Winding Up Insolvent Companies

Question 1

Which Act regulates the winding up of commercially insolvent companies?

Answer 1

1973 Act.

Question 2

What is factual insolvency?

Answer 2

Factual insolvency occurs when a company’s liabilities exceed its assets. In other words, the company has a negative net asset value. It means that if all of the company’s assets were liquidated (turned into cash), they would not be sufficient to cover its liabilities (debts).

Question 3

What does factual insolvency indicate?

Answer 3

Factual insolvency often indicates long-term financial difficulties, but the company may still have sufficient cash flow to meet its obligations in the short term.

Question 4

What is commercial insolvency?

Answer 4

Commercial insolvency refers to a company’s inability to pay its debts as they fall due in the ordinary course of business.

Question 5

What does commercial insolvency indicate?

Answer 5

Commercial insolvency reflects immediate financial trouble, where the company is unable to meet its short-term obligations, even though it may be factually solvent.

Question 6

What do both types of insolvency indicate?

Answer 6

A company’s financial health, particularly in the context of business rescue or liquidation proceedings.

Question 7

Which provision deals with the application for winding up an insolvent company?

Answer 7

Section 346.

Question 8

Who may bring an application ito section 346 for the company to be wound up?

Answer 8

1. Company
2. Creditor
3. Member of the company aka shareholder

Question 9

What happens if the application is not brought by the company itself?

Answer 9

Then the application must be served on the company, which may then oppose the application.

Question 10

Which cases deal with the discretion that the court has to grant a winding up order?

Answer 10

1. Terblanche v Offshore Design Co
2. Ter Beek v United Resources

Question 11

Which cases deal with a court granting a provisional winding up order, followed by a final order?

Answer 11

1. Helderberg Laboratories v Sola Tech
2. Excellent Petroleum v Brent Oil

Question 12

Which case deals with winding-up applications as a debt collecting strategy?

Answer 12

Badenhorst v Northern Construction Enterprises.

Question 13

What is the best way to defeat a winding-up application as a debt collecting strategy?

Answer 13

By showing that there is a bona fide dispute over the amount owing.

Question 14

Which case shows the best way to defeat a winding-up application as a debt collecting strategy?

Answer 14

Body Corporate Elma Park v Erf 195 Elma Park.

Question 15

What happens once the court has granted the winding up order?

Answer 15

The Master of the HC will appoint a liquidator usually in consultation with the applicants.

Question 16

What happens if the first order is a provisional order?

Answer 16

The liquidator will first be appointed provisionally.

Question 17

What is the principal job of a liquidator?

Answer 17

To take control of the company’s assets and sell them in order to realise the maximum benefit for creditors, and then distribute the proceeds among the creditors and to the shareholders if there is anything left after creditors have been paid. Process is summarised by the liquidation and distribution account, which the liquidator must draw up.

Question 18

What happens once the winding up is complete and all the assets distributed?

Answer 18

1. The liquidator reports to the Master, who then discharges the liquidator from their duties.
2. Master then reports the dissolution of the company to the CIPC
3. CIPC records the dissolution of the company and then deregisters it.

Question 19

What are dissolution and deregistration?

Answer 19

Legal processes that bring a company’s existence to an end.

Question 20

What is dissolution?

Answer 20

Dissolution refers to the formal termination of a company’s existence following a winding-up or liquidation process. It is the final stage after the company has settled its debts and distributed any remaining assets to its shareholders. Dissolution legally marks the company’s end of existence.

Question 21

What is deregistration?

Answer 21

Deregistration refers to the removal of a company’s name from the Companies and Intellectual Property Commission (CIPC) register, effectively making it no longer a juristic person. However, unlike dissolution, deregistration does not necessarily mean the company has been liquidated or that its debts have been settled.

Question 22

Which provision regulates dissolution and deregistration?

Answer 22

Section 82.

Question 23

Which provision deals with the effect of deregistration?

Answer 23

Section 83.

Question 24

What is the effect of deregistration?

Answer 24

1. End of legal personality
2. Directors and officer remain liable for acts or omissions which took place before deregistration
3. Any remaining company assets become vacant goods.

Question 25

What happens if an application is made to the court for an order declaring the deregistration to be void?

Answer 25

If order is granted, company is revived as if it had never been dissolved.