To wind up or not to wind up: The narrow discretion of the courts

In accordance with the so-called “Badenhorst Rule” established in the Badenhorst v Northern Construction Enterprise (Pty) Ltd [1956] (2) SA 346 (T) judgment, it is trite that winding up (liquidation) proceedings are not to be used to enforce payment of a debt that is disputed on bona fide and reasonable grounds. Where, however, the respondent’s indebtedness has been established, the onus is on it to show that this indebtedness is in indeed disputed on bona fide and reasonable grounds.

9 Mar 2022 2 min read Business Rescue, Restructuring & Insolvency Newsletter Article

At a glance

  • Winding up and disputed debts: Winding up proceedings cannot be used to enforce payment of a disputed debt. The company must show that the debt is genuinely and reasonably disputed. (Badenhorst Rule)
  • Counterclaims and winding up: The existence of a counterclaim, if established, may result in a discharge by set-off but is not a sufficient reason on its own to refuse a winding up order. It can be considered as a factor in the court's discretion.
  • Narrow discretion in winding up: Courts have a narrow discretion to refuse a winding up order when the company has not paid a established or admitted debt. Winding up is not meant to resolve disputes over the existence of a debt. The company has the burden to show reasonable grounds for disputing the debt.

In the recent case of Afgri Operations Ltd v Hamba Fleet (Pty) Ltd [2022] (1) SA 91 (SCA) the Supreme Court of Appeal (SCA) was called upon to determine whether the existence of a counterclaim constituted sufficient grounds to refuse an order for winding up.

In Afgri the appellant applied for a final order for the liquidation of the respondent, for failure by the respondent to discharge a debt owed to the appellant. The court a quo dismissed the application for the winding up of the respondent solely on the basis that it had a counterclaim against the appellant. Notably, the underlying debt giving rise to the application was not in dispute.

The SCA found that the existence of a counterclaim which, if established, would result in a discharge by set-off of an applicant’s claim for a liquidation order, was not in itself a reason for refusing to grant an order for the winding up of the respondent, but it could be a factor to be taken into account in the court exercising its discretion as to whether or not to grant the order.

Fundamentally, the discretion of the courts to refuse a winding up order, where it is common cause that the respondent has not paid a debt that has been established or admitted, is, notwithstanding the existence of a counterclaim, a narrow and not a broad one. The court’s power to grant a winding up order is a discretionary power, irrespective of the ground upon which the order is sought and the discretion must be exercised on judicial grounds. Winding up proceedings ought not to be resorted to in order to enforce payment of a debt, where the existence of such debt is disputed by the company on reasonable grounds. The procedure for winding up is not designed for the resolution of disputes as to the existence or non-existence of a debt.

As has been correctly held by our courts, where the indebtedness exists the onus is on the company to show that the existence of a debt is disputed on reasonable grounds. In upholding the appeal, the court in Afgri therefore concluded that mere recourse against an applicant in the form of a counterclaim in the face of a liquidation application will not, in itself, enable a respondent to successfully resist an application for its winding up. However, if it is considered to be an applicable factor in the court’s narrow discretion as to whether to grant the order or not, then the counterclaim must be “genuine” and actively pursued by the respondent.

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