Dangerous Good International SA (Pty) Ltd v JAG Freight (Pty) Ltd and Another [2024] ZAWCHC 169 (30 May 2024)

Is unlawful competition by a company a valid legal ground for granting a provisional winding-up order against that company?

Author

Ross Shepstone
June 26, 2024

This is an application by Dangerous Goods International SA (Pty) Ltd (the applicant) to place JAG Freight (Pty) Ltd (the first respondent) into provisional liquidation. The legal basis for the application is that it is "just and equitable" to wind up the first respondent under section 344(h) of the Companies Act 61 of 1973, alternatively under section 81(1)(c)(ii) of the Companies Act 71 of 2008.

The applicant seeks to wind up the first respondent on the basis that it is an alleged unlawful competitor of the applicant.

"The test for provisional liquidation applications is set out in Orestisolve (supra), where Rogers J (as he then was) made reference to the case of Kalil v Decotex (supra), and stated that, in an opposed application for provisional liquidation, the applicant must establish an entitlement to an order (for the provisional liquidation of the first respondent) on a prima facie basis, meaning that the applicant must show that the balance of probabilities on the affidavits is in its favour and that this would include the existence of the applicant's claim where such is disputed."

Mahomed AJ

Is unlawful competition by a company a valid legal ground for granting a provisional winding-up order against that company?

The applicant alleges that the first respondent is an unlawful competitor and that the second respondent (Jason Geysman), who was previously an employee of the applicant, used the first respondent to compete unlawfully with the applicant.

The applicant claims the first respondent owes it two debts:

a) Damages for unlawful appropriation of business opportunities; and

b) Repayment of R1,049,662.60 in "secret commissions".

The second respondent was an employee of the applicant from 2015-2023 and is the sole director/shareholder of the first respondent. The applicant alleges the second respondent breached his fiduciary duties by: Diverting business opportunities to the first respondent Interposing the first respondent between the applicant and its service providers to earn secret commissions.

The respondents dispute that these claims constitute valid grounds for liquidation and argue the debts are not properly established or quantified.

"In brief summary, the Badenhorst Rule states that even if the applicant establishes its claim on a prima facie basis, a court will ordinarily refuse an application for the winding-up of a company if the company bona fide disputes the existence of the alleged debt on which the applicant's claim is based on reasonable grounds."

Mahomed AJ

The key legal issues are whether:

Unlawful competition is a valid ground for liquidation;

The applicant has proper locus standi as a creditor; and

The requirements for provisional liquidation are satisfied.

The court held that unlawful competition alone is not a recognized legal ground for granting a winding-up order against a company. The applicant must establish a debt owed by the company to have locus standi to bring a winding-up application. For a provisional winding-up order, the applicant must establish its claim on a prima facie basis. However, even if this is done, the court will ordinarily refuse the application if the claim is bona fide disputed on reasonable grounds (the Badenhorst rule). To establish locus standi as a creditor, the applicant must show a sufficient vinculum juris (legal tie) to the company. This can potentially be done through the law of attribution - attributing the wrongful conduct of a director/controlling mind to the company itself.

A claim for disgorgement of secret profits lies against the fiduciary personally (e.g. the director), not against the company itself.

An unliquidated claim for damages is generally not sufficient to establish locus standi for a winding-up application. The claim needs to be quantified/liquidated. Winding-up proceedings should not be used to resolve disputed debts or enforce payment of debts bona fide disputed on reasonable grounds. This would constitute an abuse of process.

The key principle is that winding-up applications require a clear, liquidated debt owed by the company, and should not be used to resolve disputed claims or as a debt collection mechanism. The court will scrutinize the nature of the alleged debt and whether it is genuinely disputed before granting a winding-up order.

The case involved an application by Dangerous Goods International SA (Pty) Ltd to place JAG Freight (Pty) Ltd into provisional liquidation on the grounds that it was "just and equitable" to do so. The applicant alleged that JAG Freight, through its sole director Jason Geysman (who was a former employee of the applicant), had engaged in unlawful competition against the applicant by:

a) Diverting business opportunities from the applicant to JAG Freight; and

b) Interposing JAG Freight between the applicant and its service providers to earn secret commissions.

The court found:

a) Unlawful competition could potentially be a ground for winding-up if it resulted in a proven debt owed to the applicant.

b) The applicant had locus standi as a contingent/prospective creditor based on its claims against JAG Freight.

c) However, the applicant's claims for disgorgement of profits and unliquidated damages were bona fide disputed on reasonable grounds by the respondents. Based on the "Badenhorst Rule", which states that a winding-up order should not be granted if the alleged debt is bona fide disputed on reasonable grounds, the court refused to grant the provisional winding-up order.

"Even though the applicant established its entitlement to claim damages on a prima facie basis, these claims against the first respondent (disgorgement of profits and an unliquidated claim for damages), were both disputed bona fide on reasonable grounds. In these circumstances, based on the Badenhorst Rule, a court will ordinarily refuse a provisional liquidation application, and I intend to do so."

Mahomed AJ

The application was dismissed with costs awarded to the respondents.

Here are the key cases relied on by the court in its reasoning process:

Consolidated News Agency (Pty) Ltd (in liquidation) v Mobile Telephone Network (Pty) Ltd [2010] 2 All SA 9 (SCA).

Commissioner for Inland Revenue v Richmond Estates (Pty) Ltd 1956 (1) SA 602 (AD)

Orestisolve (Pty) Ltd t/a Essa Investments v NDFT Investment Holdings (Pty) Ltd 2015 (4) SA 449 (WCC)

Sime Darby Hudson and Knight (Pty) Ltd v Lerena [2018] 4 All SA 446 (WCC).

Gillis-Mason Construction Company v Overvaal Crushes 1971 (1) SA 524 (TPD).

Irvin and Johnson Ltd v Basson 1977 (3) SA 1067 (TPD).

Kleynhans v Van der Westhuisen 1970 (2) SA 742 (AD).

Imobrite (Pty) Ltd v DTL Boerdery CC [2022] ZASCA 67.

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