JOHANNESBURG,
South Africa, September 2, 2020/ -- It is well documented that the
COVID-19 pandemic is taking its toll on businesses. Commerce in most
sectors are fighting to keep their doors open, grappling with creditors
to avoid winding up proceedings and its far-reaching implications.
In
the past few months our offices have experienced a significant increase
of queries relating to creditors threatening with liquidation
proceedings. In this article we explain what can be done in these
situations.
The impact of COVID-19
In a
recent survey by Stats SA, the national statistical service of South
Africa, conducted during the lockdown, they asked a total of 707
businesses in the formal sector how the current crisis is affecting
their business operations. In their response to the survey, the
businesses outlined the pandemic’s detrimental impact on turnover,
trading, workforce, imports and exports, purchases and most importantly,
the business survival.
The outcome is an unfortunate indicator
of Businesses being confronted with insolvency and many critics believe
the impact is much greater. Here are some of the key findings:
- Four in ten businesses conveyed that they cannot continue to operate:
42.4%
of the respondents indicated that they will not have the financial
resources to continue with their operations, with 54% confirming that
they will only be able to survive without a turnover for one to two
months.
- Almost half of responding businesses have temporarily closed their doors:
The hospitality, construction, manufacturing, trade and mining reported the highest percentages of temporary closure.
- Five in six businesses have experienced a drop in turnover:
85.4% of the participants indicated that during the period of March to April 2020, turnover was below the normal range.
- Almost two-thirds of businesses feel that this pandemic will be worse than the 2008/09 recession:
The
recent findings published by the National Dynamics Coronavirus Rapid
Mobile Survey, reported that approximately three million people lost
their jobs over the lockdown period in South Africa.
The pandemic
forced businesses to enter into unforeseeable and unplanned commercial
loan agreements in an attempt to keep the boat afloat and to settle
burdensome overheads. Creditors are now implementing legal proceedings
against their debtors to save their own businesses through relying
heavily on liquidation proceedings. But is this the right legal avenue
to follow?
Action of motion proceedings?
To
understand the possibility of a creditor instituting legal proceedings,
it is important to shortly address the difference between action and
application proceedings. A creditor can either institute legal
proceedings by application on notice of motion supported by affidavits,
or by summons initiating action or trial proceedings. Liquidation
proceedings are in the form of motion proceedings.
The most
salient distinction is that action proceedings envisage the presentation
of facts and evidence verbally in court during a trial, whereas
application proceedings envisage the presentation of facts and evidence
in affidavits that will be read by a judge before hearing arguments in
court on the issues raised in the affidavits.
It is imperative to
note that application proceedings are usually heard in court shortly
after their initiation, whereas action proceedings may be heard several
years after their initiation. Application proceedings are usually
disposed of more expeditiously than action proceedings. As a result,
application proceedings are generally cheaper and lead to a relatively
speedy resolution of disputes compared to action proceedings.
Liquidation
proceedings are the easy way out for creditors in need of expeditious
results. It may be for this reason that creditors are often advised by
their legal representatives to follow this route.
Section 345 Notice of the companies act
The
initiation of action proceedings usually commences with a letter of
demand, demanding debtors to make payment, following with a summons if
payment is not made.
Liquidation proceedings, initiated by
creditors, usually originates by instructing the Sheriff of the relevant
court to serve a Section 345 notice of the Companies Act on the
registered address of the Company. Section 345’s effectiveness lies in
the threat of a liquidation application based on the deeming provisions
relating to commercial insolvency.
It is trite law that
commercial insolvency, being the inability of a company to pay its debts
as it becomes due and payable, justifies the liquidation of a company.
When faced with a section 345 demand based on an amount that is
allegedly due and payable, the options of a company are limited. The
Company has 21 days to either pay, secure or settle the amount claimed
to the satisfaction of the creditor or alternatively, show on a balance
of probability that the alleged indebtedness is disputed on bona fide
and reasonable grounds.
If the company neglects to adequately
respond to a section 345 demand within 21 days it will run the risk of
being deemed to be unable to pay its debts and ultimately face a
liquidation application based on its deemed commercial insolvency.
If
a company elects to dispute the alleged indebtedness it must send a
detailed response within the three weeks allowed for under section 345
of the Act recording the basis upon which the alleged liability to pay
is disputed, mindful also of the legal principles that will apply, if a
liquidation application is to follow.
Liquidation proceedings are
not intended to be used as a means of deciding claims which are bona
fide and reasonably disputed. Its foundation lies in the fact that court
will not entertain factual disputes in application proceedings because
of the need to hear oral evidence to properly adjudicate the factual
disputes. An application for liquidation will thus fail if the alleged
liability to pay is disputed on bona fide and reasonable grounds.
Creditors
frequently exploit the shortcut of utilizing liquidation application
proceedings as debt collecting tool with an attempt to scare the debtor
to pay immediately. This is a common tactic used by legal
representatives to force debtors to pay unrealistic amounts purportedly
due.
It has crystallised in numerous of case law that the
unjustified attempt to liquidate is a clear abuse of court processes and
to be deprecated. Such application will be mala-fide and courts easily
grant punitive cost orders against such applicants.
Factual Dispute & Bona Fide Defence:
The
question to consider is whether the specific matter can be argued on
paper through application proceedings or if oral evidence and witnesses
are required to properly adjudicate the matter.
Legal
representatives of creditors should, before instituting liquidation
proceedings, consider if there is real, genuine and clear factual issues
at hand that cannot be realized on paper. Real issue of fact can be
described as real, genuine bona fide dispute of fact that can only exist
where courts are satisfied that the party who purports to raise the
dispute has in his affidavit seriously and unambiguously addressed the
facts said to be disputed.
Thus, it is imperative to ascertain and address the facts in dispute and the grounds upon which the dispute is founded.
Conclusion
To
circumvent liquidation, proactive engagement with creditors at the
early stages of financial distress is imperative. An open line of
communication and the right legal team to provide advise and guidance
are key.
Companies should immediately obtain legal assistance
when faced with an application for liquidation in terms of Section 345
of the Companies Act.
The legal representative will identify if
the application is a misuse of legal process or may even recommend
alternatives like business rescue proceedings to save your business.
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