Hughes v John Dory Trucking (Pty) Limited and Others (12862/2007) [2008] ZAKZHC 17; 2008 (5) SA 300 (N) (10 March 2008)

IN THE HIGH COURT OF SOUTH AFRICA

NATAL PROVINCIAL DIVISION CASE NO.12862/2007

In the matter between:

EDWARD GRAHAM RICHARD HUGHES APPLICANT

and

JOHN DORY TRUCKING (PTY) LIMITED FIRST RESPONDENT

MALCOLM RIDLEY SECOND RESPONDENT

LYNNE WENDY RIDLEY THIRD RESPONDENT

JUDGMENT Delivered on 10 March 2008

_______________________________________________________

SWAIN, J.

[1] The applicant seeks an order provisionally winding up the first respondent, on the ground that it would be just and equitable to do so, in terms of Section 344 (H) of the Companies Act No. 61 of 1973 (hereafter referred to as the Act).

[2] No reliance was placed upon any alleged inability on the part of the first respondent, to pay its debts under Section 344 (F) read with

Section 345 of the Act. In argument Mr. Dickson, S.C., who appeared for the applicant, conceded that the applicant was unable to show that the first respondent was insolvent, or that it was unable to pay its debts.

[3] The fact that the application is brought solely on the ground that it would be just and equitable to wind up the first respondent, I regard as being of decisive significance to the outcome of this application, when considered in relation to the locus standi of the applicant.

[4] The applicant describes his locus standi as follows in his founding affidavit “I am a director of respondent. I also have the right to fifty percent of the shares thereof which is more fully set out herein. I am also a creditor of the respondent”.

[5] It is trite law that a director, purely by virtue of his position as such, lacks locus standi to apply for the winding up of the company.

[6] In terms of Section 346 (1) (C) of the Act, a member has locus to apply for the winding up of the company, subject however to the proviso contained in Section 346 (2), that such member has been registered in the register of members, for a period of at least six

months immediately prior to the date of the application. It is common cause that the applicant was not registered as such.

[7] As regards the applicant’s status as a creditor, initially in the applicant’s founding affidavit no averments were made to establish his status as such. The applicant then delivered a supplementary affidavit to establish this aspect, which is based upon an averment that he is a prospective creditor as he is entitled to a fifty percent share of the first respondent upon liquidation, and that the first respondent is indebted to the applicant in respect of certain specified debts. At the hearing Mr. Dickson, S.C. indicated that the applicant only relied upon his claim to a fifty percent share of the first respondent’s assets, to justify his status as a creditor.

[8] Although the enforceability of this claim is hotly disputed by the respondents, I am prepared to assume, without deciding the issue, that the applicant qualifies as a creditor on this basis.

[9] The applicant therefore brings the application solely on the basis that he is a creditor of the first respondent and that it is just and equitable that it be wound up.

[10] Mr. Acker, S.C., who together with Mr. Smithers appeared for the respondents, submitted that the grounds upon which the applicant would be entitled to apply for the liquidation of the first respondent were consequently very limited, relying upon the decision of Smit, J.P. in

Katsapas v Norvalspont Investments (Pty) Ltd.

1969 (4) SA 403 (0) at 406 F – H

“Assuming applicant is a creditor, then she is a very small one in relation to the assets of the company. She admits that she is unable to say that the respondent is insolvent. The balance sheets actually show a healthy state of solvency. Respondent is in no way unable to pay its debts. Not one of the other creditors desires a liquidation of the company. As creditor, she has no legitimate concern in any mismanagement by those in control of the company where the company is solvent and well able to pay its debts, unless it can be shown that due to such mismanagement the company will rapidly be reduced to a condition of insolvency so as to prejudice the creditors’ prospects of being paid”.

[11] When I put this argument to Mr. Dickson, S.C. he submitted that I should adopt what he called a “hybrid” approach to the matter. As I understand the argument, this involves a blurring of the distinction between the respective rights of a creditor and a member of the company, to seek its winding up. Mr. Acker, S.C. submitted that there was no authority for such an approach.

[12] Generally speaking a creditor, who is not also a member of the company, will seek its winding up in terms of Section 344 (F) of the Act, i.e. that the company is unable to pay its debts. The object of course being to obtain an equitable payment of the amount owed by the company to the creditor, due regard being had to the competing rights of other creditors.

[13] In the case of a member, who is not also a creditor, the member is precluded in terms of Section 346 (2) of the Act, from applying for the winding up of the company on the ground that it is unable to pay its debts.

[14] A clear distinction is therefore drawn in the Act, between the respective rights of a member and a creditor, to apply for the winding up of a company, on the ground that it is unable to pay its debts.

[15] No such clear distinction is drawn in the Act between the respective rights of a member and a creditor, to apply for the winding up of a company in terms of Section 344 (H) of the Act, on the ground that it would be just and equitable to do so.

[16] The “just and equitable” basis for winding up a company

“……..is rather a special ground under which only certain features of the way in which a company is being run or conducted can be questioned to the point of requesting the Court to wind it up” per Coetzee, J. in

Rand Air (Pty) Ltd.v Ray Bester Investments (Pty) Ltd.

1985 (2) SA 345 (W) at 349 I

[17] The five categories of such conduct which form the basis of a winding up order are well known, being:

a) The disappearance of the substratum of the company.

b) The illegality of its objects and fraud committed in connection therewith.

c) A deadlock in the management of the company’s affairs.

d) Grounds analogous to the dissolution of partnership.

e) Oppression.

Wiseman v Ace Table Soccer (Pty) Ltd.

1991 (4) SA 171 (W) at 182 D - E

[18] In the present case the applicant alleges conduct falling within categories b) and d) above.

[19] All of these categories really relate to solvent companies

Rand Air (Pty) Ltd. supra at 351 A

and it is clear that it is not just and equitable to wind up a commercially solvent company exclusively for the benefit of a minority of creditors

Wiseman’s Case supra at 181 F – G

nor is it justifiable, to extend the above categories to include as one the exclusive benefit of minority creditors, where the creditor does not establish a ground falling within one of these categories.

Wiseman’s Case supra at 182 G – H

[20] I cannot see any justification for drawing a distinction in this regard, between the rights of a majority creditor and those of a minority creditor. This must be so because the decisive criterion in either case, is whether the prospect of payment is diminished by the conduct complained of. It is therefore insufficient that the winding up

of the first respondent would be to the benefit of the applicant in his capacity as a creditor, for reasons unconnected with the payment of the debt by the first respondent.

[21] The allegations of the applicant which form the basis for the applicant’s claim that the respondents have been guilty of conduct, falling within the categories enumerated in paragraphs 17 b) and d) supra, is hotly disputed. However, even if I assume in favour of the applicant, without deciding the issue, that the applicant has established conduct on the part of the respondents, falling within one of the above categories, applicant is still faced with the burden of showing that this conduct is such that the first respondent

“….will rapidly be reduced to a condition of insolvency so as to prejudice the creditors’ prospects of being paid”.

Katsapas’ case supra at 406 H

[22] To hold otherwise and embrace a so called “hybrid” approach, would have as its consequence that a creditor would be able to seek the liquidation of a solvent company, on grounds which have no bearing upon its ability to pay the debt in question.

[23] A creditor has no interest in, or right to intervene in, the type of conduct complained of in the running of a company, falling within the above categories, unless such conduct impinges upon the creditor’s right to payment. To hold otherwise would permit any creditor to unduly interfere in the internal affairs of the company. Internal disputes between members of the company, having no bearing upon the ability of the company to pay its debts, could then be exploited by creditors threatening liquidation of the company, to obtain payment of disputed debts, or debts which are not yet due.

[24] The applicant has not shown that the conduct of the respondents complained of, will prejudice his prospects of being paid his claim, which I have for the purposes of the present application assumed to exist. In addition, none of the major creditors of the first respondent desire its liquidation. The application must accordingly fail.

[25] The respondents, as part of their opposition, launched an application to strike out certain averments made in the applicant’s founding affidavit and supplementary affidavit on various grounds, including allegations of hearsay evidence, as well as vexatious allegations. I do not find it necessary to deal with this application for the just determination of this matter, and consequently will make no

order on its merits. As regards the costs of such application, in my view the fairest order would be for each party to pay their own costs.

[26] A further issue to be dealt with is the costs of the application brought by the first respondent against the applicant, to interdict the

applicant from bringing the present application. An interim interdict was granted by Van Zyl, J. ex parte and without notice to the applicant. Gyanda, J. dealt with the applicant’s anticipation of the return day and discharged the rule, for the reasons set out in his Judgment, which form part of the papers before me. Gyanda, J. however reserved the costs of that application for decision by the Court hearing the liquidation application.

[27] I respectfully agree with the views of Gyanda, J., that had Van Zyl, J. been apprised of the facts from the applicant’s point of view, he would not have granted the order he did. I also respectfully agree with the view of Gyanda, J. that the applicant acted bona fide in bringing the present application and that his conduct was not vexatious or frivolous. The fact that I regard the basis upon which this application was brought as ill conceived in law, does not lead to such a conclusion. Mr. Dickson submitted that the second and third respondents should be ordered to pay the applicant’s costs on the basis that they were the authors of the conduct of the first respondent in bringing the application. It is quite clear that there is intense acrimony between the applicant on the one hand, and the second

and third respondents on the other. However, the second and third respondents were not formal parties to the interdict application. In my view the fairest order would be to direct that the first respondent

should pay the costs of the applicant in the application for an interdict under Case No. 14159/2007.

[28] As regards the costs of the present application, Mr. Acker, S.C. submitted that the costs of the respondents should include the costs of two Counsel. Regard being had to the complexity of the matter, the respondents acted reasonably and justifiably in my view, in engaging the services of two Counsel. In addition, I did not understand Mr. Dickson, S.C to oppose such an order.

[29] The order I make is the following:

(a) The application is dismissed.

(b) The applicant is ordered to pay the respondent’s costs, such costs to include the costs of two Counsel.

c) The parties are each ordered to pay their own costs in connection with the respondent’s application to strike out.

(d) The first respondent is ordered to pay the applicant’s costs of the application under Case No. 14159/2007.

______________

SWAIN, J

Appearances..../

Appearances:

Counsel for the Applicant : MR. A.J. DICKSON, S.C.

Instructed by : Tomlinson Mnguni James 165 Pietermaritz Street

Pietermaritzburg.

Counsel for the 1st Respondent : MR. B.A. ACKER, S.C.

Instructed by : Macritchie & Buck Attorneys

c/o Austin Smith

191 Pietermaritz Street

Date of Hearing : 15 February 2008

Date of Judgment : 10 March 2008