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ANALYSIS: Liquidation and winding up of companies

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How do you wind up and liquidate a company that is factually solvent? By Norman M Mzizi

The law of insolvency is regulated mainly by the Insolvency Act 24 of 1936, which remains the main source of South African insolvency law.1 The Insolvency Act defines an insolvent as a debtor whose estate is under sequestration and includes such a debtor before the sequestration of his estate, according to the context.2 However, insolvency is not defined in the Act.

So the question is, how do you wind up and liquidate a company that is factually solvent, that is, whose assets exceed its liabilities and which is commercially insolvent? Do you apply both the Companies Act 71 of 2008 (new Companies Act) and the Companies Act 61 of 1973 (old Companies Act), or do you apply a portion of both?

In answering these questions, it is necessary first to examine the relevant statutory provisions.

Normally creditors do not have knowledge of the assets and liabilities of a company that owes them money. They are not expected to continually confirm whether their debtor is factually solvent before they can consider the sequestration process. Section 8 of the Insolvency Act lists a number of acts of insolvency on which grounds the creditor may apply for the sequestration of the debtor when the debtor’s assets are not sufficient to satisfy all claims. According to section 8, a debtor commits an act of insolvency:

  •  If he leaves the Republic or being out of the Republic remains absent therefrom, or departs from his dwelling or otherwise absents himself, with intent by so doing to evade or delay the payment of his debts
  • If a court has given judgment against him and he fails, upon the demand of the officer whose duty it is to execute that judgment, to satisfy it or to indicate to that officer disposable property sufficient to satisfy it, or if it appears from the return made by that officer that he has not found sufficient disposable property to satisfy the judgment
  • If he makes or attempts to make any disposition of any or his property which has or would    have the effect of prejudicing his creditors or of preferring one creditor above another
  • If he removes or attempts to remove any of his property with intent to prejudice his creditors or to prefer one creditor above another
  • If he makes or offer to make any arrangement with any of his creditors for releasing him  wholly or partially from his debts
  • If after having published a notice of surrender of his estate which has not lapsed or been withdrawn, he makes any disposition of any or his property which has or would have the effect of prejudicing his creditors or of preferring one creditor above another  or lodges a statement which is incorrect or incomplete in any material respect or fails to apply for the acceptance of the surrender of his estate on the date mentioned in the aforesaid notice as the date on which such application is to be made
  • If he gives notice in writing to any one of his creditors that he is unable to pay any of his debts
  • If, being a trader, he gives notice in the Gazette in terms of voidable sale of business by transferring in terms of a contract any business belonging to him, or to the goodwill of such business, or any goods or property forming part thereof (except in the ordinary course of that business or for securing the payment of a debt) and is thereafter unable to pay all his debts.3Part G of Chapter 2 of the Companies Act of 2008 makes provision for section 79, which                reads as follows:

    “Winding-up of solvent companies

    “(1) A solvent company may be dissolved by –

    (a)  voluntary winding-up initiated by the company as contemplated in section 80, and  conducted either –

    (i)  by the company; or

    (ii) by the company’s creditors, as determined by the resolution of the company; or

    (b) winding-up and liquidation by court order, as contemplated in section 81.

    “(2) The procedures for winding-up and liquidation of a solvent company, whether voluntary or by court order, are governed by this Part and, to the extent applicable, by the laws referred to or contemplated in item 9 of Schedule 5.

    “(3) If, at any time after a company has adopted a resolution contemplated in section 80, or after an application has been made to a court as contemplated in section 81, it is determined that the company to be wound up is or may be insolvent, a court, on application by any interested person, may order that the company be wound up as an insolvent company in terms of the laws referred to or contemplated in item 9 of Schedule 5.3”

    Item 9 of Schedule 5 of the Companies Act 2008 provides as follows:

    “Continued application of previous Act to winding-up and liquidation

    “(1) Despite the repeal of the previous Act, until the date determined in terms of sub-item (4), Chapter 14 of that Act continues to apply with respect to the winding-up and liquidation of companies under this Act, as if that Act had not been repealed subject to sub-items (2) and (3).

    “(2) Despite sub-item (1), sections 343, 344, 346 and 348 to 353 [of the Companies Act 61 of 1973] do not apply to the winding-up of a solvent company, except to the extent necessary to give full effect to the provisions of Part G of Chapter 2.

    “(3) If there is a conflict between a provision of the previous Act that continues to apply in terms of sub-item (1), and a provision of Part G of Chapter 2 of this Act with respect to a solvent company, the provision of this Act prevails.”4

    No date has been determined to affect the “transitional arrangement” of item 9 of schedule 5. Section 345 of the Companies Act 1973 continues to apply with respect to the winding-up and liquidation of companies as if the old Act had not been repealed.

    Section 345 states that a company is deemed to be unable to pay its debts if a demand to pay its indebtedness is served on the company and it fails to pay the debt or to secure or compound it to the reasonable satisfaction of the creditor within three weeks, or if the return of service by the sheriff or messenger of the court reports that he has not found sufficient disposable property to satisfy a judgment.5

    A solvent company is wound up and liquidated in terms of Part G of Chapter 2 of the Companies Act 2008 and an insolvent company is wound up and liquidated under the Companies Act of 1973. Schedule 5 of the Companies Act 2008 has made a “transitional arrangement” that Chapter 14 of the old Companies Act will continue to apply with respect to the winding-up and liquidation of companies as if that Act had not been repealed. The Companies Act 2008 does not define the meaning of a solvent company or an insolvent company.

    In the Boschpoort Ondernemings (Pty) Ltd v ABSA Bank Ltd case, it was held that the inclusion of section 345 of the Companies Act 1973 when it comes to the winding-up of solvent companies under sub-item 9(1) of schedule 5 of the Companies Act 2008 but the exclusion of section 344 of the old Act under sub-item 9(2) is significant when it comes to determining what is meant by a “solvent” company. Section 345 of the Companies Act 1973 was retained in sub-item 9(1) to enable a determination to be made in terms of section 79(3) of the Companies Act 2008 that a company ‘is or may be insolvent” – even though the application was made in terms of either section 80 or 81 of the Companies Act 2008 for its winding-up as a so-called “solvent” company. The deeming provisions concerning the inability to pay its debts contained in section 345 of the old Act may be used to establish the insolvency of a company.6

    It was further held that the retention by the legislation in the context of a winding-up of a solvent company in the Companies Act 2008, of the deeming provisions as to when a company is unable to pay its debts as contained in section 345 of the Companies Act 1973, is a clear indication of what is meant by an insolvent company in the Companies Act 2008. It can only mean a company that is commercially insolvent. It therefore follows that a solvent company must be the converse, namely a company that is commercially solvent.7

    Factual solvency of a company is not, in itself, a determinant of whether a company should be placed in liquidation or not; accordingly it is not a bar to an application to wind up a company in terms of the Companies Act 1973 on the grounds that it is commercially insolvent. It will, however, always be a factor in deciding whether a company is unable to pay its debts. Thus a commercially solvent company (whether factually solvent or insolvent) may be wound up in terms of the Companies Act 71 of 2008 only; a solvent company cannot be wound up in terms of the old Act.8

    Therefore, in order for a solvent company to be wound up in terms of either section 80 or 81 of the Companies Act 2008, it must be commercially solvent. If it is commercially insolvent it may be wound up in accordance with chapter 14 of the Companies Act 61 of 1973, as is provided for in sub-item 9(i) of schedule 5 of the Companies Act 2008. The confusion which has arisen as to when a company may be wound up in terms of the Companies Act 2008 or in terms of the Companies Act 1973 is thus eliminated.9 ❐

    Notes

  1. M B Cronje, AIPSA Insolvency law and practice: study notes, sequestration and winding-up procedures. University of Pretoria, Continuing Education, 2011, 9.
  2. Insolvency Act 24 of 1936.
  3. Ibid.
  4. Companies Act 71 of 2008.
  5. Companies Act 61 of 1973.
  6. Boschpoort Ondernemings (Pty) Ltd (in liquidation) v ABSA Bank Ltd (936/12) [2013] ZASCA    173 (28 Nov 2013), http://www.justice.gov.za/sca/judgments/sca_2013/sca2013-173.pdf.
  7. Ibid.
  8. Ibid.
  9. Ibid.

Author: Norman M Mzizi CA(SA) is the Managing Director of Mpofana Investments (Pty) Ltd