Over the past year, various courts have dealt with liquidation cases where a company requests a liquidation order against another under the guise of recovering a debt that is owed. This is not a valid reason for granting a liquidation order on its own and is often scrutinised heavily by courts during the application process. This was a focus area in the case of WH Civil Engineering (Pty) Ltd and Another v Vander Diamonds (Pty) Ltd and Others (3575/2020) [2024].

Background

On 15 April 2017, Vander Diamonds and WH Civil Engineering concluded a verbal agreement in which the former let certain plant and earth-moving equipment to WH Civil Engineering for construction purposes on a project involving a third party. WH Civil Engineering undertook to effect payment of the invoices of Vander Diamonds within thirty days of the date of receipt of the statement setting out the services rendered and the plant hired on the project.

In good faith, Vander Diamonds invoiced WH Civil Engineering to hire the plant and earth-moving equipment from 20 May 2017 to 26 February 2018, as per our agreement. This resulted in an amount of R502 455 due to Vander Diamonds. However, in a spirit of compromise, the parties agreed to revise this amount to R203 550.

Vander Diamonds promptly demanded payment of R502 455 from WH Civil Engineering. However, WH Civil Engineering chose to ignore this demand. On 8 January 2018, WH Civil Engineering, represented by Whiskey Hendrick Matwalane, acknowledged its debt to Vander Diamonds for R502 455. Matwalane then stood surety for WH Civil Engineering for the amount it owed to Vander Diamonds. In terms of the acknowledgement of debt, WH Civil Engineering was to, among others, liquidate the amount of R502 455 as follows:

• Thirty per cent of R502 455 on or before 31 January 2018.
• The parties would decide within seven days after the date of the first payment regarding the full payment of the balance.
• Should WH Civil Engineering fail to effect payment on time, the total outstanding balance and an interest component at 10.25%/y, a tempore morae, would immediately become due and payable.

It is common cause WH Civil Engineering had, the acknowledgement of debt notwithstanding, failed to make any payments to Vander Diamonds. When payments were not forthcoming, Vander Diamonds sent a letter demanding payment of the outstanding amount as envisaged in Section 345 of the Companies Act (61 of 1973) in August 2020. Vander Diamonds regarded the failure of WH Civil Engineering to make payment as per the letter of demand as the inability to settle its debts when they fall due. In other words, WH Civil Engineering was commercially insolvent, and this Court agreed on 8 February 2021 when it granted an order liquidating WH Civil Engineering. A common cause between the parties is that they reduced the amount to R203 550 because of an error in calculation.

Assertions

The applicants in this application, WH Civil Engineering and Matwalane assert that they could not have been in willful default when they failed to oppose the winding-up application. They argue that they have yet to receive the demand nor the application as they were not served at the address that they had provided for the purpose. Had they received the papers, they certainly would have opposed it because WH Civil Engineering was solvent at the time of the liquidation. They would have had a bona fide defence against the application if they had been solvent at that point in time.

Conversely, Vander Diamonds states that the issue is straightforward in that one should enquire whether WH Civil Engineering was indebted to it when the order was granted. According to Vander Diamonds, WH Civil Engineering was indeed indebted to Vander Diamonds, whether in the amount stated in the acknowledgement of debt or the lesser amount of R203 550.

The Court asked if it was correct that the calculation error was rectified as early as 14 April 2018, and Vander Diamonds asked why WH Civil Engineering did not pay the amount due at the time. WH Civil Engineering has known since 20 February 2018 that the amount was wrongly calculated and corrected on 14 April 2018, yet it did not make payment. Regarding the address of service of the application, Vander Diamonds states that it served the application at the WH Civil Engineering registered address.

Issues

The Court needed to determine two issues. They emanate from the fact that WH Civil Engineering must show good cause. The elements that WH Civil Engineering ought to show are to render a reasonable and satisfactory explanation for the delay and that it has a bona fide defence that has some measure of prospects of success. These two issues, however, cannot be independently decided without the following ancillary matters:

• Could Vander Diamonds have obtained a winding-up order, as it did, regardless of the revision of the amount from R502 455 to R203 550?
• Was the service of the application at the registered address of WH Civil Engineering defective?
• What influence, if any, should WH Civil Engineering's factual solvency have on whether the order should be rescinded?
• Did Matwalane and Vander Diamonds conclude a settlement agreement on 13 October 2022?
• Is Vander Diamonds using the liquidation process to enforce a legitimately contested debt?
• What are the implications of Vander Diamonds' judgment against WH Civil Engineering, which states that it had security for the debt in terms of the acknowledgement of debt?
• Did Vander Diamonds deliberately withhold information from this Court to obtain the final winding–up order?

Good cause

The Applicants explained that they did not know about the demand delivered at WH Civil Engineering's registered address and the application for the latter's winding-up. They assert that they could not have received both these documents because they had, by letter dated 28 June 2018, furnished Vander Diamonds with another address to send correspondence. Matwalane acknowledged that he learned of the order on 29 March 2021. If this is correct, he acquired knowledge of the order thirteen days after it was granted.

On Matwalane's own version, the Applicants have been aware of the order 13 days after this Court granted it. There is no explanation why it did not immediately embark on steps to have the order rescinded and set aside. This would have been a proper reaction, mainly because Matwalane would have been mindful at the time that the amount of R502 455 for which he had signed an acknowledgement of debt had, by agreement between the parties, been corrected and adjusted down to R203 550. The invoice that was sent to the Applicants on 14 April 2018 is confirmation of the revision of the invoice.

The Applicants did not liquidate their indebtedness with Vander Diamonds because they regarded the matter as settled. Vander Diamonds vigorously refutes that the matter became settled at any stage. There are WhatsApp messages proving this.

The Court ruling pointed out that the Applicants argued they did not receive the application and that such might have been occasioned by service at the wrong address. Section 346 of the Companies Act (61 of 1973) refers to 'furnishing a copy to the company'. It is difficult, from the reading of Section 346(4A) (a) of the Act, why parties associate service of applications with the Section when it unambiguously uses the word 'furnish'. From the use of the word, it can safely be inferred that the Legislature deliberately employed it to indicate that service at the registered address is not required as in the case of the demand. The Court pointed out that, were the converse true, the Legislature would have expressed itself more explicitly as it did with Section 345. The Court added that, insofar as the use of the word furnish is concerned, the Court referred to the case of Eb Steam Company (Pty) Ltd V Eskom Holdings Soc Ltd. From the reading of Matwalane's affidavit, it is undeniable that both he and WH Civil Engineering were aware of the application and the order as early as 29 March 2021. They cannot rely on a settlement that was obviously, as per the correspondence between the parties, not reached. The conclusion on this issue should be that the Applicants were aware or should have been, as the service of the demand and the application is unimpeachable. Accordingly, compliance with Section 346(4A) (a) has occurred as Matwalane's knowledge is imputed to WH Civil Engineering.

The Court pointed out that the next issue for consideration is what influence or impact, if any, should the factual solvency of WH Civil Engineering have on whether the order should have been granted. It is significant to bear in mind that the claim of Vander Diamonds is founded on the provisions of Section 345. The Section concerns a debtor's inability to settle debts as and when they fall due for payment. Accordingly, the question to be asked is whether WH Civil Engineering could pay when Vander Diamonds demanded payment. The simple answer is that it was not; to date, it has not shown that it could. The Court pointed out that all it did was show that it was factually solvent insofar as it claimed that there were sufficient funds to cover the claim of Vander Diamonds in its account. The Court added that commercial insolvency is not concerned with whether a party's assets exceed its liabilities. It involves the ability or inability of a debtor to pay its debts as and when they fall due. Thus, WH Civil Engineering was commercially insolvent because it failed to liquidate its indebtedness with Vander Diamonds when it was called upon to do so.

The Court then dealt with the issue of Vander Diamonds using a liquidation order to reclaim a debt owed to it. The Court pointed out that WH Civil Engineering was served with a legitimate demand and failed to settle the debt. Confronted with WH Civil Engineering's inability to pay and no apparent defence, Vander Diamonds was entitled to launch the winding-up application. I am constrained to find that Vander Diamonds is not using the winding-up process to recover a debt that is validly contested.

Evasive action

The Court ultimately ruled in favour of Vander Dinamonds and dismissed the recission of the order to place WH Civil Engineering into liquidation.

In its judgement, the Court was very critical of WH Engineering and what it ultimately saw as the company's failed attempts to take evasive action to avoid paying a debt that it owed to Vander Diamonds. When WH Engineering became aware of the liquidation order 13 days after it was granted, the company should have taken action. The South African legal system has always favoured corrective action to address an order rather than evasive action to avoid it.