IN DIE HOOGGEREGSHOF VAN SUID AFRIKA IN THE HIGH COURT OF SOUTH AFRICA

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1 Reportable: Circulate to Judges: Circulate to Magistrates: YES / NO YES / NO YES / NO IN DIE HOOGGEREGSHOF VAN SUID AFRIKA IN THE HIGH COURT OF SOUTH AFRICA (Noord Kaapse Afdeling / Northern Cape Division) Saakno: / Case number: 621/03 Datum verhoor: / Date heard: 20/06/2005 Datum gelewer: / Date delivered: 01/07/2005 In the matter between: DE VILLIERS, ALBERT WILLEM Appellant and GLOBAL DIAMOND RESOURCES SA (PTY) LTD Respondent Coram: Kgomo JP et Lacock J et Goliath AJ JUDGMENT ON APPEAL LACOCK J: 1] On 18 July 2004 the appellant applied to this Court for, and was granted (per Olivier AJ as he then was), a provisional winding up order against the respondent. At the same time an application by the respondent for a postponement of the winding up application to allow

2 2 the respondent to file answering papers, was refused. [11] The respondent opposed the confirmation of the provisional liquidation order, and on the extended return day of the rule nisi, Majiedt J discharged the provisional winding up order with costs. At the same time the Court a quo dismissed an application by one Petrus F. Cloete for leave to intervene in those proceedings, with costs. [12] With the leave of the Court a quo the appellant has noted an appeal against the said order of Majiedt J whereby the provisional winding up order was discharged with costs. 2] The relevant factual background pertaining to the application before Majiedt J can be gleaned from the following extracts of the judgment in the Court a quo: The applicant had previously been in the employ of the respondent as mine manager of the respondent s Grasdrif Exploration Project in the Richtersveld area of Namaqualand in this province. It is common cause that the respondent has been conducting its business primarily at the said Grasdrif and at Caerwinning mine in the Barkly West area where the respondent was similarly involved in exploration activities. (record p. 465) The respondent is a company primarily engaged in diamond mining. Its main business activities for the last few years has been concentrated on exploration at Grasdrif and Caerwinning. Its mother company is based in the USA. The present application for liquidation is the third one brought against the respondent in the last two years. During 2001 it was placed in final liquidation by order of the Witwatersrand Local Division at the behest of one of the respondent s creditors, Standard Bank. The final order was thereafter set aside after the respondent had settled its

3 indebtedness to Standard Bank. On 31 May 2002 the present applicant withdrew his application for the liquidation of the respondent in this Court, the parties having reached a settlement in the matter. That settlement entailed respondent settling its indebtedness to the applicant in respect of unpaid salary and contained a clear and unequivocal reservation of the applicant s rights. (record p ) 3 [21] Although the appellant alleged that the respondent was indebted to him in respect of three different claims, Majiedt J was only prepared to entertain the application on a claim of accumulated leave pay in the amount of R due to the appellant. The other two claims were the subject of two defended actions pending in this Court. 3] The appellant relied on two grounds in support of the application, viz: a) that the respondent is unable to pay its debts as described in sec. 345 of the Companies Act of 1973 (sec. 344 (f) of the Act); and b) that it is just and equitable that the respondent should be wound up (sec. 344 (h) of the Act). [31] Although the respondent denied being indebted to the appellant in respect of accumulated leave pay, the Court a quo found in favour of the appellant in regard to this claim and concluded that the appellant had the necessary locus standi to bring the application. This finding was not challenged by Mr. Albertus on behalf of the respondent.

4 4 [32] The Court a quo furthermore found that the applicant has established, on a balance of probabilities, that the respondent is unable to pay its debts within the meaning of sec. 345 of the Act. This finding too, is not challenged by Mr. Albertus. 4] Immediately upon the aforesaid finding the judgment of the Court continues as follows: The matter does not end there however the question which arises is: would it be just and equitable to place the respondent in final liquidation? The enquiry into what is just and equitable postulates not facts but only a broad conclusion of law, justice and equity, as a ground for winding up per Trollip J (as he then was) in Moosa NO v Mavjee Bhawan (Pty) Ltd 1967(3) SA 131 (T) at 136. As to a Court s general discretionary power to grant or decline a winding up order even where grounds therefor have been established, see: Tjospomie Boerdery (Pty) Ltd v Drakensberg Botteliers (Pty) Ltd 1989(4) SA 31 (T) at Kyle v Maritz & Pieterse Inc [2002] 3 All SA 223 (T) at 232. In considering this aspect, regard must also be had to the wishes of creditors and the respondent s shareholders where sufficient evidence of such wishes exists. See: Leca Investments (Pty) Ltd v Shiers 1978(4) SA 703 (W) at 705. I have grave doubts as to whether it can be said, on the facts of this case, that it would be just and equitable to place the respondent in final liquidation. I expressly refrain from making a finding thereon. In the exercise of my discretion I do however, decline to confirm the rule nisi, despite the strong case made out by the applicant. I do so for the reasons hereinafter enumerated:

5 5 a) The overwhelming majority of creditors, both in value and in number, desire the continued operation of the respondent and request the discharge of the provisional winding up order. I am satisfied that these creditors have sufficient factual knowledge of and insight in the matter to be able to make such a request. b) The respondent s main shareholders (and main creditors) have made a firm commitment to place sufficient financial resources at the respondent s disposal to enable it to continue operating. This commitment has been underscored by initial funding of US $ c) It can safely be accepted that there are significant diamond deposits ready for mining at the respondent s Grasdrif operations. Considerable sums of money have been expended in exploring for the diamonds (although such monies have not always been optimally expended) and have yielded favourable results. The applicant, through Eureka (Pty) Ltd, has in fact corroborated the fact of the existence of such diamond deposits at Grasdrif why else would he take the trouble of applying for authorisation to mine there? d) I have grave difficulty in accepting, without reservation, the applicant s bona fides in this application. While I cannot find as a fact that he had acted with an ulterior purpose herein, it is an aspect which weighs to an extent in tilting the scales ever so slightly away from him. e) There appears to be a not too remote prospect of the respondent obtaining a joint venture partner for its Grasdrif and Caerwinning operations. This would cause substantial further injecting of funds into the respondent. (record p ) [41] It appears at first blush that Majiedt J conflated the two grounds on which the appellant relied, and failed to appreciate that each was a separate ground calling for disjunctive consideration.

6 6 [42] However, nothing turns on this issue since counsel for both parties were ad idem that the sole question for determination on appeal is whether the Court a quo properly exercised its discretion under sec. 344 (f) of the Act, refusing to confirm the provisional winding up order. 5] For purposes of this appeal, I will accept that this Court of appeal is not bound by the usual limited grounds upon which a court of appeal can interfere with the exercise of a discretion by a court of first instance (Ex parte Neethling & Others, 1951 (4) SA 331 (A) at 335), but that we are at liberty to approach the matter on a broader basis viz. whether the exercise of its discretion by the Court a quo was appropriate in the circumstances. (Tjospomie Boerdery (Pty) Ltd v Drakensberg Botteliers (Pty) Ltd 1989 (4) SA 31 (T) at 40 A 44 E; Shepstone & Wylie and Others v Geyser NO 1998 (3) SA 1036 (A) at 1044 J 1045 C). 6] The test to be applied in cases where a creditor has proved that a company is unable to pay its debts as contemplated in sec. 344 (f) of the Companies Act, had, in my view, been properly formulated by Dowling J in Service Trade Supplies (Pty) Ltd v Dasco & Sons Ltd, 1962 (3) SA 424 (N) at 428 as follows: The cases show that the discretion of the Court where unpaid creditors seek a winding-up order against a company unable to pay its debts is in reality a very narrow one, just as its discretion

7 to refuse a sequestration order of an application of an unpaid creditor in an insolvent estate is very narrow. In Effune v Hancock, 1923 T.P.D. 355, a full Court decision on appeal by a creditor against a refusal to grant a final winding-up order, at p. 364, DE WAAL, J., is reported to have said: 'Where a creditor alleges an act of insolvency, and proves his claim, he has the unfettered right to choose his form of execution, one of which is to sequestrate his debtor's estate,' and His Lordship goes on to indicate that any discretion the Court may have is a narrow one. In the sphere of company law the same sort of approach is valid. The great weight of authority is that generally speaking an unpaid creditor has a right ex debito justitiae to a winding up order against a company unable to pay its debts. 7 See further Kyle & Others v Maritz & Pieterse Inc. [2002] 3 ALL SA 223 (T) at 225 h: The power of the court to grant a winding up order is a discretionary power. That is true irrespective of the ground upon which the order is sought. Being a judicial discretion, the court shall have regard to the grounds and to the reasons for the winding up moved for. Previous decisions on the circumstances under which the court has granted a winding up order can at best serve as guidelines. (per Moseneke J (as he then was) ). [61] In a long standing line of cases it had been recognised that, in exercising its discretion whether to grant or refuse winding up a company, the Court should give due consideration to the wishes of creditors. Service Trade Supplies Ltd (supra) at 428 F; SAA Distributors Ltd v Sport & Spel Bpk 1973 (3) SA 371 (C) at 374 D 375 A; Leca Investments (Pty) Ltd v

8 Shiers, 1978 (4) SA 703 (W) at 705 H; Terblanche & Others v Offshore Design Co (Pty) Ltd, 2001 (1) SA 824 (C) where Van Reenen J held as follows: Our Courts have described sequestration as a legitimate form of execution (see Wilkins v Pieterse 1937 CPD 165 at 170; Moldenhauer v De Beer 1959 (1) SA 890 (O) at 892F). However, Didcott J in Gardee v Dhanmanta Holdings and Others 1978 (1) SA 1066 (N) at 1069C - D recognised that, as execution in the form of sequestration remains subject to the Court's discretion, it must be differentiated from the right of a judgment creditor to enforce execution of the routine kind. The learned Judge further recognised that a creditor of a company unable to pay its debts has a stronger claim for a winding-up order than an applicant for a sequestration order. That approach appears to accord with the dictum of Dowling J in the Service Trade Supplies case supra, which was quoted with approval by Van Zijl J in SAA Distributors (Pty) Ltd v Sport en Spel (Edms) Bpk 1973 (3) SA 371 (C) at 374A - E, to the effect that, where an unpaid creditor seeks the winding-up of a company on the basis that it is unable to pay its debts, the Court's discretion to refuse the order is a narrow one that will be exercised on limited grounds, for example that a substantial body of creditors opposes the winding up. My emphasis. 8 [62] A court may even refuse to wind up a company of which its liabilities exceed its assets if the majority of creditors so wish. The first of the grounds for winding-up is actual insolvency which occurs when a company's liabilities exceed its assets. The second ground, inability to pay debts, is the socalled commercial insolvency. In either case, the Court has a discretion not to wind up an insolvent company. Field & Co v Lucile (Pty) Ltd 1940 (1) PH E8 followed in F & C Building Construction Co (Pty) Ltd v Macsheil Investments (Pty) Ltd 1959 (3) SA 841 (D) at 844C-F, which was in turn followed in this Division in SAA Distributors (Pty) Ltd v Sport en Spel (Edms) Bpk 1973 (3) SA 371 (C).

9 Although the discretion is sparingly exercised as between a debtor company and its creditors (see eg Service Trade Supplies (Pty) Ltd v Dasco & Sons (Pty) Ltd 1962 (3) SA 424 (T) at 428), the cases cited above show that the wishes of creditors regarding winding up carry a good deal of weight. This means that the present creditors of an insolvent company are, in effect, entitled, subject to the approval of the Court, to keep it alive. (Cooper v A&G Fashions (Pty) Ltd; Ex parte Milman NO, 1991 (4) SA 204 (C) at 209 A D). [63] A court is in any event in terms of sec. 354 (2) of the Act obliged to have regard to the wishes of creditors. This section provides, 9 The Court may, as to all matters relating to a winding up, have regard to the wishes of the creditors or members as proved to it by any sufficient evidence. 7] I now turn to the reasons enumerated by the Court a quo (quoted above) for declining to confirm the provisional winding up order. 8] The wishes of the majority of creditors [81] The uncontested evidence reveal that, according to its latest financial statements, the respondent is indebted to its creditors in an amount of approximately R108 million. Of this amount, approximately R107 million represents shareholders loans and long term borrowings. Mr. Charles E. MacDonald, an attorney and director of the respondent, who deposed to the answering affidavit on behalf of the

10 10 respondent, explained these entries as follows: 107. The audited financial statements and the draft financial statements require some explanation. Firstly, under the heading shareholders loans and the sub category of permanent financing, this is a reference to an ordinary loan emanating from the shareholders and investors through their relevant holding companies to the Respondent which was converted into a interest free, non repayable advance, that is the amount loaned attracts no interest and the capital amount is not repayable upon any circumstances whatsoever. In consideration therefore, the shareholders in question receive a royalty payment from the Respondent. However, and as appears from the resolutions filed herewith, those shareholders and investors have agreed not to claim payment of those royalty amounts until the Respondent is in a financial position to do so and has settled all and any other of its creditors The term long term borrowings and long term liabilities as requested on the draft financial statements is the loan to the Respondent from its holding companies and which in turn was advanced to them by the same aforementioned shareholders and investors. Again, those loans, and while attracting interest, will only be repaid, and the interest will accrue thereon and be capitalised and therefore not be repaid until the capital amounts are repaid, once the company is in a financial position to do so and once all the other creditors of the Respondent have been settled. These averments are not in dispute. [82] At 31 December 2002, the trade creditors of the respondent as reflected in the financial statements, amounted to approximately R1.25 million in value. Attached to the answering affidavit of Mr. MacDonald was a schedule

11 11 containing the names of the trade creditors of the respondent as at 31 December 2002, as well as the amount due to each creditor. The total amount due to these creditors is approximately R [83] The equity creditors referred to in par. 8.1 above have opted against the liquidation of the respondent. Eight of the 44 trade creditors with a total claim value of R have indicated in writing that they do not support the winding up of the respondent. It is unknown whether the other creditors support or oppose the winding up of the respondent. [84] In view of the above it is apparent that, should the respondent be wound up, the equity creditors (a) stand to lose enormous amounts of money: and (b) have demonstrated (as more fully alluded to hereunder) their faith in the future viability of the respondent. [85] By reason of the aforesaid, and taking into account that the value of the assets of the respondent (excluding the value of its mineral resources) is approximately R50 million. I agree with Mr. Albertus for the respondent, that it would have been inappropriate for the Court a quo not to have taken into account the wishes of creditors.

12 12 9] The commitment by shareholders to save the respondent [91] In his answering affidavit Mr. MacDonald dealt with this issue as follows: 116. The main shareholders and investors, in consequence of all of the aforegoing and in order to deal with this application, have resolved as follows: That the application for the winding up is to be opposed and have provided all the necessary resources in order to do so, with the view of ensuring the discharge of the provisional order of winding up as granted by this Honourable Court on 18 July 2003; To advance sufficient funds to settle, alternatively to serve as security for all and any creditors, actual or contingent, of the Respondent; To make sufficient funds available to enable the Respondent to contest all and any disputed claims, and in particular, the claims as made by the Applicant; To advance sufficient funds to the Respondent to cover its administration and other monthly operating expenditure pending the finalisation of the negotiations and the conclusion of a contract with the aforementioned third parties or such other parties as I and/or the other directors of the Respondent may identify and who expressed an interest in investing in the Respondent and/or entering into a joint venture partnership with regard to the Respondent s mining activities and/or wished to acquire the assets of the Respondent and/or its business; To take whatever steps may be necessary (and have provided sufficient funds for this purpose) to ensure that the assets of the Respondent, that is the prospecting rights at Grasdrif and the mining lease rights at Caerwinning, are retained by the Respondent To this end an amount of US$50 000,00 has been deposited into the trust account of my firm, MacDonald De Bruyn &

13 13 Partners, with the express instruction that these funds be applied for the aforesaid purposes Further to the aforegoing, the same said majority shareholders of Global US have agreed and have undertaken to advance sufficient funds as may be required by the Respondent from time to time to achieve any and/or all of the aforegoing and insofar as those funds which have already been advanced, may have been utilised and thus depleted in that process. The aforesaid averments were confirmed in writing by the two main shareholders of the respondent. [92] It turned out that subsequent to the receipt of the sum of US $ referred to above, a further amount of US $ had been transferred to Mr. MacDonald to be applied for the aforesaid purposes. (Converted into South African Rand, the total amount would be approximately R ). [93] Mr. Zietsman, for the appellant, submitted that little weight can be attached to these undertakings, since similar promises had been made in the past to stave off final winding up proceedings against the respondent and creditors are still not paid. In this regard Mr. Zietsman referred to an application by Standard Bank in the Witwatersrand Local Division and a previous application by the appellant in this Division under case no. 498/2002.

14 14 In the first matter Standard Bank obtained a final liquidation order against the respondent in September This order was subsequently rescinded upon payment by the respondent of the amount due to Standard Bank. In the second matter a provisional winding up order issued against the respondent at the instance of the appellant, had been discharged upon payment by the respondent of the debt in issue in respect of unpaid salaries due to the appellant. [94] A perusal of the papers in case no. 498/02 referred to above, reveals that the claims of trade creditors as at the end of March 2002 amounted to approximately R2.35 million. In his answering affidavit in that application, Mr. MacDonald indicated that a sum of US $ had been transferred to his trust account to be applied inter alia for payment of trade creditors and that a further US $ was about to be transferred to his trust account to be applied for the same purpose. A simple exercise indicates that the value of trade creditors had been reduced by approximately R1.6 million since March 2002 until December This demonstrates that these commitments previously made were not pies in the sky, but had in fact been honoured by the shareholders and/or investors. There is no reason to believe

15 that the shareholders and investors will now renege on their present commitments. 15 [95] Mr. Zietsman however pointed out that an amount of US $ is insufficient to defray the claims of all trade creditors, and will still leave a shortfall of approximately R This may be correct, but it must be borne in mind that claims of creditors to the value of approximately R are, according to Mr. MacDonald subject to audit. This can only mean that these claims are either disputed or are subject to negotiations or settlement. 10] By reason of the aforesaid alone, I am of the view that the Court a quo was fully justified to discharge the provisional winding up order. The interests and quest of the equity creditors that the respondent not be wound up clearly outweighs the interests of those creditors who may still wish to liquidate the respondent. The respondent has, in my view, on a balance of probability convincingly demonstrated that it will not be in the interests of creditors to wind up the respondent. I am alive to the appellant s right to execute his claim against the respondent by means of a winding up procedure, but in my view the Court a quo has appropriately exercised his discretion in not confirming the provisional winding up order. I would have done the same. [101] The appellant is not remediless. He has already instituted two

16 16 actions against the respondent in this Division for damages founded on alleged defamation and for payment of an alleged severance benefit. Both actions are pending. Nothing prohibits the applicant to similarly pursue his claim for accumulated leave pay. 11] Having come to the aforesaid conclusion, I do not find it necessary to deal with the other aforesaid reasons enumerated by Majiedt J. Suffice it to say that the learned judge was, in my view, justified to take all those considerations into account in exercising his discretion not to confirm the provisional winding up order. 12] In the premises, I would have dismissed the appeal with costs, such costs to include the costs in the application for leave to appeal. HJ Lacock JUDGE I concur, and it is so ordered

17 17 FD Kgomo JUDGE PRESIDENT I concur. P GOLIATH ACTING JUDGE For the appellant: For the respondent: Adv Zietsman (Instructed by Adrian B Horwitz & Associates) Adv Albertus SC (Instructed by Neville Cloete Attorneys)