Subject index outline

Gap Merchant Recycling CC v Goal Reach Trading 55 CC 2016 (1) SA 261 (WCC) 
Winding-up — Application — Debt that is basis of application bona fide disputed on reasonable grounds — Rule that winding-up precluded in these circumstances — Nature and scope of rule — Meaning of 'bona fide' and 'disputed on reasonable grounds'. 

Winding-up — Application — Counterclaim that is bona fide and on reasonable grounds — Whether court has discretion to dismiss liquidation application.

The applicant applied for the provisional liquidation of the respondent, a close corporation. The basis of the application was a claim of R668 000 for goods sold and delivered. Respondent disputed the claim and invoked the rule that winding-up proceedings are precluded, where the debt that is their basis is bona fide disputed on reasonable grounds.

Held, that the precise nature of the rule — whether it went to the applicant's locus standi or was a self-standing principle — was not settled; nor was the question of its flexibility — whether it applied in all instances where a bona fide dispute on reasonable grounds was shown, or only when in addition the application for winding-up was shown to be an abuse of process. If the latter were the case a further question was raised of whether the respondent had to show that at the time the application was launched the applicant knew the debt was bona fide disputed on reasonable grounds; or whether it would suffice for the dispute to emerge for the first time in the answering papers. For present purposes, though, the court would adopt the approach that if on an assessment of all the affidavits the claim was bona fide disputed on reasonable grounds; it would have to dismiss the application.

As for the meaning of 'bona fide disputed on reasonable grounds', held that 'bona fides' related to the respondent's subjective state of mind — that he believed his factual statements to be true; while 'disputed on reasonable grounds' required that objectively the defence raised be supported by the facts alleged. Bald allegations lacking in particularity would not satisfy the requirement, and might even indicate that the respondent was not bona fide.

The respondent also raised a counterclaim for damages. Here again the law was unsettled. On one approach, the court had discretion to dismiss a liquidation application that was countered by a bona fide claim on reasonable grounds for damages. (The counterclaim would have to at least match or exceed the claim.) On a rival approach the liquidation application would have to be refused. (The latter position applied, though, only to liquidated counterclaims — an unliquidated counterclaim would merely be a basis for the court to exercise its discretion against granting a liquidation order.) The court ultimately adopted the position — without deciding — that it would have to dismiss the application if the counterclaim was bona fide and on reasonable grounds, and exceeded the applicant's claim.

 On examining the facts, though, the court concluded that the respondent had not on bona fide and reasonable grounds either disputed the applicant's claim or asserted a counterclaim for damages; and it was prima facie unable to pay its debts as they fell due. There were moreover no grounds to exercise the discretion to refuse a provisional liquidation order. It consequently ordered that the respondent be placed in provisional liquidation.

Werksmans Incorporated v Praxley Corporate Solutions (Pty) Limited
[2016] JOL 34039 (GJ)

Winding up application- untaxed bill can be used-

Winding up order-discretionary power irrespective of the ground upon which the order is made.

Winding up-order declaring winding up proceedings as being vexatious and frivolous and thus amounting to an abuse of the court’s procedure is discretionary.

In terms of a verbal agreement, the respondent and the applicant law firm entered into an agreement in terms of which the applicant received instructions concerning arbitration proceedings between the respondent and a third party (ODM).

In October 2012, the respondent received a notice from ODM to the effect that its board of directors had passed a resolution to place ODM under business rescue in terms of section 129 of the Companies Act 71 of 2008. That would by law result in the staying or suspension of all legal proceedings against ODM in terms of the provisions of section 133 of the Act. The respondent did not instruct its attorneys the applicants to stop arbitration proceedings but it was agreed to await the appointment of a business rescue practitioner and only then stop the arbitration. A business rescue practitioner was appointed on 
7 November 2012 thus causing the suspension or staying of the arbitration proceedings. At the end of November, the relevant attorney in the applicant firm sent his invoice to the applicant, claiming fees due to him for the period 1 November 2012 to 19 November 2012. The respondent continued to pay the applicant’s invoices up until October 2012, but in February 2013, it cancelled the respondent’s mandate to act for it. That led to the respondent sending a letter of demand for the balance owing (in respect of counsel’s fees). A deadlock was reached solely on the insistence by the respondent that the applicant tax his whole fees past paid and present.

Held that the issues before the Court were whether a party is entitled to demand that fees and disbursements that had already been paid by it to its attorneys be subjected to taxation by the taxing master; and whether there is justification to proceed with liquidation proceedings against a client who withholds payment because of a dispute in respect of the fees and disbursements of counsel.

The Court upheld the applicant’s argument that it should not be compelled to tax bills that had already been paid. The Court was unpersuaded that the respondent had made out any case to compel the applicants to submit their paid invoices for taxation.

The next question was whether the applicant was justified in launching liquidation proceedings, or whether it was an abuse of the legal process. The respondent pointed out that it had already paid in excess of R1 million in fees and disbursements to the applicant and there was accordingly no reason to believe that respondent would not be able to pay the sum claimed. The question to be answered firstly was whether an untaxed bill can be used to sue thereon or not. The court’s power to grant a winding up order is a discretionary power irrespective of the ground upon which the order is made. Similarly, the granting of an order declaring winding up proceedings as being vexatious and frivolous and thus amounting to an abuse of the court’s procedure is discretionary. The discretion must be exercised on judicial grounds. The Court found that the dispute raised by the respondent regarding the amount claimed was not genuine. The Court was also not persuaded that in launching the liquidation proceedings, the applicant acted maliciously or vexatiously.

The respondent was ordered to pay the amount claimed by the applicant.

Stalcor (Pty) Ltd v Kritzinger NO and Others (1841/2012) [2016] ZAFSHC 6 (21 January 2016)

Business rescue-variation of proved claim-tantamount to variation of plan-claimant received payments -delay to object

The applicant applies to have the value of its claim as currently reflected in the business rescue plan increased, the business rescue practitioner directed to investigate certain business affairs of the financially distressed enterprise and the respondents directed to pay the costs on a punitive scale.  The respondents resist the grant of such an order.

The undisputed facts need to be captured.  The applicant supplied certain goods to the second respondent on credit.  The second respondent failed to pay the debt. 

A resolution was adopted by the third respondent whereby the current second respondent was placed under business rescue scheme and the current first respondent was appointed as the business rescue practitioner of the second respondent.  The business rescue proceedings effectively commenced on 22 February 2013.  The first meeting of creditors was held in Bloemfontein on 11 March 2013.  After his appointment, the practitioner had various communiqués with the applicant’s attorney, Mr R C Christie and the applicant’s directors.  At one stage, on 11 April 2013 to be precise, the practitioner travelled to Germiston to have an exclusive meeting with the applicant’s representatives.  During that special visit the applicant’s capital claim of R2 666 482,29 was tabled and discussed.

The practitioner then convened the second meeting of the second respondent’s creditors in terms of section 151 of the Companies Act, 71 of 2008.  The meeting was held in Bloemfontein on 21 June 2013.  All in all nine creditors attended the meeting.  Among them was a certain Mr H B Steyn who attended the meeting as the applicant’s proxy. During the second meeting the creditors were afforded the opportunity of updating their claims.  On behalf of the applicant, Mr Steyn recorded the applicant’s claim as R2 666 482,00.  The figure represented the capital only.  The accrued interest and the taxed costs in terms of the court orders were not included.  Besides, there was no reference to interest and costs on the ballot paper. )

The practitioner went ahead during the second meeting to prepare a business rescue plan.  In due course he distributed the approved business rescue plan among the creditors.  The applicant’s name was on the distribution list.  The business rescue plan set out the value of each creditor’s claim.  The practitioner copied the applicant’s attorney as well as the applicant’s directors.  He received no objection concerning the value of the applicant’s claim which was recognised and recorded as R2 666 482,00.  No variation of the business rescue plan was subsequently requested by or on behalf of the applicant.  At the creditors second meeting held in Bloemfontein on 21 June 2013 the business rescue plan was approved by the majority.

On 28 August 2014, at the very earliest it would appear, interest due to the applicant by the second respondent was calculated in accordance with the two court orders.  The total interest which accrued from the two applications was the sum of R622 513,65.

The applicant’s three bills of costs were drawn up and presented for taxation on 20 March 2013, 23 April 2014 and 9 May 2014.  The total sum of the three taxed bills of costs was R442 594,94.

The real purpose of the current application is to have the applicant’s claim recorded as R2 66 482,00 increased by R1 065 108,62, being interest in the sum of R622 513,68 plus costs in the sum of R442 594,94, to the total of R3 731 590,62.  The increased portion thereof represents a ±40% shortfall.  The applicants bemoaned that its recorded and recognised claim had been substantially understated and that the enormous deficit would have a materially adverse impact on the real quantum of its claim.  For those reasons the applicant seeks rectification of its understated claim as recorded in the business rescue plan by the first respondent, in other words the business rescue practitioner.  This is the first relief sought.

The second respondent, a business corporate enterprise in rescue proceedings had eight other creditors besides the applicant.  Those creditors and holders of the securities issued by the second respondent were all parties to the business rescue plan.  These proceedings were initiated on 12 May 2015.  The applicants caused the current application to be served on them.  Although there were, in that way, given notice of this application none of them was cited as a correspondent

In this matter the applicant basically applied to have the existing business rescue plan varied in order to include the amounts of interests and the amounts of costs previously awarded to the applicant in terms of court orders.  Yet the very business rescue plan was not even attached to the applicant’s papers.  Therefore, I was asked to vary a document that I had not even seen.  Moreover, the applicant tendered no explanation whatsoever in its founding affidavit as to why its claim as ultimately recorded in the business rescue plan did not include such interest and costs at the crucial time, being 21 June 2013, when the creditor’s claims in the business rescue plan were finally revised or updated and finally approved.  Once approved the business rescue plan binds every creditor – sec 152(4).

The applicant’s first and even second deponent did not given any material facts to substantiate the applicant’s belated excuse for the considerable delays in having its bills drawn up, presented and taxed before the business rescue plan was finally approved by the creditors.

In the instant matter the business rescue plan was approved by the stakeholders in the presence of the applicant.  There was no objection.  It was subsequently sent to the applicant.  There was no objection.  The applicant’s attorney was copied.  There was no objection.  Almost 8 weeks after the approval of the business rescue plan the applicant complained to the business rescue practitioner that its claim in the business rescue plan was not correctly calculated because interest and costs were not taken into account. 

The applicant received14 payments distributed in accordance with the business rescue plan from 7 March 2013 until 28 August 2014.

On 10 November 2015, some 28.5 months since the final approval of the business rescue plan and some 25.5 months since the dispute was declared, the applicant rushed to court.  I pause to make an obvious comment.  The applicant’s conduct in relation to this matter was characterised by endless acts of remissness.  This is yet another, example thereof.  Worse still none of the second respondent’s creditors were cited as co-respondents, their direct and substantial interest notwithstanding.  That too was a material omission.

Now I turn to the second relief, prayer 2 of the notice of motion.  The prayer has its origin from two paragraphs in the founding affidavit.  Those were paragraphs 18 and 19.  The applicant, so it seemed to me, suspects that before the business rescue proceedings started the second respondent and third respondent had committed certain voidable transactions or engaged themselves in reckless trading or committed material breach of certain contractual obligations.  Based on that suspicion the applicant applies for an order in terms of section 141(2)(c) of the Companies Act, no 71 of 2008 whereby the first respondent as the business rescue practitioner is directed to investigate the activities of the close corporation and its member, and to file a report within 6 months with the registrar – vide paras 18 and 19, founding affidavit.

In the light of all these material considerations I am satisfied that it had not been shown that there was cause to be concerned; that there is no reason to believe that the applicant’s suspicion was well founded; that the proposed further investigation is likely to reveal any foul play by the suspected respondents and that the first respondent had not properly complied with his obligations in terms of section 141.  In any event section 141(2)(c) does not countenance the type of relief sought by the applicant.  I would, therefore, also deny the relief. 

In appropriate cases there is a constitutional imperative that a high court should develop common law.  However, before a judge can embark upon such an exercise a party calling upon the court to do so has demonstrate there are facta nova and lacuna in existing law.  This is important because common law cannot be developed in a vacuum.  Accordingly I decline the invitation extended to me by the applicants to develop common law by extending the scope of section 141(2)(c).

The applicant’s conduct was characterised by a series of acts of omissions.  The applicant flagrantly breached the rules and practice directives of the court.  In the circumstances, I am inclined to award all the costs in favour of the respondents.  To ensure that the respondents are not put out of pocket as a result of the applicant’s failings, I believe that it is appropriate and just to award the costs on the special scale as between attorney and client in favour of the respondents.  I cannot demonstrate my displeasure strongly enough.

Accordingly I make the following order: 63.1  The application is dismissed.

63.2  The costs of this application including all the wasted costs occasioned by the postponements shall be borne and paid by the applicant.

63.3  The respondents are entitled to have their costs taxed on the special scale as between attorney and client.

Noordman N.O. and Another v Bruin (3635/2013) [2016] ZAFSHC 9 (29 January 2016)

Directors-s 424 of the Companies Act, 61 of 1973- reckless and/or fraudulent conduct in respect of a company’s business

The liquidators of an insolvent company and the sole shareholder and former director of that company are at loggerheads.  The manner in which the insolvent company carried on its business is the centre of attraction in so far as the liquidators believe that its former director should be held liable in his personal capacity for the insolvent company’s debts.

Messrs O A Noordman and S M Rampoporo, the two liquidators of Elysium Graanbemarking (Pty) Ltd (2000/006848/07) (in liquidation), (herein later referred to as “the insolvent company”), are the plaintiffs.   Mr Jopie Fourie Beyers De Bruin, the sole shareholder and former director of the insolvent company, is the defendant.  Plaintiffs seek an order in terms whereof defendant is declared personally liable for payment of the total debts of the insolvent company in the amount of R2 952 836.37 plus interest a tempore morae and costs.  The claim is based on s 424 of the Companies Act, 61 of 1973 (“the Old Companies Act”), which deals with the liability of directors and others for reckless and/or fraudulent conduct in respect of a company’s business.  In terms of this section a court may, on application of inter alia the liquidator of a company, declare that any person who was knowingly a party to the carrying on of the business of the company, recklessly, or with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

[5] In their particulars of claim plaintiffs rely on sixteen grounds in support of the averment that defendant shall be personally held liable.  I do not intend to quote those grounds now, but shall deal with the more pertinent grounds which were raised in the evidence.

Feedex Exchange (Pty) Ltd (“Feedex”) trades as a grain merchant, conducting its business inter alia in the Free State Province. Feedex has been doing business with an entity known as Elysium Graanbemarking (“Elysium”) since about 2002.  Defendant was Elysium’s contact person and for all intents and purposes effectively in control of Elysium. Elysium, or the insolvent company as contended by defendant, also acted as grain merchant and particularly in the Koppies district, Free State Province.  Defendant was at relevant times a farmer and grain producer who conducted his business in the Koppies district. 

Ex facie documentary evidence placed before me, and following the trend of previous years,  several contracts were entered into between Feedex and Elysium during 2005 in respect of the 2005/2006 sunflower harvest season.  In terms hereof Feedex purchased grain from Elysium in respect of sunflower crops still to be planted by various farmers (“producers”).    

When entering into the various contracts Feedex knew at all relevant times that Elysium had entered into back to back agreements with producers in the Koppies district in order to be able to sell and deliver grain to Feedex.  In each case the parties recorded that the grain sold by Elysium to Feedex had been purchased from a particular producer.  Defendant as representative of Elysium signed the contracts as producer (“produsent”), which is clearly not correct as Elysium acted as grain merchant.

The identities of all producers in respect of all contracts entered into between Feedex and Elysium were therefore known to Feedex and duly recorded in writing. 

The business of a grain merchant (and farming in general) is risky as many risk factors such as droughts, hail, excessive rainfall and several other factors have an impact on production of grain.

It is clear from the evidence that Feedex was at all relevant times fully aware of the identity of the producers with whom Elysium concluded back to back contracts.  There was no recklessness or intention to defraud or fraudulent purpose in the manner in which defendant conducted its business.  The attitude and actions of defendant since January, but particularly during May and June 2006 were criticized by Mr Zietsman and these should be considered more closely.  It must be pointed out that plaintiffs failed to rely in their particulars of claim on such conduct, in particular the failure to deliver grain, as a ground for liability in terms of s 424(1). 

Mr Zietsman also submitted that defendant’s fraudulent action is evident from the fact that he elected to issue summons (on behalf of his company) against the producers Oosthuizen and Loggenberg, but that no action was taken against others who failed to deliver, including himself and his son.  Defendant was thereafter the driving force of the litigation between his company and Feedex over a period of years, only to surrender eventually and thereafter to apply for his company’s winding-up.

I do not accept that the litigation instituted can be labelled as fruitless and that defendant acted fraudulently.  His company had a liquid claim while Feedex’ claim for damages was illiquid.  The mere fact that legal costs have been incurred is a necessary consequence of litigation.  It appears from defendant’s interrogation that his company carried on with business during at least 2007.  An amount of in excess of R1.5M was received during this year from Tiger Brands in respect of maize contracts which were entered into on the same basis as in casu.  However various producers, including defendant personally, had to be paid and expenses settled if the cheques relied upon by plaintiffs are considered.  The investigation was not continued and it is uncertain what was due to the company.  Mr Zietsman did not labour this issue at all during argument.  The receipt of payments by either defendant or his company’s attorney has been dealt with in the plea and no evidence pointing to action within the ambit of s 424(1) has been led.  It was alleged that payments had been made from the insolvent company’s cheque account towards university expenses of defendant’s daughter, but it has not been proven when these payments were made and that defendant was not entitled at the time to authorise these.  This aspect was also not argued on behalf of plaintiffs.  The further allegations that defendant used his company as a conduit and that he failed to differentiate between the legal persona of his company and himself have not been addressed in evidence or arguments.  It is apparent from the contracts entered into that Feedex should have been well aware that defendant and his son entered into contracts under their own names, distinct from the name Elysium Graanbemarking.  These allegations are without merit.  The same applies to those not specifically mentioned herein.

In my view defendant did not act recklessly, fraudulently or with the intention to defraud creditors, and Feedex in particular, although there can be no doubt that his company failed to comply with its contractual obligations.  The plaintiffs failed to bring their claim within the ambit of s 424 (1) of the Old Companies Act and therefore the action should be dismissed.