had demanded repayment and had not been paid. He stated that he was no longer prepared to wait for payment.

The applicant disclosed that one of the corporation’s properties (at Beacon Way Park, Parow) had been destroyed in a fire in October 2016, later rehabilitated, and thereafter let to Khayelitsha Cookies (Pty) Ltd under a lease concluded in March 2018 for five years, renewable for a further five years at the lessee’s election. The applicant stated that the property was subsequently sold to Thomkwa & Jabez Holdings (Pty) Ltd in May 2021.

The applicant alleged that the corporation’s relationships with the tenant and purchaser were troubled, and that the lease and sale agreements had been cancelled or had lapsed. He referred, without detail, to ongoing litigation in the Bellville Regional Court and the High Court between the corporation and the tenant/purchaser, and stated that he was compelled to demand repayment and bring the winding-up application given the “flurry of litigation” which he said he could not be required to fund.

After intervention, the second to fourth respondents alleged that the winding-up application was brought in bad faith to pre-empt the corporation’s exposure in pending litigation and to defeat contractual claims they asserted against the corporation. They alleged prejudice in that liquidation would jeopardise the fourth respondent’s position regarding the property transaction and expose them (including sureties) to losses.

The intervening respondents disputed both the applicant’s standing as creditor and the contention that the corporation was unable to meet its obligations. They pointed out (apparently not in dispute) that the corporation earned rental income of over R90 000 per month from the Beacon Way Park units, and that the tenant/sureties also paid municipal accounts rendered to the corporation for the properties.

A significant factual theme concerned the absence of an occupation certificate for the rehabilitated building. The intervening respondents implied the applicant was the guiding mind of the corporation and responsible for the failure to obtain the occupation certificate, which in turn affected transfer under the sale agreement and the lawfulness of occupation. The applicant alleged the cost to obtain compliance would be at least R1 million, while the intervening respondents produced an estimate of R552 869,23; the fourth respondent indicated willingness to pay for necessary work in exchange for a reduction in purchase price.

The agreed sale price under the property transaction was R8 400 000, which, on the papers, would have been sufficient to redeem the corporation’s indebtedness to the applicant.

Legal Issues

The central legal questions were whether the applicant had made out a case for a provisional winding-up order of the corporation and, if so, whether the court should nevertheless refuse such relief in the exercise of its discretion due to indications that the application was an abuse of process brought for an ulterior purpose rather than for the proper object of liquidation.

This required the court to determine, first, issues involving the application of legal standards to facts, namely whether there was a prima facie case in the sense required for provisional liquidation and whether the applicant was a creditor with a substantial claim. Secondly, it required an evaluative determination, involving a discretionary judgment, as to whether liquidation should be refused because the applicant had not shown a genuine intention to establish a concursus creditorum and to obtain the type of advantage that liquidation is designed to confer on creditors of the relevant class.

A further issue, addressed to the extent necessary, was the effect of the loan having no fixed repayment terms, including whether a prior demand was legally required and the extent to which immediate repayment could be insisted upon in circumstances where a reasonable time for payment might be appropriate.

Court’s Reasoning

The court began by identifying the standard for provisional winding-up: the applicant had to establish a prima facie case in the sense explained in Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A). On the papers, the court was satisfied on a balance of probabilities that the applicant had a substantial claim against the corporation for monies lent and advanced. The existence of the loan and an outstanding balance was supported by the annual financial statements and a factual findings report by the corporation’s accounting officer. The court regarded the intervening respondents’ challenges to the claim as largely argumentative rather than factual, given their status as strangers to the corporation’s internal affairs.

Turning to the demand point, the intervening respondents had criticised the absence of particularity about any formal statutory demand under provisions equivalent to section 345(1)(a) of the Companies Act 61 of 1973 or section 69 of the Close Corporations Act 89 of 1984. The court considered it improbable that a formal demand had been made before launching the application, noting the strong indications that the applicant was the controller and guiding mind of the corporation, so that a formal demand would be somewhat farcical. However, because the applicant did not in fact rely on the statutory deeming provisions, the court found it unnecessary to decide that point.

The court nevertheless addressed the common-law position where a loan contains no fixed date for repayment. Relying on Fluxman v Brittain 1941 AD 273, the court noted that while such a debt is due upon request, the law recognises that immediate enforcement may be moderated where circumstances warrant the allowance of a reasonable time for repayment, whether granted by the lender or by the court. The court observed that it would ordinarily be for the debtor to raise the issue of reasonable time, but this had not occurred, unsurprisingly given the applicant’s dual role as sole member and creditor.

The court then moved to the decisive enquiry: the intervening respondents alleged that the application was not brought bona fide to establish a concursus creditorum, but rather to achieve an ulterior objective connected to the property disputes and pending litigation. The court treated as relevant the timing and nature of the applicant’s call-up of the loan, particularly because the applicant was not an outside lender but a member standing in a fiduciary relationship to the corporation in terms of section 42 of the Close Corporations Act 89 of 1984. In that capacity, the applicant could not properly pursue his own affairs in conflict with the best interests of the corporation. The court regarded the applicant’s stance—asserting that the entity was not entitled to time and had to pay when called upon—as overly glib in a context where ulterior motive was alleged and the loan appeared to have been advanced to capitalise the corporation.

The court further considered the corporation’s financial position and assets. Guided by the balance sheets in the annual financial statements, the court noted indications that the corporation’s assets exceeded its liabilities and that the corporation was an operating entity with rental income apparently sufficient to cover operating expenses, with the 2022 financial statements showing a profit. The court also noted the presence of a substantial assessed tax loss (over R3 million), which would be forfeited upon liquidation and which constituted a valuable potential benefit to the corporation.

In assessing whether liquidation served proper purposes, the court considered the disputes involving the lease and the sale agreement. It was not possible, on the papers, to form a fully informed view on the merits of the pending litigation. However, the court found it difficult to conceive, on the presented material, what advantage there could be for the corporation in pressing a case that the lease had been cancelled, especially where the absence of an occupation certificate appeared central and where, on the face of matters, the corporation could not lawfully let the building without such a certificate, with reference to section 14 of the National Building Regulations and Building Standards Act 103 of 1977. The court also noted that the deed of sale required the seller to provide an occupation certificate, and that the purchaser had indicated willingness to pay for necessary work in exchange for a reduction in price.

A significant consideration was that the agreed selling price of R8,4 million would have been sufficient to settle the applicant’s loan claim and other debts. The applicant’s counsel conceded that there was no demonstrable advantage to the applicant in pursuing repayment via liquidation. The court regarded this as raising an unresolved and “counterintuitive” feature of the case, particularly given the applicant’s position as trustee holding the member’s interest for a trust. The court stated that, in the face of the allegation of an undisclosed ulterior purpose and abuse of process, an explanation was called for, but none was plausibly provided.

The court accepted the legal position that a winding-up application may be refused where it constitutes an abuse of process brought mala fide for an improper ulterior purpose, drawing on Wackrill v Sandton International Removals (Pty) Ltd and Others 1984 (1) SA 282 (W) and the line of cases referred to there, and noting that this approach had been endorsed again in Imperial Logistics Advance (Pty) Ltd v Remnant Wealth Holdings (Pty) Ltd [2022] ZASCA 143 (24 October 2022). The court also referred to its earlier review in Western Province Rugby Football Union v Western Province Rugby (Pty) Ltd; Ex Parte Van Zyl NO and Another [2016] ZAWCHC 194 (20 December 2016), where it had explained that “predominance” in the ulterior motive context must practically negate any genuine interest in obtaining winding-up for proper purposes.

Applying these principles, the court distilled the enquiry to whether the applicant had shown he would enjoy an advantage or benefit by the establishment of a concursus creditorum. On the papers, and given the concessions and unresolved “enigmas,” the court was left unsatisfied that the applicant had a genuine intention to bring about a concursus creditorum. This lack of demonstrated advantage and the indications of ulterior motivation justified refusal of relief in the exercise of the court’s discretion.

Outcome and Relief

The application for provisional liquidation was dismissed.

The applicant was ordered to pay the second to fourth respondents’ costs of suit, including costs reserved under an earlier order (6 June 2022) and the costs occasioned by a postponement granted on 10 November 2022.

Cases Cited

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

Fluxman v Brittain 1941 AD 273

Mackay v Naylor 1917 TPD 533

Nel v Cloete 1972 (2) SA 150 (A)

Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration 1974 (3) SA 506 (A)

Orestisolve (Pty) Ltd t/a Essa Investments v NDFT Investments Holdings (Pty) Ltd and Another [2015] ZAWCHC 71 (28 May 2015); 2015 (4) SA 449 (WCC)

Wackrill v Sandton International Removals (Pty) Ltd and Others 1984 (1) SA 282 (W)

Berman v Brimacombe 1925 TPD 548

Amod v Khan 1947 (1) SA 150 (N)

Amod v Khan 1947 (2) SA 432 (N)

Millward v Glaser 1950 (3) SA 547 (W)

Tucker’s Land and Development Corporation (Pty) Ltd v Soja (Pty) Ltd 1980 (3) SA 253 (W)

Imperial Logistics Advance (Pty) Ltd v Remnant Wealth Holdings (Pty) Ltd [2022] ZASCA 143 (24 October 2022)

Western Province Rugby Football Union v Western Province Rugby (Pty) Ltd; Ex Parte Van Zyl NO and Another [2016] ZAWCHC 194 (20 December 2016)

Phase Electric Co (Pty) Ltd v Zinman's Electrical Sales (Pty) Ltd 1973 (3) SA 914 (W)

BP & JM Investments (Pty) Ltd v Hardroad (Pty) Ltd 1978 (2) SA 481 (T)

Ter Beek v United Resources CC and Another 1997 (3) SA 315 (C)

Nathaniël & Efthymakis Properties v Hartebeestspruit Landgoed CC [1996] 2 All SA 317 (T)

Legislation Cited

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

Close Corporations Act 89 of 1984, section 69

Close Corporations Act 89 of 1984, section 42

National Building Regulations and Building Standards Act 103 of 1977, section 14

Companies Act 46 of 1926, section 112(a)

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, although the applicant established on the papers that he was probably a creditor with a substantial loan claim against the corporation, the application should nevertheless be refused in the exercise of discretion because the applicant had not shown a demonstrable advantage to be gained through liquidation and the establishment of a concursus creditorum.

Given objective indications and concessions suggesting that the applicant was materially actuated by an ulterior purpose, and the unresolved features of why liquidation was pursued despite an apparent route to repayment through the property transaction, the court was not satisfied that the application was brought with the genuine intention required for winding-up proceedings. The application was dismissed with a costs order against the applicant in favour of the second to fourth respondents.

LEGAL PRINCIPLES

A provisional winding-up applicant must establish a prima facie case in the sense described in Kalil v Decotex (Pty) Ltd and Another 1988 (1) SA 943 (A), including a substantial claim and the factual basis for winding-up relief on the papers.

Where a loan has no fixed term of repayment, it becomes due upon request, but the common law recognises that immediate enforcement may be moderated where circumstances justify a reasonable time for repayment, as discussed in Fluxman v Brittain 1941 AD 273, with related references to earlier authority.

A member of a close corporation stands in a fiduciary relationship to the corporation under section 42 of the Close Corporations Act 89 of 1984, and cannot properly advance personal interests in conflict with the corporation’s best interests; this context may be relevant when evaluating the bona fides of steps taken by such a member-creditor, including calling up internal funding in a manner potentially inimical to the entity.

Even where technical grounds for winding-up are present, a court retains a discretion to refuse winding-up where the application constitutes an abuse of process, including where it is brought mala fide with an improper ulterior motive rather than for the proper purpose of liquidation, as reflected in Wackrill v Sandton International Removals (Pty) Ltd and Others 1984 (1) SA 282 (W) and endorsed in later authority including Imperial Logistics Advance (Pty) Ltd v Remnant Wealth Holdings (Pty) Ltd [2022] ZASCA 143 (24 October 2022).

In abuse-of-process challenges by third parties, the enquiry focuses on whether the applicant has a genuine intention to establish a concursus creditorum and whether there is a demonstrable advantage of the kind liquidation is intended to confer; where the papers do not demonstrate such advantage and leave unresolved features suggestive of ulterior purpose, the court may refuse winding-up in the exercise of discretion.

Smit v Sofa Planet CC and Others (4424 / 2022) [2023] ZAWCHC 1 (17 January 2023)