Republic of South Africa

Case Number 23255/2010

In the matter between:

Versus

In the matter between:

Versus

In the matter between:

Versus

ZONDI, J:
Introduction
[1] This is an application for the provisional winding-up of the respondent on the ground that it is unable to pay its debts within the meaning of section 345 as read with section 344 of the Companies Act, 61 of 1973 ("the Act") (respondent's failure to respond to a statutory demand and "commercial insolvency"). The respondent's indebtedness to the applicant arises from a deed of suretyship in terms of which the respondent had bound itself as surety and co-principal debtor for the obligations of Charles Potgieter Investments (Pty) Ltd (in liquidation) ("the principal debtor" or "CPI") in respect of certain overdraft facilities afforded to it by the applicant.

[2] The respondent opposes the application essentially on three grounds, firstly that a letter of demand purporting to be a notice in terms of section 345 ("the statutory notice"), upon which the applicant relies, is defective; and secondly that as a result of the applicant's prejudicial conduct towards the principal debtor it has been discharged from the suretyship and thirdly that the principal debtor has a counterclaim for an amount which far exceeds the applicant's claims.

[3] King Charles Winelands (Pty) Ltd launched two applications, on 22 November 2010 and 6 May 2011 respectively, for leave to intervene in the winding-up application. In terms of the first intervention application, King Charles Winelands (Pty) Ltd sought to obtain an order in terms of section 354 (1) of the Act, that the winding-up proceedings be stayed with a view to the implementation of section 413 of the Act.

[4] In relation to the first intervening application no order, save for the issue of costs, is sought. The second intervening party opposes the liquidation of the respondent on the grounds that the respondent is not commercially insolvent and is in a position to pay its debts; the value of the respondent's assets exceeds its liabilities and finally that it is not just an equitable that the respondent be wound-up. The applicant did not file an answering affidavit opposing the second intervention application.

The facts
[5] The applicant alleges that the respondent is indebted to it in the sum of R657 324.23 in respect of a mortgage bond account number 8065084217. The applicant avers that on 20 September 2010 its attorneys on its instructions addressed a written demand to the respondent for the payment of the sum of R657 324.23 by the respondent within a period of three weeks from delivery of the letter of demand. The letter constituting a notice in terms of section 345 of the Act was delivered at the respondent's registered address on 21 September 2010.

[6] The respondent denies that it is in arrears with its bond repayments and in substantiation of its denial has filed a copy of the bank statement indicating that it is up to date with its repayments on the bond.

[8] In this regard the applicant alleges that the respondent bound itself as surety and co-principal debtor with Charles Potgieter Investments (Pty) Ltd for due and punctual payment of all amounts due and payable by the said Charles Potgieter Investments (Pty) Ltd to the applicant in the sums of R10 000 000.00 in respect of account number 4046363654; R379 365.75 in respect of account number 8058537257 and R384 547.96 in respect of account number 8058537273.

[9] The applicant further alleges that on 15 October 2010 its attorneys addressed in terms of section 345 of the Act a written demand for payment of all amounts owing by the respondent in terms of the deed of suretyship and for payment thereof within a period of three weeks from delivery of the notice to the respondent. The letter of demand was delivered at the respondent's principal place of business on 18 October 2010.

[10] In its opposing affidavit the respondent admits having concluded a deed of suretyship with the applicant but denies that it is liable to the applicant for the payment of any amount pursuant thereto. In substantiation of its denial the respondent alleges that when the applicant brought the liquidation proceedings on 21 October 2010 a period of 10 days, within which it was required to make payment in terms of the letter of demand, had not expired. It therefore contends that the liquidation application was brought prematurely and that for this reason the applicant may not rely on the respondent's failure to respond to a section 345 statutory demand as a ground of its liquidation.

"Three weeks thereafter. - It is submitted that in the calculation of this period the date of service of the demand must be excluded (cf National Bank of South Africa Ltd v Leon Levson Studios Ltd 1913 AD 213 at 217-218; Versveld v SAR & H 1937 CPD 55 at 59; Re Lympne Investments Ltd [1972] 2 All ER 385 (Ch) at 387). The ground for winding-up under s 344 (f) read with s 345 (1) (a) does not exist until the whole of the three-week period, ie twenty-one days has expired; hence an application presented before such period has expired must be dismissed..."

[12] The applicant's case for liquidation based the respondent's failure to respond to a section 345 statutory demand must therefore fail as when it brought the winding-up application on 21 October 2010 the whole of the three weeks period had not expired. But this is not the end of the matter because this is not the only ground on which the applicant relies for the winding-up of the respondent. It also relies on the respondent's commercial insolvency. It alleges that the respondent is unable to pay its debts and that for this reason it must be wound-up. This is denied by the respondent.
[13] In its reply the applicant rejects the denial by the respondent that it is unable to pay its debts. The applicant alleges that on 22 October 2010 and in response to the letter of demand it addressed to the respondent in terms of section 345 the general manager of Charles Potgieter Group ("the Group"), which included both Charles Potgieter Investment (Pty) Ltd and the respondent, addressed a letter to the applicant's attorneys in which it admitted that Charles Potgieter Investments (Pty) Ltd and the respondent were liable to the applicant for the payment of the amounts claimed; that the respondent is a property owning entity whose only income was rental income and that it is the intention of Charles Potgieter Group to pay all its debts by way of selling properties. In the letter Charles Potgieter Group further pointed out that its assets are in excess of its liabilities and that it requested a period of six months within which to sell certain immovable property owned by the Group to enable them to pay the debts from the proceeds of such sales.

[14] The second intervening party has sought leave to intervene in this application on the basis that it is the creditor of the respondent. It alleges that the respondent is indebted to it in the sum of R16 143 603.59 which is far in access of the amount claimed by the applicant. It opposes the application on the ground that the second respondent is not commercially insolvent. It contends that the respondent is in a position to pay its debts. The second intervening party further alleges that the value of the respondent's assets exceed its liabilities by an amount of R7 925 969.84. It points out that in its normal cause of business the respondent remains a successful financial concern and in this regard it says:
"5.2 Op 21 April 2011 en in navolging van 'n transaksie met MSP Residential Property Fund (Pty) Ltd ter waarde van ongeveer R72 000 000.00, het het die bate en laste posisie van die Charles Potgieter
Group en ook veral die respondent aansienlik verander en sien die respondent se eiendomsportjefulte tans daaruit soos gereflekteer duer die schedule aangeheg as AANHANGSEL "2TBP 4" hiertoe. Bevesting van die registrasie van hierdie eiendomme van die respondent ter waarde van R43 175 329.00 word gevind in die skrywe van die oordrag prokureurs, gedateer 3 Mei 2011, hierby aangeheg, gemerk as AANHANGESEL "2TBP 
5".
5.3 Die gevolg van hierdie transaksie met MSP Residential Property Fund (Pty) Ltd (wie Mettle Property Group (Pty) Ltd se transaksie as kontrakteurende party vis-a-vis die Groep vervang het) is dat die respondent se laste van R63 995 659.42 verminder het na R20 820 330.16. Die netto batewaarde van die respondent se eiendomsportefulje, billik gewaardeer, beloop huidiglik R7 925 969.84 (R28 746 300.00 - R20 820 330.16). Weereens moet in aggeneem word date die dekkingsverbande, in die totale debrag van R9 720 000.00, wat ten gunste van ABSA Bank Beperk geregistreer is ter verseking van die borgstelling van R10 000 000.00, vir doeloendes van hierdie bereking as deel van die respondent se laste ingesluit is, nieteenstande die feit dat die hoofskuld huidiglik in dispuut is."

[15] The second intervening party further points out that the respondent's monthly rental income is R129 275.50 which far exceeds its monthly bond repayment obligation of R90 983.86. It accordingly asks for the dismissal of the application.

[18] It is correct that in terms of rule 18(6) a party who in its pleading relies upon a written contract must annex it to the pleadings. It is also correct that if a party fails to comply with any of the provisions of rule 18 his pleading is deemed to be an irregular step and the opposing party is entitled to have it set aside in accordance with rule 30. I am, however, of the view that in the present case in light of the respondent's admission that it concluded a deed of suretyship, upon which the applicant relies, the applicants' failure to annex a copy of the deed of suretyship, is not fatal to the application. With regard to the applicant's failure to annex a copy of a mortgage loan I am also of the view that its absence is not fatal to the applicant's application as the applicant in its reply has disavowed any reliance on a cause of action based on the respondent's indebtedness pursuant to a mortgage bond.

[20] I turn now to consider the respondent's defences to the application for its winding-up. In defending the application the respondent alleges that it has been discharged from the suretyship as a result of the applicant's prejudicial conduct towards the principal debtor. In support of its defence the respondent alleges that as part of Charles Potgieter Group ("the Group") it owns various properties and is also involved in property development and administration. It alleges that in an attempt to counter the severe financial setbacks which the Group had experienced as a consequence of the combined effect of the economic depression and the introduction of the National Credit Act ("the NCA") the Group developed a business plan which in effect guaranteed buyers of potential properties in developments of the Group, a rental income in respect of such properties for a period of five years. Furthermore the transaction would be structured on the basis that 10% of the purchase price would be delayed and only be payable upon the resale of the property or within five years of the date of transfer which ever occurs first.

[30] In explaining the contractual arrangement which Charles Potgieter Investments (Edms) Bpk had with the applicant the respondent has this to say in paragraph 5.15 of the answering affidavit:

5.15.1. ABSA Bank Beperk het die geld aan Charles Potgieter Investments (Edms) Bpk geleen en voorgeskiet op oortrokke rekening sodat Charles Potgieter Investments (Edms) Bpk sy normale besigheid, naamlik die ontwikkeling en verkoop van eiendomme kon doen en voorsit;
5.15.2. Te alle relevante tye en in die besonder ook by die aangaan van die ooreenkoms ten aansien van die oortrokke rekening, was dit in die kontemplasie van ABSA Bank en Charles Potgieter Investments (Edms) Bpk, en was dit as sodanig gei'nkorporeer as 'n stilswyende of/of gei'mpliseerde term van daardie ooreenkoms, dat ABSA Bank Beperk, in die gewone loop van besigheid, soos al die ander finansiele instellings, finansiering sal verskaf aan kopers van eiendomme van die Groep, en in die besonder ook die van Charles Potgieter Investments (Edms) Bpk, op die normale bankpraktyk en standaarde, welke beperk is tot:
(a) Die kopers se finansiele vermoe, dit is sy vermoe om die verbandverpligtinge na te kom; en
(b) Die bestaan van sekuriteit, in die vorm van die waarde van die onroerende eiendom.
5.15.3. In die omstandighede het daar:
(a) 'n Regsplig op ABSA Bank Beperk gerus om nie gewillige en daartoe instaat kopers van Charles Potgieter Investments (Edms) Bpk se eiendomme, teen billike en markverwante pryse, se finansiering af te keur op gronde nie verbandhoudend met die koper se finansiele vermoe en die bestaan van voldoende sekuriteit in die waarde van betrokke onroerende eiendom, nie. 
(b) 'n Regsplig op ABSA Bank Beperk gerus om hul nie skuldig te maak aan onredelike besigheidpraktyke en samespanninge deur ander finansiele instansies te oortuig om gewillige en daartoe instaat kopers van Charles Potgieter Investments (Edms) Bpk se eiendomme, verkoop teen billike en markverwante pryse, se finansiering af te keur op gronde nie verbandhoudend met die koper se finansiele vermoe en die bestaan van voldoende sekuriteit in die waarde van die onroerende eiendom, nie."

[33] In its reply the applicant defends its decision to reject the principal debtor's business model on the ground that it regarded its sale agreements as loaded transactions. In explaining its reason for treating them as such the applicant points out that it is a standard business practice for developers such as Charles Potgieter Investments that before the commencement of a residential property development the developer would ask the applicant to finance the sale of all the individual units in the development. The development which was involved in this matter is known as Burgundy Estate. The sections of the Estate which are involved are Villa Sienna and Zinfandel. The applicant further points out that for the purposes of such application, a detailed and comprehensive presentation is submitted to it and that the developer's standard contract of sale would form an important part of the presentation.

•

Any form of rental guarantee to the client
•	
•	Hotel suites (of any kind)
•	
•	Any form of lending on Fractional Ownership.
•	99 year decreasing terms lease.
IAA/e warrant that all the information l/we supplied is to the best of my/our knowledge and belief true and correct in all material respects and l/we am not aware of any other information which, should it become known to the bank, would affect the consideration of my/our application in any way.

IAA/e are aware that should information become available to the bank that could impact this application negatively; the bank has the right to withdraw the application/ approval without prior notice."

[37] The applicant says it was not prepared to condone these irregularities and to finance future transactions concluded on the basis thereof. It argues it was for these reasons that it decided to terminate the commercial relationship with the principal debtor.

[38] In an e-mail which the applicant sent on 28 October 2009 to one Ernest Albrecht, who had been appointed to market the units in Villa Sienna, the applicant explained why it terminated the commercial relationship with the principal debtor. It says:
1. ABSA can not find sufficient security value in the development, 'the asking prices are considered too high for current market' 
2. as you are aware, ABSA will not entertain irregular deal structuring
regarding end user finance ...
The marketing of this development is aimed at investor buyers (buy or rent) with delayed deposits been offer, the deposit only payable at the same time the lease agreement expires. The purchaser must then either refinance the deposit or sell the unit to pay the deposit. This format of deal structuring is not considered acceptable to the bank."

[40] The applicant further alleges that on 13 November 2009 it came to its attention that the principal debtor had been selling units in the Zinfadel section of Burgundy Estate in terms of a standard contract of sale which contained, in an addendum, a term to the effect that no deposit would be payable by the purchaser. Instead the deposit would be treated as a loan by the principal debtor to the purchaser. The addendum to the sale agreement provided for the payment of a loan by the purchaser to the seller.

[41]   Clause 2 of the addendum provided for the payment of the loan. Sub-clause

"We have implemented the following system: Purchase price: R799 000 in terms of pre-valuation of the bank and at which we have sold the properties for over the last two years. As the bank found value in our properties, no transaction can be seen as loaded transaction. We offered a delayed payment of 10 % of the purchase price re-payable either on the resale of the property or within 5 years from date of transfer, whichever comes first. Furthermore, as we have contracted with a rental management company, who currently manage 380 properties, to manage and rent the properties on behalf of purchasers if they wish to rent the properties for investment purposes. This is at a rate of R5 500 per month fixed for 5 years resulting in the managing company being cash positive over the term of the rental as the rental currently obtained, is an amount of R4 200 to R4 500 per month per unit with 10% escalation clauses."

[43]    The principal debtor denied that the scheme it introduced constituted irregular
transaction contending that:
"Throughout the world, structured transactions are the order of the day. It is commercially sound and part of the free market system which is safeguarded in South Africa by the democracy and our constitution. Our structure is not as referred to in the ABSA directive, a cashback in any way, or a deposit paid on behalf of a purchaser or a rental guarantee given by the developer. The definition of delayed payment is clear, the money is payable to the developer, if not paid, we will collect in terms of the agreement of sale and it cannot be seen as a loaded transaction. Furthermore, a management and rental company will rent the property from the purchaser on a basis of them being able to sub-let and furthermore to manage the property on behalf of the purchaser which again is normal commercial practise in South Africa. The abovementioned is a commercial structure based on a valuation of the bank meaning that the finance provided on a transaction is normally 90% to value resulting in the bank being secured and the developer having to wait for the balance of the purchase price. ABSA bank is now preventing us from structuring the balance of the purchase price even though they have security and are satisfied with the value of the property, which can only be seen as the bank preventing out property rights to be exercised, unilaterally changing the free market system into dictatorship and thirdly causing us irreparable harm and damage in preventing us doing business in a commercial sound way as conducted throughout the world in these difficult times."
[44] The respondent alleges that the applicant's refusal to provide bond finance to the principal debtor's prospective purchasers of its Units in accordance with the agreement with the applicant constituted breach of the agreement. It says as a result of breach the principal debtor suffered damages for the past and future loss of income in the sum of R50 067 250.00. These are the facts which, the respondent alleges, give rise to the principal debtor's counterclaim against the applicant and upon which the respondent relies for its defence.

[46] The nature of the defence to be raised by the principal debtor is an alleged counterclaim for damages for loss of income which the principal debtor allegedly suffered as a result of the applicant's breach of the contract between the principal debtor and the applicant when the applicant decided not to grant bond financing for the purchase of the principal debtor's units.

[50]   In my view the respondent's defence is flawed as it assumes that there is a relationship between the terms governing the grant and use of the overdraft facility and the terms regulating the grant of the bond finance. In my view the two transactions are separate and operate independently of each other. In order to succeed in its defence the respondent would have to show that it was an implied term of the overdraft agreement that in considering the bond finance the applicant was enjoined to consider not only the purchaser's financial situation but also the terms upon which the overdraft finance was made available to the principal debtor. I doubt very much that the applicant would have agreed to have such a term imported into the overdraft agreement to ensure its business efficacy. In my view an implied term pleaded by the respondent is not necessary to render the overdraft agreement fully functionally and as such it cannot be inferred. Accordingly I find that the facts which the respondent has alleged are not facts which, if proved at trial, would constitute a good defence to the applicant's claim. The respondent's defence should therefore fail.

[51] It is clear from the evidence that the financial model or business plan introduced by the principal debtor entailed a delayed payment of the deposit of the purchase price and a rental guarantee through a company associated with it. The principal debtor had not obtained the applicant's approval to market and sell units in Villa Sienna on the basis of the incorporation of the rental income guarantee to potential purchasers and in these circumstances the applicant was entitled to decline bond finance applications.

R16 144 387-41 by the respondent. It opposes the liquidation application on the grounds, firstly, that the respondent is not commercially insolvent; secondly, that the respondent's assets exceed its liabilities and thirdly, that it is not just and equitable that the respondent be wound-up.

[54] The discretion which the Court exercises is limited to a certain extent by the provision of section 413 (b) which provides that when the Court has regard to the wishes of the creditors it should consider the value of the respective creditor's claim. In this regard the second intervening party points out that the respondent is indebted to it in the amount of R16 144 387.41 which is far in excess of the applicant's claim of R10 763 872 .71.

[55] The second intervening party further alleges that the value of the respondent's assets exceeds its liabilities by an amount of R7 925 969.84 and that in its normal course of business the respondent remains a successful financial concern. It points out that in April 2011 it concluded transactions amounting to R43 175 329.00 and the value of 6 pending transfers is R4 104 900.00. The second intervening party further alleges the respondent's monthly rental income of R129 275.50 exceeds its monthly bond repayment obligations of R90 983.36 and that the respondent is not in arrears with its bond repayments. It contends that it is not just and equitable to wind-up the respondent as the effect of liquidation will reduce the value of its assets by about 60%.

[56] I am not inclined to, in the exercise of my discretion, postpone or stay the liquidation application in terms of section 354 (2) as there is no doubt in my mind that the respondent is commercially insolvent. It does not have liquid assets or readily realisable assets available to meet its liabilities. It is clear from the respondent's financial statements that if the respondent were to pay RIOmillion demanded by the applicant it would not be in a position to carry on normal trading. The respondent is a property owning company and a substantial amount of its assets consists of properties which are mortgaged to various financial institutions. The value of the investment property is indicated as R93 125 900.00 and the total amount owing under mortgage bonds is R61 829 516.00. It is also not clear whether other-creditors of the respondent are in support of the application for a stay and whether they will derive any benefit therefrom, and if so, what the nature of such benefit will be. In the circumstances the second intervening party's application should be dismissed.

The Order
[58]   In the result the following order is granted:
1. The respondent be placed under provisional liquidation in the hands of the Master of the High Court (Western Cape High Court) in terms of Act 61 of 1973.

2.1. the respondent should not be placed under final liquidation;
2.2. the costs of this application should not be costs in the liquidation.

3.1. By the Sheriff of the High Court on the respondent at its registered address being Haumann Rodger-Shiraz House, The Vineyards Office Estate, 99 Jip de Jager Road, Bellville;
3.2. By the Sheriff of the High Court on the South African Revenue Services;
3.3. Publication of this Order in one publication each "Die Burger" and the "Cape Times" newspapers in the language in which this order is granted; and
1	On the employees of the respondent, if applicable, and on all trade unions representing such employees.

5. The first and second intervening parties are ordered to pay the costs occasioned by their intervention including the costs consequent upon the employment of two counsel.

D H ZONDI
HIGH COURT JUDGE