Litigants frequently find themselves debating whether disputed costs and/or fees in liquidation proceedings brought under s 345 of the Companies Act 61 of 1973 have a legal basis in the proceedings and in our courts. In this recent judgment, we discover that fees that are appropriately disputed and the applicant fails to demonstrate a prima facie case have a legitimate standing under our law. This plainly indicates that liquidation proceedings under s 345 applications cannot be utilised lightly to enforce debt payments from the debtor. This article aims to emphasise the necessity of liquidation proceedings in circumstances involving disputed fees.
In this case, the applicant filed an application for an order to wind up the respondent under s 346, read in conjunction with ss 344(f) and 345 of the Companies Act. It is common cause that in or around September 2021, the applicant and the first respondent signed a formal agreement to supply solar panels, batteries, and inverters to the first respondent’s energy-efficient residential complex. According to the agreement between the parties, the applicant was required to pay €375 000 in down payments for 50 houses. However, it is clear from the evidence that the respondent did not make the amount due and payable to the applicant. As a result, in and around April 2023, the applicant sent a letter to the respondent in accordance with s 345(1) of the Act seeking payment from the respondent. However, the respondent made no payment or a share thereof, nor did he enter into a settlement agreement. At this time, the applicant filed an application to wind up the first respondent. In this case, the applicant alleges that the first respondent has been and remains owing and/or indebted to the applicant in terms of the sale price. However, the first respondent had repeatedly recognised and/or admitted that it is owing to the applicant while failing to take any active and positive steps to lessen the risks and honour the sale price as agreed. In response, the first respondent contends that, in a nutshell, the reason for its failure to honour the agreement sale price is that the goods, particularly the batteries supplied by the applicant, were defective, and that the applicant was aware of the materially defective goods, which have caused significant damage to the respondent. As a result, the first respondent denies that it is insolvent and commercially insolvent.
The application was filed as part of the first respondent’s winding-up process under s 345 liquidation. This court was then tasked with determining whether the first respondent was unable to pay its debts and if the first respondent’s denial of the applicant’s claim is founded on legitimate reasons.
This court considered a number of liquidation laws and determined that the applicant had not demonstrated that the first respondent is commercially insolvent. The first respondent has demonstrated that its indebtedness is legitimately disputed on reasonable grounds. As a result, the applicant is not entitled to seek liquidation of the first respondent because all the prerequisites for a successful liquidation application and/or order have yet to be met, including the formalities required by s 346 of the Companies Act.
The court further stated that attempting to coerce payment of a debt that is legitimately disputed, or if the goal is to oppress, swindle, or impede the company’s rights, would be an abuse of process. The crucial point is that winding up requires a current debt obligation that is due and payable. Once the creditor demonstrates the existence of the debt, the company must demonstrate that the debt is disputed on legitimate and reasonable grounds. The court also debated whether the Badenhorst ruling applied to the final stage of liquidation proceedings. This court believed that when there is a factual dispute about a respondent’s indebtedness in an application for a final liquidation order, both the Badenhorst rule and the Plascon-Evans test should be followed. To put it simply, the Plascon-Evans test and the Badenhorst rule serve different goals. It is also trite that liquidation may not be used to enforce disputed debt payments. It is not appropriate for resolving complex factual disagreements. In this case, when the applicant submitted its notice of motion, it was aware of or should have anticipated that a factual disagreement would arise as a result of the respondent’s response. In essence, the respondent urged the applicant to resolve the case through arbitration, but it knowingly ignored that recommendation. The court was satisfied that the respondent presented a legitimate defence and explanation on the papers. The court also found that the applicant failed to establish a prima facie case for winding up the first respondent. The applicant failed to produce substantial evidence of the respondent’s indebtedness to it, as well as proof of its incapacity to repay its debts. The court concluded that there is a genuine and reasonable dispute about the debt, preventing reliance on winding-up proceedings. A dispute existed before the start of the winding-up process.
This case demonstrates that litigants must exercise prudence when utilising liquidation as a debt-collection strategy that looks to be a threat to the creditor in order to get the creditor to pay. This case emphasises the vital role of disputed debts in liquidation procedure. In a nutshell, in complex cases where there is a material defect in the products and services supplied, the creditor must anticipate a material dispute arising from its claim, and liquidation can never be used to enforce disputed debt payments because this would be an abuse of court processes and frustrate the debtor’s rights. In conclusion, liquidation is a drastic and extreme remedy that litigants frequently use, even when claims are legitimately disputed as is in this case.
Lusapho Yaso LLB (UWC) LLM (UCT) is a legal advisor in Johannesburg.
This article was first published in De Rebus in 2025 (Jan/Feb) DR 68.
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