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A high court judgment has drawn a sharper line around the use of liquidation in South Africa’s property sector by ruling that institutional creditors cannot use winding-up proceedings as a tactical debt collection tool.The court found that such proceedings should not be used to force the sale of valuable property assets if a developer is fundamentally solvent but experiencing temporary liquidity constraints.Nearly four weeks ago, the high court in KwaZulu-Natal dismissed an application to liquidate Schoonspruit Development over a disputed R15.5m debt, finding that the property developer remained commercially solvent despite short-term liquidity pressures. The precedent emerged from a dispute between Great Lakes Consultancy and property developers Schoonspruit Development and Agri Industria after commercial lender Business Partners sought to liquidate the companies over an outstanding debt of R15.5m.The court held that liquidation cannot be used as a debt-collection mechanism if a company has substantial assets capable of meeting its obligations, reinforcing that winding-up is a remedy of last resort rather than a tactic to force the disposal of property assets.The ruling is likely to resonate across the property industry, in which developers often carry big land holdings that take years to unlock but are increasingly under pressure from higher borrowing costs and tighter credit conditions.“The liquidation remedy was never intended to be weaponised as a tactical debt-collection shortcut for institutional lenders. This judgment reaffirms that liquidation is an extraordinary remedy, not a commercial strategy to force the sale of assets where a company is fundamentally solvent,” said Johan Victor, principal attorney at Johan Victor Attorneys & Litigators, who represented the applicants.The liquidation remedy was never intended to be weaponised as a tactical debt-collection shortcut for institutional lenders.— Johan VictorVictor said that if a business is fundamentally asset rich and its financial strain stems from project timing and cyclical liquidity pressures, forcing a fire sale destroys the value of the business as a going concern.Victor said the ruling reinforces the purpose of South Africa’s business rescue framework.“This judgment sends an unambiguous signal to the commercial banking and financial sectors. South African courts will robustly intervene to protect equity, safeguard infrastructure delivery and ensure equitable treatment for all stakeholders through the proper deployment of business rescue.”Judge Pieter Bezuidenhout ordered the companies be placed under business rescue, preserving a combined land portfolio independently valued at about R575m.The figures before the court illustrated the imbalance between the debt being pursued and the value of the underlying assets. Schoonspruit Development owns land valued at R96.3m, while Agri Industria’s portfolio is valued at R478.9m. Together, the companies’ liabilities amounted to about R42.4m.In his judgment, Bezuidenhout found that even if the court accepted Business Partners’ substantially lower valuation of the assets, the companies would still retain a big equity surplus after settling all liabilities.That finding goes to the heart of an issue confronting many property developers. These businesses frequently own high-value land banks that generate little immediate income while infrastructure is installed, approvals are secured and properties are marketed. Though balance sheets remain strong, cash flow can tighten before projects begin generating sales.The judgment suggests courts will distinguish between developers suffering temporary liquidity constraints and those that are commercially insolvent.Victor said that distinction is critical for the property market.“Property development is, by its nature, capital intensive. Cash flow and asset value do not always move together. A temporary liquidity squeeze should not automatically justify destroying long-term value through liquidation.”He said liquidation in such circumstances risks harming more than the developer.“When development land is forced into distressed sales, value is destroyed for shareholders, creditors, municipalities awaiting infrastructure delivery and ultimately the broader economy.”The judgment also halted concurrent liquidation proceedings after the business rescue application triggered the statutory moratorium. Court papers further alleged that while the application was pending, Business Partners and its legal representatives sought to transfer three serviced and subdivided properties to another entity. The liquidation proceedings were subsequently adjourned indefinitely.Bezuidenhout also ordered Business Partners to pay the costs of the application on a punitive scale, including the costs of two counsel.Business Day
