SECTION: 3
Corporate
Insolvency Law
TABLE OF CONTENTS
Content
Section 3
Corporate Insolvency Law
Page
53
Overview
55
3.1
Winding-up process of Companies and Close
Corporations
56
3.2
Consequences of winding-up
67
3.3
Summary
74
3.4
Conclusion
76
54
Version: 03/2004
IB CP6 LG
Overview
Learning Outcome
The following is the Learning Outcome of this Section:
3. Interpret Corporate Insolvency Law.
Learning
Objectives
The Learning Objectives are as follows:
On completion of this Section, you will be able to:
3.
Assessment
Criteria
Interpret Corporate Insolvency Law by:

Having insight into the winding-up process of Companies and
Close Corporations

Appreciating the consequences of winding-up
To demonstrate the achievement of the Learning Objectives, you are required to
meet the criteria and/or provide the following evidence:
Have insight into the winding-up process of Companies and Close
Corporations
 Define a debtor
 Identify the Acts under which a Company/Close Corporation can
be wound-up
 Differentiate between voluntary and compulsory winding-up
 Define the role of a Liquidator
 Differentiate between a composition and a compromise
Appreciate the consequences of winding-up
 List the consequences of winding-up for a Company/Corporation
 List the liabilities of the Directors and Officers of a Company
 List the liabilities of the Members of a Close Corporation
55
Version: 03/2004
IB CP6 LG
3.
Corporate Insolvency Law
3.1
Winding-up process of Companies and Close Corporations
Introduction
Extract
from
the Act
In Section 1, we discussed the definition of a debtor. For the purpose of the
Insolvency Act a debtor is:
"debtor", in connection with the sequestration of the debtor's estate, means a
person or a partnership or the estate of a person or partnership which is a
debtor in the usual sense of the word, except a body corporate or a
Company or other association of persons which may be placed in liquidation
under the law relating to Companies;
From the above it is clear that the Insolvency Act does not regard a Company or
Close Corporation as debtors and can therefore not be sequestrated, but is
liquidated or wound-up under the Companies or Close Corporations Acts
respectively.
Before you continue with this Section, read paragraphs
6.19.13 – 6.19.15.4 in the Credit Policy and Process Manual.
Sources of
Corporate
Insolvency Law
When a Company/Close Corporation becomes Insolvent, it can be wound up
under the Companies Act or the Close Corporations Act, as the case may be.
These Acts also deal with the consequences of winding-up.
Although these statutes provide for the initiation of the winding-up procedures,
certain procedures and rules contained in the Insolvency Act or even the
common law still apply (Companies Act, Section 339; Close Corporations Act,
Section 6).
A Liquidator under the supervision of the Master handles the winding-up of a
Company or Corporation.
Winding-up or liquidation can also take place for reasons other than
insolvency.
For example: If the Members no longer wish to continue the activities of the
Company or the Corporation.
56
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Voluntary
winding-up
Chapter XIV of the Companies Act deals with the winding-up or liquidation of
Companies.
For the purposes of winding-up, it is important to note that the term “Company”
has an extended meaning in terms of Section 337 (definitions). It includes
“Company”, “external Company” as well as “any other body corporate”.
Voluntary winding-up of a Company is initiated by a special resolution passed
by its Members (Companies Act, Section 349).
A Company may be wound-up either by the Court or voluntarily. The
voluntary winding-up may be a creditors’ or a members’ winding-up. Both are
initiated by a resolution of the members. The Court may convert a voluntary
winding-up to a winding-up. A Creditor usually does this on application.
In both instances the winding-up is initiated in the same way, namely by
registration of the resolution of Members.
The Members’ voluntary winding-up procedure can only be used if there are
no creditors or if the Company or Corporation has given security to the Master
that all the creditors will be paid within 12 months.
If the Company/Corporation cannot pay its debts, it cannot use a Members’
voluntary winding-up. A creditors’ voluntary winding-up does not necessarily
mean that the creditors are involved in the decision to wind up the
Company/Corporation. It means the creditors will have a say in the winding-up
process and that the Liquidator will take instructions from the creditors and not
the members.
In such a winding-up, the consequences are basically the same as in a windingup by the court, although the process takes place without the intervention of the
court.
However, it is possible to have a voluntary winding-up converted into a windingup by the court.
A voluntary winding-up commences when the resolution is properly
registered at the Registrar of Companies or of Close Corporations.
57
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Compulsory
winding-up
The Company/Corporation itself or one or more of its creditors or Members
can make an application for a compulsory winding-up.
As discussed in the sequestration of Individuals, the court granting such an
application, will usually make a provisional order first. The case will then be
postponed to enable interested parties to oppose the final order.
Refer to the Credit Policy and Process Manual,
paragraph 6.19.4.2 – Stopping of accounts on notice of provisional order.
Both the Companies and Close Corporations Acts state the grounds upon which
a Company and Close Corporation may be wound up in court.
These grounds range from non-compliance with certain rules to the broad ground
that it is just and fair to wind up such a Company/Corporation.
For the purpose of this Unit, we only need to consider the inability of the
Company/Corporation to pay its debt. In this case, a creditor usually brings
a request for winding-up.
A Company/Corporation will be deemed to be unable to pay its debts if:

A creditor with a liquidated claim of R100 and R200 (for a Company and
Close Corporation respectively), has left a demand for payment of
his/her claim at the registered office of a Company/Corporation and this
demand was not paid, secured or compromised to the satisfaction of the
creditor within 21 days.

A judgement against the Company/Corporation could not be satisfied
because the sheriff executing the warrant or other process did not find
sufficient disposable property to attach, or because the proceeds of the
disposable property attached and sold was insufficient.

If it is proved, to the satisfaction of the court, that the
Company/Corporation is unable to pay its debts.
58
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Discuss the types of winding-up with your Coach. Ensure that you can
differentiate between the two types.
Use the space below and note the difference between these two types in
your own words.
Remember to refer to the Credit Policy and Process Manual for additional
information.
59
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Reflect back to the different types of sequestration of Individuals in Section
2 and specifically the activities that you have done on sequestration.
Complete the table below by noting the difference between sequestration of
Individuals and the winding-up of Companies/Close Corporations.
Sequestration of Individuals
Winding-up of Companies/Close Corporations
60
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Role, duties and
function of
Liquidator
As with the Insolvent Estates of Individuals, the administration of Insolvent
Estates of other debtors such as Companies, also takes place under the
supervision of the Master of the High Court.
Instead of appointing Trustees, the Master will appoint Liquidators to manage
the administration of the Insolvent Estates of Companies, etc.
These Liquidators are also elected at prescribed meetings of creditors. Again,
the responsibility of appointing an elected Liquidator rests with the Master of the
High Court.
Liquidators, as with Trustees, need no special licence to be appointed. The
Master keeps a list of competent, qualified people for appointment.
Extract
from
the Act
Section 369 of the Companies Act reads as follows:
369. Determination of person to be appointed Liquidator —
(1) In the case of a Members’ voluntary winding-up of a Company, the Master
shall, subject to the provisions of Section 370, appoint the persons nominated
by the Company in the resolution referred to in Section 356 (2) (a) (i) as
Liquidator or Liquidators of the Company concerned.
As discussed in Section 2, the duties are mainly contained in Sections 18A,
40, 45, 69-72, 76-82 and 91 and the powers in Sections 18B, 73, 77-78(1-(3)
and 80(1) of the Insolvency Act.
Refer to the Credit Policy and Process Manual,
paragraphs 6.19.4.8 – Appointment of Liquidator.
61
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Reflect back to the role of the Trustee discussed in Section 2.
Complete the table below by noting the differences and similarities between
the Trustee of an Insolvent Individual and the Liquidator of a
Company/Close Corporation.
Role, duties and function of Trustee of an
Insolvent Individual
Role, duties and function of Liquidator of a
Company/Close Corporation
Similarities
Differences
62
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Meetings and
proof of claims
In Section 2 we discussed the provisions of the Insolvency Act relating to the
creditor’s meetings and proof of claims. These provisions also apply to
Companies/Corporations.
In the event of a compulsory winding-up, at least one Members’ meeting
must be held so that a Liquidator can be nominated by Members and the
statement of affairs considered by them.
A Members’ meeting is also required in a voluntary winding-up by creditors,
unless the Members deal with the above matters at the meeting where the
resolution was adopted.
Liability of
Directors, Officers
and Members
It is the duty of the Liquidator to investigate whether any person in the
Company/Corporation may be personally liable for the way in which its affairs
were being carried out.
In the case of a Company, the following instances of liability may arise:
IF…
THEN …
there has been a breach of faith or
trust in relation to the Company
the court may order a promoter,
Director or officer to repay money or
restore property to the Company.
any person knowingly took part in the
carrying on of the Company’s
business in a reckless way or with
the intent of defrauding creditors,
the court may declare him liable for
any or all of the debts or liabilities of
the Company.
In the case of a Close Corporation, the following instances of liability may
arise:
A Member/Members may be liable jointly and severally with the Corporation
in various instances where the Close Corporations Act uses personal liability as a
sanction for non-compliance with its provisions.
IF…
THEN …
any person knowingly conducts the
business of a Corporation in a
reckless or grossly negligent way, or
with the intent of defrauding
creditors or for a fraudulent purpose
such a person may be declared liable
by the court of any or all of the
debts/liabilities of the Corporation.
there has been a gross abuse of the
separate juristic personality of the
Corporation
the court may disregard its separate
existence and order that a person
shall be personally liable for its
debts.
63
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Liability of
Directors, Officers
and Members,
continued
IF…
THEN …
the Corporation is unable to pay its
debts,
Liquidator can recover payments
made to Members by reason of their
Membership, if the payments were
made within 2 years before the
winding-up and while the Corporation
did not comply with the solvency and
liquidity requirements.
the Corporation is unable to pay its
debts,
the Liquidator can recover any salary
paid to a Member in his/her capacity
as officer/employee of the Corporation
within 2 years before the winding-up if
the payment was not reasonable in the
circumstances.
a Member, former Member, officer,
accounting officer or person involved in
the formation of the Corporation has
misapplied/retained money or
property of the Corporation or is
guilty of a breach of faith in relation
to the Corporation
the court may order such person to
contribute to the assets of the
Corporation.
Ensure that you understand the liabilities that may arise in the event of a
liquidation of a Company and Close Corporation. Discuss uncertainties
with your Coach.
Note learning points in the space below.
64
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Composition and
compromise
In general the winding-up of Companies/Corporations are very similar. However,
when it comes to composition and compromise, the legal position differs.
A Company can reach a compromise with its creditors by using Section 311 of
the Companies Act. This is an expensive procedure due to the high level of
involvement in courts.
A Close Corporation, which cannot pay its debts, can reach a composition with its
creditors.
By means of the procedure described in the Close Corporations Act (Section
72) which deviates from the composition in the Insolvency Act in a number of
ways.
An example is that a composition can be proposed at any time after the
commencement of the winding-up and not only after the 1st meeting of the
creditors has been held.
Also, the majority required is two thirds in value and number as opposed to
the three quarters in value and number required by the Insolvency Act.
Speak to your Manager regarding the composition of a Company/Close
Corporation.
Ask your Manager for examples where a composition was reached between
the bank and the Company/Corporation and the circumstances/factors
leading up to/influencing the composition.
Also discuss the differences between the composition of an Individual and
a Company/Corporation.
Use the space below and on the next page and note down these differences
in your own words.
65
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
66
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
3.2
Consequences of winding-up
Introduction
As with the sequestration of an Individual, the winding-up of a Company/
Corporation also has certain consequences.
The winding-up affects the:

Status of the Company/Corporation

Its property

Civil legal proceedings instituted against or by it

Position of the Company Directors
As discussed in Section 2, the winding-up of a Company/Corporation also has
consequences for the Bank.
When a Company/Corporation, which is being wound up, is unable to pay
its debts, the provisions of the Insolvency Act will apply to any matter not
specifically provided for in the Companies or Close Corporations Act
respectively.
The above will also apply even if the winding-up was granted on grounds
unrelated to insolvency and it later appears that the Company/Corporation
cannot pay its debts. This means that the following Sections of the
Insolvency Act will still apply:

The principles regarding uncompleted contracts

Voidable dispositions

The ranking of claims
67
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Effect of windingup on status
The Company/Corporation being wound up remains a juristic person. It may
however, not continue its business except to the extent that it is necessary to
wind up its affairs.
In Introduction to Law and how Law Govern Credit we discussed a juristic
person. Use the space below and note the definition of a juristic person.
After the commencement of the winding-up, shares in a Company and
Members’ interest in a Corporation cannot validly be transferred, except with
the permission of the Liquidator.
During the winding-up the words “IN LIQUIDATION” or “IN VOLUNTARY
LIQUIDATION” depending on the case, must appear in brackets after the name
of the Company/Corporation.
The Company/Corporation will only cease to exist when it is dissolved after all its
affairs have been wound up.
Effect of windingup on property
As discussed in Section 2, in the event of Individuals and partnerships, the
property vests in the Master.
Here however, the property of the Company/Corporation does not
automatically vest in the Master and then in the Liquidator.
The property is deemed to be in the custody and under the control of the
Master until the Liquidator has been appointed.
In some instances the court may order that all or some of the property will vest
in the Liquidator in his/her official capacity.
If the Company/Corporation is unable to pay its debts, any transfer of its
property after the commencement of the winding-up will be void unless the
court orders otherwise.
68
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Effect of windingup on civil
proceedings
After the commencement of winding-up all civil legal proceedings by or
against a Company/Corporation are stayed until the appointment of a
Liquidator.
The liquidation proceedings can only be continued once a Liquidator has
been appointed. The Liquidator has to be notified in advance of any intended
proceedings.
Any attachment of property or sale in execution after the commencement of
winding-up is void.
Effect on
Company
Directors
When a Company is being wound up the Directors are divested of all their
powers.
Firstly, the provisional Liquidator and then the Liquidator, when appointed,
takes control of the Company’s affairs.
The Directors must comply with certain statutory duties, such as furnishing a
statement of the Company’s affairs. In the case of a Company unable to pay
its debts, the Directors must attend the meetings of creditors.
Close Corporations do not have Directors, but many of the provision
applicable to Company Directors, apply to the Members of a Corporation.
69
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law

Form a small discussion group with 3 of your fellow Learners.

Each Learner to take one of the effects that winding-up have on:




Status of the Company/Corporation.
Its property.
Civil legal proceedings instituted against or by it.
Position of the Company Directors
and interpret it in his/her own words.

Discuss these interpretations between yourselves.

Use the space below and write down these effects as interpreted by
yourselves, in your own words

On completion, discuss any concerns/uncertainties with your Coach.
70
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Now that we have discussed the effects of liquidation or winding-up of a
Company/Close Corporation, we need to look at the effects on the Bank.
Read through the article “A new approach to corporate failures” on the next
page. On completion discuss the effects that liquidation have on the Bank
as well as what measures have been put in place to minimise or prevent
these risks, with your Manager.
Note the impacts/effects on the Bank in the space below.
71
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
A New Approach To Corporate Failures
This article appeared in ITC's e-newsletter of 9/11/2001, What's new...s
(www.itc.co.za webmaster@itc.co.za).
This week's edition of What's new...s? provides some useful insight into a new approach that banks
and other credit-grantors are taking with respect to corporate failures.
Too often credit people are so anxious to extract payment from a problematical account that they
apply for liquidation without fully considering the consequences. These decisions are often so
charged with emotions that one tends to forget that liquidation is almost always a lose-lose situation.
There was a time when banks appeared to passively accept that corporate failures are an unfortunate
fact of life, and that losses resulting from failures are an occupational hazard to be factored into the
expected return on investments. What is more, banks appeared, once the corporate borrower had
been placed in liquidation and the loss had been provided for, to resign themselves to the outcome of
the winding-up, and to deem whatever dividend was received to be a bonus.
Today banks are no longer prepared to stand on the sidelines and merely watch their corporate
customers slide into insolvency. They are furthermore waking up to their vital role, as creditors, in the
liquidation process, and the substantial benefits to be gained from greater control of and
accountability from professional Liquidators appointed by the Courts. Where a Company finds itself in
financial trouble, winding-up should be a last resort.
Everyone, including shareholders, banks, other creditors, the workforce and the economy as a whole,
loses when a Company fails. Many Companies that are fundamentally sound have good products and
add real value to the economy, fail as a result of a temporary liquidity crisis or the inability of
management to keep pace with growth. Banks are redefining their role where medium to large
corporate customers stumble. They are more inclined (although mindful of the risk of being held
accountable as quasi managers of the Company) to participate in, and even initiate, controlled
recovery programs designed to nurse the Company back to financial health.
Most major banks have invested in the creation of intensive care units, staffed by skilled
professionals, who while looking after the interests of the banks and other creditors, can engage and
advise management of faltering Companies in constructive and innovative strategies towards
recovery. Invariably, such strategies involve co-operation between creditor banks and other creditors
in debt re-scheduling, interest relief and standstill arrangements. Standstill and debt rescheduling
programs require, to succeed, not only co-operation between banks and other creditors, but also the
support and commitment of the other stakeholders including shareholders, Directors, management
and staff of the troubled Company. The failure of such programs is most often occasioned by failure to
disclose relevant information, lack of co-operation and commitment in implementing suggested
strategies, and fraud and other criminal behaviour.
Regrettably, there have been a number of recent highly publicised instances where, despite the best
efforts of banks and creditors involving comprehensive debt standstill arrangements, the relevant
Companies have failed. There have, fortunately, also been significant successes, although these are
understandably less well publicised. The recent negative publicity surrounding the appointment of
Liquidators by the Master of the High Court has once again highlighted the urgent need for the
restoration of public confidence in the liquidation industry, which deals with billions of Rands worth of
assets at any given time.
72
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Allegations of irregularity in the appointment process and in the disposal of assets and distribution of
liquidation proceeds, have not only created an awareness that the insolvency legislation is in need of
overhaul but have also focused the attention of banks and other major creditors on their important role
in the process. In some instances they have induced banks, which are usually the largest creditors of
liquidated Companies, to drive the liquidation process from a creditor's point of view to ensure that the
maximum possible value is achieved from the Insolvent Estate and that, where necessary, the culprits
responsible for the demise of the Company are held accountable.
This increased awareness and involvement of the banks is to be welcomed, and coupled with the
expected overhaul of the relevant statutes, will hopefully have the effect of increasing the affectivity of
the liquidation process, lowering the potential for irregularity and increasing public confidence in the
industry players. With the expertise available in banks presently, Companies, which are on the brink
of insolvency, are more regularly identified prior to actual liquidation. A lot of time and effort is
expended in attempts to turn troubled Companies around before liquidation becomes inevitable. Apart
from the debt re-scheduling, interest relief and standstill arrangements currently employed by banks
as mechanisms to restore solvency to the struggling Company, it is envisaged that the existing judicial
management procedure provided for in the Insolvency Act will be re-engineered to allow for more
informal and practical procedures.
This may reduce the risk of banks being held liable by other creditors, where they, in a bona fide
manner, seek to guide troubled Companies back to health. Properly structured, and given the
commitment of all stakeholders many liquidations can be avoided by the introduction of a standstill/rescheduling program and a more practical judicial management process, to the benefit of all
stakeholders. Once liquidation is inevitable, much can be done by banks and other creditors to
maximise the dividend accruing to them, and to minimise leakage and the risk of irregularities.
73
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
3.3
Summary
Summary
Below is a summary of the key learning points of this Section. Read through
them carefully and ensure that you understand all the concepts. Discuss any
uncertainties with your Coach before you move on to the next Section.

The Insolvency Act does not regard a Company or Close Corporation as
debtors and they can therefore not be sequestrated, but are liquidated or
wound-up under the Companies or Close Corporations Acts respectively

A Liquidator under the supervision of the Master handles the winding-up of
a Company or Corporation

Winding-up or liquidation can also take place for reasons other than
insolvency – the Members no longer wish to continue the activities of the
Company or the Close Corporation

There are two types of winding-up:
 Voluntary winding-up
 Compulsory winding-up

Voluntary winding-up of a Company is initiated by a special resolution
passed by its Members

It is a Members’ voluntary winding-up if there are no creditors or if the
Company or Corporation has given security that all the creditors will be
paid within 12 months

If the Company/Corporation cannot pay its debts, it cannot use a
Members’ voluntary winding-up. A creditors’ voluntary winding-up does
not necessarily mean that the creditors are involved in the decision to wind
up the Company/Corporation. It means the creditors will have a say in the
winding-up process

The Company/Corporation itself or one or more of its creditors or
Members can make an application for compulsory winding-up

It is the duty of the Liquidator to investigate whether any person in the
Company/Corporation may be personally liable for the way in which its
affairs were being carried out

A Company can reach a compromise with its creditors by using Section
311 of the Companies Act
 A Corporation, which cannot pay its debts, can reach a composition with its
creditors, similar to the composition provided for in the Insolvency Act
74
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
Summary,
continued
The winding-up affects the Company’s/Close Corporation’s:





Status of the Company/Corporation
Its property
Civil legal proceedings instituted against or by it
Position of the Company Directors
The winding-up of a Company/Corporation also has consequences for the
Bank
Use the space below and summarise your own key learning points from
this Section.
75
Version: 03/2004
IB CP 6 LG
3.
Corporate Insolvency Law
3.4
Conclusion
Conclusion
Apart from the Insolvency Act, there are numerous other Acts that also impact on
the sequestration procedures of Individuals and the winding-up of Companies
and Close Corporations.
The intent of this Unit was to give you an overview of Insolvency Law in South
Africa.
An understanding of the law will put the sequestration process of Individuals, as
well as the winding-up of Companies, into perspective, once you deal with such
issues in your duties in the Credit Department.
The application of the sequestration process for Individuals will be dealt with in a
forthcoming Unit, Contractual Capacity Pertaining to Individuals.
The application of the winding-up of Companies and Agricultural Customers will
be dealt with in Legal Aspects of Banking Pertaining to the Commercial and
Agricultural Customers.
In this Unit you will learn to apply all the minimum requirements of the different
Acts involved as well as the business requirements of the Bank.
There are numerous Internet sites where you can get useful additional
information regarding insolvencies – both in South Africa and overseas.
You are urged to do extra reading on the subject and share useful information
with fellow Learners.
Enjoy this learning experience!
76
Version: 03/2004
IB CP 6 LG