Can a winding-up application be brought under both the old and the new Companies Act?

June 1st, 2022
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When one is not certain whether a company is solvent or insolvent, a difficulty will arise as to whether the application to wind-up the company is to be brought under the Companies Act 71 of 2008 (the new Act) or the Companies Act 61 of 1973 (the old Act). This issue will be considered in the present article.

The new Act governs the winding-up of companies, which are solvent (in Part G of the new Act). However, Chapter XIV of the old Act continues to govern the winding-up of a company, which is insolvent (in terms of item 9(1) of sch 5 to the new Act).

It must firstly be noted that item 9(2) of sch 5 to the new Act provides that s 346 of the old Act (which is in Chapter XIV of the old Act) does not apply to the winding-up of solvent companies (as well as other sections of the old Act which do not apply, but which are not relevant for present purposes).

Section 346 of the old Act deals with an application for winding-up of a company. It provides that the application must be served on the company, the Master of the High Court, every registered trade union that represents any of the employees of the company and the employees themselves. Service must also take place on the South African Revenue Service (Sars). The application must also be accompanied by a certificate by the Master that sufficient security has been given for payment of all necessary fees and charges.

As an example of such a case, it is convenient to refer to a company, which is in effect a ‘partnership’ carried on by means of a limited liability company. It has long been accepted that a partnership may be carried on through the vehicle of a small domestic company. The legal entity is a registered limited liability company, which the partners use as a vehicle for their partnership, and the applicable Companies Act will apply to such company.

However, it has been known to happen that the shareholders in such a company fall out with each other and an application is brought by one of the shareholders for the winding-up of the company. The court will wind such company up on the ground that such winding-up is just and equitable (see Erasmus v Pentamed Investments (Pty) Ltd 1982 (1) SA 178 (W) at 181A – 185C and Apco Africa (Pty) Ltd and Another v Apco Worldwide Inc 2008 (5) SA 615 (SCA) at para 18).

The problem could arise in the following scenario:

  • A and B agree to enter a partnership as equal partners; they intend to carry on a business together.
  • A is to be responsible for dealing with customers and carrying on the business on a day-to-day basis.
  • B is to be responsible for the administration of the business and the financial matters.
  • A and B decide to carry on the business through the medium of a limited liability company.
  • They accordingly cause such company to be registered, in which they are equal shareholders.
  • The company carries on business for about a year, when B advises A that B has dismissed A as a partner and will carry on the business of the company on his own. B then proceeds to carry on the business of the company to the exclusion of A.
  • A is naturally disconcerted and approaches an attorney for advice.

On the face of it the answer is for the company to be wound up so that its assets can be liquidated and divided between the shareholders (or partners).

However, B has taken over all aspects of the business and A is now unaware whether the company is solvent or insolvent.

As regards a solvent company

Section 81(1)(d) of the new Act provides that a court may order a solvent company to be wound up if:

‘The company, one or more directors or one or more shareholders have applied to the court for an order to wind up the company on the grounds that –

(i)         the directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and –

(aa)     irreparable injury to the company is resulting, or may result, from the deadlock; or

(bb)     the company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock; or

(iii)       it is otherwise just and equitable for the company to be wound up.’

The new Act thus recognises that the breakdown of the relationship between the ‘partners’ in such a company will constitute a ground for the winding-up of the company on the basis that it will be just and equitable for such an order to be granted.

The conclusion is thus that where the company is solvent, application for a winding-up order must be made under s 81(1)(d) of the new Act and if it is insolvent, the application must be brought under Chapter XIV of the old Act and in particular under s 344(h) of the old Act, which provides that a company may be wound up by the court if ‘it appears to the court that it is just and equitable that the company should be wound up’.

However, in the example, A has been excluded from the business of the company and is not able to state conclusively whether the company is solvent or insolvent.

I thus submit that it will be necessary for the winding-up application to be brought under both the old Act and s 81(1)(d) of the new Act. The old Act will apply if the company is found to be insolvent and the new Act will apply if the company is found to be solvent.

In Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA) application was made for the winding-up of a company in terms of the old Act, alternatively in terms of s 81(1)(c)(ii) of the new Act (which provides for winding-up of a solvent company by creditors on the ground that it is just and equitable for the company to be wound-up). The court a quo granted a winding-up order in terms of s 81(1)(c)(ii) of the new Act. The Supreme Court of Appeal (SCA) found that the company was insolvent, and that a winding-up could only have been granted under the new Act. The SCA accordingly held that the winding-up order had been correctly granted but for the wrong reason and dismissed the appeal against the winding-up order. I submit that it is permissible for an application to be made for a winding-up order under the new Act alternatively the old Act, particularly where the applicant is not aware whether the company is solvent or insolvent.

A further issue arises as to the way the application is to be brought under the new Act.

Item 9(2) of sch 5 to the new Act provides, as mentioned, that s 346 of the old Act does not apply to the winding-up of a solvent company. However, item 9(2) of sch 5 does nevertheless state that s 346 (and the other sections referred to) do apply to the winding-up of a solvent company ‘to the extent necessary to give full effect to … Part G of Chapter 2’.

I submit that the formal requirements of s 346 are in fact necessary to give full effect to s 81 of the new Act (which is in Part G of ch 2). It is surely necessary for the Master to furnish the certificate required by s 346(3) and for notice of the application to be given to the Master, trade unions, employees, and Sars.

It would thus follow that when an application is made to wind up a solvent company on the grounds of a deadlock between shareholders, it will still be necessary to obtain a certificate from the Master and to serve the application on the Master, trade unions, employees, and Sars.

Where the company is insolvent, it will of course be necessary to comply with the requirements of s 346.

In the example given above, as the application will be brought under Chapter XIV of the old Act and alternatively under s 81 of the new Act, it will in any event be necessary to furnish the certificate of the Master and serve the application on trade unions, employees and Sars, as such requirements are prescribed expressly by s 346 of the old Act, which applies to a winding-up application where the respondent company is insolvent.

It thus follows that when a practitioner wishes to have a company wound up, they must first determine whether the company is solvent or insolvent. If it is solvent, the application must be brought under the new Act. If the company is insolvent, the application must be brought under the old Act. If one is not certain whether the company is solvent or insolvent, then the application must comply with the requirements of both the new Act and the old Act.

Nathan Segal BA LLB (Wits) LLM (London) is a legal practitioner and member of the Bridge Group in Johannesburg.

This article was first published in De Rebus in 2022 (June) DR 17.

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