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Kowarski v Time Clothing (Pty) Ltd (413/2010) [2010] ZAECGHC 87 (16 September 2010)

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IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE HIGH COURT, GRAHAMSTOWN)


CASE NO: 413/2010

Date Heard : 26 August 2010


Judgment Delivered : 16th September 2010



In the matter between:



ROY DAVID KOWARSKI …........................................................APPLICANT



and



TIME CLOTHING (PTY) LIMITED …............................................RESPONDENT




JUDGMENT



CRISP AJ:


THE PARTIES


[1] The Applicant is ROY DAVID KOWARSKI a businessman who presently resides in New South Wales in Australia but is a South African citizen and regularly visits South Africa.


[2] The Applicant owns 15% (fifteen percentum) of the issued share capital in the Respondent. Applicant contends that he has held those shares for ten years. The quantum thereof is in a sum of R3 209 307-00 (three million two hundred and nine thousand three hundred and seven rand).


[3] The Respondent is TIME CLOTHING (PTY) LIMITED, a company with limited liability having its registered office at 80 Frere Local, Vincent, East London. The Respondent manufactures and distributors sport wear clothing and related textile products.


[4] The Respondent has four shareholders, being the Applicant, the deponent to the Respondent’s answering affidavit JOHN GOLDHILL (“GOLDHILL” who is the director of the Respondent), SHARON ANNE KEOGH and BEVERLY JOAN GOLDHILL (the latter both having deposed to Respondent’s supporting affidavits). Goldhill describes the Respondent as a family owned company.


[5] Applicant contends that the Respondent’s clothing business was started in 1994 when he acquired a 10% shareholding. It seems that the Respondent’s business has been operating over a period of sixteen years. Applicant’s shareholding is presently 15% having acquired 5% of the shares of erstwhile shareholders LEN PRICE and NIGEL PAYNE (who are alluded to in paragraph 23 below. The Applicant, SHARON KEOGH and BERVELEY GOLDHILL purchased the shares of PRICE and PAYNE when the latter exited the Respondent).


[6] The four shareholders are actively involved in the running of the business of the Respondent. Applicant had been employed as Sales Manager.




RELIEF SOUGHT


[7] The Applicant issued a statutory notice upon the Respondent dated 19th November 2009. In the said notice the Applicant demanded that the Respondent make immediate payment of his shareholder’s loan account in the sum of R3 209 307. The Applicant contends that the Respondent is unable to pay its debts. He seeks an order winding-up the Respondent. The Applicant accordingly approaches court as a creditor of the Respondent. He sought to exit the company on the 19th of November 2009, when he emigrated to Australia and now seeks payment of the aforementioned shareholder’s loan account.


[8] It is common cause between the parties that the Respondent is indebted to the Applicant in a sum of R3 209 307-00 for his shareholders’s loan account, (the “loan amount”).


THE APPLICANT’S PRIMARY CONTENTION


[9] Counsel for the Applicant Mr Notshe SC who appeared together with Mr Maselle, submits that in terms of S 345 (1) (a) of the Companies Act,1court is only required to establish on a balance of probabilities whether the Respondent is unable to pay its debts (my underlining). It matters not, argues Mr Notshe, whether the Respondent has a reasonable and bona fide defence in this regard, precisely because the indebtness is not disputed. Mr Notshe finds authority for his contention in the matters cited in the footnote below.2



[10] Section 345 (1) (a) of the Companies Act requires an Applicant to prove on a balance of probabilities that the Respondent’s indebtedness is due. Mr Notshe’s contention accordingly is that once a court is satisfied that the debt is due and that a Respondent is unable to pay his debt, it ought to issue a winding –up order without demur.


THE RESPONDENT’S PRIMARY CONTENTION



[11] Mr Ford SC, who together with Ms Beard appeared for the Respondent, submits that a court has to have regard to the PLASCON-EVANS3 rule in respect of each and every disputed fact. Even though the debt is admitted the Respondent denies that it is due and the general approach to factual disputes in motion proceedings must be adopted in terms of Mr Ford’s argument.


[12] The three issues disputed by the parties will be dealt with seriatim below.

THE FIRST ISSUE


[13] The first point for decision is whether the sum of R3 209 307-00 is indeed payable on demand by the Respondent to the Applicant, alternatively whether the agreement referred to in paragraphs 14 and 15 below was in place as at the 19th November 2009, when the statutory notice was issued.



[14] GOLDHILL contends that an agreement was arrived at by and between the shareholders (including the Applicant) in 1994, to the effect that the shareholders loan accounts would be utilized to fund the activities of the Respondent on an ongoing basis. GOLDHILL avers in paragraph 10.17 of his answering affidavit that the said agreement was a verbal agreement. He further contends that the oral agreement was tacitly ratified.


[15] Goldhill avers that since the inception of the Respondent -

By agreement amongst the shareholders and the Respondent, share holder loans are not repayable upon demand but are subject to the aforegoing agreement”4


[16] Goldhill further explains that the dividends declared by the Respondent (company) are not paid out to the shareholders but are used to increase the capital base of the company.


[17] In paragraph 7.4 of his replying affidavit, the Applicant denies any knowledge of the said agreement.


[18] Mr Notshe argues that the annexures to the Respondent’s papers belie the fact that any such agreement existed. The alleged agreement, so contended Mr Notshe, is a fabrication which arises for the first time in the answering affidavit and states that no regard ought to be had thereto.


[19] Mr Ford, on the other hand, contends that the probability of four friends/family members getting together and deciding against raising a huge bank loan but instead pooling their financial resources, is not only an alternative but at the same time a logical manner of funding a business operation. In order to make sure that the funding base remains stable, such shareholders could agree amongst themselves that the capital substratum could never be depleted by the payment of money to the shareholders. For this reason a shareholder who desires to exit Respondent’s shareholder portfolio, is obliged to sell the shares, so that the capital base remains intact.


[20] Applicant’s submissions in reply to the above averments do not appear to seriously contradict the Respondent’s averments. When the Respondent was launched on or about the 31st of January 1994, Applicant states the following:–


Nigel offered to draw draft shareholders agreement by 07 February 1994. This would include two important factors:

1) That any shareholder wishing to sell his shares, would be obliged to first offer his shares to the other shareholders at a price determined by independent auditors, before offering the same share to anybody else”5……


[21] Goldhill states in paragraphs 4,5 and 6 of his affidavit that when the Applicant advised Respondent of his intention to emigrate to Australia the other three shareholders offered to purchase the Applicant’s shares. GOLDHILL contends that this did not succeed because the Applicant declined to sign a restraint of trade agreement.6


[22] The remaining shareholders attempted to facilitate the purchase of Applicant’s shares by a business entity styled True Group.7 Finally the Respondent furnished the Applicant with its audited financial statements for the previous four years in order that he may himself attempt to find a willing buyer of his shares. Goldhill states that the Applicant had been given permission to sell to a third party precisely because the aforementioned agreement disallowed the Respondent from diminishing its share capital base by paying to the Applicant the value of his shareholder’s loan account.8


[23] Applicant avers in sub-paragraph 6.6 of his replying affidavit that when the erstwhile shareholders, LEN PRICE and NIGEL PAYNE, decided to dispose of their shareholding, those shares were purchased by the Applicant, Ms Keogh and Ms GOLDHILL, as set out in paragraph 5 above.9 It would accordingly seem that this was the stance adopted by the Respondent when shareholders exited the company.


[24] It would appear that the Applicant’s own submissions support the Respondent’s contention to the effect that the shareholder’s loan accounts formed the financial grundnorm of the Respondent’s business operations. It is for this reason that on or about the 31st of January 1994, and if not on that date, then some time thereafter, and/or by tacit agreement between the shareholders, the stance adopted was that the capital sum of the shareholding was not to be diminished by making payments to the shareholders. Goldhill phrases the Respondent’s reasoning thus:-


“…the only way in which a shareholder can obtain payment of his shareholders loan account is if the shareholder sells his shares in the business together with the loan account. 10


[25] As confirmation thereof that the Respondent seeks to maintain the capital amount in the said shareholder’s account, Goldhill says that small ad hoc withdrawals are made therefrom, only when funds were available therein in the first place, and secondly only when the personal exigencies of a shareholder made it a matter of necessity to make small but urgently required withdrawals on the said shareholder’s behalf.


[26] In my view the aforesaid submissions set out in the papers lend a ring of truth to the Respondent’s version. Given that not once in the past sixteen years has a shareholder, including erstwhile shareholders Price and Payne, sought to demand payment of their loan accounts, the probabilities are that a verbal / tacit agreement, to that effect, was indeed in place as between the shareholders. The probabilities as set out in the papers sufficiently support the above view and I am not persuaded that oral evidence on this issue, will tip the scales in favour of the Applicant. Regard being had to KALIL and PAYSLIP, supra, as also to STELLENBOSCH FARMERS’ WINERY LTD VS STELLENVALE WINERY (PTY) LTD,11 and further regard being had to the PLASCONS-EVANS rule, I find that the agreement aforesaid was in place in respect of Respondent’s shareholders who were desirous of exiting the Respondent. The sum of R3 209 307-00 was accordingly not payable to the Applicant by the Respondent upon demand.

THE SECOND ISSUE


[27] The next issue which falls to be considered is whether, based on the verbal /tacit agreement, the Applicant’s shareholder’s loan account was payable on the 19th November 2009.12 This is a necessary determination since the Respondent does not dispute the existence of the debt. Respondent contends, however, that the Respondent has a bona fide defence against the Applicant’s claim. This defence is that the Applicant failed to pursue the route set out in his very own papers. Secondly, Applicant was not compliant when the remaining shareholders attempted to facilitate the sale of his shareholding to the True Group. Finally Applicant was specifically authorized to dispose of his own shares and did not do so.


[28] The Respondent is in the language of S 345 (1) (a) of the Companies Act, liable to pay to a creditor only sums which are then due, owing and payable –

345 (1) (a) a creditor by cession or otherwise, to whom the company is indebted in a sum of not less than one hundred rand then due - “…(my underlining)


[29] In terms of the agreement aforementioned the loan amount was not due and payable on the 19th of November 2009. As of that date the other three shareholders were free to deliberate upon the payment to the Applicant of a sum therefor from their own pockets which was to be “…determined by independent auditors.” 13 Alternatively, the Applicant was obliged to sell his shares to a third party; and in the further alternative the parties could coordinate their efforts in attempting to procure a buyer for the said shares.


[30] It follows axiomatically that in the circumstances aforementioned and if things went according to plan, Applicant would only receive payment of the loan account some time after the 29th of November 2009. The conclusion to be drawn herefrom is that the debt was not then due. This is precisely so because the shareholders, upon the inception of the Respondent, had agreed to run their factory on a financial model where their combined shareholder’s loan accounts remained permanently vested in the company. Shareholders were only entitled to make a small ad hoc loan when excess sums were available The effect hereof was that the capital share loan account was employed to fund the business operations of the Respondent and the quantum thereof remained static or improved but was never to be reduced by making payments to the shareholders.


[31] A debt which is not payable upon receipt of a statutory notice by a Respondent but has to undergo further processes in order to determine whether payment is possible cannot support a winding-up order, in terms of my reading of S 345 (1) (a). Unless the debt is payable without further ado, such debt is not one which may support an application for a winding-up of a company. 14 The reason herefor is because of the retrospective operation of the commencement of a winding-up order. A winding-up order commences as of the date that the winding-up application is brought before court in terms of the provisions of S164 of the Companies Act. The retrospectivity of the provision is designed so as to prevent a situation where some members or creditors gain an advantage over other creditors or members. In the circumstances of this matter the sum of R3 209 307-00 had to be due, owing and payable at the time of the granting of a winding-up order, precisely because such an order has a retrospective effect.


[32] The above is the status quo because the shareholders had agreed that the shareholder’s loan accounts were to be utilized to fund the business activities of the Respondent. They further agreed upon the mechanism available to a shareholder who wished to repudiate his shareholding and encash same. Where the parties have reached the agreement aforementioned, then the implied term usually imported into loan agreements which are silent as to the date of payment, being that such sums are repayable on demand, becomes inoperative and the agreement specifically entered into carries the day.15


[33] The law applicable in instances where a contingent or prospective creditor applies for the winding-up of a debtor company where such creditor purports to rely upon the provisions of S 345 (1) (a) (i) of the Companies Act, is clearly laid down in the GATX and BARCLAYS BANK matters referred to above. Mr Justice Kirk- Cohen in the said GATX matter states emphatically that where there is a bona fide dispute as to whether the debt is then due and payable –“….an interdict may be granted to protect the company from the institution of liquidation proceedings based thereupon.Regard being had to my finding set out in paragraph 26 above, to the effect that the agreement had been arrived at by and between the Respondent’s shareholder’s in 1994, and that the shareholder loan accounts were not payable to shareholder’s on demand, I find that Applicant’s loan account debt was not due, owing and payable at the time that the Applicant issued his statutory letter on the 29th of November 2009.


THE THIRD ISSUE


[34] I now turn to consider whether the Respondent is unable to pay its debts.


[35] Section 344 (f) of the Companies Act makes reference to the circumstances under which a company may be wound-up

(a)

(b)

(c)

(d)

(e)

(f)the company is unable to pay its debts as described in section 345”


[36] I have already referred to S 345 (1) (a) of the companies Act. S 345 (1) (c) requires proof “…to the satisfaction of the court that the Company is unable to pay its debts”


[37] Counsel for the Applicant argued in strident terms that the Respondent was unable to pay his debts. This argument was based upon a detailed analysis of the audited Financial Statements prepared by BIRCH BRUCE CHARTERED ACCOUNTANTS (S.A) annexed as “C” to the Applicant’s founding papers.16


[38] Applicant’s Counsel urged me to find that the Respondent will in future be unable to pay its contingent and prospective liabilities and that it is accordingly in the interests of the Respondent as well of its creditors to wind-up the company.


[36] Counsel has further indicated that the Respondent has failed to pay secondary tax on Companies (STC Tax) and has run its affairs in a manner which leads Counsel to believe that an investigation by the Receiver of Revenue is urgently required.


[40] Mr Notshe could not counter the averment that there was no evidence before court to the effect that over the last sixteen years, the Respondent has shown an inability to meet its everyday expenses. Mr Notshe argued that it is not those day-to-day expenses which the Respondent is unable to pay. It is unable to re- pay the combined shareholder’s loan account in a sum of R24 949 056-00 and the current bank overdraft in a sum of or about R865 644-00. Respondent is accordingly facing the prospect of a financial crisis of extreme proportions. Counsel submitted that the wisest thing to do would be to liquidate the Respondent instantly.


[41] Mr Ford, argued that the payment of these debts would not raise a problem should the need therefor arise. He refers to pages 19 and 20 of the record and indicates that the Respondent’s assets exceed its liabilities. Should the Respondent be constrained to pay the combined shareholder’s loan accounts and the bank overdraft, it will be able to do so.


[42] Mr Ford further submits that should the Applicant seriously desire only the payment of his shareholder loan account then the usual and proper procedure would have been to issue summons. There is merit in this submission. The object of a summons is precisely to bring a Defendant before court and to intimate the nature of the claim or demand he is required to meet.17


[43] The payment of the shareholders loan account is, however, not the sole desire of the Applicant according to the Respondent. Applicant has set up, so contends Goldhill, a business in competition with the Respondent. Applicant’s desire is to wind-up the Respondent so that he might not have opposition. It is for this reason, states Goldhill, that the Applicant had refused to sign a restraint of trade agreement even though the quantum offered had surpassed the R 3 209 302-00 sought herein.18


[44] Having regard to the PLASCON- EVANS rule, I find that the probabilities favour the Respondent on this issue. In view thereof that the Respondent has to date hereof kept his trade creditors at bay, I have no alternative but to conclude that the Respondent will continue to do what he has done over the past sixteen years and that he is, and will be able to pay his debts.


[45] Sight may not be lost thereof that the Applicant has been a member of the Respondent since its inception. Were the Respondent indeed unable to pay its debts during the past sixteen years, Applicant would have been the ideal person to set out those problems on affidavit.


[46] Instead, Applicant calls for audited financial statements; book debts and factorable book debts in order that he may transmit them to his experts so that they may ascertain whether or not the Respondent will be unable to pay prospective debts.


[47] I believe that the Respondent is correct when it contends that had Applicant seriously required further financial documents, he ought to have instituted an application to compel.


[48] The proper approach to be adopted in respect of commercial insolvency is the approach adopted in EX PARTE LEBOWA DEVELOPMENT CORPORATION LTD [1989]19. A company is unable to pay its debts when it is found that it is unable to pay its day- to-day liabilities. The test is not as submitted by Applicant, an inability to pay future debts.


[49] Lawrence Faku, purportedly representing in excess of 800 employees, who are members of the South Africa Clothing and Textile Workers Union advises court that Respondent is financially viable.


[50] I find that there is insufficient evidence before me to find that the Respondent is unable, to pay its debts or that it would in future be unable to pay its debts. I am satisfied that the Respondent appears to be commercially solvent and that it seems well able to meet its financial demands in the ordinary course of business. The Respondent accordingly does not fall foul of the provisions of section 344 (f) of the Companies Act.


[51] Regard being had to my findings in respect of sections 345 (1) (a) and 345 (1) (c) of the Companies Act, I find that the Applicant has not made out a case for the winding-up of the Respondent.


[52] The application is dismissed with costs, such costs including the costs of two counsel.








___________________

O.H. CRISP

ACTING JUDGE OF THE HIGH COURT




Counsel for the Applicant: Adv. V.S Notshe SC & Adv. B.W. Maselle


Attorneys for the Applicant: WHEELDON RUSHMERE & COLE

119 High Street

GRAHAMSTOWN



Counsel for the Respondent: Adv. E.A.S. Ford SC & Adv. M.L. Beard



Attorneys for the Respondent : Messrs NETTLELTONS

118 a High Street

GRAHAMSTOWN


1Act 61 of 1973

2KALIL V DECOTEX (PTY) LTD 1988 (1) SA 943 (A)

INTERACESS (PTY) LTD V VAN DORSEN [1999] 2 ALL SA 561 (C)

3PLASCON- EVANS PAINTS LTD V VAN RIEBEECK PAINTS (PTY) LTD [1984] ZASCA 51; 1984 (3) SA 623 (A)

4Answering affidavit, sub-paragraph 3.4; record; p50

5Replying affidavit para 6.5.2 record p 80

6Answering affidavit ; para 4; record p 51

7Answering affidavit; para 5, record p 52

8Answering affidavit para 6; record p 52 I believe that this is what is styled a debtor factoring document in terms whereof a third party is actually given sight of debtor vouchers in an attempt at attracting him to invest in a business with a promising prospective income, purely in terms of the of the quantum debtor’s receivable

9 Replying affidavit; subparagraph 6.6.1; record 9 81

9

10Answering affidavit ; paragraph 5; record p 52

11 1957 (4) SA 234 (C) at 235 E-G

12Annexure “D” to Applicant founding papers; record; p 39

13Replying affidavit, sub-para 6.5.2 (1); record p 80

14GATX- FULLER (PTY) LTD V SHEPERD AND SHEPERD INC[1984] 4 ALL SA 75 (W) at 80 VIDE ALSO: BARCAYS BANK (D.,C.& O) AND ANOTHER V RIVERSIDE DRIED FRUIT CO (PTY) LTD 1949 (1) SA 937 ( C) at 948

15INTERACCESS (PTY) LTD V VAN DORSTEN [1999] 2 ALL SA 561(C) at 574 e-f

16Record; p 12

17The Civil Practice of the High Courts and Supreme Court of Appeal of South Africa; Herbstein and Van Winsen; JUTA; Fifth Edition, P 474 and the cases cited therein

18Annexure “R3” to opposing affidavit; record p 64

191989 (3) SA71 (T)