Courts will not tolerate abuse of the business rescue process as a defence against winding up

Faced with a debtor who (i) had repeatedly acknowledged indebtedness yet failed to pay; (ii) argued that the business rescue application lodged on the eve before the liquidation hearing (which application was only issued minutes before the hearing) suspended the progress of the liquidation application; and (iii) raised jurisdictional objections, the Western Cape High Court (WCHC) was required to assess whether the defences raised by the respondent, including the business rescue application, were bona fide or merely tactical.

Facts

On 30 January 2024, the applicant, Exeo Khokela Civil Engineering Construction (Pty) Ltd, and the respondent, Schoonspruit Development (Pty) Ltd, concluded a written agreement for the provision of construction services. It was common cause that the applicant duly performed their obligations under this agreement. Accordingly, the applicant rendered an invoice, which the respondent failed to pay. In subsequent email correspondence, the respondent acknowledged its indebtedness, indicating that the failure to pay was due to the delay in securing external funding.

In the circumstances, the applicant asserted that the respondent was commercially insolvent and accordingly sought relief in terms of the Companies Act 71 of 2008 (Companies Act) and its transitional provisions. (It bears noting that section 224(3) of the Companies Act provides that the repeal of the Companies Act 61 of 1973 (Old Companies Act) does not affect the transitional arrangements in Schedule 5. Item 9 of that schedule preserves the continued application of Chapter 14 of the Old Companies Act to the winding-up of insolvent companies.)

The respondent opposed the application, challenging the court’s jurisdiction and denying both liability (notwithstanding correspondence to the contrary) and insolvency.

The applicant’s provisional winding up application was heard on 6 August 2025. On the preceding evening, 5 August 2025, a business rescue application was lodged in the KwaZulu Natal Division of the High Court, Pietermaritzburg, which application was only issued the next day. At the liquidation hearing the respondent, relying on section 131 of the Companies Act, contended that the launching of the business rescue application suspended the winding up proceedings.

In its jurisdictional challenge to the winding-up application, the respondent asserted that because its registered office is located in Pietermaritzburg, the WCHC did not have geographical jurisdiction to hear the application.

The jurisdiction of the WCHC

The respondent, relying on a previous judgment of the WCHC in Sibakhulu Construction (Pty) Ltd v Wedgewood Village Golf Estate (Pty) Ltd [2013] (WCC), contended that jurisdiction in winding-up proceedings is confined to the court nearest to a company’s registered office.

In Van der Merwe v Duraline (Pty) Ltd [2013] (WCHC), the WCHC held that liquidations of insolvent companies are still governed by Chapter 14, read with section 12, of the old Companies Act. These provisions confer jurisdiction on the court either where the company has its registered office or its principal place of business.

The court in this matter confirmed the position set out in the Van der Merwe case, stating that the statement relied on by the respondent in the Sibakhulu case was made in passing (obiter) and therefore was not authoritative on this particular point.

Accordingly, in the case of the winding up of an insolvent company, the court reaffirmed that the dual jurisdiction set out in the Old Companies Act remains applicable. As a matter fact, the respondent’s principal place of business was in Cape Town, where its directors resided and operated. The WCHC therefore confirmed that it had jurisdiction to hear the winding-up application, and the respondent’s objection in this regard failed.

The effect of the (last-minute) business rescue application

The respondent contended that the launching of the application for its business rescue had the effect of suspending the winding-up application, as set out in section 131(6) of the Companies Act.

The court highlighted that there are two things to note regarding the Supreme Court of Appeal (SCA)’s dealing with section 131(6). 

Firstly, the suspension of liquidation proceedings only occurred upon a properly “made” business rescue application, and a business rescue application cannot be considered “made” unless it has been formally issued at court (Lutchman No and Others v African Global Holdings and Others [2022] (4) SA 529 (SCA)).

Secondly, section 131(6) specifically refers to the suspension of “liquidation proceedings”. The SCA has confirmed that “liquidation proceedings” refers only to those actions performed by a liquidator in dealing with the affairs of a company in liquidation, not the proceedings pertaining to the application seeking the winding up of the company (Kalil v Decotex (Pty) Ltd [1988] (1) SA 932 (A)). This position was affirmed by the Gauteng High Court, which held that the effect of section 131(6) is not that a business rescue application suspends “legal proceedings taken by a creditor for purposes of obtaining an order to that a company be wound-up” (Absa Bank Ltd v Summer Lodge (Pty) Ltd [2013] ZAGPPHC).

Applying the above, the WCHC held that the business rescue application, even if it was properly instituted, did not prohibit the court from hearing the liquidation application and, should it so choose, granting a provisional winding-up order.

The WCHC further highlighted the findings in PFC Properties (Pty) Ltd v Commissioner for the South African Revenue Services and Others [2023] ZASCA 111 that business rescue applications tainted by abuse and used as a tactical delay, without prospects of success, do not and should not attract the protection afforded by section 131(6) of the Companies Act and should be considered as an abuse of process.

Factual insolvency vs commercial insolvency

For the purposes of section 344(f) of the Old Companies Act, it is not necessary to prove actual insolvency by showing that the company’s debts outweigh its assets. Commercial insolvency, which is established where the evidence shows that a company cannot meet its debts as they fall due, is sufficient.

At the provisional stage of the winding-up application, the applicant is required to demonstrate its entitlement to an order on a prima facie basis.

Once a creditor has proved indebtedness and an inability to pay, it is usually entitled to a winding-up order. The court’s discretion to then refuse the provisional relief is limited, and the onus shifts to the respondent to demonstrate the debt is legitimately disputed on bona fide and reasonable grounds.

The WCHC did take the opportunity to warn creditors that winding-up proceedings should not be employed as a mechanism to enforce payment of a debt that is disputed on bona fide and reasonable grounds.

In the present matter, the debt was substantiated, and on the respondent’s own admissions (in correspondence and in the business rescue papers) it was in financial distress. These facts enforced the notion that, on probabilities, the respondent was commercially insolvent.

No plausible evidence was put before the court to refuse this notion, and the court once again confirmed that bare denials do not create a genuine dispute of fact.

Accordingly, the WCHC granted the provisional winding-up order.

Conclusion

The WCHC reaffirmed key principles under the transitional provisions of the Companies Act, also emphasising that dual jurisdiction remains applicable, business rescue cannot and should not be used as a procedural shield to suspend liquidation applications, and bare denials without supporting evidence are insufficient to resist a prima facie case of commercial insolvency.

This judgment is particularly significant as it confirms that South African courts will not tolerate tactical litigation manoeuvres designed to manipulate the delay in obtained genuine relief sought from the courts. The judgment ultimately underscores the judiciary’s commitment to preventing abuse of process while ensuring that genuine commercial insolvency is dealt with promptly and effectively.