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REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO:  28106/2016

12/9/2018

In the matter between:

POWER HORSE ENERGY DRINKS GmbH                                                           Applicant

and

TRIBEONE FESTIVALS (PTY) LIMITED                                                           Respondent

J U D G M E N T

 

VAN DER LINDE, J:

 

Introduction

[1] This is an application for the winding-up of the respondent company in terms of Chapter 14 of the Companies Act 61 of 1973 (“the old Act”), still applicable in the Act 71 of 2008 era.  The case against the respondent is that it cannot pay its debts and, more particularly, that it is deemed not to be able to pay its debts because it did not do so despite receipt of a letter duly dispatched in terms of section 345 of the old Act, and the passage of three weeks after receipt.

[2] The respondent’s defence to the application is that the debt which the applicant claims is owing to it, is a disputed debt, on bona fide and reasonable grounds; and so this application for the winding-up of the respondent is an abuse of process because the applicant was well aware, as in fact its own section 345 letter presages, that the debt was disputed.

[3] The application introduces an interesting dimension because the applicant has disclosed correspondence between the parties which, at least, prima facie, was engaged upon in order to settle the dispute. It relies on this disclosed correspondence, particularly a letter of 22 February 2016 by the respondent, for its contention that the respondent has admitted being indebted to the applicant in an amount of just over €21 000.

[4] The aggregate amount of the applicant’s claim is €170 000 in respect of which – on the applicant’s argument – the letter by the respondent of 22 February 2016 admits an indebtedness in respect of some €21 000.

The applicant accepts that ordinarily such correspondence would not be admissible by virtue of the general principle that without prejudice correspondence entered into in a bona fide attempt to settle a dispute is protected by litigation privilege.  

[5] However in this case the applicant argues that in the letter of 22 February 2016 the respondent not only admitted indebtedness to the applicant in the amount of €21 000, but in fact also committed an act of insolvency.  Relying on the judgment of Absa Bank Limited v Hammerle Group (Pty Ltd, [2016] JOL 33570 (SCA), the applicant contends that the letter and its contents is admissible against the respondent. 

[6] Making matters more interesting is the fact that in an interlocutory application the respondent had applied to this Court for an order compelling the applicant to put up security for the costs of the winding-up application, because the applicant is a peregrinus not only of the court but also of the country.  In that application the applicant also disclosed the same contentious without prejudice correspondence, including the letter of 22 February 2016, in its answering affidavit. The respondent objected to the disclosure of the correspondence on the basis of litigation privilege, applying to have it struck out. 

[7] The respondent’s application to compel the applicant to furnish security succeeded before my colleague Nyathi, AJ but his Lordship refused the application for striking out.  His Lordship did not provide reasons for his order.  The applicant now argues that inevitably the only reasoning that could have motivated his Lordship to have come to that conclusion, was that the judgment in Absa Bank Limited v Hammerle was followed and the letter became admissible on the basis, not that it contained an admission by the respondent that it was insolvent and could not pay its debts as and when they fell due for payment, but rather simply on the basis that the letter constituted an attempt by a debtor to compromise its debts; and that constituted an act of insolvency under the Insolvency Act, 24 of 1936.

[8] In other words, the applicant argues that the ratio of Absa v Hammerle is not simply that an admission of an act of insolvency in the course of correspondence otherwise protected by privilege, is admissible in an application for the sequestration of the estate of a debtor; but is also admissible in an application for the winding-up of a company debtor. This submission was not derailed by the acceptance that a company cannot be wound up on the basis of it having committed an act of insolvency under the Insolvency Act, as opposed to it being unable to pay its debts for purposes of the old Act.

[9] There is yet a further facet to this argument, and it is this.  The applicant argues that the order of Nyathi, AJ is res judicata and that issue estoppel applies, meaning that the issue as to the admissibility or otherwise of the correspondence has been decided in a manner that is binding on the parties, and therefore the correspondence must be admitted. 

[10] The applicant argues in this regard that the conclusion is inevitable that Nyathi, AJ also concluded that the letter of 22 February 2016 constituted an act of insolvency and is therefore admissible, relying on Absa Bank v Hammerle, against a company debtor in a winding-up application.

[11] In a sense these issues, interesting as they are, do not really determine the substance of the matter because, as was submitted by Mr Bhana, SC who appeared with Mr Rowan for the respondent, even if the correspondence were admitted, the debt of the applicant, meaning the entire debt, is disputed on a bona fide and reasonable ground and therefore the application for the winding-up of the respondent must fail in any event. 

[12] However, the issues as to the admissibility of evidence raised by the applicant are important and they need to be addressed.  As concerns the respondent’s submission that the entire debt contended for by the applicant is in any event disputed on a bona fide and reasonable ground, it will assist if something is said by way of introduction to that topic.

[13] What had happened is that some time ago in 2012 the applicant and the respondent concluded a written agreement in terms of which the applicant would pay the respondent €200 000 for the respondent to advertise the applicant’s power drink both before and during a music festival which the respondent would organise. 

[14] The applicant proceeded to pay to the respondent the total amount of €170 000 (not the full amount of €200 000) and in turn the respondent went ahead and provided advertising space and exposure to the applicant before the music event.  The contract did not allocate the amount of €200 000 to exposure before the music festival and exposure during the music festival; and indeed the contract conferred upon the respondent a discretion as to how to allocate advertising exposure in respect of the applicant’s product in the run-up to the music festival and at the music festival itself. 

[15] What then happened is that the City of Tshwane rendered the facility at which the music festival would be held unavailable and accordingly, according to the respondent, force majeure rendered performance by the respondent of advertising exposure at the music festival impossible, not ex tunc, but pro nunc.  In other words, according to the respondent at least, the contract became impossible of performance not ab initio, but from that point onwards into the future.

[16] The applicant on the other hand regarded the respondent’s inability to continue with the arrangement of the music festival as a breach of contract on the respondent’s part, as the applicant purported to cancel the agreement. Pursuant to that cancellation, the applicant claimed from the respondent repayment of the €170 000 which the applicant had part-paid to the respondent pursuant to the applicant’s obligations in terms of their agreement.

[17] The applicant says that its claim is not a damages claim but simply a claim for repayment of its performance.  This is important from the applicant’s perspective, because the respondent relies on clause 12 of the agreement between the parties in terms of which, in the event of the respondent’s performance being rendered impossible through force majeure, no breach will have been committed by the respondent, which would otherwise have given rise to an entitlement on the part of the applicant not only to cancel the agreement, but also to claim anything, be it damages or repayment of performance, pursuant to such cancellation.

[18] Important however for purposes of this part of the application is the respondent’s contention that from the get-go of the dispute between the parties, the applicant appreciated that it could not justifiably claim repayment of every Euro that it had paid to the respondent, because admittedly the respondent had provided advertising exposure to the applicant.

[19] That gave rise to a ground of dispute between the applicant and the respondent which in turn led to negotiations between them, without prejudice, in an attempt to settle the value to which the applicant would be entitled in respect of the advertising exposure which the respondent had afforded to the applicant; and then if there was a margin favourable to the applicant, what that margin would be and how that margin would be settled.

[20] It is that debate between the parties that gave rise to the letter by the respondent of 22 February 2016 in which the respondent suggested to the applicant that an appropriate margin in favour of the applicant was some €21 000; and the respondent proposed in the letter that that margin be settled by tripling it up to some €54 000 and then providing, as it were, performance in kind by providing advertising exposure to the applicant in the future at other future music festivals to be arranged by the respondent. 

[21] It is that letter which the applicant then construes as an admission of liability in the amount of €21 000, thereby establishing not only the applicant’s locus standi in the winding-up proceedings but also the inability of the respondent to pay its debts. 

[22] It seems to me, for reasons that I will set out more fully below, that the correct approach to this matter is as follows. First, a merely interlocutory order of my brother Nyathi, AJ would ordinarily bind neither him nor me. It did not purport to deal with the merits of the dispute between the parties and since that is so, res judicata or issue estoppel does not apply. 

[23] Next, the ratio in Absa v Hammerle does not apply, because all that that judgment decided was that a communication by a debtor company that it is insolvent and unable to pay its debts is not protected by the privilege which normally protects settlement negotiations, in the public interest.  This is what Mbha, JA said:

[13] It is true that as a general rule, negotiations between parties which are undertaken with a view to a settlement of their disputes are privileged from disclosure. This is regardless of whether or not the negotiations have been stipulated to be without prejudice. However, there are exceptions to this rule. One of these exceptions is that an offer made, even on a "without prejudice" basis, is admissible in evidence as an act of insolvency. Where a party therefore concedes insolvency, as the respondent did in this case, public policy dictates that such admissions of insolvency should not be precluded from sequestration or winding-up proceedings, even if made on a privileged occasion. The reason for the exception is that liquidation or insolvency proceedings are a matter which by its very nature involves the public interest. A concursus creditorum is created and the trading public is protected from the risk of further dealing with a person or company trading in insolvent circumstances. It follows that any admission of such insolvency, whether made in confidence or otherwise, cannot be considered privileged. This is explained by the words of Van Schalkwyk J in Absa Bank Ltd v Chopdat, when he said:

"[A]s a matter of public policy, an act of insolvency should not always be afforded the same protection which the common law privilege accords to settlement negotiations.

A creditor who undertakes the sequestration of a debtor's estate is not merely engaging in private litigation; he initiates a juridical process which can have extensive and indeed profound consequences for many other creditors, some of whom might be gravely prejudiced if the debtor is permitted to continue to trade whilst insolvent. I would therefore be inclined to draw an analogy between the individual who seeks to protect from disclosure a criminal threat upon the basis of privilege and the debtor who objects to the disclosure of an act of insolvency on the same basis."

In the final analysis, the learned Judge said at 1094F:

"In this case the respondent has admitted his insolvency. Public policy would require that such admission should not be precluded from these proceedings, even if made on a privileged occasion." 

[24] However, in the present matter, I do not believe that the letter by the respondent of 22 February 2016 can be described as an admission by the respondent of an inability on its part to pay its debts as and when they fall due for payment, or an admission on the part of the respondent that it is insolvent.  That being so, the letter of 22 February 2016 would ordinarily be inadmissible and the respondent’s striking out application ought to have succeeded, were it not for the next consideration.

[25] The order of Nyathi, AJ – whether correct or incorrect - had the legal effect of removing from the contentious letter the shield of protection against disclosure that the respondent was entitled to hold up. The letter became part of the official record in the interlocutory application, open to the public. That being so, the protection afforded by legal/professional privilege cannot revive; compare South African Airways SOC v BDFM Publishers (Pty) Ltd and Others, 2016 (2) SA 561 (GJ), per Sutherland, J:

[43] Building upon that proposition it was further argued on behalf of SAA that once a person has exercised the human right to claim privilege over given information, the right of privilege in respect thereof can be invoked as against the world to protect and preserve the confidentiality of the information which is subject to a claim of privilege. Accordingly, so runs the argument, even when that confidentiality has been breached, the right to protection is not extinguished, but continues in perpetuity. Thus, the confirmation of the order is appropriate, because a clear right has been established in the right to privilege so described, further publication will perpetuate the harm, and no other suitable remedy can achieve the suppression of further dissemination of the information.

[4] …

[48] By invoking such legal advice privilege, no less than litigation privilege, the client invokes a 'negative' right, ie the right entitles a client to refuse disclosure by holding up the shield of privilege. What the right to refuse to disclose legal advice in proceedings cannot be is a 'positive right', ie a right to protection from the world learning of the advice if the advice is revealed to the world without authorisation. The client may indeed restrain a legal advisor on the grounds of their relationship, and may also restrain a thief who takes a document evidencing confidential information on delictual grounds.

[49] But if the confidentiality is lost and the world comes to know of the information, there is no remedy in law to restrain publication by strangers who learn of it. This is because what the law gives to the client is a 'privilege' to refuse to disclose, not a right to suppress publication if the confidentiality is breached. A client must take steps to secure the confidentiality and, if these steps prove ineffective, the quality or attribute of confidentiality in the legal advice is dissipated. The concept of legal advice privilege does not exist to secure confidentiality against misappropriation; it exists solely to legitimise a client in proceedings refusing to divulge the subject-matter of communications with a legal advisor, received in confidence. This vulnerability to loss of the confidentiality of the information over which a claim of privilege can and strangers who learn of it. This is because what the law gives to the client is a 'privilege' to refuse to disclose, not a right to suppress publication if the confidentiality is breached. A client must take steps to secure the confidentiality and, if these steps prove ineffective, the quality or attribute of confidentiality in the legal advice is dissipated. The concept of legal advice privilege does not exist to secure confidentiality against misappropriation; it exists solely to legitimise a client in proceedings refusing to divulge the subject-matter of communications with a legal advisor, received in confidence. This vulnerability to loss of the confidentiality of the information over which a claim of privilege can and is made flows from the nature of the right itself. The proposition about the consequences of loss of confidentiality is endorsed by the authorities.”

[26] It does not seem to me that the disclosure issue is fact-driven; once as a matter of law the privilege was lost through court order, it was irretrievably lost, absent possibly an appeal against the order, no matter whether one or more persons actually saw the letter. The letter was now part of a public record.

[27] That leaves the question whether the defence which the respondent has put up is a bona fide defence and one which is raised on reasonable grounds.  In turn, this involves the question whether the respondent’s contention in its answering affidavit that the applicant received more advertising value than the €170 000 which it paid to the respondent pursuant to the agreement, can be dismissed as not being bona fide and not being raised on reasonable grounds. 

[28] In my view that conclusion cannot be drawn.  The respondent’s exposition of the value which it attributes to the advertising exposure which it afforded to the applicant may be contentious, but even the applicant has to accept that some value is attributable to the exposure which the respondent afforded to it. Despite applicant’s counsel describing the language used by the respondent as gobbledygook, this court cannot dismiss out of hand that in the business of advertising exposure, rand value must be accorded to what the respondent calls “eye-ball” exposure to the applicant’s product.

[29] There is a further dimension to this. The applicant argued that the contradiction between the admitted advertising value in the contentious letter and that subsequently contended fro in the answering affidavit, shows that the defence is not bona fide. But the applicant never accepted the lesser value which the respondent ascribed in its contentious letter to the rand value of such advertising exposure that the applicant received in the event. That means the offer that the respondent made in the contentious letter lapsed. It seems to me that it is therefore not open to the applicant to argue that the respondent actually admitted an indebted to the applicant in the amount of € 20 000.

[30] It follows that the application for the winding-up of the respondent must be dismissed with costs including the costs of two counsel.  I do not believe that a special costs order is warranted. In the result I make the following order:

(a) The application is dismissed with costs including the costs of two counsel.

 

WHG van der Linde

Judge, High Court

Johannesburg

 

 

For the applicant: Adv A Kemack, SC

Adv J Hoffman

Instructed by: WerthSchröder Inc

Applicant’s attorneys

1^st Floor, Kiepersol House

Stonemill Office Park 300

Acacia Road

Darrenwood

Tel:  (011) 476 1776

Fax:  (011) 476 1813

Email:  kschroder@wertschroeder.com

Ref:  RAKSchröder\SP\KSP00014

For the respondent: Adv R Bhana, SC

Adv A W T Rowan

Instructed by: Mervyn Taback Inc

Respondent’s attorneys

13 Eton Road, Parktown

Johannesburg

Tel: (011) 358 7700

Email: nm3@tabacks.com

Ref:  Ms N Mather

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