Reading (in) between the lines: winding up close corporations

Prior to the enactment of the Companies Act (71 of 2008) (the new Act), the winding up of close corporations and companies was regulated by the Close Corporations Act, (69 of 1984) (the CC Act) and the Companies Act (61 of 1973) (the old Act) respectively.

Section 68 of the CC Act provided the grounds upon which a court could liquidate a close corporation. Section 68(c), in particular, stated that a close corporation could be wound up by a court if the corporation was “unable to pay its debts”. In terms of s 69, a close corporation would be deemed unable to pay its debts, when, inter alia, a creditor to whom an amount of no less than R200 is due, serves a demand upon the close corporation at its registered office and pursuant thereto “the close corporation has for 21 days thereafter, neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor”. These two provisions (the latter being known as the deeming provision) were mirrored in the old Act under s 344(f) as read with s 345. Thus, save for the differences in respect of the minimum debt which must be due and payable, close corporations and companies could be wound up by courts on substantially similar grounds, namely when the entity was deemed to be commercially insolvent.

The new Act came into effect on 1 May 2011. In repealing the old Act, and making various amendments to sections of the CC Act, the new Act now purports to regulate both the winding up of companies and close corporations.  However, pursuant to certain transitional provisions contained in schedule 5 of the new Act, and until such a time as the Minister determines otherwise, chapter 14 of the old Act continues to regulate the liquidation of commercially insolvent companies and close corporations. Before the enactment of the new Act, s 66(1) of the CC Act held that the provisions of the old Act which related to the winding-up of a company applied to the winding-up of a close corporation only in so far as the provisions could be applied in respect of any matter not specifically provided for in the CC Act. There are, however, numerous sections of the old Act which were specifically excluded, including sections 344 and 345.

Section 66(1) has however been amended so that the schedule 5 transitional arrangements, which need to be “read with the changes required by the context”, will apply to the liquidation of a close corporation in respect of any matter not specifically provided for in the CC Act, which now includes those previously excluded sections 344 and 345 of the old Act. Thus, where the CC Act fails to address a particular matter with regard to the winding-up of close corporations, chapter 14 of the old Act will “fill in the gap”.

The first question which needs to be addressed is whether a court can still grant a winding up order in respect of a close corporation when the enabling provision (s 68) has been repealed. A further question is why the deeming provision (s 69) was not similarly repealed if the enabling provision is no more, and finally, how should a court now deal with an application for the winding up of a close corporation given the above. Put differently, the repeal of s 68 but not of s 69 of the CC Act raises the question as to whether the deemed inability to pay a debt, as envisioned in s 69, nevertheless constitutes a valid ground upon which a court may liquidate a close corporation.

In HBT Construction and Plant Hire CC v Uniplant Hire CC 2012 (5) SA 197 (FB), the court held that an application for the liquidation of a close corporation could not be based on s 69 of the CC Act alone. The court reasoned that s 68(c) had been the empowering provision pursuant to which a close corporation could be liquidated, and that s 69 had merely qualified the meaning of ‘unable to pay its debt’ under s 68. Thus, according to the court, s 69 of the CC Act did not constitute an independent ground upon which to liquidate a close corporation. Accordingly, and in the absence of s 68, s 69 could not be relied upon to liquidate a close corporation. The court held that an applicant seeking to liquidate a close corporation must instead prove that the close corporation is actually insolvent or persuade the court that liquidation is just and equitable in the circumstances.

In Scania Finance Southern Africa (Pty) Ltd) v Thomi-Gee Road Carriers CC and Another 2013 (2) SA 439 (FB), however, the court held otherwise. In this case the court reasoned that the amendment of s 66(1) of the CC Act has the effect of extending the provisions of the old Act, which relate to the winding up of companies, to the winding up of close corporations, specifically in the instance where the CC Act neglects to address a particular matter. The court held that in order to give effect to the legislative intent, s 344 of the old Act must fill in the gap and operate in conjunction with s 69 of the CC Act to form the basis upon which to liquidate a close corporation which is deemed to be commercially insolvent.  Essentially, “the grounds for winding-up ‘insolvent’ close corporations by order of court are now the same as the grounds for winding-up of ‘insolvent’ companies”.

The latest case in this line of cases that have grappled with the seemingly anomalous gap in the CC Act is the unreported judgment that Cloete J handed down in the Western Cape High Court in the case of ABSA Bank Ltd v Tamsui Empire Park 1 CC 2013 ZAWCHC 187. In this case, Tamsui was indebted to ABSA Bank in terms of a loan agreement. ABSA duly served a demand for payment upon Tamsui and 21 days thereafter when payment was not forthcoming, ABSA launched an application for the provisional liquidation of Tamsui.  ABSA based its application on s 69 as read with s 68(c) of the CC Act and argued that Tamsui’s failure to settle the debt within the period provided resulted in Tamsui being deemed unable to pay its debts and accordingly that this constituted a ground for the winding up of the close corporation. Tamsui contended that ABSA’s application was fatally flawed given the fact that it made reference to s 68 of the CC Act which had been repealed. ABSA however argued that it was irrelevant whether it had based its application on s 69 as read with s 68 of the CC Act for the reason that the new legislative regime envisioned that close corporations would be liquidated on the same grounds as companies. Accordingly, even if s 68 had been repealed, ABSA argued that s 344 of the old Act could be relied on to liquidate a close corporation.

In his judgment, Cloete J emphasised the importance of giving effect to the legislative intent and in adopting an interpretation of legislation which would give effect to a statutory provision rather than render it nugatory. The court held that s 68(c) read with s 69 of the CC Act, and s 344(f) read with s 345 of the old Act, were substantially similar provisions, and that both s 69 and s 345 were commonly referred to as the deeming provisions for for commercial insolvency, and were dependent for their validity upon s 68(c) of the CC Act and s 344(f) of the old Act respectfully. The difference of course was that s 68 has been repealed while s 344 still exists by virtue of Item 9 of schedule 5 of the new Act.

Cloete J went on further to hold that in choosing to retain s 69 of the CC Act “the legislature must have intended for it to have some purpose. The only manner in which this can be achieved is by following the approach of the court in Scania Finance, namely that, s 69 of the CC Act must, despite its reference to s 68, be construed as referring to s 344(f) of the old Act.” The fact that s 68(c) was repealed at the same time that s 66(1) was amended and the transitional provisions of the new Act came into force reinforced the court’s argument. Cloete J held that “the reference in s 69 to s 68(c) can thus be construed as a reference to a repealed provision which has nonetheless been substantially re-enacted, in relation to close corporations, by way of the transitional provisions in the new Act read with s 344(f) of the old Act.” Thus, provided that an applicant can show that demand had been duly made on a debt which was due and that the close corporation had failed to settle the debt within the specified time frame, then this would suffice to liquidate a close corporation.

Ultimately, the court found against ABSA on the basis that the debt relied upon was not due and payable when the s 69 demand had been made and thus the claim was not ripe, however this does not impact on the court’s reasoning on the above.

It will be interesting to see if the other divisions of the High Court will follow the reasoning of the Court in the ABSA Bank and Scania Finance cases, or not. Until such time as there is a clear and concise authoritative stance on the interpretation of the CC Act, it is suggested that an applicant seeking the provisional liquidation of a close corporation must first ensure that the principal debt is in fact due at the time when demand for payment is made, and also that the liquidation application clearly and concisely sets out the sections of the old Act and of the CC Act that are being relied upon, as explained by Cloete J above. It is also advisable for an applicant to found its application on an alternative ground such as it being ‘just and equitable’ in the circumstances, especially in divisions where the law has not yet been settled.

Article by: Andrew Goldschmidt and Mame Amoateng

Andrew Goldschmidt

Andrew Goldschmidt

A Partner at Ashersons, Andrew has been with the firm since 2007. He has experience in contentious as well as non-contentious corporate and commercial matters ranging from the drafting of commercial contracts to commercial litigation, with particular regard to corporate and contractual disputes.

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