Navigating the Liquidation Process: Part 3 – Liquidations by Special Resolution

In this article, we explore the process of liquidating companies by Special Resolution as outlined in the Companies Act. This method, governed by Chapter 14 of the 1973 Act, continues to apply for insolvent companies, as stipulated by Schedule 5 Item 9(1) of the 2008 Act, until new legislation is enacted and proclaimed by the Minister.

Eligibility for Liquidation by Special Resolution

Chapter 14 is specifically for the liquidation of insolvent companies. To declare a company insolvent, it must be proven that the company is unable to pay its debts, as detailed in Section 345 of the 1973 Act. This section identifies conditions under which a company can be deemed unable to pay its debts:

• A payment demand was made, and the debtor has failed to pay within three weeks.
• The sheriff or court messenger could not find sufficient assets to satisfy a judgment debt.
• The court is satisfied that the company cannot pay its debts.

Who Can Apply for Liquidation?

Under Section 346(1) of the 1973 Act, the following parties may apply to liquidate an insolvent company:

• The company itself
• One or more of its creditors (including contingent or prospective creditors)
• One or more of its shareholders, or members in the case of a non-profit company
• The Master, if the company has already been liquidated by special resolution

Grounds for Application

Section 344 lists the grounds for winding up a company, including:

• The company resolved by special resolution to be wound up by the court.
• The company started business without the Registrar's certification or failed to commence business within a year.
• The company suspended its business for a whole year.
• The number of members in a public company fell below seven.
• Seventy-five percent of the company's issued share capital was lost or became useless.
• The company is unable to pay its debts as described in Section 345.
• An external company is dissolved in its country of incorporation or has ceased to carry on business.
• It is just and equitable to wind up the company.

These grounds are affected by the requirement that the company must be insolvent before liquidation can proceed. Some grounds, like the inability to pay debts, continue to apply. However, others, like failing to commence business or having membership below seven, may not align with the more flexible approach of the 2008 Act.

Proving Insolvency in terms of Section 345

An applicant seeking to liquidate a company due to its inability to pay debts must meet the conditions in Section 345 of the 1973 Act:

• The applicant must be a creditor owed at least R100.00.
• A demand for payment must have been served on the company's registered office.
• The sheriff or court messenger returned with an endorsement of insufficient assets to satisfy a judgment debt.
• Any fact convincing the court that the company is unable to pay its debts.

Conclusion

Liquidation by Special Resolution remains a critical process for handling insolvent companies under South African law. Understanding the grounds and application process is essential for stakeholders involved in the liquidation process.