When a company is unable to pay its ordinary day-to-day liabilities, it would generally be considered insolvent.. It would be tempting to action liquidation proceedings against the debtor, but our Courts now require that creditors explore other legal procedures or methods to recoup the monies due before deciding whether to liquidate a company or not. One such guidance in law is called the Badenhorst Rule.

“If the debt is disputed by the debtor, one must be careful in deciding which process to follow.”

This was the stated opinion in the matter of Badenhorst v Northern Construction Enterprises (Pty) Ltd 1956 (2) SA 346 (T).“Winding-up proceedings are not to be used to enforce payment of a debt that is disputed on bona fide and reasonable grounds.”

This was reiterated in another matter; Freshvest Investments (Pty) Ltd v Marabeng (Pty) Ltd (1030/2015) [2016] ZASCA 168, where the Court agreed that liquidation proceedings should not be executed to collect debt that is disputed on bona fide and reasonable grounds. There were various defences set out in the Respondents’ affidavit and it was argued that the debt was not enforceable but to prove the contrary of the creditors claim, there should be a bona fide or reasonable defence to have the winding-up order dismissed.

When there is a genuine dispute of facts in a matter, a liquidation application would not be the appropriate process to follow and it is of utmost importance to differentiate between the factual disputes relating to liability, and those disputes relating to liquidations.

A court application is the quickest route to follow, as the evidence is presented by means of an affidavit, which will be perused by a judge before the matter will be heard. The matter will be heard once it has been initiated. An application should not be considered when there is a material dispute of facts. Action proceedings take years to finalise the matter as the facts and evidence are heard verbally at a trial.

The decision of which matters contain a material dispute of fact would depend on whether oral evidence would have to be heard by various witnesses who will be cross-examined as well. The application process does not contain any settlement negotiations as the outcome will be at the judge’s discretion.

In South Africa, there are two types of insolvency:

  1. Commercially insolvent
  2. Factually insolvent

A debtor is factually insolvent when its liabilities exceed its assets; while a debtor is commercially insolvent if it cannot pay its debts even though its assets may exceed its liabilities. Commercial insolvency would justify a liquidation application, whereas in the case of factual insolvency, additional factors need to be considered first.

Unfortunately, one should also bear in mind where a company is insolvent, the directors of that company may sit with the risk of being personally liable for the debt.

Should the debt of the debtor be recognised, he / she will be required to prove that the debt is disputed on reasonable grounds (i.e. the onus is on the debtor). It will ultimately be up to the court to grant a winding-up order.

Creditors should be very cautious when wanting to proceed with a liquidation application because if the incorrect court process is instituted, the matter may be dismissed, and the creditor may then be liable to pay all the legal costs of the debtor. This would also result in a delay for the matter to come to a finalisation as it will then have to be referred to trial to resolve the disputes raised.

It is essential to seek professional advice on the options available as part of your debt collection process.

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Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)

Natasha De Achadinha is a Junior Associate in the Commercial Litigation Department at Barnard Incorporated Attorneys – a full service corporate and commercial law firm.

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