Roodt Inc South Africa
Block A 7 Eton Road Sandhurst Johannesburg
Tel +27 11 685 0000
info@roodtinc.com
Johannesburg Office
JOHAN ROODT
jaroodt@roodtinc.com
UK Office
JOHN COHEN
jcohen@roodtinc.com

The distinction between deemed insolvency and actual insolvency

The Companies Act 2008: under the transitional provisions, it is necessary to prove actual insolvency when applying to wind up a company or close corporation on the grounds that it cannot pay its debts

One of the complexities involved in the transition from the old Companies Act 61 of 1973 to the new Companies Act 71 of 2008 is that the provisions of the former Act in relation to the grounds for winding up an insolvent company continue to apply on an interim basis until the proposed new comprehensive Insolvency Act (which is still being drafted) comes into force.

The winding-up provisions of the new Companies Act of 2008 therefore apply only to the winding up of solvent companies (for example, because of a deadlock amongst its directors) and not of insolvent companies.

Deemed insolvency as distinct from proven insolvency

However, the statutory provisions in terms of which a company or close corporation is deemed to be unable to pay its debts (as contained in section 344 of the Companies Act of 1973) no longer apply in relation to the winding up of a company or close corporation on the grounds that it is insolvent.

Currently, therefore, a creditor who wishes to apply to the High Court for the winding up of a company on the grounds that it is unable to pay its debts has to prove that the company is, in fact, unable to pay its debts (and is thus factually insolvent) and it no longer suffices to prove that the company is merely deemed to be insolvent (that is to say, is regarded in law as being insolvent) on any of the grounds provided for in section 344 of the Companies Act 1973, for instance, that it has, despite formal demand, failed to pay a particular debt,

Alternatively, the creditor will currently have to prove that it is "just and equitable" for the court to order the winding up of the company in question, regardless of its insolvency or otherwise, because this ground for winding up remains applicable to both solvent and insolvent companies.

It needs to be borne in mind that just because a company has failed to pay a debt does not necessarily mean that it is unable to do so; it may simply mean that the company, though viable and with a sound balance sheet, is currently illiquid. Or the company, though solvent, may just be playing for time or testing the resolve of the creditor. Nor indeed does the mere fact that a close corporation has not paid a debt, despite promises and proposals to do so, make it "just and equitable" that the respondent should be wound up.

These principles apply equally to the winding up of companies and of close corporations.

A creditor overlooked this aspect of the transitional provisions of the new Companies Act

This important aspect of the transitional provisions of the new Companies Act was overlooked by the aggrieved creditor in the recent decision of the Free State High Court in HBT Construction and Plant Hire CC v Uniplant Hire CC 2012 (5) SA 197 (FB).

In this case, the applicant applied to the High Court for the respondent close corporation to be wound up, but (believing, erroneously, that it could rely on a deemed inability to pay its debts) it adduced no evidence of the close corporation's actual insolvency. Consequently, said the court (at para [13] of the judgment) it had to be assumed that the close corporation in question was still solvent.

It is, of course, no easy matter for a creditor to prove that a debtor company is in fact insolvent, either in the balance sheet sense that the value of its liabilities exceeds the value of its assets, or even that it is commercially insolvent in the sense that it is unable to pay its debts as they fall due. As was noted above, failure or refusal to pay a debt does not, of itself, prove an inability to pay.

In this particular matter, the close corporation in question did not deny that it had failed to pay the debt in question, but averred that it had a bona fide defence to the creditor's claim. It also seemed to be arguable as the court observed that the debt in question had prescribed.

In the result, the court dismissed, with costs, the application for the winding up of the respondent close corporation.

The difficulties now facing a person seeking the winding up of a company that has not paid a debt

This judgment reveals the difficulties that are now faced by an unpaid creditor of a company or close corporation who is seeking to have it wound up so that the statutory process can be put in train for its assets to be sold in execution and its creditors paid from the proceeds of the sale.

There is of course nothing to stop a creditor from issuing summons, taking judgment, and executing that judgment, that is to say, instructing the deputy sheriff to attach the debtor's property in preparation for a sale in execution. The problem arises when that process of execution does not result in payment of the debt, and the creditor wants the company or close corporation to be wound up so that the liquidator will search for further funds or assets.

However, if a creditor were to go through the execution process and it did not yield sufficient to pay the debt, a court may well accept that these facts establish, with sufficient certainty, that the debtor company or close corporation is in fact insolvent without any need to have recourse to the deeming provisions of the Companies Act of 1973 in this regard which are no longer applicable to the winding-up of an insolvent company.

If this is correct, then the impact of the transitional provisions of the new Companies Act in regard to the grounds for winding up an insolvent company or close corporation may simply be that a creditor will no longer be entitled to fast-track an application for a winding-up order on the grounds that a formal demand for payment (as envisaged in section 345(1)(a) of the Companies Act 1973) has gone unheeded; a creditor may now have to take the further step of issuing a writ of execution and getting a return from the deputy-sheriff to the effect that insufficient assets could be found to settle the debt. This return on the writ of execution can then form the basis of an argument that it proves actual insolvency with sufficient certainty for a court to grant a winding-up order.

It is clear that, under both the old and the new Companies Act, a court will not grant a winding-up order where the debtor bona fide disputes the debt in question on reasonable grounds; see Kalil v Decotex (Pty) Ltd 1988 (1) SA 943 (A).

Back

 
Copyright 2019 Roodt Inc.  Designed and Developed by Fyre Interactive home | newsletter| contact us