A letter of demand in terms of section 345 of the Companies Act No. 61 of 1973 (the “Old Act”) is a powerful tool for debtors who are owed an amount of money exceeding R100 (one hundred Rand) (“345 Letter of Demand”), however, creditors should be aware of when and how to utilise a 345 Letter of Demand, as its use is not appropriate in all circumstances.
It is noted that in this article, reference is made to the Old Act, this is so as in terms of section 9 of schedule 5 of the Companies Act No. 71 of 2008, chapter 14 of the Old Act continues to apply in respect of the winding-up and the liquidation of companies.
This article unpacks what constitutes a 345 Letter of Demand, the effect of sending a 345 Letter of Demand in the normal course and the effect of sending a 345 Letter of Demand to a debtor when such debtor has a reasonable dispute in relation to the debt and the consequences thereof.
Section 345 of the Old Act:
In terms of section 345 of the Old Act, a company is deemed to be unable to pay its debts if a creditor, by cession or otherwise, to whom the company is indebted in an amount of R100 (one hundred Rand) or more which amount is due –
- has served on the company at its registered office, a demand requiring the company to pay the sum so due; and
- the company has for 3 (three) weeks thereafter neglected to pay the sum or secure or compound for the sum to the reasonable satisfaction of the creditor.
Effect of a 345 Letter of Demand:
In terms of section 344 of the Old Act, a company may be wound up by the Court if such company is unable to pay its debts as described in section 345 of the Old Act.
Upon the lapsing of the 3 (three) weeks and the company having neglected to pay the outstanding debt or to secure or compound for the sum to the reasonable satisfaction of the creditor, the creditor who issued the 345 Letter of Demand may apply to court to have the company wound up.
This places considerable pressure on the company to pay its debts, as failing to do so could lead to the creditor launching a winding-up application to the relevant court and, if successful, the company being wound-up.
Misuse of 345 Letters of Demand:
The case of Badenhorst v Northern Construction Enterprises Proprietary Limited 1956 (2) SA 346, sets out the “Badenhorst rule” which states that winding-up proceedings should not be resorted to as a means of enforcing the payment of a debt, the existence of which is disputed on bona fide and reasonable grounds. This principle is not dependent on an actual abuse of the court process and was reaffirmed in the supreme court of appeal in the case of Freshvest Investments (Pty) Ltd v Marabeng Proprietary Limited (1030/2015)  ZASCA 168. Creditors should therefore refrain from sending 345 Letters of Demand to debtors when a debt is reasonably disputed.
Section 347(1A) of the Old Act provides that whenever the court has satisfied itself that an application for the winding-up of a company is an abuse of the court’s procedure or is malicious or vexatious, the court may allow the company to prove any damages which it may have sustained as a result of the application and award compensation to the company as the court deems fit. In addition to this, the applicant may also be exposed to a punitive cost order in the winding-up proceedings should it be found by the court that the application constitutes an abuse of the court process.
When it is appropriate to make use of a 345 Letter of Demand:
345 Letters of Demand are powerful tools to induce the payment of a company’s debts as they place considerable pressure on the receiving company to pay its debts to avoid an application to be wound-up.
Notwithstanding this, when a debt is reasonably disputed, creditors should refrain from misusing the process, by sending 345 Letters of Demand to their debtors and thereafter proceeding with winding-up proceedings on the basis thereof, as this would expose such creditor to an award for compensation in favour of the company and/or a punitive cost order against the creditor for abuse of the court process.
It would therefore be appropriate for a creditor to make use of a 345 Letter of Demand when there is an existing debt which amounts to R100 (one hundred Rand) or more owing to such creditor and when such debt is not reasonably disputed.
VDMA’s team of experts is at your disposal for any assistance with any claims for outstanding amounts that you or your business may require.
Published 10 March 2023