THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Case No: 205/14
Reportable

In the matter between:

ABSA BANK LIMITED
APPELLANT

and

HAMMERLE GROUP (PTY) LTD
RESPONDENT
(Formerly Clidet No 773 (Pty) Ltd)
(Registration number: 2007/018552/07)

Neutral citation:
Absa Bank v Hammerle Group (205/14) [2015] ZASCA
43 (26 March 2015)
Coram:
Brand, Maya, Cachalia, Mhlantla and Mbha JJA
Heard:
13 March 2015
Delivered:
26 March 2015
Summary:
Winding-up – where debt giving rise to application for winding-
up has been subordinated to other creditors of the respondent – applicant is a
contingent creditor and is entitled to institute winding-up proceedings against
the respondent – admission of insolvency – exception to what would
otherwise be privileged communication.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from the North Gauteng High Court, Pretoria (Mabuse J) sitting as
court of first instance):

1 The appeal is upheld with costs, including the costs of two counsel.
2 The order of the North Gauteng High Court, Pretoria, is set aside and
substituted with the following order:
'(a) The respondent is liquidated in the hands of the Master of the High Court.
(b) Costs of the application, including the cost of two counsel, will be costs in
the winding-up of the respondent.'

______________________________________________________________

JUDGMENT
______________________________________________________________

Mbha JA (Brand, Maya, Cachalia and Mhlantla JJA concurring)

[1] The appellant launched an application in the North Gauteng High
Court, Pretoria for the winding-up of the respondent on the ground, inter alia,
that the respondent was commercially insolvent and unable to pay its debts as
envisaged in s 345 of the Companies Act 61 of 1973 (the Act). The court a
quo (per Mabuse J) dismissed the application on the basis that (a) part of the
debt giving rise to the application was extinguished by prescription; and (b)
the remainder thereof was not yet due and payable as it had, by agreement
between the parties, been subordinated to the debts of other creditors of the
respondent. This appeal against those findings is with leave of the court a
quo.

[2] The relevant background to the dispute can be summarised as follows.
Pursuant to a loan agreement concluded between the parties on 6 December

2007 (the loan agreement), the appellant advanced a loan of R4 million, which
together with interest thereon would be repayable in 60 instalments of
R96 045,70 from 1 January 2008. The purpose of the loan was to finance the
respondent and its business. The indebtedness arising under this loan
agreement was secured by a Special and General Notarial Covering Bond
(the Bond) which was registered by the Registrar of Deeds in favour of the
appellant on 13 December 2007. In terms of clause 2 of the bond, the
respondent bound certain of its movable property specially and generally as
security for its obligations to the appellant.

[3] On 19 November 2007 the appellant, the respondent, Mfiso
Investments (Pty) Ltd and Uwe Christian Hammerle concluded a Subscription
and Shareholders Agreement (the subscription agreement) in terms of which
the appellant loaned and advanced to the respondent the sum of R10 million.
The purpose of this loan, which took on the form of a shareholders loan, was
to enable the respondent to fund the acquisition of the respondent's business
and assets. By virtue thereof, the appellant acquired a minority shareholding
in the respondent. In terms of the subscription agreement the loan was
repayable in 60 (sixty) equal monthly instalments consisting of the capital
repayment amount and interest and became repayable immediately under
certain circumstances, for example, if the respondent breached any material
term or condition of the agreement.

[4] The appellant averred in the founding affidavit that as at 31 May 2011,
the respondent was indebted to it in the total amount of R21 005 197,46. This
amount comprised of (a) R4 693 437,78 owing under the loan agreement and
the notarial bond, and (b) R16 311 759,68 arising from the subscription
agreement. The respondent denied in the answering affidavit that it was
indebted to the appellant and raised two defences. First, that the appellant's
claim under the loan agreement had prescribed and consequently that the
debt had become extinguished. Secondly, that the loan advanced to the
respondent in terms of the subscription agreement was in terms of clause
11.3.3 thereof subordinated in favour of the respondent's creditors and as the

respondent was indebted to its creditors in the amount of R2 205 657,07, the
amount claimed by the appellant was not due and payable.

[5] In so far as the defence based on the subordination clause is
concerned, reliance was placed on a judgment dated 15 October 2010 under
case number 14203/2010 (the first liquidation application). In his judgment
Blieden J dismissed the appellant's application to wind-up the respondent,
inter alia, on the basis that the amount claimed under the subscription
agreement was not due and payable as it was subordinated to other creditors
to whom the respondent owed R452 513,28 in total, at the time. The
respondent averred accordingly that regard being had to the subordination
clause in the subscription agreement, the issue as to whether or not any
amounts were due and payable under this agreement were res judicata and
could not be raised again in these pleadings.

[6] The denial in the papers that the amount owing at the time of the
institution of the application and consequently that the appellant was not a
creditor as was required by the Act, was resolved at an early stage of the
hearing on appeal. Counsel for the respondent conceded at the outset that
the appellant was a creditor of the respondent, albeit a contingent creditor.
Moreover, that the respondent was commercially insolvent and unable to pay
its debts as envisaged in s 345 of the Act. He then contended that this court,
in the exercise of its discretion, should nonetheless grant a provisional order
only, instead of a final winding-up order. I shall revert to this aspect in due
course.

[7] In my view all those concessions were well made. With regard to the
debt under the subscription agreement, the respondent admitted both in its
answering affidavits in the first liquidation application and in this case, that it
owed creditors R452 513,28 and which at the time of the launching of the
current proceedings, had escalated to R2 205 657,07. Although the
appellant's contention in the founding affidavit, that the respondent was clearly
unable to pay its debts was only met with a bare denial, no iota of evidence

was presented to prove the contrary or that any claims or debts of the
creditors were being met.

[8] On 4 July 2011 the appellant's attorney of record addressed a letter of
demand to the respondent for payment of the arrears under the subscription
agreement within 30 days of receipt of the letter, failing which the entire
capital and interest outstanding would immediately become due and payable.
The respondent's attorney replied to the demand on 5 July 2011 stating quite
significantly, that the respondent would tender payment only if there were
surplus funds available subject to the subordination clause contained in the
subscription agreement.  The respondent's indebtedness to the appellant in
the amount claimed was not disputed. This, in my view, was a clear admission
of both the respondent's liability and its inability to pay its debts.

[9] In my view the appellant is, in light of the subordination clause in the
subscription agreement, a contingent creditor of the respondent in terms of
s 346 of the Act.1 The appellant was accordingly well within its right to have
applied, on this ground alone, for the winding-up of the respondent.2 It follows
accordingly that the court a quo erred (as did Blieden J in the first liquidation
application) when it refused to wind-up the respondent on the basis that the
debt, specifically under the subscription agreement, was not as yet due and
payable, because it had been subordinated to other creditors of the
respondent.

[10] I now turn to consider the respondent's liability to the appellant with
regard to the loan agreement and the plea of prescription raised by the
respondent. On 7 June 2011 the appellant's attorney despatched a notice in
terms of s 345(1) of the Act calling upon the respondent to settle all
outstanding arrears in terms of the aforesaid agreement within three weeks

1 Section 346(1) of the Companies Act 61 of 1973 provides:
'(1) An application to the Court for the winding-up of a company may, subject to the provisions
of this section, be made
(a)  . . . .
(b) by one or more of its creditors (including contingent or prospective creditors);
. . . .'
2 Premier Industries Ltd v African Dried Fruit Co (1950) Ltd 1953 (3) SA 510 (C) at 513D-F.

after delivery of the aforesaid notice, failing which the appellant would apply
for the liquidation of the respondent.

[11] On 24 June 2011 the respondent replied stating that '[o]ur client has
always indicated that it would like to make [a] settlement proposal . . .'. It also
stated in the same letter that '[n]otwithstanding the aforesaid, please note that
our client has been struggling to turn the business around. However, our client
believes that it may in due course turn the business around by making it
profitable. At this stage our client has not been able to make any meaningful
profit in the business'.

[12] In my view the contents of this letter again serve, not only as an
unequivocal acknowledgement of indebtedness by the respondent in the
amount claimed under the loan agreement, to the appellant. It also shows that
the respondent is unable to pay its debts and, is in consequence,
commercially insolvent. The respondent contended that the letter was written
with a view of settling a dispute and was as such inadmissible. It accordingly
applied that the letter be struck out, which application was granted. Although
the offending paragraphs, which reflected the settlement proposals, were
blocked out, the respondent's argument that the entire document was
rendered inadmissible was upheld.

[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 is 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,3
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.'4

[14] Moreover, in this case, the unequivocal admissions of liability by the
respondent were not even made in the course of any negotiations, but in
response to a letter of demand for payment of the arrear instalments due in
terms of the loan agreement. The court a quo accordingly erred in granting
the application to strike out reference to the respondent's admissions of
liability.

[15] The further consequence of my finding that the respondent
unequivocally admitted its liability to the appellant of the amount claimed in
the letter of 24 June 2011, is that the plea of prescription cannot be sustained.
This is because such admission would have interrupted the running of

3 Absa Bank Ltd v Chopdat 2000 (2) SA 1088 (W) at 1092H-1094F.
4 Lynn & Main Inc v Naidoo 2006 (1) SA 59 (N) paras 23-24 which affirmed the principle
enunciated in Chopdat.

prescription, if any.5

[16] As alluded to earlier, counsel for the respondent, having conceded at
the outset that the respondent was insolvent and that the appellant had locus
standi, sought to persuade us to exercise our discretion and not grant a final
winding-up order but rather to grant a provisional winding-up order against the
respondent. He reasoned thus. The prescription point raised by the
respondent remains a live issue which could succeed on the return day, and
the effect of the subordination clause in the subscription agreement is that if
the respondent is finally liquidated the appellant's claim will die a natural
death. This argument cannot, in my view, be sustained as it is the appellant's
prerogative to institute the liquidation proceedings even though it might not be
able to successfully prove a claim before the liquidator. With regard to the
request for a provisional winding-up order, he sought to place reliance on the
decisions in Jhatam v Jhatam6 and Santino Publishers CC v Waylite
Marketing CC,7 where a similar point about prescription of a debt was raised.

[17] In my view these cases are clearly distinguishable. In Santino
Publishers both counsel agreed that the appellant's claim had become
prescribed. The Full Court accordingly held that it should not, in the exercise
of its discretion, grant an application for a (final) winding-up of the respondent
on a claim which had prescribed. Furthermore, the application for the winding-
up of the respondent in that case had since become academic. Similarly, in
Jhatam, Holmes J in the exercise of his discretion, felt constrained to grant an
order for compulsory sequestration on a claim which could well turn out to be
unenforceable on the ground that the petitioning creditor's claim had become
prescribed.

[18] In light of my finding that the respondent unequivocally acknowledged
its indebtedness to the appellant and thus interrupted prescription, it follows

5 Section 14(1) of the Prescription Act 68 of 1969 reads:
'(1) The running of prescription shall be interrupted by an express or tacit acknowledgement
of liability by the debtor.'
6 Jhatam v Jhatam 1958 (4) SA 36 (N) at 38C-G.
7 Santino Publishers CC v Waylite Marketing CC 2010 (2) SA 53 (GSJ) at 58A-C.

that the point pertaining to prescription being still alive, is clearly not good.
The court a quo accordingly further misdirected itself in refusing to wind-up
the respondent on the basis that the debt arising from the loan agreement,
had become prescribed.

[19] In the circumstances I make the following order:
1 The appeal is upheld with costs, including the costs of two counsel.
2 The order of the North Gauteng High Court, Pretoria, is set aside and
substituted with the following order:
'(a) The respondent is liquidated in the hands of the Master of the High Court.
(b) Costs of the application, including the cost of two counsel, will be costs in
the winding-up of the respondent.'
_____________________
B H MBHA
JUDGE OF APPEAL

APPEARANCES:

For appellant:
F H Terblanche SC

H R Fourie

Instructed by:

Tim du Toit Attorneys, Johannesburg

Phatshoane Henney Attorneys, Bloemfontein

For respondent:
S L Joseph SC

H J Fischer

Instructed by:

DMS Attorneys, Sandton

Molefi Thoabala Attorneys, Bloemfontein

THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

FROM

The Registrar, Supreme Court of Appeal

DATE

26 March 2015

STATUS

Immediate

Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

Absa Bank Limited v Hammerle Group (Pty) Ltd
(205/2014) [2015] ZASCA 43 (26 March 2015)
________________________________________________________________________________

Today the Supreme Court of Appeal (SCA) delivered a judgment upholding the appeal by the
appellant, Absa Bank Ltd and set aside the order of the court a quo.

The issue before the SCA was whether the court a quo erred in dismissing the winding-up
application of the respondent on the ground that the debt giving rise to the application was
extinguished by prescription and the remainder thereof of was not yet due and payable.

Pursuant to a loan agreement concluded between the parties on 6 December 2007, the appellant
advanced a loan of R4 million to the respondent, which together with interest thereon would be
repayable in 60 instalments of R 96 045,70 from 1 January 2008. The purpose of the loan was to
finance the respondent and its business. The loan agreement was secured by a Special and General
Notarial Covering Bond which was registered by the Registrar of Deeds.

On 19 November 2007 the appellant, the respondent, Mfiso Investments (Pty) Ltd and Uwe Christian
Hammerle concluded a Subscription and Shareholders Agreement (the subscription agreement) in
terms of which the appellant loaned and advanced to the respondent the sum of R10 million. The
purpose of this loan, which took on the form of a shareholders loan, was to enable the respondent to
fund the acquisition of the respondent's business and assets. By virtue thereof, the appellant
acquired a minority shareholding in the respondent. In terms of the subscription agreement the loan
was repayable in 60 (sixty) equal monthly instalments consisting of the capital repayment amount
and interest and became repayable immediately under certain circumstances. On 31 May 2011 the

respondent was indebted to the appellant in the total amount of R 21 005 197,46, the respondent
denied that it was indebted to the appellant and claimed that the appellant’s claim under the loan
agreement prescribed and consequently the debt had become extinguished. The debt under the
subscription agreement was subordinated to other creditors of the respondent.

On appeal, the SCA held that the appellant was well within its right to have applied for the winding-
up of the respondent and that the court a quo erred when it refused to wind-up the respondent on
the basis that the debt was not yet due and payable, as it had been subordinated to other creditors
of the respondent.

The SCA found that the respondent unequivocally acknowledged its indebtedness to the appellant in
the letter of 24 June 2011 and this interrupted prescription.  This unequivocal admission of liability by
the respondent was made in response to a letter of demand for payment of the arrear instalments
due in terms of the loan agreement.  The SCA held further that the court a quo clearly misdirected
itself in refusing to wind-up the respondent on the basis that the debt arising from the loan
agreement had become prescribed.

--- ends ---