Winding up
1. The winding up of solvent companies is governed by Part G[1] of Chapter 2 of the Companies Act 71 of 2008. Notwithstanding the repeal of the Companies Act 61 of 1973, Chapter XIV[2] of the Companies Act of 1973 continues to apply with respect to the winding-up and liquidation of companies under the Act of 2008 as if the Act of 1973 had not been repealed.[3]
2. Thus,
2.1. when a solvent company is wound up the winding-up provisions of both Acts apply, provided that in the case of conflict the Act of 2008 prevails and sections 343, 344, 346, and 348 to 353 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,[4] and
2.2. when an insolvent company is wound up only the winding up provisions of the Companies Act of 1973 apply and not those of the Act of 2008.[5]
3. The Companies Act of 1973 contain provisions relating to the winding up of insolvent companies and also apply the law (including the Insolvency Act 24 of 1936) relating to insolvency to the winding up of insolvent companies.[6] Section 34 of the Insolvency Act 24 of 1936 apply in the winding up of a company unable to pay its debts by virtue of section 340(1) of the Companies Act of 1973.[7]
4. When a solvent company is wound up under the Companies Act of 2008 but it later appears that the company is or has become insolvent (for instance, because of a loss of asset value) the provisions of the Companies Act of 1973 relating to insolvency will be or will become applicable. In such a situation the liquidators will be able to rely on Chapter XIV of the Companies Act of 1973, including sections 339, 340, 341(2), 348 and 415.
5. In Taylor and Steyn v Koekemoer[8], Margo J[9] held that even though a company is subject to a winding up order (under the Companies Act of 1973) for a reason or on a ground other than inability to pay its debts, section 415 (1) of the Companies Act of 1973 would nevertheless apply if in fact it was unable to pay its debts, and it would apply even if the inability arose after the commencement of the winding up. He held that the section applies when the company is unable to pay its debts on the date the liquidators invoke the section. I submit that the situation would be no different if the winding-order were granted under the Companies Act of 2008 and during the winding up it is discovered that the company is in fact unable to pay its debts.
A company ‘unable to pay its debts’
6. A company is insolvent when it is unable to pay its debts as they fall due. This phrase ‘unable to pay [all] its debts’ appears in a number of sections[10] in the Companies Act of 1973. The meaning in sections 339, 340(1) and 341(2) is the same.[11]
7. Importantly, in this regard the following appears in Henochsberg with reference to section 339:[12]
The time by reference to which it must be determined whether the company is in fact unable to pay its debts is the time when it is sought to invoke such section, not the time of the commencement of the winding up….
Section 339 therefore does not apply retrospectively as in the case of s 348…
8. Section 345 of the Companies Act of 1973 is of no relevance to the question whether a company being wound up is able to pay its debts at the present time as section 345 applies to the question whether a company should be wound up[13] and the question is being asked at the time of the application for a winding up order in court, not at the time of the litigation in terms of section 340(1) and 341(2) of the Companies Act of 1973.
The concursus creditorum
9. The concursus creditorum lies at the heart of insolvency law and therefore of section 340 and 341(2) of the Companies Act of 1973.
10. The establishment of the concursus on the commencement date of the winding up applies the concursus retrospectively and heralds a ‘sea change’ in the affairs of a company.[14] The concursus is established when the application for winding up is presented to the Court, in other words when it is lodged with the Registrar of the Court,[15] or in the case of a voluntary liquidation, when the special resolution is registered.[16]
The applicable principles: Section 340 of the Companies Act of 1973
11. Section 341(1) provides that –
11.1. any disposition by a company of its property,
11.2. which, if made by an individual, could, for any reason, be set aside in the event of his insolvency,
11.3. may, when made by a company, be set aside in the event of the company being wound up and unable to pay all its debts,
11.4. and the provisions of the law relating to insolvency[17] shall mutatis mutandis be applied to any such disposition.
The applicable principles: Section 341(2)
12. Section 341(2) of the Companies Act of 1973, broken down into its constituent parts provides as follows:
12.1. Every disposition of its property
12.2. by any company
12.3. being wound-up
and
12.4. unable to pay its debts
12.5. made after the commencement of the winding-up,
12.6. shall be void
12.7. unless the Court otherwise orders.
13. Once the facts listed in the sub-paragraphs 1 to 5 above are established the onus is on the recipient of the disposition to prove that there are grounds to order otherwise in accordance with the proviso in the seventh sub-paragraph.
14. The proviso to section 341(2) provides equitable relief for a snookered bona fide creditor of an insolvent company.[18] The proviso is however not necessarily a remedy for such a bona fide creditor: The interests of the bona fide creditor are subservient to the interests of the body of creditors;[19] hardship body of creditors and the sanctity of the concursus are of much greater importance than hardship to the recipient.[20]
15. The proviso is a tool to address the anomaly that occurs when dispositions made lawfully are subsequently rendered of no effect because of the retroactive establishment of the concursus. This explains the incidence of onus.
Inability to pay debts
16. As indicated above, both section 340(1) and 341(2) of the Companies Act of 1973 contain the phrase ‘unable to pay [all] its debts.’
17. Parties relying on these sections must plead and prove the facts necessary to sustain reliance on the section. When they fail to do so, the run the risk of being in the same position as the appellants in Sackstein NO v Proudfoot SA (Pty) Ltd,[21] where Cloete JA remarked (obiter):
The appellant’s counsel fairly and correctly conceded (as he had in the court a quo) that the appellant had not discharged the onus of proving that the company’s inability to pay existed at the time the present action was instituted. That is the end of the statutory claims. The proper order would have been absolution from the instance …
18. Similarly, in the judgment by Saldulkar J in Gainsford NO and Others v Gulliver’s Travel (Bruma) (Pty) Ltd:[22]
[102] Mr Subel has argued that before section 340(1) of the Companies Act is triggered, the plaintiffs must establish that Tuscan is “unable to pay all its debts”. The relevant time for determining whether the company which is being wound up as being unable to pay its debts is not at the time of the application for winding-up nor at the time of the grant of the winding-up order.
It is not necessarily the date when it was placed in liquidation.[23] The relevant time is at the date of the institution of the proceedings in the course of winding-up. The plaintiff’s reliance on the order of court winding up Tuscan, as proof that Tuscan is unable to pay its debts, therefore, is misplaced.
[103] In addition, the confirmation of the Liquidation and Distribution account does not relieve the plaintiffs of having to establish that Tuscan is unable to pay its debts. [emphasis added]
Discretion
19. When the application is brought within the ambit of the legislation, section 340(1) and 341(2) require the Court to exercise a judicial discretion.[24] In Lane NO v Olivier Transport[25] Pincus AJ set out a summary of guidelines for the exercise of the discretion: The learned Judge said:
(a) The discretion should be controlled only by the general principles which apply to every kind of judicial discretion. (See Re Steane’s (Bournemouth) Ltd [1950] 1 All ER 21 (Ch) at 25.).
(b) Each case must be dealt with on its own facts and particular circumstances.
(c) Special regard must be had to the question of good faith and the honest intention of the persons concerned.
(d) The Court must be free to act according to what it considers would be just and fair in each case. See Herrigel’s case supra at 678 and see Re Clifton Place Garage Ltd [1970] Ch 477 (CA) at 490 and 492 ([1970] 1 All ER 353 at 356 and 357-8).
(e) The Court, in assessing the matter, must attempt to strike some balance between what is fair vis-à-vis the applicant as well as what is fair vis-à-vis the creditors of the company in liquidation.
(f) The Court should gauge whether the disposition was made in the ordinary course of the company’s affairs or whether the disposition was an improper alienation. See Re Wiltshire Iron Co; Ex parte Pearson (1868) LR 3 Ch App 443 at 447.
(g) The Court should investigate whether the disposition was made to keep the company afloat or augment its assets. See Herrigel’s case supra at 679-80.
(h) The Court should investigate whether the disposition was made to secure an advantage to a particular creditor in the winding-up which otherwise he would not have enjoyed or with the intention of giving a particular creditor a preference and which latter factor may be decisive. See Wiltshire’s case supra at 447.
(i) The Court should enquire whether the recipient of the disposition was unaware of the filing of the application for winding-up or of the fact that the company was in financial difficulties. See Re Tellsa Furniture (Pty) Ltd (1984-85) 9 ACLR 869 (NSW).
(j) Little weight should be attached to the hardship which will be suffered by the applicant if the payment is not validated, the purpose of the subsection being to minimise hardship to the body of creditors generally. See Herrigel’s case supra at 680.
(k) The payment should not be looked upon as an isolated transaction if in fact it formed part of a series of transactions. See Herrigel’s case supra at 680.
(l) Generally a Court will refuse to validate a disposition by a company when it occurs after the winding-up has commenced unless the liquidator (duly authorised) consents accordingly and there is a benefit to the company or its creditors. See Herrigel’s case supra at 680.
20. The Court must decide what would be fair and just in the circumstances and must strike a balance between the interests of the parties.
21. In deciding what is fair and just the sanctity of the concursus creditorum must be central to the decision.
J MOORCROFT
ADVOCATE
FELLOW OF THE ASSOCATION OF ARBITRATORS (SOUTHERN AFRICA)
[1] Sections 79 to 83 of the Companies Act 71 of 2008. Winding-up by order of court is dealt with in section 81.
[2] Sections 337 to 426 of the Companies Act 61 of 1973.
[3] Companies Act of 2008, Schedule 5 paragraph 9(1).
[4] Schedule 5 paragraph 9(2) and (3).
[5] Sections 79(1)(b) and 81(1) of the Companies Act of 2008.
[6] See sections 339 and 340 of the Companies Act of 1973.
[7] Galaxie Melodies (Pty) Ltd v Dally NO 1975 (4) SA 736 (A) 745A.The judgment deals with section 181(1) of the Companies Act 46 of 1926, the counterpart of section 340(1) of the 1973 Act. In that case it was accepted that the company was ‘unable to pay its debts’ (cf 741B).
[8] Taylor & Steyn NNO v Koekemoer 1982 (1) SA 374 (T) 379B. See also In re Hardwood Timber Co Ltd (In Liquidation) 1932 NPD 170 180 and Earl Motors (Pty) Ltd v Estany & Co (Pty) Ltd 1963 (2) SA 234 (E) 236B-G.
[9] McEwan J and Philips AJ concurring.
[10] Sections 337, 339, 340(1), 340(2)(c), 341(2), 344(e), 345, 360, 366, 386, 414, 415, 416,417, 421, and 425 of the Companies Act of 1973.
[11] See also Sackstein NO in his capacity as liquidator of Tsumeb Corporation Ltd (in liquidation) v Proudfoot SA (Pty) Ltd [2006] 2 All SA 577 (SCA) paragraph 8.
[12] Delport et al, Henochsberg on the Companies Act 71 of 2008 [previously by Meskin], APPI-9.
[13] Henochsberg, APPI-16(1).
[14] Engen Petroleum Ltd v Goudis Carriers (Pty) Ltd (in liquidation) [2015] 1 All SA 324 (GJ) paragraphs 18 and 20. Compare the words of Lord De Villiers CJ Walker v Syfret N.O. 1911 AD 141: “The effect of a winding-up order is to establish a concursus creditorum, and nothing can thereafter be allowed to be done by any of the creditors to alter the rights of the other creditors. If a debt owing by the insolvent company to one creditor has been extinguished by compensation, he cannot, merely because the debt arises out of a negotiable instrument, be allowed to deprive the other creditors of the benefit of such extinguishment by reviving it by means of a cession to a third party.” [160] …..“The sequestration order crystallises the insolvent’s position; the hand of the law is laid upon the estate, and at once the rights of the general body of creditors have to be taken into consideration. No transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body.” [166].
[15] Section 348 of the Companies Act of 1973, and Engen Petroleum Ltd v Goudis Carriers (Pty) Ltd (in liquidation) [2015] 1 All SA 324 (GJ) paragraph 15 as well as Development Bank of Southern Africa Ltd v Van Rensburg NNO 2002 (5) SA 425 (SCA) paragraph 8. See also section 340(2).
[16] Section 352()1) of the Companies Act of 1973.
[17] Including section 34 of the Insolvency Act.
[18] Engen Petroleum Ltd v Goudis Carriers (Pty) Ltd (in liquidation) [2015] 1 All SA 324 (GJ) paragraph 22.
[19] Engen case paragraph 24.
[20] Lane NO v Olivier Transport 1997 (1) SA 383 (C) 386D–387B.
[21] Sackstein NO in his capacity as liquidator of Tsumeb Corporation Ltd (in liquidation) v Proudfoot SA (Pty) Ltd [2006] 2 All SA 577 (SCA paragraph 9. The case concerned section 340 of the Companies Act of 1973 and sections 29 and 30 of the Insolvency Act. The principles that apply to the same question in the context of section 34 are the same. See also Visser v Rousseau en Andere NNO 1990 (1) SA 139 (A) 149E-150C, Gainsford NO, & others v Gulliver’s Travel (Bruma) (Pty) Ltd [2009] JOL 23787 (W) paragraph 102 (with reference to section 340 of the Companies Act of 1973 and section 26 of the Insolvency Act); Taylor & Steyn NNO v Koekemoer 1982 (1) SA 374 (T) 379B and Standard Bank of SA Ltd v The Master and Others 1999(2) SA 257 (SCA) 262A to 263B (in respect of the same phrase in section 415 of the Companies Act of 1973).
[22] Gainsford NO and Others v Gulliver’s Travel (Bruma) (Pty) Ltd [2009] JOL 23787 (W) paragraphs 102 to 105.
[23] Footnote 62 in the report reads: “Henochsberg Vol 1, at 670; Blackman Commentary on the Companies Act, Vol 3, 14-23; See Taylor & Steyn NNO v Koekemoer 1982 (1) SA 374 (T) at 377–379.”
[24] Steane’s (Bournemouth) Ltd [1950] 1 All ER 21 (Ch) 25; Herrigel NO v Bon Roads Construction Co (Pty) Ltd 1980 (4) SA 669 (SWA) 678A-679A; Lane NO v Olivier Transport 1997 (1) SA 383 (C) 386A-D; Excellent Petroleum (Pty) Ltd (In Liquidation) v Brent Oil (Pty) Ltd 2012 (5) SA 407 (GNP) paragraphs 46 to 48
[25] Lane NO v Olivier Transport 1997 (1) SA 383 (C) 386C-387B; Gainsford NNO v Tanzer Transport (Pty) Ltd 2014 (3) SA 468 (SCA) paragraph 28.
