Teaching week 11: Corporate insolvency (liquidation) with a focus on companies

Study material
Nagel et al Commercial Law paras 35.82 – 35.155; 35.185 – 35.188

Note that business rescue, directors’ liability and reckless trading is dealt with in the next semester
in ODR 320 (Entrepreneurial Law)

Learning objectives
After studying this section, you should be able to demonstrate your knowledge, and
understanding, of corporate insolvency (liquidation) in the following manners:

• Distinguish between sequestration and liquidation;

• Discuss the role that insolvency plays in the liquidation of insolvent companies and close
corporations;

• Define, and distinguish between, the liquidation of an insolvent company, business rescue,
and a compromise with creditors where a corporate entity suffers financial difficulties (only
on a basic level);

• Distinguish between the liquidation of a solvent company in terms of the 2008 Companies
Act and the liquidation of an insolvent company in terms of the 1973 Companies Act;

• Discuss the manners in which the liquidation of an insolvent company may be brought about;

• Describe the circumstances under which the court may liquidate a company upon request of
an applicant, specifically on the ground that the company is unable to pay its debts;

• Describe the required contents of the affidavit in support of an application for liquidation
of an insolvent company;

• Describe the powers of the court when hearing an application for liquidation;

• Explain the effects of a liquidation order;

• Discuss the rules surrounding the appointment of a liquidator;

• Summarise the general powers and duties of a liquidator;

• Describe the rules pertaining to:

o the interrogation of certain persons;

o the tracing and recovery of assets;

o the realisation of a company's assets;

o the application of the proceeds of a company's assets;

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• Discuss the account that the liquidator must lodge in which he accounts for his conduct in
the winding-up of the company's affairs;

• Explain what a compromise with creditors in terms of the 2008 Companies Act entails;

• Apply the abovementioned principles/law to practical scenarios to solve legal problems.

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 Corporate Liquidations
(Part 01) – The application
13 May 2025
WJC Swart
__________________________________________________________________________________

1. Introduction

2. A juristic person

3. The stakeholders

• The Master

o Duties and function

▪ Open of liquidation file

▪ Appointment of the liquidator
▪ Convening certain meetings
▪ Approval of estate accounts prepared by the liquidator

• CIPC
• Shareholders (Members)
• Creditors
• Employees
• Liquidators

4. The Law

• Ss 79-81 of the Companies Act 71 of 2008 for solvent companies

• S 224 of the Companies Act 71 of 2008 repealed the Companies Act 61 of 1973, except for Ch
14

• Item 9(2) of Schedule 5 of the Companies Act 71 of 2008

o Ch 14 of the Companies Act 61 of 1973 - still regulates the liquidation of
insolvent companies

• S 339 of the Companies Act 61 of 1973 includes the insolvency law

5. The commencement

A. Voluntary or by court

• Voluntary
o Voluntary (members or creditor) – Special resolution by shareholders

B. The court

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 • Action or motion proceedings?
• High court or Magistrates Court?

6. Grounds

Insolvent companies

• S 344(a)-(h) of the Companies Act 61 of 1973

• S 344(f) read with s 345 of the Companies Act 61 of 1973

o deemed unable to pay

o Owe creditor R100
o Failed to pay for 3 weeks

• See also s 345 – no or not enough assets to satisfy a judgment

__________________________________________________________________________________

Boschpoort Ondernemings (Pty) Ltd v ABSA Bank Limited [2014] 1 All SA 507 (SCA)

• Differentiate between solvent and insolvent companies?

• Factual insolvency a defence?
• Differentiate between insolvency and financial distress? Why important?

__________________________________________________________________________________

① Q
7. Notice of motion and Founding Affidavit

• Applicant – s 346 (Company, creditor, shareholder, the Master)

• Respondent

• Jurisdiction

o High Court?

o Registered office or principal place of business

• Security of costs issued by the Master – s 346(3)

• Intention to serve the application on the Master – s 346(4)

• Grounds

• Annexures

See
·
example that will be uploaded
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8. Serve on:

• Registered trade unions

• Notice on the premises of the company

• SARS

• The company (registered office or principal place of business)

• The Master – see s 346(4)

9. The order s 347(1)

Court has a discretion

• Provisional and final liquidation

• Adjourn (conditional and unconditional)

• Dismiss

• Any order it deems fit

10. Date of commencement

• NB - S348 of the Companies Act 61 of 1973

11. Effect of order

• Control

12. The end

• Ss 82 and 83 of the Companies Act 71 of 2008

o Dissolve and removal of the register Aftertherose ly

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 ADDITIONAL PRESCRIBED READING AND STUDY MATERIAL

__________________________________________________________________________________

Dear Student

Please read the judgment of the Supreme Court of Appeal in Boschpoort Ondernemings (Pty) Ltd v ABSA
Bank Ltd 2014 (2) SA 518 (SCA) http://www.saflii.org/za/cases/ZASCA/2013/173.html and carefully
consider the following:

• Are the terms insolvency and solvency defined in the Companies Act 71 of 2008 and Chapter 14
of the Companies Act 61 of 1973?
• What is the difference between a company that is insolvent and a company that is in ‘financial
distress’?
• What is the approach of our courts to the following argument?

‘Although a company is commercially insolvent it cannot be liquidated,

because its assets exceed its liabilities.’
 Note on interaction between insolvency and corporate legislation:
• Distinguish between natural persons and juristic persons.

1. A natural person’s estate is sequestrated in terms of the Insolvency Act – the name of the process is
sequestration and it is regulated primarily by the Insolvency Act. For example, the grounds and procedure for
sequestration are set out in the Insolvency Act.
2. A company is liquidated/wound-up in terms of the Companies Act – the name of the process is liquidation
and it is regulated primarily by the Companies Act. For example, the grounds for winding-up and the procedure
for liquidation are set out in the Companies Act.

• There are two Companies Acts – the 2008 and the 1973 Acts.
1. The 2008 Act deals with solvent companies – the grounds for winding-up a solvent company. The 2008 Act
refers to the 1973 Act when it comes to insolvent companies – the grounds and process for winding-up an
insolvent company are set out in chapter 14 of the 1973 Act.
2. The 1973 Act contains provisions dealing with the winding-up an insolvent company. However, the Companies
Act 1973 lacks provisions on certain matters. For example, it contains no provisions on impeachable
transactions or unexecuted contracts. If the liquidator of an insolvent company is confronted with an
impeachable transaction or unexecuted contract, the liquidator must refer to the Insolvency Act for the
necessary rules to follow.

• The names of the procedures are SEQUESTRATION (natural person) and LIQUIDATION (company) (nouns).

• When assets are sold and “turned into money”, the verb used to describe this is "liquidate" in the context of the
liquidation of assets – whether in sequestration or liquidation – the assets are liquidated (verb).

For companies:

Companies Act of 2008 Companies Act of 1973 Insolvency Act

“go to Chapter 14 of the 1973 Act Use the provisions in Chapter 14 Fall back on the provisions of the Insolvency
when it comes to insolvent to administer the insolvent Act if it is something that can be applied to
companies” estate a company (eg voidable dispositions YES,
exempted assets or rehabilitation NO) and
the Companies Act does not contain its own
rules in this regard

• NB: a company is LIQUIDATED in terms of corporate law provisions because the Companies Act contains
special provisions to effect this – the provisions were designed especially for companies.
• NB: banks and insurance companies are dealt with in terms of separate special legislation designed for banks
and insurance companies.
For natural persons:

Is the person a debtor for purposes of section 2 of the Insolvency Act?

I.e. can this person’s estate be sequestrated? YES Insolvency Act

E.g. natural person, partnership, trust, or any other entity not Never the Companies Act

dealt with in terms of its own special legislation

1.
Liquidation ORDER Or Special Resolution

yet appointed
not Meetings
Liquidates
First Meeting -Creditors Meeting - members Second Meeting - Creditors
Final order or Creditors’ voluntary winding -up Final order or Creditors’ voluntary winding -up First meeting and appointment of
registered registered liquidator(s)
Convened by Master – s 364(1) Convened by Master – s 364(1) Master, but presided over by the
liquidator
Purpose and agenda Purpose and agenda Purpose and agenda

1. Statement of affairs 1. Statement of affairs – s 363 1. S 402 report

2. Prove of claims 2. Nomination of liquidator – s 364(1)(b) 2. Prove of claims
3. Nomination of liquidator
Received instructions from creditors
 The liquidator – Powers and Duties

General duties – s 391 Specific duties Reporting Powers

• Received statement of affairs – s 363(5) Record statements of all monies, goods, books, • Prepare and submit s 402 Categories
accounts, and other documents received by him report
• Takes control and possession on behalf of the company. 1. Exercise on his/her own –
• Investigate and report s 386
• Collect debts • Name contraventions – s 400 2. Authority of creditors
• In Liquidation or In Voluntary Liquidation and/or members – s 386(3)
• Pay costs related to liquidation • Open bank account • Delinquent order – s 219 3. Master – s 386(2)
• Savings account
• Pay creditors • Withdrawals only from current account –
s 394
• Distribute the surplus - shareholders
 S 414 read with s S 360? S 417 S 418 S 381 S 423
415 Inspection (Private) (Private) Conduct of
liquidator
Unable to pay its Unable to pay its Unable to pay its debts
debts debts Winding-up order
Winding-up order
Winding-up order Winding-up order

Incorporates – ss 66,
67 and 68 of the
Insolvency Act 1936

Abuse?
S 346(1)(e)
S 388
Who may rely on the Master or another Creditor Master or the Court The Master Master Master
section? officer
Member Liquidator Liquidator
Liquidator
(shareholder) Creditor Creditor
Creditor who proved
a claim Member Member
Who may be Director or any other Books ‘any director or officer of Liquidator Any person part of
examined? person the company or person incorporation
Documents known or suspected to
Subpoenaed s 414 have in his possession Past and present
(2) any property of the directors
company or believed to
be indebted to the Any officer of the
company, or any person company
whom the Master or the
Court deems capable of Misapplied
giving information property or money
concerning the trade,
dealings, affairs or Breach a duty of
property of the faith or trust
company’ - s 417
Scope of Relevance Breach of trust
examination?
Business and affairs
of company

Before or after
winding-up

Oblige to answer
despite incrimination
Who chairs the Master or presiding Master or the Court Commissioner: Court
meeting? officer Magistrate or any
other person
appointed
Who appoints the Master Master or Court
chair?
Representation Yes – s 414(6) Yes – s 417(1A)
Relief or sanctions Examination of ‘Apprehend’ any Delinquent
witnesses witness directors and
others to restore
Production of books property and to
and documents compensate the
company
Personal liability of directors and officers

S 424 S22(1) of the CA 71/2008 S 76 read with s S 218 CA S 69 CA S 64 of CC Act

77 of the CA 71/2008 71/2008
71/2008
Persons Directors and officers Company Directors and Any person Any person
Liable prescribed officers contravened the Act
Grounds Recklessly Prohibited conduct Breach of duty Contravention of the sequestrated Carry business of
with the intent to defraud Carrying business recklessly Act cc recklessly or in
creditors Gross negligence a fraudulent
other fraudulent purpose Intent to defraud any person manner
Any fraudulent person
Scope of Personal liability for any or all CIPC issue notice Loss, damages or costs Loss suffered Director and All or any debts or
liability debts of the company Reasonable grounds to believe that prescribed officer other liabilities of
company is engaged in prohibited disqualified, unless the corporation
conduct exempted by a
court
Unbale to pay debts as it becomes
due and payable in the normal course
of business
Company show cause why it should
be permitted to trade
Failure to show good cause within 20
business days:

Issue compliance notice requiring the

company to cease trading
 Close Corporations - Meeting of creditors and members

Meeting of creditors Meeting of members

One month after:

Final winding-up order

Resolution of a creditors’ voluntary winding-up

Liquidator

See s 78
Purpose and agenda Purpose and agenda

1. Statement of affairs 1. Statement of affairs

2. Prove of claims 2. Receiving directors or authorisation
3. Nomination of co-liquidator
4. Receiving directors or authorisation
Close Corporations

General liquidator Liquidator’s report

S 66(1) of the CCA – aligned Master appoints S 79 – report to
the winding-up of CCs to Ch Prov liquidation order
14 Resolution for winding-up Meeting of creditors
registered members
S 74 – co-liquidator
S75 – filling of vacancies
Ss 371-376
Ss 378-386
Ss 391-394
 Individual Companies Close Corporations
Law applicable Insolvency Act 24 of 1936 • Companies Act 71 of 2008
• Ch 14 of the Companies Act 61 of 1973 • Close Corporations Act
• Law of insolvency – s 339 • S66 of the CC Act makes Ch 14 of the Companies
Act 61 of 1973 applicable.
• S 339 of Companies Act 61 of 1973 makes the
Insolvency Law applicable
Administration • Trustee • Liquidator • Liquidator

• Master • Master • Master

• CIPC • CIPC
Modes • Voluntarily liquidation – Special Resolution • S 67 of the CC Act amended; and
of • Court order • S 68 of the CC Act repleaded
commencement
Effect
• Companies Act 71/2008 = solvent companies

• Companies Act 61/1973 = insolvent companies

Voluntary liquidations = written resolution signed by

all the members

Date Compulsory sequestration = • S 348 The same as companies – s 66 of the CC Act.

of provisional sequestration order • NB: See effect of s 341 on share transactions
commencement and dispositions
Voluntary surrender = Only
one order

Jurisdiction • High Court • High Court • High Court or Magistrates Court

• Registered office / main place of business
Grounds • Factual or actual insolvency See s 69 of the CC Act.
• Commercial insolvency • Deemed unable to pay its debts.
• Financial distress

S344(a)-(h)

S 344(f) – unable to its debts (See s 345)

 Appointment of • Special provisions in the CC Act.
trustees/Liquidators
• See ss 74 and 75.
Benefit for creditors Yes No No
Rehabilitation Yes Business rescue? Business rescue?
 PRACTICAL EXERCISE – APPLICATION FOR LIQUIDATION

__________________________________________________________________________________

The contents of an affidavit in support of an application for winding-up is dealt with in para 35.90 of the
prescribed textbook.

Consider the draft application that can be downloaded at the following link
https://www.vbsmutualbank.co.za/documents/NoM_and_FA_Vele.pdf and form an opinion on whether
the draft application complies with each and every of the prescribed statutory requirements for an
application for the liquidation of a company.

Make a few notes on where in the application evidence can be found of compliance with each and every
formal requirement discussed in para 35.90 of the prescribed textbook.
__________________________________________________________________________________

PRACTICE QUESTIONS

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KLM Ltd is a public company that trades in rare eastern antiquities. Due to travel restrictions imposed during the
Covid-19 pandemic, KLM Ltd is in severe financial distress. It is unlikely that the company will recover to trade as
a successful concern again.

Answer the following questions based on the facts above. Your answers must be as concise and to the point as
possible. Where more than one answer is given, only the first answer will be marked.

1. Name two ways in which a company may be wound-up in general. (2)

2. Indicate whether actual or commercial insolvency is needed to wound-up an insolvent company and refer
to case law to support your answer. (2)

3. Explain which statutory framework (which Act) would govern the grounds for winding-up KLM Ltd if it is
insolvent. Provide comprehensive reasons for your answer in light of the new statutory framework for
companies introduced in 2008. (3)

4. Nini was contracted by KLM Ltd to assess the authenticity of the antiquities before they were sold to
clients. KLM Ltd has failed to pay Nini for her services, notwithstanding that she served a letter of demand
requiring payment at its registered office in Pretoria on 1 December 2021. Explain whether Nini has a
ground to institute liquidation proceedings against KLM Ltd based on these facts. (5)

5. Assume for purposes of this question that Nini was not an independent contractor but an employee of
KLM Ltd. Explain whether Nini has a right to know about the institution of any liquidation proceedings
against KLM Ltd. Provide comprehensive reasons for your answer and, if she has such a right, indicate
how she should be informed. (3)