Absa Bank Limited v Hammerle Group (Pty) Ltd

ABSA Bank advanced two loans to Hammerle Group (Pty) Ltd: (1) a R4 million loan under a loan agreement dated 6 December 2007 secured by a notarial bond, repayable in 60 monthly instalments of R96 045.70; and (2) a R10 million shareholders' loan under a Subscription and Shareholders Agreement dated 19 November 2007, also repayable in 60 monthly instalments. By 31 May 2011, the respondent owed R21 005 197.46 in total - R4 693 437.78 under the loan agreement and R16 311 759.68 under the subscription agreement. ABSA issued demands for payment in June 2011 and subsequently applied to wind up the respondent. The respondent raised two defences: (1) that the loan agreement debt had prescribed; and (2) that the shareholders' loan had been subordinated to other creditors (R2 205 657.07 owed) under clause 11.3.3 of the subscription agreement and was therefore not yet due and payable. The North Gauteng High Court dismissed the winding-up application on both grounds.

• Whether a creditor whose debt has been subordinated to other creditors can institute winding-up proceedings as a contingent creditor under section 346 of the Companies Act 61 of 1973
• Whether correspondence containing admissions of insolvency made during settlement negotiations is admissible in winding-up proceedings despite being privileged
• Whether the respondent's acknowledgement of indebtedness interrupted the running of prescription under section 14(1) of the Prescription Act 68 of 1969
• Whether the court should exercise its discretion to grant only a provisional winding-up order where prescription and subordination issues are raised

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.

The binding legal principles established are: (1) A creditor whose debt has been subordinated to other creditors is a contingent creditor within the meaning of section 346(1)(b) of the Companies Act 61 of 1973 and is entitled to institute winding-up proceedings against the debtor company, even though the subordinated debt is not immediately due and payable. (2) Admissions of insolvency made by a debtor, even during privileged settlement negotiations or on a 'without prejudice' basis, are admissible in winding-up proceedings as an exception to the general rule of privilege. This exception exists because liquidation proceedings involve the public interest, create a concursus creditorum, and protect the trading public from dealing with companies trading while insolvent - public policy requires such admissions not be excluded. (3) An express or tacit acknowledgment of liability by a debtor interrupts the running of prescription under section 14(1) of the Prescription Act 68 of 1969.

The court noted that it is the prerogative of an applicant creditor to institute liquidation proceedings even though the applicant might not be able to successfully prove a claim before the liquidator. The court also drew an analogy (citing Absa Bank Ltd v Chopdat) between an individual seeking to protect disclosure of a criminal threat on the basis of privilege and a debtor objecting to disclosure of an act of insolvency on the same basis - both must yield to public policy considerations. The court distinguished the cases of Jhatam v Jhatam and Santino Publishers CC v Waylite Marketing CC regarding the exercise of discretion to grant provisional versus final winding-up orders where prescription is raised, noting those cases involved different factual circumstances where prescription was either agreed or genuinely disputed.

This case is significant in South African insolvency law for establishing important principles regarding: (1) the standing of contingent creditors (including subordinated creditors) to institute winding-up proceedings under section 346 of the Companies Act 61 of 1973; (2) the exception to without prejudice privilege for admissions of insolvency in liquidation proceedings based on public policy considerations and the protection of the concursus creditorum; (3) the application of section 14(1) of the Prescription Act regarding interruption of prescription through acknowledgment of debt; and (4) the proper exercise of judicial discretion in granting final versus provisional winding-up orders. The judgment reinforces that liquidation proceedings are not merely private litigation but involve broader public interests in protecting creditors and the trading public from dealing with companies trading while insolvent.