GROUNDS FOR LIQUIDATION OF A COMPANY
GROUNDS FOR LIQUIDATION OF A COMPANY
It is known that some creditors of companies may endeavour to do debt collection through liquidation. This seems to be more prevalent during times of increased economic pressure when cash strapped creditors seek to collect larger debts quicker. In such cases, the debtor will be served by Sheriff with an attorney’s letter demanding payment of the amount owing to the creditor within a period of three weeks, failing which an application for the company’s liquidation is threatened. Although such strategy carries some procedural risks, it is perceived to be efficacious in certain cases, as it has the effect of compelling the debtor to pay immediate attention to its economic survival and consequently, often has the desired effect of soliciting payment or settlement. A lesser known fact is that legal action for the liquidation of a company is not limited to weary creditors, but may indeed originate from various other sources.
Under South African law, application for the liquidation of a company may be made, amongst others, by the company itself, one or more of its shareholders, the Master of the High Court (in certain circumstances) and even contingent or prospective creditors. A shareholder may only apply for the liquidation of the company if such shareholder has been registered as such for a period exceeding six months immediately prior to the date of application or if the shares devolved upon such shareholder by virtue of the death of a former holder of shares.
Section 344 of the (old) Companies Act number 61 of 1973, determines that a Court may wind up a company if:
the company has by special resolution resolved that it be wound up by the Court;
the company commenced business before the Registrar certified that it was entitled to commence business;
the company has not commenced its business within a year from its incorporation, or has suspended its business for a whole year;
in the case of a public company, the number of members has fallen below seven;
seventy-five per cent of the issued share capital of the company has been lost or has become useless for the business of the company;
the company is unable to pay its debt as described in section 345;
in the case of an external company, that company is dissolved in the country in which it has been incorporated, or has ceased to carry on business or is carrying on business only for the purpose of winding-up its affairs; and
it appears to the Court that it is just and equitable that the company should be wound up.
A court may also wind up a solvent company in accordance with the (new) Companies Act number 71 of 2008 under certain circumstances:
1. the company has passed a special resolution that it should be wound up by a Court;
2. the company, one or more directors or one of its shareholders have applied to the Court to have the company liquidated due to:
2.1 the directors being deadlocked in the management of the company where the deadlock is incapable of being broker by the shareholders and may cause irreparable harm to the company or the company’s business is incapable of being conducted to the advantage of the shareholders;
2.2 the shareholders are deadlocked in voting power and for a period that includes two consecutive annual general meeting dates fail to elect successors to directors whose terms have expired;
2.3 it is otherwise just and equitable for the company to be wound up.
3. upon application by a shareholder on the grounds that:
3.1 the directors, prescribed officers or other persons in control of the company are acting in a fraudulent or otherwise illegal manner; or
3.2 the company’s assets are being misapplied or wasted;
3.3 the Companies & Intellectual Property Commission or the Takeover Regulation Panel has applied to the Court for an Order to liquidate the company on the grounds that:
3.3.1 the company, its directors or prescribed officers or other persons in control of the company are acting in a matter that is fraudulent or otherwise illegal; and
3.3.2 within the previous five years, enforcement procedures in terms of the new Act or the Close Corporations Act were taken against the company, its directors or prescribed officers for substantially the same conduct.
In summary, the onus rests on directors to ensure proper management and good governance of a company. It also becomes apparent that, when structuring a company, careful attention should be given to avoiding, where possible, deadlocking. It is thus advisable that, when a company’s Memorandum of Incorporation and Shareholders Agreement is structured, adequate and effective provision is made for institutionally fatal deadlocks which render no alternative but the liquidation of an otherwise viable company. It may thus be prudent for companies to subject their Memorandums of Incorporation and Shareholders Agreements to scrutiny by qualified and suitably experienced attorneys, where necessary.