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[2012] ZAKZDHC 91
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Firstrand Bank Ltd v Wayrail Investments (Pty) Ltd (684/2012) [2012] ZAKZDHC 91; [2013] 2 All SA 295 (KZD) (20 December 2012)
IN THE KWAZULU-NATAL HIGH COURT,
DURBAN
REPORTABLE
REPUBLIC OF SOUTH AFRICA
CASE No: 684/2012
In
the matter between:
FIRSTRAND
BANK LIMITED
.....................................................................
Applicant
and
WAYRAIL
INVESTMENTS (PTY) LTD
....................................................
Respondent
JUDGMENT
Delivered on 20 December
2012
Vahed J:
This matter served before me on the
opposed motion roll on 24 October 2012 which was the extended return
day of an Order provisionally
winding-up the respondent which was
made by Mnguni J on 18 April 2012. The final Order is opposed and
detailed and lengthy affidavits
have been exchanged. The applicant
has complied with the procedural formalities for a final Order in
that publication and the
requisite service of documents have been
effected. That much is not in dispute.
On the papers two principal issues
emerge for resolution. The first relates to the authority of the
deponent to the respondent’s
answering affidavit. This issue
was not persisted in by Mr
Harcourt SC
who appeared for the
applicant. Nothing more needs to be said on this score.
That left the only real issue in the
case, which related to whether the respondent was
solvent
within the meaning of that term as it is employed in item 9(2) in
schedule 5 to the
Companies Act, 71 of 2008
and in
section 81
of
that Act.
That issue brought into sharp focus
the concepts of
solvent
,
insolvent
,
commercially
insolvent
and
inability to pay debts
as they have come to
be known and employed in our law when considering whether a company
is insolvent and liable to be wound-up.
It is common cause in this matter
that the respondent’s assets, fairly valued, exceed its
liabilities. It is also common
cause, or not seriously in dispute,
that the respondent cannot make payment of its ongoing obligations
because it does not have
sufficient cash resources (or readily
available resources) with which to do so.
In what follows, unless the context
indicates otherwise, I shall refer to the
Companies Act, 71 of 2008
as “the 2008 Act” and to the Companies Act, 61 of 1973
as “the previous Act”. The 2008 Act repealed,
in its
entirety, the previous Act, but, in certain transitional
arrangements, retained its applicability in certain given
circumstances.
The winding-up of
insolvent
companies is one
such circumstance.
The present application is based, in
the main, on the respondent’s inability to pay its debts and
its winding-up is sought
in terms of the provisions of the previous
Act read with Item 9 of Schedule 5 of the 2008 Act.
Section 81 of the 2008 Act provides
as follows:
81
Winding-up of solvent companies by court order
(1)
A court may order a solvent company to be wound up if-
(a)
the company has-
(i)
resolved, by special resolution, that it be wound up by the court; or
(ii)
applied to the court to have its voluntary winding-up continued by
the court;
(b)
the practitioner of a company appointed during business rescue
proceedings has applied for liquidation in terms of section 141
(2)
(a)
, on the grounds that there is no reasonable prospect of
the company being rescued; or
(c)
one or more of the company's creditors have applied to the court for
an order to wind up the company on the grounds that-
(i)
the company's business rescue proceedings have ended in the manner
contemplated in section 132 (2)
(b)
or
(c)
(i) and it
appears to the court that it is just and equitable in the
circumstances for the company to be wound up; or
(ii)
it is otherwise just and equitable for the company to be wound up;
(d)
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;
(ii)
the shareholders are deadlocked in voting power, and have failed for
a period that includes at least two consecutive annual
general
meeting dates, to elect successors to directors whose terms have
expired; or
(iii)
it is otherwise just and equitable for the company to be wound up;
(e)
a shareholder has applied, with leave of the court, for an order to
wind up the company on the grounds that-
(i)
the directors, prescribed officers or other persons in control of the
company are acting in a manner that is fraudulent or otherwise
illegal; or
(ii)
the company's assets are being misapplied or wasted; or
(f)
the Commission or Panel has applied to the court for an order to wind
up the company on the grounds that-
(i)
the company, its directors or prescribed officers or other persons in
control of the company are acting or have acted in a manner
that is
fraudulent or otherwise illegal, the Commission or Panel, as the case
may be, has issued a compliance notice in respect
of that conduct,
and the company has failed to comply with that compliance notice; and
(ii)
within the previous five years, enforcement procedures in terms of
this Act or the Close Corporations Act, 1984 (Act 69 or
1984), were
taken against the company, its directors or prescribed officers, or
other persons in control of the company for substantially
the same
conduct, resulting in an administrative fine, or conviction for an
offence.
(2)
A shareholder may not apply to a court as contemplated in subsection
(1)
(d)
or
(e)
unless the shareholder-
(a)
has been a shareholder continuously for at least six months
immediately before the date of the application; or
(b)
became a shareholder as a result of-
(i)
acquiring another shareholder; or
(ii)
the distribution of the estate of a former shareholder,
and
the present shareholder, and other or former shareholder, in
aggregate, satisfied the requirements of paragraph
(a)
.
(3)
A court may not make an order applied for in terms of subsection (1)
(e)
or
(f)
if, before the conclusion of the court
proceedings-
(a)
any of the directors have resigned, or have been removed in terms of
section 71, and the court concludes that the remaining directors
were
not materially implicated in the conduct on which the application was
based; or
(b)
one or more shareholders have applied to the court for a declaration
in terms of section 162 to declare delinquent the directors,
if any,
responsible for the alleged misconduct, and the court is satisfied
that the removal of those directors would bring the
misconduct to an
end.
(4)
A winding-up of a company by a court begins when-
(a)
an
application has been made to the court in terms of subsection (1)
(a)
or
(b)
;
or
(b)
the
court has made an order applied for in terms of subsection (1)
(c)
,
(d)
,
(e)
or
(f).’
Item 9 of Schedule 5 of the 2008 Act
provides as follows:
‘
(1)
Despite the repeal of the previous Act, until the date determined in
terms of sub-item (4), Chapter 14 of that Act continues
to apply with
respect to the winding-up and liquidation of companies under this
Act, as if that Act had not been repealed subject
to sub-items (2)
and (3).
(2)
Despite sub-item (1), sections 343, 344, 346, and 348 to 353
do not apply to the winding-up of a solvent company,
except to
the extent necessary to give full effect to the provisions of Part G
of Chapter 2.
(3)
If there is a conflict between a provision of the previous Act
that continues to apply in terms of sub-item (1), and
a provision of
Part G of Chapter 2 of this Act with respect to a solvent company,
the provision of this Act prevails.
(4)
The Minister, by notice in the Gazette, may –
(a)
determine a date on which this item ceases to have effect but no such
notice may be given until the Minister is satisfied that
alternative
legislation has been brought into force adequately providing for the
winding-up and liquidation of insolvent companies;
and
(b)
prescribe ancillary rules as may be necessary to provide for the
efficient transition from the provisions of the repealed Act,
to the
provisions of the alternative legislation contemplated in paragraph
(a).’
Relying principally on the authority
in this division of
Business Partners v Yellow Star Properties
1061 (Pty) Ltd
, an unreported decision of
Radebe
J in
case number 7188/2011 KZND delivered on 13 July 2012 and
HBT
Construction & Plant Hire CC v Uniplant Hire CC
[2011]
ZAFSHC 216
, Mr
Harpur SC
, who appeared for the respondent
argued that
solvent
, where it appeared in both in section 81
and in item 9 of Schedule 5 of the 2008 Act, meant and referred to
factual or actual
solvency. In other words, it did not include
commercial insolvency. Thus, he continued, the applicant’s
reliance on the
previous Act was not competent because the
respondent was
solvent
and if the applicant wanted to secure
its winding-up, it had to bring itself within the confines of
section 81 of the 2008 Act.
After I had reserved judgment in the
matter Mr
Harcourt
drew attention to the decision of
King
AJ in
Standard Bank of SA Ltd v R-Bay Logistics CC
[2012]
ZAKZDHC 69 which had been handed down in this division on 31 October
2012.
In
R-Bay Logistics
,
King
AJheld, on the identical issue, that
solvent
, for the
purposes of Item 9 of Schedule 5 of the 2008 Act, meant, at the very
least, commercial solvency. In other words, a company
with an excess
of assets over liabilities but which could not discharge its debts
as and when they arose in the ordinary course
of business was one
properly liable to be wound up in terms of Item 9 of Schedule 5 of
the 2008 Act. In that regard,
King
AJ held as follows:
‘
[25]
I have already said that the concept of "commercial insolvency"
in the sense that a company is unable to meet its
obligations when
they fall due, is one which is well known in company law and is
enshrined in Section 344(f). I have also said
that such commercial
insolvency requires the application of a test which is quite
different to that which one must apply to establish
actual
insolvency. That being so, it would be quite incongruous for the
legislators to require an applicant to establish the actual
insolvency of a respondent company merely in order to entitle that
applicant to bring an application for winding-up, making use
of the
provisions of Section 344(f), which requires the application of a
completely different test.
[26]
To my mind, this offers compelling evidence that what the legislature
intended, when it used the term "solvent" in
Item 9 was
that a company must be solvent in at least the commercial sense,
before any winding-up of that company could take place
under Part G.
For present purposes, it is not necessary for me to determine
whether, for Part G of the new Companies Act to apply,
it would have
to be established that the company was also actually solvent.
[27]
There has been judicial debate about whether, for the purposes of
Section 344(f) of the old Companies Act, it is possible for
the Court
to conclude, upon evidence of actual insolvency, that a company is
"unable to pay its debts". Certainly, proof
of the actual
insolvency of a respondent company might well provide useful evidence
in reaching the conclusion that such company
is unable to pay its
debts but that conclusion does not necessarily follow. On the other
hand, if there is evidence that the respondent
company is
commercially insolvent (i.e. cannot pay its debts when they fall due)
that is enough for a Court to find that the required
case under
Section 344(f) has been proved. At that level, the possible actual
solvency of the respondent company is usually only
relevant to the
exercise of the Court's residual discretion as to whether it should
grant a winding-up order or not, even though
the applicant for such
relief has established its case under Section 344(f).
[28]
I believe that my view is also reinforced by the provisions of
Section 79(3) of the new Companies Act (which is in Part G),
read
together with Item 9(2). It will be noted that, under Item 9, only
certain of the sections which form part of Chapter 14 of
the old
Companies Act are said not to be applicable in the case of the
winding-up of a solvent company. What is noteworthy is that
Section
345 of the old Companies Act still applies even to the winding-up of
a solvent company under the provisions of the new
Companies Act.
Bearing in mind that commercial insolvency (ie: inability to pay
current debts) is not one of the grounds mentioned
in Section 81 of
the new Companies Act, for the winding-up of a solvent company, the
question arises as to why the legislature
saw fit to preserve the
operation of Section345 of the old Companies Act even when the
winding-up of a solvent company is under
consideration by the Court.
The provisions of
section 69
of the
Close Corporations Act, which
mirror those of
section 345
of the old Companies Act, were also
preserved when the Close Corporation Act was amended, to take account
of the provisions of
the new Companies Act.
[29]
I believe that the explanation is contained in Section 79(3) of the
new Companies Act. It provides that, if during the course
of an
application to wind-up a solvent company, brought under the
provisions of Section 81, it is determined that the respondent
company is or may be "insolvent" the Court may order that
the company be wound up as an "insolvent" company
in terms
of the laws referred to in Item 9. What the section contemplates is
that if the "solvency" of the respondent
company is in
doubt, its winding-up can be dealt with on the basis contemplated by
Section 344 of the old Companies Act. The only
apparent purpose of
preserving the operation of Section 345 of the old Companies Act,
even when one is dealing with the winding-up
of a "solvent"
company is, it seems to me, that it provides the basis for a Court to
come to the conclusion that the
respondent company is or may be
"insolvent", as contemplated by Section 79(3). As far as I
can see, Section 345 of the
old Companies Act has no other relevance
in relation to any application to wind-up brought under the new
Companies Act. I accordingly
conclude that, in determining whether a
respondent company is, or may be, "insolvent" as
contemplated by Section 79(3),
the Court would be entitled to have
regard to evidence that the respondent company was unable to pay its
debts, as contemplated
by Section 345 ofthe old Companies Act. In
other words, the word "insolvent" in Section 79(3) is
intended to refer to
a respondent company which is or may be
commercially insolvent. Again, whether that word also encompasses the
notion of actual
insolvency need not be decided for present
purposes.’
After
R-Bay Logistics
was
drawn to his attention, Mr
Harpur
sought an opportunity to
deliver additional written submissions and these were received in
due course. In contending that
R-Bay Logistics
was wrongly
decided Mr
Harpur
sought to draw a distinction between the
concept of inability to pay debts as a requirement for winding-up
under the previous
Act and the concepts of
solvency
and
insolvency
under the 2008 Act. He argued that the shift in
the 2008 Act to the “new” concepts of
solvency (or
insolvency)
and
liquidity
meant that in the 2008 Act
solvent
could only mean that provided for in section 4(1)(a)
of the 2008 Act; ie. the
solvency
portion of the
solvency
and liquidity test
.
In emphasising that distinction he
focussed his argument on section 4 (the solvency and liquidity test)
and the definition of
financially distressed
, both in the
2008 Act.
Before dealing with that argument it
is necessary to place in context the terms
solvency (or solvent)
and
insolvency (or insolvent)
as they have come to be treated
judicially over time. I can do no better that repeat what
King
AJsaid in that regard in
R-Bay Logistics
:
‘
[13]
The point raised by the Respondent has received judicial attention in
only a few cases because the new Companies Act
has been in force for
only 18 months or so. During argument, I raised various matters with
counsel for the parties, and, because
the issue is novel, I afforded
both counsel additional time to file supplementary arguments. They
did so and I am grateful to them
both for their input.
[14]
Central to the issue raised by the Respondent is what is meant by
"solvent" and "insolvent" where those
terms are
used in Item 9 and Part G. It has long been accepted that, in our
law, a state of “insolvency” has two different
meanings.
Actual or literal insolvency involves a comparative measurement of
the value of a company’s assets and its liabilities.
If the
total value of those liabilities exceeds the total value of the
assets, the company is actually insolvent. However, “commercial
insolvency” recognises that, whether a company is actually
insolvent or not, if it does not have sufficient cash resources
to
make payment of its ongoing obligations, as and when they fall due,
the company is commercially insolvent.
Ex
Parte
De Villiers &Ano NNO: In re Carbon Developments
1993 (1) SA 493
(A) at 502
Johnson
v Hirotec (Pty) Ltd
[2000] ZASCA 131
;
2000 (4) SA 930
(SCA) at 933 (para 6) to 934
(para 8)
[15]
The two concepts (i.e. actual insolvency vs commercial insolvency)
are quite different. The former involves the mere assessment
of the
value of a company’s assets and liabilities. The latter
involves an assessment of the company’s cash flow, to
determine
whether it has the immediate wherewithal to pay its current expenses,
as they fall due.
[16]
To my mind, the first question to answer is whether, in Part G and
Item 9, the reference to a “solvent” or “insolvent”
company is intended to relate to actual insolvency or so-called
commercial insolvency.
[17]
It seems clear that the legislature was mindful of the distinction
between these two meanings when it passed the new Companies
Act.
Section 4 thereof deals specifically with a “solvency and
liquidity test”. That test has to be applied in various
circumstances, under the new Companies Act, in which, putting it
generally, the capital of a company is used or distributed for
a
purpose other than the conduct of the company’s ordinary
business. For present purposes, the details of the test, and the
circumstances in which it is applied, are not relevant. What is
relevant is that Section 4 spells out that the test for solvency
involves a comparison of the value of a company’s assets with
that of its liabilities whilst the test for liquidity involves
a
consideration of the likelihood that the company will beable to pay
its debts as they become due in the ordinary course of business.
[18]
Sadly, the new Companies Act does not define “solvent” or
“insolvent” in relation to the winding-up
of a company.
As far as I can detect, those terms are used only in Part G (dealing
with the winding-up of “solvent”
companies) and in Item 9
which deals with the law which is to apply to the winding-up of
“solvent” and “insolvent”
companies. Giving
those words their ordinary meaning, one might well conclude that
those terms refer to actual insolvency, as distinct
from commercial
insolvency.
[19]
However, one needs also to consider the context in which those terms
have been used in the new Companies Act. For many years,
in our
Company law, a reference to its “solvency” encompassed
both actual insolvency and commercial insolvency, depending
upon the
context.
Ex
Parte
De Villiers &Ano NNO: In re Carbon Developments
1992 (2) SA 95
(W) at 112 – 113
Ex
Parte
De Villiers (On Appeal
: See para 14 above) at
pages 502 to 504
[20]
What then did the legislature mean, in Part G and in Item 9, when it
referred to a “solvent” company? Did it mean
actual
insolvency or commercial insolvency or, perhaps, both?
[21]
To answer, I think it is first necessary to consider the
apparentintention behind the transitional provisions encapsulated
in
Item 9. It seems clear that the legislature's ultimate objective is
to replace the provisions of Chapter 14 of the old Companies
Act,
dealing with the winding-up of companies, with new legislation which
would deal, separately, with "solvent" companies
and
"insolvent" companies. However, at the time that the new
Act came into force, it made provision (in Part G) only
for the
winding-up procedure for "solvent" companies. For reasons
which are not apparent, the legislature had not got
round to creating
any new legislation to deal with the winding-up of "insolvent"
companies.
[22]
It is therefore clear that Item 9 is intended to serve only as a
stopgap, until such new legislation is passed. Item 9(4)(a)
specifies
that Chapter 14 of the old Companies Act must continue in force until
such new legislation, dealing with "insolvent"
companies,
is actually in place.
[23]
Nothing in the new Companies Act has changed any of the provisions of
Chapter 14 of the old Companies Act. Accordingly, for
the purpose of
winding-up an "insolvent" company, Section 344 thereof must
still regulate the basis upon which it can
be wound up. Of particular
relevance in this case is Section 344(f) which requires an applicant
to prove that the respondent company
is unable to pay its debts, as
contemplated in Section 345 of the old Companies Act.
[24]
Accordingly, the legislature must have intended that, to wind-up an
"insolvent" company, between the date of commencement
of
the newCompanies Act, and the implementation of intended new
legislation, an applicant would have to establish one or other
of the
grounds for winding- up contemplated by Section 344, including, in
particular, that the respondent company was unable to
pay its debts.’
I revert to Mr
Harpur’s
argument as foreshadowed in paragraphs 13 and 14 above, and will
consider, firstly, his reference to
financially distressed
,
and thereafter, his reliance on section 4.
The term
financially distressed
is employed in chapter 6 of the 2008 Act, which deals with the
concepts of Business Rescue and Compromises with Creditors. Section
128 contains the definitions applicable only to chapter 6 and
therein the term is described thus:
‘
(f)
'financially
distressed'
,
in reference to a particular company at any particular time, means
that-
(i)
it appears to be reasonably unlikely that the company will be able to
pay all of its debts as they become due and payable within
the
immediately ensuing six months; or
(ii)
it appears to be reasonably likely that the company will become
insolvent within the immediately ensuing six months;’
The first observation that I make is
that that definition is applicable only for the purposes of chapter
6. In other words, it
has been ring-fenced for application only in
chapter 6.
The second, and perhaps more
important observation is that the definition includes a prospective
assessment. Apart from possibly
being presently unable to pay it
debts, It has to be
likely
that in the six months immediately
following the date the assessment is made the company
will
be
unable to pay all of its debts as the become due and payable. That
is something far different from a situation where a company
is
currently
or
ispresently
unable to pay its debts within
the ordinary course of business.
Section 4 of the 2008 Act introduces
the new concept of a solvency and liquidity test. It provides:
‘
4
Solvency and liquidity test
(1)
For any purpose of this Act, a company satisfies the solvency and
liquidity test at a particular time if, considering all reasonably
foreseeable financial circumstances of the company at that time-
(a)
the assets of the company, as fairly valued, equal or exceed the
liabilities of the company, as fairly valued; and
(b)
it appears that the company will be able to pay its debts as they
become due in the ordinary course of business for a period of-
(i)
12 months after the date on which the test is considered; or
(ii)
in the case of a distribution contemplated in paragraph
(a)
of
the definition of 'distribution' in section 1, 12 months following
that distribution.
(2)
For the purposes contemplated in subsection (1)-
(a)
any financial information to be considered concerning the company
must be based on-
(i)
accounting records that satisfy the requirements of section 28; and
(ii)
financial statements that satisfy the requirements of section 29;
(b)
subject to paragraph
(c)
, the board or any other person
applying the solvency and liquidity test to a company-
(i)
must consider a fair valuation of the company's assets and
liabilities, including any reasonably foreseeable contingent assets
and liabilities, irrespective of whether or not arising as a result
of the proposed distribution, or otherwise; and
(ii)
may consider any other valuation of the company's assets and
liabilities that is reasonable in the circumstances; and
(c)
unless the Memorandum of Incorporation of the company provides
otherwise, when applying the test in respect of a distribution
contemplated in paragraph
(a)
of the definition of
'distribution' in section 1, a person is not to include as a
liability any amount that would be required,
if the company were to
be liquidated at the time of the distribution, to satisfy the
preferential rights upon liquidation of shareholders
whose
preferential rights upon liquidation are superior to the preferential
rights upon liquidation of those receiving the distribution.’
Like the concept of
financially
distressed
, section 4 also includes a prospective assessment. To
satisfy the “solvency” portion of the test a company
must be
and must
appear
that
it will
, for a period of
twelve months after the date on which the test is applied, be able
to pay its debts as they become due in the
ordinary course of
business. To repeat myself: That is something far different from a
situation where a company
is currently
or
ispresently
unable to pay its debts within the ordinary course of business.
Section 4 of the 2008 Act also
importantly designs a solvency
and
liquidity test (my
emphasis). The two concepts of
solvency
and
liquidity
are conjoined and, for the purposes of the section, and of the other
provisions of the Act which employ the section, are to be
considered
as a set of circumstances, and not individually. In paragraph 17 of
R-Bay Logistics
,
King AJ
did not consider it necessary
to examine the section in any detail. I, however do.
I begin with the observation that, as
best as I can tell, nowhere does the 2008 Act call for or provide
for a separate
solvency test
or a separate
liquidity test
.
As I have indicated above, the section 4 test is always employed as
a joint investigation.
In its definitions section (section
1) the 2008 Act says that the “’
solvency and
liquidity test
’ means the test set out in section 4(1)”.
In terms of section 13 of the 2008
Act a foreign company may transfer its registration to the Republic,
inter alia
, if immediately following the transfer of
registration the company will satisfy the solvency and liquidity
test.
Section 44 of the 2008 Act provides
for circumstances where a company may provide financial assistance
for the subscription of
securities. The board may only do so if
immediately after providing the financial assistance the company
would satisfy the solvency
and liquidity test.
Similarly, section 45 of the 2008
Act, in providing for circumstances where loans or other financial
assistance is made to its
directors, dictates that such assistance
or loans are only possible if after providing the assistance the
company would satisfy
the solvency and liquidity test.
Section 46 of the 2008 Act prohibits
the board of a company from making a distribution unless,
inter
alia
, ‘it reasonably appears that the company will satisfy
the solvency and liquidity test after completing the proposed
distribution’
and ‘the board of the company, by
resolution, has acknowledged that it has applied the solvency and
liquidity test, as
set out in section 4, and reasonably concluded
that the company will satisfy the solvency and liquidity test
immediately after
completing the proposed distribution’.
In section 47 of the 2008 Act the
board of a company is authorised to offer a cash payment in lieu of
making an award of capitalisation
shares. It may not resolve to do
so in the absence of applying and giving consideration to the
solvency and liquidity test in
certain defined circumstances.
Section 77 of the 2008 Act makes
provision for the liability of directors who failed to vote against
a particular distribution.
Such liability arises after, in the
circumstances described in the section, the application of the
solvency and liquidity test.
In section 113 of the 2008 Act
provision is made for two or more companies to amalgamate or merge.
The amalgamated or merged company
must, upon amalgamation or merger,
satisfy the solvency and liquidity test and the section also
prescribes by whom, when and
how the test is to be undertaken. The
implementation of the amalgamation or merger is dealt with in
section 116, where again,
in sub-section 7 thereof, reference is
made to the amalgamated or merged entity being required to satisfy
the solvency and liquidity
test.
In terms of section 162(7) of the
2008 Act ‘ …a court may make an order placing a person
under probation, if …
while serving as a director, the person
… was present at a meeting and failed to vote a resolution
despite the inability
of the company to satisfy the solvency and
liquidity test, contrary to [the] Act …’.
In terms of section 164 of the 2008
Act a shareholder may demand that a company, against tender of such
shares, pay such shareholder
the fair value of all shares held in
such company. The section provides that the making of such demand,
the tendering of the
shares and the payment by the company for the
acquisition of such shares are not subject to the application by the
company of
the solvency and liquidity test.
As best as I can make out, the
sections of the 2008 Act that refer to and call for the application
of the solvency and liquidity
test set out in section 4, are those
dealt with in paragraphs 24 to 33 above. To my mind, the solvency
and liquidity test, as
described in section 4, is a device or tool
for the purposes of implementing the provisions or satisfying the
restrictions imposed
in or by those sections.
Significantly, neither section 81 (or
for that matter the whole of Part G) nor Item 9 of Schedule 5 of the
2008 Act refers to
the solvency and liquidity test. It refers simply
to a
solvent
company.
Like
King
AJ, I too find it
regrettable that the 2008 Act does not define the terms
solvent
and
insolvent
. However, going further than he did, I find
that there is sufficient to conclude that the word
solvent
,
where it appears in Part G and in Item 9 of Schedule 5 of the 2008
Act, means both factual or actual solvency
AND
commercial
solvency in the sense that a company must currently or presently be
able to discharge its liabilities as and when
they fall due in the
ordinary course of business. To my mind, and in grateful
acknowledgement, I find
King
AJ’s reasoning to be
unassailable. I adopt it here in support of my view.
To my mind, that conclusion is
supported additionally by the fact that Item 9(2) of Schedule 5 of
the 2008 Act retains, insofar
as
solvent
companies are
concerned, the applicability of section 345 of the previous Act. In
addition to the consideration given to this
aspect by
King
AJ,
I am of the view that the deeming provisions of the previous Act
were retained so as to enable creditors, who by and large
have no
access to the financial records of a company, to have access to a
device that would entitle an otherwise
solvent
company, to be
regarded as being
insolvent
(at the very least commercially)
for the purposes of being wound-up in terms of the provisions of
Item 9 of Schedule 5 of the
2008 Act.
If I hold, as I do, that for the
purposes Part G (which includes section 81) of the 2008 Act a
company has to be solvent in both
senses of the word, ie. both
factually and commercially solvent, the question that arises is why
then does section 81 also include,
as a ground for winding-up a
solvent company, the situation catered for in section 81(1)(b)?
It will be remembered that section
81(1)(b) of the 2008 Act provides for a situation that allows a
business rescue practitioner
to apply for the company’s
winding-up on the grounds that no reasonable prospects of the
company being rescued exist. He
or she does so by virtue of the
provisions of section 141(2)(a) of the 2008 Act which provides:
‘
(2)
If, at any time during business rescue proceedings, the practitioner
concludes that—
there
is no reasonable prospect for the company to be rescued, the
practitioner must—
so
inform the court, the company, and all affected persons in the
prescribed manner; and
apply
to the court for an order discontinuing the business rescue
proceedings and placing the company into liquidation;’
Bearing in mind that in order to get
into “business rescue”, in the vast majority of cases,
the company will have
to be
financially distressed
the
failure of business rescue will inevitably mean that at that point
the company, at the very least, will be commercially insolvent.
That
that must be so is evident from the definition of
business rescue
in section 128 of the 2008 Act, which indicates that the object of
the exercise includes either a situation where the company
can
continue to exist on a
solvent
basis
or
better results
are achievable on ultimate liquidation. How then does it qualify as
a
solvent
company for the purposes of winding-up in terms of
section 81(1)(b) if
solvent
means both actual and commercial
solvency?
On the other hand, and if
solvent
,
for the purposes of Item 9 of Schedule 5 of the 2008 Act, means only
actual solvency (and excludes commercial solvency), how
would a
business rescue practitioner apply to wind-up, in circumstances of
failed business rescue, a company that is actually,
but not also
commercially, insolvent? I pose that question because, in the
ordinary course, under the previous Act, a business
rescue
practitioner would have no standing to initiate winding-up
proceedings.
There is no easy answer to the
problem.
The one answer is to suggest that
this is simply one of those cases where
solvent
or
solvency
must mean different things for the different purposes of the 2008
Act. I would, however, prefer to think otherwise. It is by
far
preferable to retain a consistent meaning for those terms throughout
the 2008 Act. Retaining such consistency would also
mean that there
is also harmony with the intention, in the business rescue
provisions, of aiming to restore a company to a
solvent
basis, which must, in the context, mean a situation where a company
is commercially solvent.Maintaining such consistency would
also
support a better reason for retaining the applicability of section
345 of the previous Act to solvent companies.
Another answer suggests that section
81(1)(b) exists only for those few, and I dare say, rare, instances
where a
solvent
company (in both the actual and commercial
sense) is nevertheless unable to be
rescued
and the business
rescue practitioner, notwithstanding its
solvency
, considers
winding-up to be the preferred route, perhaps because in the
circumstances that obtain she or he considers it just
and equitable
to do so.
Yet another answer, regrettable as it
may be, but one which I nevertheless prefer, is to conclude that
unfortunate (or perhaps
bad or clumsy) drafting has led to the
inadvertent inclusion of the provision in section 81(1)(b).
Insufficient attention has
been given as to how the various
sectionsand schedules of the 2008 Act harmonise and interact. The
problem is therefore one for
the legislature to fix.
To address the issue in any other
fashion would lead to even more absurd results. To my mind, any
other treatment of the issue
would result in a situation that is not
reasonable and neither sensible nor businesslike.
See
Natal Joint Municipal Pension Fund
v Endumeni Municipality
2012 (4) SA
593
(SCA) at paras 17 – 26.
Treated in that fashion, section
141(2)(a) can also then be given purpose and content. Applying the
provisions of sub-item 3 of
Item 9 of Schedule 5 of the 2008 Act,
section 141(2)(a) can be regarded as being sufficient to vest a
business rescue practitioner
with standing to apply for the
winding-up of an insolvent (including commercially) insolvent
company under the provisions of
the previous Act.
Like
King
AJ, I regard, with
due respect,
Business Partners
and
HBT Construction
(and
similar decisions) to be wrong and they ought not to be followed.
Having reached that conclusion, and
notwithstanding my summary of the issues in paragraphs 2 and 3
above, there remains two peripheral
issues that I must deal with.
The respondent has disputed the debt
due to the applicant and has indicated that, if the point was
reached, the matter ought to
be referred for the hearing of oral
evidence to resolve that dispute. The underlying facts are these:
During October 2007 the respondent
borrowed the sum of R1,2 million from the applicant which was
advanced to the respondent
against,
inter alia
, the security
of a mortgage bond over its immovable property;
After the respondent fell into
arrears with its repayments the applicant, during 2009, applied for
the respondent to be wound-up;
The 2009 winding-up application was
settled on the basis that the respondent would pay the full amount
then outstanding by paying
off the arrears then accumulated and
then by continuing with normal repayments;
The respondent again fell into
arrears resulting in the present application;
In the present application the
respondent challenges debt due on the basis that it disputes that
charges for legal costs and
other expenses (like insurance
premiums) were correctly debited to its account. The debiting of
interest (insofar as the rate
applied is concerned) going back to
the inception of the loan is also placed in dispute.
The applicant contends that these
debits were agreed to either in terms of the original loan or in
terms of the settlement when
the earlier winding-up was avoided. As
such they can be dismissed on the papers. I agree. In any event, a
Court does not lightly
refer a winding-up application for the
hearing of oral evidence.
Finally, there remains the general
discretion to refuse a winding-up order. As the cases suggest, the
discretion is a very narrow
one, and in this matter I decline to
exercise it. The respondent has shown no special considerations
requiring me to act otherwise.
See
Absa Bank Ltd v Rhebokskloof
(Pty) Ltd
1993 (4) SA 436
(C) at 440J – 441J;
Services
Trade Supplies v Dasco& Sons (Pty) Ltd
1962 (3) SA 424
(T)
at 428 B – F and
Ebrahim (Pty) Ltd v Pakistan Bus Services
(Pty) Ltd
1964 (4) SA 146
(N) at 147 E – H.
In the circumstances I grant an Order
finally winding-up the respondent.
_______________
Vahed J
CASE INFORMATION
Date of Hearing: 24 October 2012
Date of Judgment: 20 December 2012
Applicant’s Counsel: A W M
Harcourt SC
Applicant’s Attorneys: Maharaj
Attorneys
3 Rydall Vale Crescent
Rydall Vale Park
La Lucia Ridge
(Ref: Ms Seevnarayan/F1246)
Respondent’s Counsel: G D Harpur
SC
Respondent’s Attorneys:
RavindraManiklall& Company
Suite 4, Kohinoor Centre
108 Wick Street
Verulam
(Ref: Mr Maniklall/cm/N1209)