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It is an abuse of the process of the court to pressure a corporate debtor into paying a disputed debt by applying for it to be wound up

The hazards of applying for a company or close corporation to be wound up in order to pressure it to pay a debt

The wheels of business are lubricated by credit, and nothing is more common than for a debtor to dispute liability when the date for repayment arrives.

This can herald a long drawn-out legal battle between a creditor who is trying to pressure the debtor into paying, and a debtor who is digging in his heels to avoid paying - or at least to delay payment for as long as possible.

Often both parties feel they are in the right, and that the other party is behaving unscrupulously. The creditor believes that the debtor is clutching at straws to avoid or delay payment and is putting up a bogus defence, while the debtor believes the creditor is trying to force payment of a debt to which it is not entitled, or is pressing for payment prematurely.

Applying to wind up a company or close corporation on the grounds that it is unable to pay its debts

A creditor who is faced with a recalcitrant company or close corporation often thinks that the most promising avenue for obtaining speedy payment is to try to put the company or close corporation into liquidation, because the liquidator (in contrast to the controllers of the company or cc) is unlikely to raise spurious defences to the debt.

The creditor may thus be tempted to apply for the winding up of the debtor company or close corporation on the grounds that it is "unable to pay its debts".

As Corbett JA made plain in Kalil v Decotex (Pty) Ltd 1988 (1) SA 943 (A) at 980B - D (and this dictum was recently quoted with approval by the Supreme Court of Appeal in Desert Star Trading 145 (Pty) Ltd v No 11 Flamboyant Edleen CC 2011 (2) SA 266 (SCA)) -

it has been held, following certain English authority, that an application for liquidation should not be resorted to in order to enforce a claim which is bona fide disputed by the company. Consequently, where the [company in question] shows on a balance of probability that its indebtedness to the [creditor] is disputed on bona fide and reasonable grounds, the Court will refuse a winding-up order. The onus on the [company from which payment is claimed] is not to show that it is not indebted to the [creditor]: it is merely to show that the indebtedness is disputed on bona fide and reasonable grounds.'

The low threshold of proof to counter the winding-up application

In other words, a debtor company or close corporation that is faced with an application for it to be wound up on the grounds that it is unable to pay its debts - and which wants to ward off that application so it can carry on its business and try to trade its way out of its financial woes - does not have to prove, either conclusively or even on a balance of probabilities, that it does not owe the debt; it merely has to show - on paper - that it has a defence to the creditor's claim that is bona fide and based on 'reasonable grounds'.

These requirements are usually easily satisfied, and the more unscrupulous and unethical the debtor company or close corporation, the easier it is to put up a bogus defence that satisfies these criteria. The creditor then faces the long haul of contested litigation that could take years to come to trial and reach finality.

An abuse of the process of the court

On the other hand, an unscrupulous creditor may apply for a company or close corporation to be wound up as a way of exerting pressure to pay a genuinely disputed debt.

The courts in this country and elsewhere have held that it is an abuse of the process of the court for a creditor to apply for a debtor to be wound up or sequestrated if the creditor knows that the debt is disputed on reasonable grounds. If the creditor persists in bringing such legal proceedings, the court may not only dismiss the application but order the creditor to pay the debtor's legal costs on the highest scale as a mark of its disapproval.

A creditor knows - and knows that the debtor knows - that, even making an application for a company or cc to be wound is likely to damage its commercial reputation and may even cause its bank to call up loans and reduce its credit facilities - thereby actually tipping it into insolvency.

Consequently, if a company or close corporation receives a threat to bring an application for winding-up, it may be tactically wise to respond by applying to court for an interdict to stop such an application being made.

The court has an inherent jurisdiction to prevent its process being abused. As was held by an Australian court in Fortuna Holdings Pty Ltd v The Deputy Commissioner of Taxation of the Commonwealth of Australia [1978] VR 83-

"When a court restrains the presentation of a winding up petition to that court it exercises part of its inherent jurisdiction to prevent abuse of its process. Mann v Goldstein, [1968] 1 WLR 1091, at pp. 1093-4; [1968] 2 All E.R. 769.

Usually a court acts against abuse of its process after proceedings have been commenced. Thus, existing proceedings may be stayed or dismissed, or documents delivered as a step in the proceedings may be struck out. This is done to relieve a party to the proceedings from an oppressive and damaging situation in which he has been placed through abuse of court process.

The law has long recognized that with proceedings to wind up a company, intervention after the commencement of proceedings would often be too late to relieve the company of oppression and damage. The courts have recognized that irreparable damage may be done to a company merely through public knowledge of the presentation of a petition. Usually the damage flows from the loss of commercial reputation which results. The courts have also been conscious of the pressure which may be put on a company, by a person with a disputed claim against it, threatening to present a winding up petition unless the company meets his claim. While that threat exists, the company, in order to avoid the damage involved in the presentation of a petition, is pressed to meet the claim although it may have substantial and genuine grounds for regarding itself as not required to do so.'

Pre-empting the dispute

Except where the creditor holds an unconditional acknowledgement of debt, it is notoriously difficult for a creditor to compel a debtor - particularly a company or close corporation - to pay a debt when it falls due where the debtor is determined to delay payment as long as possible.

An astute creditor will try to secure his position before any dispute arises by making it difficult for a debtor to contest liability, for example, by entering into an agreement which in effect, will require the debtor to pay first and argue later.

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