Navigating the Liquidation Process: Part 2 – Liquidation by Court Order

In this continuation of our series on the liquidation of companies, we delve into Section 81 of the Companies Act 2008, which focuses on the liquidation of solvent companies by court order. Understanding the intricacies of this section is crucial for stakeholders, including creditors, employees, and investors, as it outlines the legal framework and grounds for winding up a solvent company.

Understanding Solvency in Section 81

Section 81 is specifically designed for solvent companies, although the Act does not define "solvent." Instead, Section 4 provides a solvency and liquidity test. This test comprises two components:

Solvency: According to Section 4(1)(a), this refers to the accounting concept where a company's assets exceed its liabilities.
Liquidity: As per Section 4(1)(b), this assesses the company's ability to pay its debts as they become due, often termed as commercial solvency.

The liquidity aspect is particularly noteworthy. A company may be insolvent in accounting terms (assets less than liabilities) but still generate enough income to meet its debt obligations. Conversely, a company may be solvent (assets exceed liabilities) but face liquidity issues, unable to pay its debts on time due to insufficient cash flow, often tied up in non-liquid assets like property.

For creditors, the liquidation of a cash-generating yet insolvent company might seem undesirable, while the liquidation of a solvent but cash-strapped company might appear beneficial. This balance of interests is likely why the legislation differentiates between the liquidation processes for solvent and insolvent companies.

Grounds for Liquidating a Solvent Company

Section 81 outlines specific grounds under which a court may order the liquidation of a solvent company. These grounds are closely tied to who may apply for the liquidation:

The Company Itself:

The company has resolved by special resolution to be wound up by the court.
The voluntary winding-up by special resolution is to continue under court order.

The Company, Directors, or Shareholders:

A deadlock among managers that shareholders cannot resolve, causing irreparable harm or preventing the company from benefiting shareholders.
A deadlock among shareholders, making it impossible to elect directors for at least two annual general meetings.
It is just and equitable for the company to be wound up.

Shareholders (with court permission):

Directors or those in control are acting fraudulently or illegally.
Company assets are being misapplied or wasted.

Business Rescue Practitioner:

No reasonable prospect of rescuing the company.

Creditors:

Business rescue proceedings have ended, and it is just and equitable to wind up the company.

Companies and Intellectual Property Commission or Takeover Regulation Panel:

Directors or those in control have acted fraudulently or illegally, and the company has failed to comply with a compliance notice.
Repeated misconduct resulting in fines or convictions.

Legal Precedents and Interpretations

The distinction between factual and commercial insolvency has been a point of legal contention. The Supreme Court of Appeal's decision in Boschpoort Ondernemings (Pty) Ltd v Absa Bank Limited clarified that companies failing to pay their debts, whether due to liquidity or solvency issues, must be liquidated under Section 344 of the old Act. This interpretation has raised concerns, particularly about the viability of using Section 81(1)(c) for liquidating companies based on liquidity issues alone, without considering business rescue first.

Conclusion

Section 81 of the Companies Act 2008 provides a structured approach to the liquidation of solvent companies, balancing the interests of creditors, employees, and investors. Understanding the grounds and legal precedents associated with this section is essential for navigating the complexities of company liquidation. In our next article, we will explore the specific grounds for liquidation by Special Resolution.