SPONSORED SUPPLEMENT
2 Friday March 25 2011
THE MERCURY
businessupdate
Effeectivee daatee of liquidaation – aand consseequeenceess of aa liquidaation ordeer
THE winding-up of companies in
South Africa is governed by the
Companies Act 61 of 1973, as
amended (“the Companies Act”),
which incorporates sections of the
Insolvency Act 24 of 1936 (“the
Insolvency Act”).
Close corporations are governed
by the Close Corporations Act 68 of
1984 (“the Close Corporations Act”),
which incorporates the Companies
Act and the Insolvency Act.The
provisions of the Companies Act
which relate to the winding-up of a
company, including the regulations
made thereunder, apply mutatis
mutandis and in so far as they can be
applied to the liquidation of a
corporation in respect of any matter
not specifically provided for in the
Close Corporations Act.
Typically, an order of court placing
a company in liquidation is granted
provisionally, and a return date is set
during which period notice of the
provisional order is given to the
company, its employees, any
potential trade unions and the South
African Revenue Services.
A copy of the court order is also
published in the Government Gazette
and in a local newspaper circulated in
the area where the company’s
business is situated. On the return
date, should there be no opposition to
the granting of a final order, the court
will usually place the company in final
liquidation. In Gauteng, North West
Province, Mpumalanga and
Polokwane, however, the procedure
is different in that a final order of
liquidation can, should the court see it
fit to do so, be granted immediately
without a return date.
In order to determine the actual
date of liquidation – that is, the date
that the company is deemed to be
liquidated – one must determine the
method of application for liquidation.
The effective date of liquidation by
shareholders resolution will be the
date of registration of the special
resolution for winding-up by the
Companies Office (section 340 (2) of
the Companies Act 61 of 1973, as
amended).
Where a liquidation order has
been granted pursuant to an
application to the High Court, the
effective date of liquidation is dated
retrospectively back to the date of the
physical issuing of the liquidation
application papers with the Registrar
of the High Court (section 348 of the
Companies Act “presentation to the
Court of the application for the
winding-up”). It is important to
understand the effective date of
liquidation in order to understand how
the process works once liquidation
has commenced.
Upon the commencement of
liquidation, all pending legal
proceedings against the company
are suspended until the appointment
of a liquidator by the Master of the
High Court (“the Master”). Creditors
can then proceed with litigation once
the liquidator has been appointed or
apply for leave of the court to institute
proceedings.
A judgment of court will be a claim
against the estate and the creditor will
not be allowed to attach or execute
any of the assets of the entity in
liquidation.The company’s estate is
Callyn Wilkinson, insolvency expert
effectively frozen so as to prevent
certain creditors from being preferred
and/or enhancing their position at the
expense of other creditors. Any civil
attachments of assets of the
company after the commencement of
winding-up will be void. All assets of
the company vest in the Master and,
therefore, vest in the liquidator that is
appointed by the Master.
In addition, upon the granting of
the final order of liquidation, directors
of the company in liquidation are
divested of all power and subsequent
unauthorised dispositions of property
are void.
Dispositions made without value
can be set aside by the court where a
liquidator proves that either more
than two years before liquidation the
company disposed of an asset and,
immediately following that disposition,
the company’s liabilities exceeded its
assets and the disposition was not
made for value; or, within two years of
liquidation, the company disposed of
an asset not for value. A disposition
without value is not established if the
person claiming under or, who
benefited by the disposition, proves
that the company’s assets exceeded
its liabilities at the time of the
disposition.
The court can further set aside the
following transactions where a
liquidator proves that:
* Within six months before
liquidation and, immediately after the
disposition, the liabilities of the
company exceeded its assets, unless
the person in whose favour the
disposition was made proves that it
was made in the ordinary course of
business and that it was not intended
to prefer one creditor over another.
* After the disposition the
company’s liabilities exceeded its
assets and the disposition was made
with the intention of preferring a
creditor and the company was
subsequently liquidated.
* An asset was disposed of in a
manner that had the effect of
prejudicing creditors or preferring one
creditor over another, and the
disposition was effected by the
company in collusion with another.
Where a company disposes of
any business or goodwill belonging to
it and the sale is not properly
advertised to creditors under the
Insolvency Act, the sale will be void
against creditors for six months after
the disposition and will be void if the
company is liquidated at any time
within that period.
All of the above transactions are
voidable by the liquidator but, until the
transactions are set aside by the
court, they stand.The only exception
is that of voidable sales of a business
or of property forming part of a
business, as set out above.Where a
liquidator has reason to believe that a
transaction may be voidable, it is the
liquidator’s duty to investigate the
transaction and, if authorised by the
creditors, the liquidator can launch
court proceedings to set the
transaction aside.
Liquidators must realise the
assets of the company and distribute
the proceeds to creditors. Creditors
are dependent on the liquidator to
maximise their dividends by
ensuring that assets are sold for the
highest possible purchase price and
by pursuing claims against
delinquent directors and other
parties who may be liable to the
company. Liquidators act on the
directions of creditors, which are
given at formal meetings.
The winding-up of a company is
complete when the liquidator has
realised all the assets and completed
his investigations, including any
action that has arisen through this,
into the affairs of the company.The
liquidator produces a final liquidation
and distribution account and makes
the final dividend payment to
creditors, if any.The Registrar then
de-registers the company.
CALLYN WILKINSSON – ASSSOCIATE,
ENSS INSSOLVENCY DEPARTMENT
A quick outcome
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THE Constitution of South Africa can
be a powerful tool – one that can find
application even in the arena of
commercial activity.This gamechanging piece of legislation can have
the effect of undoing age-old common
law principles, and impacting on the
business world as much as it does on
the world of the human rights activist.
Among the rights enshrined in the
Bill of Rights are the rights to equality,
equal protection by the law and the
right of access to the courts.The aim
of the Constitution is to entrench
these fundamental freedoms so
deeply within the heart of South
African law that they cannot be
trampled upon, even if this means that
the common law must be developed
in “Constitution friendly” directions.
Any law which infringes upon the
rights set out in the Bill of Rights can,
and ultimately will, be challenged by
affected parties in the highest court in
South Africa – the Constitutional
Court.
The case of Twee Jonge Gezellen
(Pty) Ltd and another v Land and
Agricultural Development Bank of
South Africa t/a The Land Bank is the
perfect example of this healthy
functioning of South Africa’s judiciary
in ways which were inconceivable
before 1994.The case revolves
around the issue of the
constitutionality of the common law
remedy, the provisional sentence.
Provisional sentence proceedings,
frequently utilised in achieving speedy
debt recovery, are very useful legal
procedures, and therefore often
encountered in commerce. Hence the
interest around this case, which had
the effect of adapting this
longstanding common law remedy in
order to bring it in line with the
objectives of the Constitution.
A creditor in possession of a liquid
document such as a cheque,
mortgage bond or an
acknowledgement of debt, can rely on
this efficient mechanism for the
recovery of the money due.The
advantage to the creditor is that,
unless the debtor can succeed in
persuading a court using only
affidavit evidence that the creditor’s
claim ought not to prevail, the debtor
will be compelled to pay the claim in
full before entering into the principle
case.The rationale for this
procedure is that it precludes a
debtor with no valid defence from
“playing for time”. If the debtor
ultimately wins the principle case, it
will be reimbursed by the creditor.
In ordinary court proceedings a
debtor intent on delaying the
inevitable and unconcerned about
the costs of this approach, can often
succeed in stretching legal
proceedings for a number of years
before that debtor is eventually
brought to account. Provisional
sentence proceedings give a distinct
advantage to the creditor because
these procedures often mean that a
debtor is compelled to “pay now and
argue later”.
The discomfort of a debtor in
these circumstances is unsurprising
and in the Twee Jonge Gezellen
case this dissatisfaction led the
defendant to an argument aimed at
the alleged constitutional invalidity of
provisional sentence proceedings.
The constitutional challenge was
based, inter alia, on section 34 of the
Constitution which provides that:
“Everyone has the right to have
any dispute that can be resolved by
the application of law decided in a fair
public hearing before a court or,
where appropriate, another
independent and impartial tribunal or
forum”.
The contention, which found
favour with the Constitutional Court,
was to the effect that a defendant
against whom provisional sentence is
granted, but who cannot pay, is not
able to enter into the principle case.
Where this defendant has a solid
defence but where this defence
cannot be established upon affidavit,
it is precluded during the first phase
of the provisional sentence procedure
from using oral evidence or the crossexamination of witnesses, all of which
may have proven its defence.
An example may be where a
cheque has been obtained through
fraud.Where this defendant is
prevented from entering the principle
case because it is unable to pay the
debt, such defendant is deprived of
the advantages of a fair trial
procedure.
On the other hand, the Court
recognised the importance of the
provisional sentence procedure
particularly in the sphere of
commerce. In particular, the judges
highlighted the advantage of speedy
relief for the creditor and the
frustration of attempts by the
disingenuous debtor to run a trial on
defences without merit – therefore
serving the interests of the
administration of justice.
The outcome of the balancing act
undertaken by the Constitutional
Court in this trial was a limited
change to the common law remedy
of provisional sentence, restricted to
cases where the nature of the
defence does not allow the
defendant to show a balance of
success in its favour without the
benefit of oral evidence and where
the defendant is unable to satisfy the
judgement.
In this scenario, our courts will
henceforth have a discretion, which
was not available in the past, to refuse
provisional sentence if it is satisfied
that there is an even balance of
success in the main case on the
papers and a reasonable prospect
that oral evidence may tip the balance
in the defendant’s favour. In that event,
judgement will only be granted
against the defendant if it loses in the
main case, after the hearing of oral
evidence.
J ANINE LEE – DIRECTOR, LITIGATION
LISSA CLARKE – CANDIDATE
ATTORNEY, SHIPPPPING AND
LOGISTICSS