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September 05, 2019

Threatening sequestration or winding-up to force payment

Some attorneys believe that the threat of sequestration or winding up will force a debtor into submission. Take care, as this may justify a special order for costs.

s15 of the Insolvency Act reads:

Compensation to debtor if petition is an abuse of court’s procedure or malicious or vexatious.—Whenever the court is satisfied that a petition for the sequestration of a debtor’s estate is an abuse of the court’s procedure or is malicious or vexatious, the court may allow the debtor forthwith to prove any damage which he or she may have sustained by reason of the presentation of the petition and award him or her such compensation as it may deem fit.

Similarly, a winding-up application will be refused where a creditor’s application is an abuse of process, e.g. where the application is brought to bring pressure on the debtor to obtain payment of money to which the applicant is not entitled or is bona fide disputed.

In Walter McNaughtan (PtyLtd v Impala Caravans (PtyLtd where the company had been “put to needless expense in resisting [the] application although it had expressly warned the applicant of the basis on which the application would be opposed”, the court, when dismissing the application, held that the “conduct of the applicant in nevertheless persisting in a futile application which was doomed to failure from the beginning” and justified a special order for costs.

Basically, the court has an inherent jurisdiction to prevent abuse of its process and, even where a ground for winding-up is established, the court will not grant a winding-up order where the sole or predominant purpose of the applicant is mala fide and with an ulterior or improper purpose, or to harass or oppress the company or to fraudulently defeat its rights.
Having said that, where proper grounds for a winding-up are established, the court ought not to exercise its discretion against the applicant unless it appears that the improper and ulterior purpose is at least the predominant purpose motivating the applicant.

The court could even grant an interdict restraining a person from bringing or proceeding with, or dismiss, an application for the winding-up of a company if that application is or would be an abuse of the process of the court. The court’s jurisdiction to grant an interdict or dismiss the application should be exercised with great circumspection and with regard to the justice of the case on each side.