When can a company successfully resist a winding-up application based on a counterclaim?

December 1st, 2022

A well understood principle in South African common law; is that a creditor of a company is entitled to apply to court for an order to compel the winding-up of a company that is unable to pay a debt that is due and payable by the company to the creditor. This principle was codified into statute in the Companies Act 61 of 1973 (the old Companies Act), at s 344 read with s 345 of the old Companies Act. This legislation is still in force and applicable notwithstanding the advent of the new Companies Act 71 of 2008. The court has a discretion in deciding whether or not to grant the order for the liquidation of the company; and of equal importance to the application and enforcement of the creditor’s entitlement with regard to its rights in the old Companies Act, as referred to above, is that the debt owed to the creditor cannot be disputed on bona fide and reasonable grounds by the company. Once the existence of the debt is established by the creditor the onus will be on the company to show that the debt is disputed on bona fide and reasonable grounds.

The matter of Afgri Operations Ltd v Hamba Fleet (Pty) Ltd 2022 (1) SA 91 (SCA) shed light on when the court will consider a counterclaim against the creditor, which is alleged by a company debtor to be sufficient to vitiate the creditor’s rights to the granting of an order for the winding-up of the company debtor where the latter cannot pay the creditor’s debt.

The facts of this case are worth discussing briefly. Hamba Fleet (Pty) Ltd (Hamba Fleet) was a debtor company of Afgri Operations Ltd (Afgri) due to the former failing to pay certain costs, which the court had held Afgri had been validly entitled to receive from it. In response to Hamba Fleet’s failure to pay, Afgri brought an application for the winding-up of Hamba Fleet. Hamba Fleet sought to resist the granting of an order for its liquidation being taken against it on the basis that Afgri’s debt was disputable on bona fide and reasonable grounds.

In deciding the case, the Supreme Court of Appeal (SCA) reaffirmed the principle that ‘the discretion of a court to refuse to grant a winding-up order where an unpaid creditor applies is a “very narrow one” that is rarely exercised’ and exercised in special or unusual circumstances. Further, it affirmed that generally, after a creditors’ indebtedness has prima facie been established, the burden of proof where a company debtor seeks to resist an order being made against it then shifts to the company debtor, which must show that the indebtedness established is disputed on bona fide and reasonable grounds.

The court confirmed that the test for establishing the existence of bona fide and reasonable grounds to refuse an order sought by the creditor where a company debtor alleged the existence of a counterclaim the debtor company has against the creditor, is found in Plascon-Evans Paints Ltd v Van Riebeeck Paints (Pty) Ltd [1984] 2 All SA 366 (A). The court noted that for the company debtor to succeed in its attempts to resist the order based on the existence of a counterclaim, the pleadings of the debtor company must demonstrate a prima facie case in favour of the debtor company specifically in respect of the counterclaim.

The court found that Hamba Fleet had, in what purported to be a counterclaim, merely alleged that it was owed moneys that would offset its indebtedness. The court held that Hamba Fleet’s averments were tantamount to an allegation and lacked any real evidence such as: summons instituting its counterclaim, and documents proving its liquidity.

In addition, Hamba Fleet failed to respond to the s 345 demand. During the case the underlying debt, giving rise to the application for the winding-up of Hamba Fleet, was not in dispute and was admitted by Hamba Fleet. Hamba Fleet also ‘made no allegation that it was either factually or commercially solvent’. It was common cause that Hamba Fleet was not trading or conducting any business at the time of the application for its winding-up and it admitted it had no assets but placed the blame for this on Afgri. Other relevant factors included the lack of any indication that the respondent may be solvent and the fact that Hamba Fleet did not appear to be trading.

The court found that Hamba Fleet had failed to demonstrate a prima facie case in favour of the debtor company in respect of the counterclaim and, therefore, failed to discharge the onus of demonstrating that its indebtedness to Afgri had indeed been disputed on bona fide and reasonable grounds.

The effect of the SCA’s judgment is that the unmitigated recourse to a counterclaim, alone, by a respondent, does not qualify success to resist an application for its winding-up. A debtor company that wished to rely on the existence of a counterclaim against a creditor with a valid debt owed to it by the company debtor who is seeking the court to order the liquidation of the company, must not only allege the existence of the counterclaim in its pleadings but must also present strong evidence to establish a prima facie case in favour of its counterclaim.

Wandile Mbabane LLB (UNISA) is candidate legal practitioner in Durban.

This article was first published in De Rebus in 2022 (Dec) DR 9.

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