South Africa: Eastern Cape High Court, Grahamstown

REPORTABLE
IN THE HIGH COURT OF SOUTH AFRICA
(EASTERN CAPE, GRAHAMSTOWN)

Case No: CA 314/2009

In the matter between:
MELISSA BOTTCHER First Appellant
EILEEN HELENE DE KLERK Second Appellant
DERROL LAWRENCE BOTTCHER Third Appellant
and
ARTHUR’S BUILDERS CISKEI (PTY) LIMITED Respondent
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Coram: Chetty, Revelas JJ and Van der Linde AJ
Date Heard: 31 May 2010
Date Delivered: 24 June 2010

Summary: Company – Winding-up by Court – Company unable to pay its debts – Building contract – Employer cancelling contract when contractor ceased building operations – Contractor alleging progress payment unlawfully withheld by mortgagee bank – Employer’s claim against contractor an unliquidated claim for damages based on breach of contract – Employer a contingent or prospective creditor having locus standi to present petition for winding-up of company – Opposition to winding-up application based on several grounds – Contractor contending that it had not contracted with employer – Court rejecting allegations as false – Trial court however accepting contractor’s averments that bank reneging on paying third progress payment – Finding factually incorrect –Contractors reliance on arbitration clause misplaced – Respondent though possessed of assets, commercially insolvent – Appeal allowed

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JUDGMENT

______________________________________________________________
Chetty, J

[1] This is an appeal, with leave of the court below, Tshiki J, against the dismissal of an application for the provisional liquidation of the respondent. The appellants sought a winding-up order on the ground that the respondent was unable to pay its debts as envisaged in s 345 (1) (c) of the Companies Act^[1] (the Act). The application was dismissed with costs hence the present appeal. It would appear from the judgment that although the question arose whether the appellants should properly have proceeded by way of trial action the court below, correctly in my view, found that whilst there were disputes of fact, they were capable of resolution on the papers.

[2] A court’s powers to grant a winding up order is derived from and defined in s 344 of the Act which, inter alia, provides in s 344 (f) that a company may be wound up it is unable to pay its debts as described in s 345 of the Act. S 345 in turn, under the rubric, “When company deemed unable to pay its debts, provides in subsection 1 (c) that a company is deemed to be unable to pay its debts where it is proved to the satisfaction of the court that a company is unable to pay its debts. The applicant has to establish a prima facie case which is done when, on a consideration of all the affidavits filed, such a prima facie case has been established on a balance of probabilities. This approach has consistently been followed since Kalil v Decotex (Pty) Ltd and Another^[2]. The position is that a provisional winding-up order may be issued when the grounds relied upon on the applicants’ affidavit, although disputed in the respondent’s affidavit, can nonetheless be said to have been established prima facie in the sense that subject to anything that may emerge at a later hearing of oral evidence, the applicants’ case appears to have been established on a balance of probabilities. As Corbett JA pointed out in Kalil^[3], the provisional order “. . . does no lasting injustice to the respondent for he will on the return day generally be given the opportunity, in a proper case and where he asks for an order to that effect, to present oral evidence on disputed issues.”

[3] The application for the winding-up of the respondent company has its genesis in agreements concluded between the appellants and the respondent^[4] in terms of which the former, purchased erf 10739 in a housing development styled Malibu Heights in King Williams Town from the respondent for the purchase price of R480 000.00, R150 000.00 being in respect of the plot and the balance of R330 000.00 in respect of a three bedroom house to be built by the respondent in terms of a separate building contract concluded between them. The building operations duly commenced on schedule during February 2008, progressed rapidly and by 23 April 2008, 52% completed. Almost immediately building operations ground to a halt. The respondent was prevailed upon to complete the project but to no avail. Instead recriminations were exchanged between the parties, attorneys were engaged, and a plethora of correspondence exchanged which culminated in the application for the winding-up of the respondent. In the founding affidavit, the first appellant commenced with a detailed account of the development, its progress and the subsequent prolonged period of inactivity. She detailed the unsuccessful attempts made, by, not only her, but the other owners of the plots whose homes had in similar fashion been partially completed, to cajole the respondent’s sole director, one Ricardo Flanagan (Flanagan), to fulfil the respondent’s contractual obligations.

[4] She, – (i) adverted to correspondence directed to the respondent by her and the other affected parties in the development, and, when no reply was forthcoming, the notification to him that the contract had been cancelled; (ii) outlined the steps taken to secure the services of another building contractor to complete the project. In summation she alleged that the respondent’s failure to complete the project established prima facie that it was clearly unable to pay its debts and should accordingly be wound up. In her replying affidavit, and with reference to various supporting affidavits, she sought to elaborate upon her contention that the respondent was commercially insolvent.

[5] The application for the provisional winding up of the respondent was resisted on a number of grounds which were elaborated upon in the answering affidavit deposed to by Flanagan. The first and main ground of opposition raised was that the respondent was not the party with whom the appellants had contracted but another entity, RAF Development CC (RAF). It is common cause that Flanagan was the sole director and member of both the respondent and RAF respectively. The court below however rejected Flanagan’s evidence that RAF was the contracting party and on appeal before us Mr. Cole was constrained to accept that he was bound by such finding.

[6] In his answering affidavit, not content with merely asserting that the respondent was incorrectly cited, Flanagan embellished his evidence in order not only to disprove the appellant’s contentions to the contrary but moreover to show that the first appellant was deliberately untruthful. He alleged that she was from the outset aware that RAF was the building contractor in as much as he had specifically informed her that it was the building contractor. The court below disbelieved this entire body of evidence. The corollary of the rejection of this testimony was that the court below, correctly in my view, concluded that Flanagan’s version was fabricated. In my view the judge had more than sufficient reason for disbelieving Flanagan. The documentary evidence adduced established quite unequivocally that the respondent had contracted with the appellants and not RAF.

[7] The judge, however, thereafter, quite inexplicably, accepted Flanagan’s evidence that he was entitled to resile from the contract. The rationale for this finding is difficult to comprehend. Whilst a trier of fact is quite entitled to find that a witness may be believed on one aspect of his/her evidence but not on others, Flanagan’s evidence concerning his repudiation of the contract was equally contrived. Although the maxim falsum in uno, falsum in omnibus is not of application to our jurisprudence, where it is shown that a witness has been deliberately untruthful on one aspect of his evidence, the trier of fact may conclude that his evidence on another aspect cannot safely be relied upon. In rejecting Flanagan’s evidence concerning the identity of the building contractor, the court correctly concluded, as I stated, that Flanagan was deliberately untruthful and not merely mistaken. The remainder of his evidence thus required careful consideration in order to determine its veracity. In contending that the respondent was contractually entitled to cease building operations, Flanagan relied on clause 8.8 of the contract. It reads as follows -

“Should the Employer without good cause prevent the Contractor from receiving a draw when it is lawfully due, the Contractor, without prejudice to any other rights which it may have in terms if this agreement, or in law, shall be entitled forthwith to require the Employer to make immediate payment of the sum due. Should the Employer fail to make such payment, the Contractor shall be entitled to suspend all building operations on the Works and to charge the Employer for all costs incurred directly or indirectly, as a result of such suspension, without prejudice to any other rights as the Contractor may have in terms of this agreement or in the law.”


[8] The court below found, as a matter of fact, that the refusal on the part of the mortgagee, Absa Bank Ltd (Absa) to effect a further progress payment triggered the operation of clause 8.8 and that the respondent’s failure to continue with the building operations did not establish that the respondent was unable to pay its debts as provided for in s 345 of the Act. This finding is factually incorrect. In the answering affidavit, Flanagan meticulously expounded a formula in terms of which he alleged the respondent would be paid. He stated that where work had been completed to slab height the respondent would be entitled to 11% of the contract price and a further 29% when work had progressed to roof height and the walls plastered. He alleged further that a person, whom he described as a Mr. Demo, and whom he described as a bank inspector, had duly inspected the site and issued both progress certificates as per the formula.

[9] He further alleged that the respondent continued the building operations by erecting the roof, installing the ceilings, and commencing with the electrical work and painting and then called for the third progress payment which Absa refused to honour. It will be gleaned from the aforegoing précis of Flanagan’s evidence that the non-payment of the third progress certificate purportedly excused him from continuing the building operation.

[10] On the respondent’s own version however, it admitted having received an amount of R167 042, 42. It is not in issue and in fact confirmed by annexure “RA4” to the replying affidavit that such payment was effected on 23 April 2008 by Absa on the strength of a progress certificate certified by the valuator and indicating that 52% of the building work had been completed. Although the first appellant stated that she thereafter signed a further progress payment certificate presented to her by Flanagan, no real progress in completing the building operations in fact ensued. It is not in issue that Mr. Demont Troy Herman, (Herman) (the Mr. Demo referred to by Flanagan) an independent valuator, was the person who certified annexure “RA4”. In his affidavit annexed to the first appellant’s replying affidavit, he confirmed having been presented with a further progress payment certificate signed by the first appellant but which he refused to certify by virtue of the lack of any meaningful progress in the building operations. Flanagan’s evidence that Herman in fact signed the third progress certificate which he then presented to Absa, is clearly fabricated.

[11] The respondent’s decision to cease building operations was premised on Absa’s failure to effect payment of the third progress certificate of the sum of R82 500, 00. The evidence of Herman was that he consciously refrained from presenting the certificate to Absa for two reasons viz. the complete lack of any meaningful progress and the respondent’s failure to install the infrastructural services and in particular, the electrical services. A holistic appraisal of the evidence ineluctably compels the conclusion that the respondent’s evidence of a formula in terms of which payments to it would be effected is contrived and devoid of all substance. Mr. Cole, somewhat tentatively, submitted that Herman’s evidence was introduced only in the first appellant’s replying affidavit, and should accordingly be treated with a measure of circumspection. The submission overlooks the fact that the introduction of Herman’s evidence in no way seeks to supplement the appellant’s case. The first notion that payments to the respondent was to take place in accordance with a formula was specifically raised in the respondent’s answering affidavit. Those allegations are inconsistent with the first appellant’s averment that the respondent was paid an amount of R167 042, 42 in respect of a progress payment certificate, an allegation admitted by the respondent. Herman’s affidavit not only substantiates the first appellant’s case that Absa had cogent reasons for refusing to make a further progress payment but that Absa was never presented with such a certificate by him. Consequently the court below’s conclusion that clause 8.8 entitled the respondent to cease building operations can accordingly not be sustained.

[12] The court below furthermore quite erroneously found that the letter^[5] addressed to the appellants attorneys by the respondent’s attorneys constituted proof that the respondent’s unwillingness to continue with the building operations was directly attributable to Absa’s refusal to effect payment of the third progress certificate. I have already alluded to the fact that no such certificate was presented to Absa and that the cessation of the building operations was entirely due to the respondent’s inability to perform its contractual mandate. In addition the agreement provided for the completion of the project within six months of the respondent being given possession of the site i.e. by the end of August 2009, which had, by then, long since elapsed.

[13] The respondent’s explanation for the lack of progress was as adverted to earlier, the alleged refusal by the bank to effect payment of the third progress certificate. As alluded to hereinbefore, Herman refused to certify the certificate and it was accordingly never presented to Absa. The real reason for the delay in recommencing building operations is not difficult to determine. In terms of the approval for the development granted by the Buffalo City Municipality (BCM) the developer was responsible for all costs pertaining to the provision of infrastructural services. In her founding affidavit the first appellant alleged that Absa’s refusal to effect further payments was directly related to the respondent’s failure to provide electricity to the individual units and annexed an e-mail from Absa to the respondent’s attorney in terms of which Absa’s position was made pertinently clear – further payments would only be made on submission of a certificate under the hand of an engineer certifying that the electricity had been connected.

[14] It is not in issue that a cheque payment for the electrical mini substation box was made by Flanagan at BCM on 8 July 2008 and a further cash payment for the same amount made four months later on 7 November 2008. The respondent’s explanation for the cash payment was that he had stopped payment of the cheque and it was proffered to negate the inference that the cheque had been dishonoured. The averment that the cheque had been stopped and not dishonoured is further evidence of his disingenuousness. Why and for what purpose payment of the cheque should have been stopped was never adverted to. If indeed it was stopped, which appears highly unlikely, the only plausible reason would be that Flanagan knew that it would not be met. The respondent, as the developer, was, in terms of the BCM approval granted, responsible for the provision of the infrastructural services. The development was far from complete, the six month completion date had long elapsed and the cash payment was only made four months after the cheque payment. The inescapable inference is that the cheque was in fact dishonoured and the cash payment made four months later provides further corroboration for the appellants’ contention that the respondent was unable to meet its financial commitments.

[15] As further corroborative evidence that the delay in completing the building operations was occasioned by the refusal of Absa to effect payment to him, the respondent annexed an unsigned affidavit by an engineer, Mr. Peter Allen (Allen) in which the latter purported to confirm that the BCM had given permission for provision of infrastructural services to be completed at the conclusion of the development. These allegations were likewise patently untrue. The first appellant in reply annexed an affidavit from Allen in which he not only denied making a statement in the terms alleged but moreover refuted the respondent’s allegations attributed to him and averred that the only request directed at the BCM by him was that the formal road works be completed at the end of the development.

[16] In the introductory portion of this judgment I identified the appellants’ cause of action against the respondent as an unliquidated claim for damages for breach of contract. Mr. Cole, whilst constrained to accept that in law an applicant who has a valid claim against a company for damages for beach of contract is a contingent or prospective creditor of such company and accordingly has the requisite locus standi to apply for the winding-up of that company nonetheless submitted that the appellants had to prove that the respondent was lawfully indebted to them.

[17] In the course of this judgment I found that the respondent’s reliance on Absa’s failure to effect payment of the third progress payment to be devoid of all substance and that it did not constitute a breach of contract. On the contrary the evidence in my view conclusively established that the respondent breached its contractual obligations as a consequence of which the appellants were obliged to themselves complete the project. To that end the appellants obtained a written quotation from another builder to complete the project according to the original specifications who, arithmetically, calculated that the costs to complete the project amounted to R226 922, 22. Although only the quotation was annexed to the appellants’ founding affidavit, the author thereof, Mr. B.P Vermaak deposed to an affidavit annexed to the replying affidavit in which he confirmed that his quotation represented the fair estimate of the costs to complete the building project. In such circumstances it can hardly be contended that the appellants did not have a valid monetary claim against the respondent.

Should the matter have been referred for Arbitration?

[18] As a further ground of opposition to the relief sought the respondent sought reliance on clause 14 of the agreement. The clause is inelegantly drafted, littered with typographical errors and not a model of clarity. Unedited, it reads as follows -

“Arbitration

If any dispute of difference shall arise between the Employer and the Contractor, during the progress and before the completion of the work or after the termination of the Employment of the Contractor under his contract, abandonment or breach of the contract, as to the construction of the contract, or as to any matter or thing arising there under, or as to the withholding of any draw to which the Contractor may be entitled, then an architect, civil engineer, quantity surveyor or any other professional person involved in the building industry appointed by both the parties, shall determine such dispute or difference by a written decision given to the Contractor. The said decision shall be final and binding on all the parties.

The arbitration shall have the power to disclose, review and revise any certificate, opinion, decision, requisition or notice and determine all matters in dispute which shall be submitted to him, and of which notice shall be given as aforesaid, in the manner as if no such certificate, opinion, decision, requisition or notice had been given. Upon every or such any reference, the costs of and incidental to the reference and award shall be in the discretion of the arbitrator, who may determine the amount thereof, or direct the same to be taxed between attorney and client or as between party and party shall be direct by whom and to whom an in what manner the same shall be borne and paid.”

The court below, with reference to clause 14, stated, “In my view, given the fact that the respondent was in denial of breach of the agreement, the applicants should have considered its remedies in terms of the contract”. The only reasonable inference to draw herefrom is that the court below, as an additional ground refused the application on the basis that the clause precluded the applicants from proceeding in the manner in which they did. The issue relating to arbitration was pertinently raised in the respondent’s opposition to the application and the point vigorously pursued by Mr. Cole on appeal.

[19] It will be seen that clause 14 refers to three kinds of disputes or differences which are capable of arbitration at three different stages viz., during progress and before completion and after termination of the contract. The first is where the dispute or difference between the parties is one “as to the construction of the contract”. The second is where the dispute or difference is one “as to any matter or thing arising thereunder” and the third is where the dispute or difference is “to the withholding of any draw to which the contractor may be entitled”. The question which arises is whether the dispute or difference which arose between the parties is one which falls within the ambit of clause 14. It clearly does not and it ill behoves the respondent to contend to the contrary. The dispute does not relate to the construction of the contract nor to any thing or matter arising thereunder.

[20] As regards the third scenario the dispute must relate to a draw to which the contractor was entitled to. Flanagan’s untruthfulness regarding the third progress payment certificate clearly established that the respondent was not entitled to any further draws. Furthermore, prior to the proceedings being launched the respondent vehemently denied having contracted with the applicants alleging that RAF was the contractor. On its own version the resolution of that dispute was clearly not one which fell within the ambit of clause 14 and the respondent’s attempt to do so provides further evidence of Flanagan’s disingenuousness.

[21] The court below was further persuaded not to grant the relief sought holding that “on the papers before Court there is no evidence that the respondent has in fact, in the course of its business, displayed conduct which amounts to its inability to pay its debts”. That finding was, with respect to the learned judge factually incorrect. The dishonouring of the cheque to the BCM and failure to pay Dot Kemp Estates the commission to which it was entitled provides further irrefutable proof that the respondent, notwithstanding being possessed of sufficient assets was commercially insolvent. Although the court below referred to a passage in the judgment of Caney J in Rosenbach & Co (Pty) Ltd v Singh’s Bazaar (Pty) Ltd ^[6] it seems, with respect, to have misunderstood the import of the judgment as the dismissal of the application so clearly attests to. Henochberg^[7] correctly points out that “The mere fact that the value of a company’s assets may exceed the amount of its liabilities does not preclude a finding that the company is unable to pay its debts: such a finding may be made if these assets are not readily realisable and the company has no further funds with which to meet current demands – if, in other words, the company is “commercially insolvent.” Upon a holistic appraisal of the evidence adduced the applicants clearly established that the respondent was unable to pay its debts.

[22] The appeal must accordingly be allowed. The order of the court below is set aside and replaced by the following –

“It is ordered -

That the Respondent Company be and is hereby placed under provisional winding-up order in the hands of the Master of this Court;
That a rule nisi do hereby issue calling upon the Respondent to show cause, if any, to this Court at 10h00 on Thursday the 29^th day of July 2010 why the Respondent company should not be placed under final winding-up order in the hands of the Master of this Court;
That service of this order be effected in the following manner:-

by ONE (1) publication in the DISPATCH newspaper;

3.2	by the Sheriff:-

on the Respondent at its registered address;

3.2.2

on the Commissioner of South African Revenue Services, East London.

______________________
D. CHETTY
JUDGE OF THE HIGH COURT










Revelas, J

I agree.


______________________
E. REVELAS
JUDGE OF THE HIGH COURT








Van der Linde, AJ

I agree.


______________________
H.J VAN DER LINDE
ACTING JUDGE OF THE HIGH COURT

On behalf of the Appellants: Adv D.J Taljaard

Instructed by Nettletons
118A High Street
Grahamstown
Ref: Mr Nettleton/Sam

Tel: (046) 622 7149

On behalf of the Respondent: Adv S.H Cole
Instructed by Neville Borman & Botha
22 Hill Street
Grahamstown
Ref: Mr. J Powers/René

Tel: (046) 622 7200

^[1] Act No. 61 of 1973
^[2] 1988 (1) SA 943 (A)at 976E-977J
^[3] At 979C
^[4] Although the deed of sale identified the respondent as the seller of the erf Flanagan, its sole director, attempted to establish that it was not. The answering affidavit is awash with allegations that from the outset, RAF Development CC, a close corporation, Flanagan being the sole member was the contractor, I interpolate to say that this denial was shown to be demonstrably false in reply, RAF only being admitted as a home builder in the register of the National Home Builders registration council on 23 March 2009.
^[5] Annexure “E”
^[6] 1962 (4) SA 593 (D) at p597
^[7] Henochberg on the Companies Act. Vol I p 910