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IN THE HIGH COURT OF SOUTH AFRICA

NATAL PROVINCIAL DIVISION REPORTABLE

Case No: 1435/08

In the matter between:

SHORIE`S INVESTMENTS CC APPLICANT

and

TGR CONSTRUCTION CC RESPONDENT

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JUDGMENT

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Madondo J

INTRODUCTION

[1] The applicant seeks an order for the provisional winding up of the respondent on the grounds that it is unable to pay its debts, as envisaged in section 68 (c) of the Close corporation Act, 69 of 1984 (the Act), alternatively, that it is just and equitable in terms of section 68(d) read with section 69 of the Act that the respondent be wound up.

[2] The applicant is Shorie`s Investments CC, a close corporation duly incorporated as such in accordance with the Close Corporation Laws of the Republic of South Africa and having its principal place of business at 40 Main Road , Dannhauser, Newcastle, KwaZulu-Natal.

[3] The respondent is TGR Construction CC, a close corporation duly incorporated as such in accordance with the Close Corporation Laws of the Republic of South Africa and having its registered address at 21 Auburn Place, Bellevue, Pietermaritzburg, KwaZulu-Natal and its principal place at 8 Posselt Road, New Germany, KwaZulu-Natal.

BACKGROUND

[4] The applicant alleges that the respondent is indebted to it in the sum of at least R1, 756, 954.34, being the balance outstanding on account of goods sold and delivered by the applicant to the respondent at the latter’s special instance and request, during the period May 2007 to September 2007. On 17 October 2007, the respondent prepared and forwarded to the applicant a reconciliation of account,¹ showing that the respondent owed the applicant the sum of R1, 780, 254.09. However, reconciliation did not include the applicant’s final invoice in the amount of R23, 196.85, which raised the total outstanding to R1, 803,450.94.

[5] On 29 November 2007 the applicant’s member, Prithraj, and the respondent’s member met and agreed upon a final credit of R 46,496.60 which brought the total amount outstanding to R1, 756,954.34. On 1 November 2007 the applicant received a written offer from the respondent to repay its debt in varying instalments².On 10 December 2007 the applicant accepted payment by way of monthly instalments provided that the members of the respondent would stand as surety for the debt. Mr Holing, an attorney for the respondent, informed the applicant that he would not advise the members of his client to stand as surety and that Masakane Hardware is another larger creditor of the respondent. The respondent owed the said hardware in the region of R 1300 000-00.

[6] The applicant then wrote the respondent a letter threatening to issue liquidation papers should the respondent and its members fail to sign the agreement as surety by 20 December 2007.The respondent did not respond to the said letter. On 25 January 2008 the applicant then brought this application against the respondent. The application for the provisional order liquidating the respondent was set down for hearing on 6 February 2008.The respondent opposed the application and filed its Answering Affidavit a day before the hearing, 5 February 2008.The applicant filed its replying affidavit on 26 February 2008. Thereafter the matter was set down for hearing on 11 August 2008 and it came before me.

FACTS

[7] During the period between May 2007 and September 2007 the applicant and the respondent entered into various sale agreements and in terms of which the applicant would supply various materials and labour to the respondent. At the time the respondent was a contractor in respect of a development for its client, MDV Developments. According to the respondent it was a term of each agreement that the respondent would make payment to the applicant as and when its client made periodical payments to it .The labour payments would be made as and when the wages of labourers became due. However, according to the applicant its terms of trade with the respondent were that payment was to be made within 30 days from the date of invoice.

[8] The respondent alleges that during the course of its relationship with the applicant, it became apparent that there were a number of significant problems relating to the services and materials the applicant supplied:

(i) The prices being charged for the same materials varied significantly
between the quotations and the invoices and also between voices
rendered at different times;

(ii) The prices being charged were substantially higher than the general trade prices;

(iii) The materials specified on certain invoices were not the same as the materials delivered and were frequently of a sub-standard quality;

4. Many of the materials delivered were latently defective;

5. The invoices did not tally with the amount in fact required and/or delivered;

6. The workmanship of the labourers was of an extremely poor quality to the extent that much of the work had to be redone by other third parties, at the expense of the respondent;

7. The applicant’s workers were responsible for numerous damages on site due to carelessness and a lack of supervision; The client in fact evicted the applicant from the site towards the end of October or in early November 2007, being totally frustrated and disillusioned with the applicant’s inability to deliver the agreed services and/or materials.

The respondent alleges that the negotiations then commenced between the parties with regard to what amount the respondent was indebted to the applicant, if in fact, it was so indebted at all.

[9] The respondent claims that it is entitled to levy penalties against the respondent because the project was delayed through the problems referred to above. Because of the poor workmanship and often latently defective products, third parties had to be contracted to complete the work properly at a substantial expense, adding to the respondent’s damages. The respondent contends that it is entitled to recover such expenses from any amount it may owe the applicant either by way of set off (once quantified) , alternatively , by way of damages.

[10] On the other hand, the applicant contends that the respondent is indebted to it in the sum of R1, 756,954.34, being the balance outstanding on account of goods sold and the applicant delivered to the respondent during the period May 2007 to September 2007. There has been correspondence between the parties wherein the respondent unconditionally undertook to pay the amount it owed to the applicant in instalments. However; such an undertaking was not honoured. In the premises, the applicant alleges that the respondent is unable to pay its debt.

[11] Further, the respondent informed the applicant that it was due to receive retention of approximately R1, 600.000.00 in February or March 2008. The respondent has fear that if the retention monies were to be released to the respondent, it may use such monies to settle the claims of certain creditors over others, thereby creating preferences. The applicant therefore claims that it is also just and equitable that the respondent be wound up. The respondent denies that it is indebted to the applicant and that it is unable to pay its debt.

ISSUES

[12] The issues in this matter are:

1. Whether the respondent is indebted to the applicant and, if the answer is in the affirmative, whether the respondent is unable to pay its debts;

2. Whether the respondent’s dispute to its indebtedness to the applicant is bonafide and based on reasonable grounds;

3. Whether it is just and equitable to wind up the respondent on the basis that it may utilize the retention money to pay other creditors, thereby preferring those creditors over the applicant.

SUBMISSIONS

[13] The respondent has raised a point in limine relating to the admissibility in evidence of facts contained in the founding affidavit derived from “without prejudice settlement negotiations“ conducted between the respondent and the applicant’s attorney. The respondent contends that as the offer was marked without prejudice, it constituted a privilege communication which is inadmissible in evidence in legal proceedings between the parties. Mr Van Rooyen for the applicant has argued that there is no conclusive legal significance attached to the phrase “without prejudice.“ He went on to argue that the mere fact that a communication carries such phrase does not per se confer upon it the privilege against disclosure. In order to render a “privileged“ admissible, the following requirements must be met. There must be:

1. a dispute between the parties ;

2. a communication (oral or written) containing both an admission and an offer to achieve a comprise, which is bonafide (genuine negotiations’)

If the statement does not comply with all the aforementioned requirements, the statement and the admissions contained therein remain admissible. In support of his argument Mr Van Rooyen has referred me to Jili v South Africa Eagle Insurance Co.Ltd 1995(3) SA 269 (N) 275B; Brauer v Markrow and another 1946 TPD 344 at 344-355 and Lynn $ Main Inc.v Naidoo 2006 (1) SA 59 (N) at page 64.

[14] It has been argued on behalf of the applicant that on the papers the respondent has acknowledged its indebtedness to the applicant in, at least, the sum of R500 000-00.

[15] With regard to the respondent’s inability to pay its debt to the applicant, Mr Van Rooyen for the applicant has argued that in terms of the provisions of section 68 of the Act read with section 346(1) (b) of the Companies Act, 1973 (the Companies Act), a creditor, including a prospective or contingent creditor, may apply for the winding up of a close corporation. He contended that the respondent should be wound up due to the fact that it is unable to pay its debts or that it is just and equitable that the respondent be wound up, as envisaged by section 68(c) and 68(d) of the Act. In terms of section 69(c) the applicant is required to prove to the satisfaction of the Court that the corporation is unable to pay its debt.

[16] The test is whether it appears from the papers that the respondent disputes the applicant’s claims on reasonable and bonafide grounds. Mr Van Rooyen argued that evidence that a company has failed to pay a debt, the payment of which is due, is cogent prima facie proof of inability to pay its debts and current liabilities.

DISCUSSION

Point in limine

[17] In its point in limine the respondent contends that as the offer was marked “without prejudice”, it constituted a privilege which is inadmissible in evidence in these legal proceedings between the parties. In Jili v South African Eagle Insurance Co.Ltd,³ the court held that there is no conclusive legal significance attached to the phrase “without prejudice” and that the mere fact that a communication carried it did not per se confer upon it the privilege against disclosure, where there is no dispute existing between the parties or it does not form part of a genuine attempt at settlement.

[18] Once the offer has been accepted a proper and binding compromise comes into effect irrespective of whether the offer has been marked without prejudice, putting an end to the dispute between the parties.⁴. In this regard James JP, as he then was, in Gcabashe v Nene ⁵said the following:

“Negotiations conducted without prejudice are, of course, designed to resolve
disputes between the parties and if the negotiations result in a settlement then
logically evidence about the settlement and the negotiations leading up to it
should be available to the trial court because the whole basis for non disclosure
has fallen away”.

[19] In Sanlam Ltd v Sayed,⁶ the court held that a without prejudice offer during settlement negotiations is inadmissible as an admission by the party making it, but admissible if the fact to be proved is that an offer of settlement was made at all. In the present case it is common cause between the parties that the respondent made an offer to pay the amount owing and payable to the applicant by monthly instalments and that the applicant accepted such an offer. The acceptance of the offer ended the dispute between the parties and the accepted offer became settlement agreement. In the premises, no privilege against non disclosure of the accepted offer can be sought by the applicant. In addition, it has been argued on behalf of the applicant that the document in question is also tendered as proof that an offer to pay the amount owing to the applicant by the respondent was made and accepted. It therefore follows that Annexure “D” enjoys no protection against disclosure in the legal proceedings between the parties. The document, Annexure “D” is accordingly admissible in evidence against the respondent.

Is the respondent indebted to the applicant?

[20] The applicant in its papers categorically states that the respondent is indebted to it in the sum at least of R 1, 756,954.34, after the deduction of the final credit in the amount of R 46,496.60, being the balance of the goods the applicant sold and delivered to the respondent. The respondent simply denies that it is indebted to the applicant in the said sum of money and that if it is indebted in any amount such amount is presently due and owing. There is no truth in the respondent’s version in this regard since it was the respondent itself which prepared and forwarded a reconciled account (Annexure “C”) to the applicant showing that the amount due and owing to the applicant was R 1,780,254.09. In Annexure “D” the respondent offered to liquidate such debt by means of monthly instalments as set out therein. It is evident from the respondent’s conduct that it was thereby acknowledging its indebtedness to the applicant and that the debt was then fully due and payable. There is nothing in the papers which really and precisely gainsays the version of the applicant as to the respondent’s indebtedness to it.

Respondent’s inability to pay its debts

[21] Proof that the respondent is unable to pay its debts constitutes a valid and sufficient ground for the issue of a winding up order⁷. Section 68 provides:

“A corporation may be wound up by a Court, if ─

1. …

2. …

3. the corporation is unable to pay its debts; or

4. it appears on application to the Court that is just and equitable that the corporation be wound up.”

[22] It is common cause that the agreements of sale were entered into between the parties in the period between May 2007 and September 2007 and that in consequence thereof the applicant sold and delivered goods to the respondent. At a later stage a reconciliation of the respondent’s account was done and the respondent undertook to pay the amount due and owing in monthly instalments, as set in Annexure “D”, until its debt was finally liquidated. Annexure “D” reads:

“Dear Tommy

Our account with your selves

We refer to our discussions and offer the following proposal of settlement in respect of the above:-

November R 200, 000, 00

December R 100, 000, 00

February R 200, 000, 00

Thereafter R150, 000, 00 per month until the reconciled debt is settled. We alsointend utilizing the balance of retentions that will be available, upon the finalization of the final contract certificate, to reduce same.

Please confirm that the proposal is acceptable to you.”

[23] It does not appear from the respondent’s papers as to what happened to its outstanding account with the applicant which it had offered to settle by monthly instalments. Nor has any evidence been tendered to show that such undertaking by the respondent was honoured in that instalments were paid as agreed upon between the parties, the balance of retention money was also utilized and that the debt was finally liquidated. Nor is it disputed that since the date of Annexure “D” the respondent has not made any payment in settlement of its account at all. Instead, the respondent claims that it is entitled to some damages (unquantified) as a result of a delay in the project , poor workmanship by the applicant’s employees , latently defective products and the defective performance by the applicant. In conclusion, the respondent contends that it would as a result have a counterclaim against the applicant for a substantial amount arising from the problems referred above. However, it could not tell in how much the applicant is indebted to it.

[24] The respondent simply denies that it is indebted to the applicant in the sum of R1,756,954.34 and states that if it is indebted to the applicant in any amount such amount is presently not due and owing. However, it admits contracting with the applicant for the supply of materials and labour. But; it does not explain as to what had become of the payment for such supply. Instead, the respondent claims that the final account has not been completed as the process is still continuing and that therefore it is not possible to calculate all the figures the respondent claims entitlement to. This is quite confusing and really disturbing since it was the respondent that prepared and forwarded a reconciliation account to the applicant indicating that it was indebted to the applicant in the sum of R1, 780,254.09 and offered to settle the same in instalments. This provides conclusive proof that the respondent was unable to pay its debt and that it requested an extension of time to pay.

[25] It is common cause that since the applicant’s acceptance of its offer to settle its debt by paying monthly instalments the respondent has not made any payment at all towards the settlement of such account. In Rosenbach & Co. (Pty) Ltd v Singh’s Bazaars (Pty) Ltd⁸, Caney J had the following to say in this regard:

“The proper approach in deciding the question whether a company should be wound up on this ground appears to me, in the light of I have said, to be that, if it is established that a company is unable to pay its debts, in the sense of being unable to meet the current demands upon it, its day to day liabilities in the ordinary course of its business, it is in a state of commercial insolvency …”.

The respondent’s failure to make any payment in settlement of its debt since the acceptance of the offer provides conclusive proof that it is commercial insolvent.

Bonafide and reasonable grounds

[26] The respondent must show on a balance of probabilities that its indebtedness to the applicant is disputed on bonafide and reasonable grounds.⁹ Section 69 of the Act provides:

“(1) For the purposes of section 68(c) a corporation shall be deemed to be unable
to pay its debts, if ─

(a) a creditor , by cession or otherwise , to whom the corporation is indebted in a sum of not less than two hundred rand then due has served on the
corporation ,by delivering it at its registered office , a demand requiring
the corporation to pay the sum so due , and the corporation has for 21 days thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor ; or

(b) …

(c) it is proved to the satisfaction of the Court that the corporation is unable
to pay its debts.

(2) In determining for the purposes of subsection (1) whether a corporation is unable to pay its debts, the Court shall also take into account the contingent and prospective liabilities of the corporation “.

[27] In casu, it is common cause that instead of the applicant delivering a demand requiring the respondent to pay the amount due and owing, the respondent prepared and forwarded to the applicant a reconciliation of account, Annexure “C”, showing that the respondent owed the applicant the sum of R1,780,254.09. However, the sum of R23, 196.85 was not included, which raised the total outstanding to R1,803,450.94. Subsequent thereto, the member of the applicant and the member of the respondent met and agreed upon a final credit of R46,496.80 , thereby reducing the total amount owed to the applicant to R1,756,954.34. The respondent then offered to liquidate the said amount in monthly instalments as set out in Annexure “D,” which became settlement agreement between the parties. This, in my view, rendered the issue of a letter of demand in terms of the Act unnecessary. The applicant has proved that the respondent is indebted to it in the sum more than R200.

[28] Regarding the question whether the respondent corporation is unable to pay its debt, Corbett JA, as he then was, in Kalil v Decotex (Pty) Ltd and another ¹⁰said the following:

“Consequently where the respondent shows on a balance of probability that its indebtedness to the applicant is disputed on bonafide and reasonable grounds, the Court will refuse a winding–up order. The onus on the respondent is not to show that it is not indebted to the applicant: it is merely to show that the indebtedness is disputed on bonafide and reasonable grounds “

[29] In its answering affidavit the respondent admits that the applicant’s¹¹ final invoice No. 42 for R23196.85 raised the total outstanding to R1,803,450-94. The total amount owing in terms of Annexure “C” was R1, 780,254.09. Annexure “D” does not show any dispute that the account was not due for payment .The respondent only objected to its members signing personal surety ship in respect of the debt. The respondent proposed to settle the account as reflected in Annexure “C”, thereby making an unconditional undertaking to liquidate its debt by paying monthly instalments.

[30] In addition, the respondent offered to make payment of R150 000 per month until the reconciled debt was liquidated. The respondent even went as far as offering to utilize the balance of retentions upon finalization of the final contract certificate to reduce the account. Annexure “D” clearly shows inability on the part of the respondent to pay the debt which was due, owing and payable by it to the applicant and a request for the extension of time to pay.

[31] The respondent’s version is characterized by the startling lack of particularity in respect of the alleged breaches of the sale agreements between the parties and the manner in which the amounts claimed as damages are calculated and arrived at. The respondent has not specified and nor has it given any details of the prices allegedly varied between the quotations and the invoices; the materials specified in the invoices which were not the same as the materials delivered; the delivered materials that were latently defective and the invoices that did not tally with the amounts paid. Surely, the respondent must have kept records of all the items referred to above. Nor does it appear from the papers that any complaint had ever been made during the course of the project regarding prices, variations between invoices and goods supplied. In the premises, I am not satisfied that the respondent has disclosed its defence and the material facts upon which it relies for such a defence with sufficient particularity and details to enable this Court to determine whether the respondent’s defence, that it is not indebted to the applicant, is bonafide and based on reasonable grounds. The impression created is that the respondent is deliberately vague and leaving open to it to evade its liability.

[32] The next question to decide is whether the respondent’s defence of set off can be said to be based on reasonable grounds. For the Court to give effect to the set off, it must have been pleaded by the party wishes to take advantage of it. The respondent has obliquely pleaded the set off. However, for the set off to operate the following conditions must be met¹²:

“ Both debts must be:

1. of the same nature;

2. liquidated;

3. fully due ,and

4. payable by and to the same persons in the same capacities”.

[33] In this case debts are not of the same nature. The respondent’s debt arose out of the sale agreements in terms of which the applicant supplied materials and labour to the respondent. Whereas the applicant’s debt allegedly arose in the form of damages as a result of the alleged breaches of such agreements, defective materials and incorrect invoicing by the applicant. The latter debt is not yet liquidated and fully due to the respondent. This is evident from .paragraph 11.10 of the respondent’s answering affidavit where it says:

“Because the final account has not been completed (and the process is still continuing), it is not possible to calculate all the above figures in order to determine exactly what is or is not finally due”.

[34] The unliquidated claim for damages is not capable of being set off against admitted liquidated obligation¹³. Nor is it alleged that such unliquidated claim by the respondent exceeds any amount the respondent owes to the applicant. The applicant concedes that the work was some how defective and that alternative sub-contractors were employed to complete the installations. This according to the applicant gave rise to the applicant crediting the respondent with a sum of R46496.60 at the meeting held on 29 November 2007. The respondent does not really dispute that such credit was given to it. The claim for a set off is therefore not based on any reasonable grounds.

Just and equitable order

[35] Such order can only be made if the Court considers it just and equitable.¹⁴

It is the underlying equitable principle of law governing companies and close corporations that no co-owner, no partner, no shareholder and no member is normally obliged to remain a co-owner, partner, shareholder against his will in circumstances where this is unfair or oppressive to him.¹⁵ The weight of authority shows that this principle often finds application in a situation where there is a dispute or deadlock or misunderstanding between the co-owners, partners and members to such an extent that they can no, longer able to work amicably together¹⁶. However, the Court has discretion to grant such an order if the circumstances of the particular case so demand.¹⁷

[36] Section 49 of the Act provides relief to the victim of oppressive conduct. The corresponding provisions in the Companies Act are contained in section 252. The common law also provides similar protection.¹⁸ The manner in which the affairs of the company are being conducted must be shown to be unfairly prejudicial, unjust and inequitable.

[37] In Garden Province Investment and others v Aleph (Pty) Ltd and others,¹⁹ the Court held that that in order to succeed in invoking the provisions of section 252 of the Companies Act a minority shareholder must establish not only that a particular act or omission of a company results in a state of affairs which is unfairly prejudicial, unjust or inequitable to him, but that the particular act or omission itself was one which was unfair or unjust or inequitable. Similarly, looking at the second part of the section, where the complaint relates to the manner of conduct of the business, it is the manner in which the affairs have been as well as the result of the conduct of the business in that manner which must be shown to be unfairly prejudicial, unjust or inequitable

[38] In Livanos v Swartzberg and others²⁰, Cillie J said at 399:

“In any event it is not the motive for the conduct that the Court must look at but
the conduct itself and effect which has on the members of the company”.

[39] In the present case the parties are not members but the applicant alleges that the circumstances are such that it is just and equitable to wind up the respondent corporation. Such a conclusion is based on mere assumption by the applicant that the respondent may use the retention money to pay other creditors and thereby preferring them over it. Nor has any evidence been tendered to show that such retention money is the only liquid asset the respondent owns or may possibly have. Though it is common cause that the respondent also owes Masakhane Hardware a substantial amount of money, there is nothing to show that Masakhane would be preferred over the applicant. In the absence of the evidence that retention money is the only asset the respondent has and that the respondent intends to prefer other creditors to the applicant, I am not satisfied that circumstances are such that it is just and equitable to wind up the respondent on this ground alone.

CONCLUSION

[40] On considering all the affidavits before me, I am satisfied that a case for liquidation has on the balance of probabilities been established: In the reconciled account (Annexure “C”) prepared and drafted by the respondent the total amount owing to the applicant is R1,780,254.09.In Annexure “D” the respondent offered to liquidate this amount by monthly instalments with effect from November 2007.In addition to monthly instaments, the respondent undertook to utilize the retention money in order to reduce the debt. Since then, the respondent has not made any payment to the applicant in settlement of its account at all. In the circumstances, the applicant has proved that the respondent is indebted to it in a sum of not less than R200, which is fully due and payable.

[41 ]Offering to liquidate the amount owing by monthly instalments was indicative of the fact that the respondent was unable to pay its debts and that it was therefore asking for the extension of time to pay. However, to date of hearing of this matter (11August 2008) the respondent had failed to make any payment. Its failure to make any payment after so long provides sufficient proof that the respondent is unable to pay its debt.

[42] The respondent claimed to have suffered damages in the hands of the applicant arising from latently defective materials, variation of invoices and a delay in the completion of the project. However, on the version of the respondent such damages have not been quantified since the process is still continuing. It therefore follows that the damages are not liquidated and fully due. Nor is there anything to suggest that such damages when quantified will exceed the amount owing. In compensation for the poor workmanship, the respondent had been given a credit of R 46,496.60. In the circumstances, the respondent has failed to demonstrate that it genuinely believed that it could validly raise the defence of set-off and that its indebtedness to the applicant close corporation is disputed on bonafide and reasonable grounds.

ORDER

In the result, I make the following order:

1. The respondent close corporation is hereby placed under provisional liquidation in the hands of the Master of the High Court, Natal Provincial Division;

2. A rule nisi is hereby issued calling upon the respondent and all other interested persons to show cause, if any, to this Court on 12 December 2008 at 09h30or so soon thereafter as counsel may be heard why the respondent should not be finally wound up;

3. This order must be published on or before the 5^th of December 2008 once in the Government gazette and once in the Witness newspaper;

4. The respondent is ordered to pay the costs of this application.

Judgment reserved on: 11 August 2008

Judgment delivered on: 10 November 2008

Counsel for Plaintiff: Adv Van Rooyen

Instructed by: VENN NEMETH & HART

Counsel for Defendant: Adv Goddard

Instructed by: Van Onselen Holing Dlamini Inc

c/o J LESLIE SMITH & CO

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