South Africa: Chapter 14 Of The Now-Repealed Companies Act Of 1973 Continues To Apply To The Winding Up Of Insolvent Companies

The implications of the continued application of chapter 14 of the Companies Act 1973 to companies being wound up on the grounds of insolvency

The general effective date on which the Companies Act 71 of 2008 came into force was 1 May 2011. Consequently, as from that date, the Companies Act 61 of 1973 was repealed, except in so far as the transitional provisions contained in schedule 5 of the new Act provide for the continued application of certain provisions of the old Act.

Of particular significance are the provisions of sch 5 of the Companies Act 2008 in relation to the winding-up of companies and the important distinction in this regard between solvent companies and insolvent companies.

Item 9(1)-(2) of Sch 5 provides, in effect, that despite the repeal of the Companies Act 1973, certain specified provisions of chapter 14 of that Act (which deals with the winding-up of companies, both solvent and insolvent) continue to apply, except in relation to solvent companies. Expressed more plainly, chapter 14 of the Companies Act 1973 continues to apply in relation to the winding up of insolvent. companies.

However, the distinction drawn in Sch 5 of the Companies Act 2008 in terms of which the winding-up of solvent companies is governed by that Act whilst the winding up of insolvent companies continues to be regulated by the Companies Act 1973 raises the question as to what is meant, in this context, by solvent and insolvent.

In Firstrand Bank Ltd v Lodhi 5 Properties Investment CC 2013 (3) SA 212 (GNP) van der Byl AJ held that where item 9(2) of Sch 5 to the Companies Act 2008 refers to solvent companies having to be wound up in terms of the provisions of that Act, it uses the word solvent in contradistinction, not just to companies that are factually insolvent (that is to say, those companies whose liabilities exceed their assets) but also to those that are commercially insolvent in other words, those companies that are unable to pay their debts as they fall due.

Consequently, since the coming into force of the Companies Act 2008, where a company is being wound up on the grounds that it is insolvent, it suffices for the applicant to show that it is commercially insolvent and it is not necessary to show that it is factually insolvent.

This interpretation has since been endorsed in Scania Finance Southern Africa (Pty) Ltd v Thomi-Gee Road Carriers CC 2013 (2) SA 439 (FB) and in Standard Bank of South Africa Ltd v R-Bay Logistics CC 2013 (2) SA 295 (KZD), both of which rejected the decision to the contrary in HBT Construction and Plant Hire CC v Uniplant Hire CC 2012 (5) SA 197 (FB).

Although the Supreme Court of Appeal has yet to speak on this issue, it therefore seems safe to say that the decision in Firstrand Bank Ltd v Lodhi 5 Properties Investment CC was the starting point of an established consensus that is unlikely to be reversed.

This will come as a considerable relief to an unpaid creditor of a company who wishes to bring an application for it to be wound up, for he will not be required to prove that it is factually insolvent (which may be an impossible task in application proceedings, for he will usually lack the evidence necessary to prove factual insolvency), and will be able to succeed by proving commercial insolvency and to rely on such commercial insolvency to trigger the deemed inability to pay the debt in question as provided for in section 345(1) of the Companies Act 1973 by laying before the court either a statutory demand for payment (as envisaged in section 345(1)(a)) or a nulla bona return (envisaged in section 345(1)(b)).

The directors' personal liability for the company's debts

The ancillary question of great importance to such a creditor – namely, the grounds, under the new Companies Act of 2008, on which he can apply for an order declaring that the company's directors are personally liable for the company's debts – has not yet come before the courts, but the answer seems clear.

Such personal liability for the company's debts was provided for in section 424(1) of the Companies Act 1973; however, there is no exact counterpart to this provision in the Companies Act 2008.

It is true that section 22 of the Companies Act 2008 contains an explicit prohibition on reckless or fraudulent trading, but it does not go on to say that anyone who was party to such conduct by the company can be declared personally liable for its debts. (And there are other provisions of the Act that create a liability for damages vis-a-vis the company in relation to this and any other contravention of the Act.) A declaratory provision of personal liability for the company's debts can now be sought only in terms of section 20(9) of the Companies Act 2008 which provides that where there has been an unconscionable abuse of the juristic personality of a company, the court can declare the company (in terms of section 20(9)(a)) to be deemed not to be a juristic person in respect of its liabilities and can make an ancillary order (in terms of section 20(9)(b) of the Act), which implicitly includes an order that its directors are personally liable for some or all of its debts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.