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VOLUNTARY WINDING-UP OF PRIVATE COMPANIES & CLOSE CORPORATIONS
VOLUNTARY WINDING-UP OF PRIVATE COMPANIES & CLOSE CORPORATIONSOur company law regime makes provision for the voluntary winding-up of Companies and Close Corporations in certain circumstances.
It is important to distinguish between voluntary winding-up by Members and voluntary winding-up by Creditors.
Voluntary winding-up by members (Shareholders):
This procedure to wind up the affairs of a Company or Close Corporation is used when the purpose for which the Company has been incorporated has been fulfilled and it has no outstanding debts. The members of the Company or Close Corporation adopt a special resolution to wind-up the Company or Close Corporation and nominate a liquidator to administer the winding-up process. Upon receipt of the duly registered special resolution, the Master of the High Court appoints the liquidator to wind up the affairs of the Company or Close Corporation. If the Company has no outstanding debts and the directors and auditors of the Company has certified to this effect, the liquidator will be exempt from furnishing the necessary security.
Voluntary winding-up by Creditors:
This procedure to wind-up the affairs of a Company or Close Corporation is utilized by the members of a Company or Close Corporation unable to pay its debts. It basically entails the adoption (and registration) of a special resolution subsequent to the completion of the prescribed CM 100 form. Liquidation ensues once the special resolution is registered. The name, voluntary winding-up by creditors is a bit confusing as it is the members of the Company or Close Corporation who initiates this procedure. This procedure, which can only be used in certain circumstances, is much cheaper and less cumbersome then a formal application to liquidate a Company or Close Corporation via an application to the High Court. Once appointed by the Master of the High Court, the liquidator will commence with the process to wind-up the affairs of the Company or Close Corporation.
APPLICATIONS TO WIND-UP COMPANIES & CLOSE CORPORATIONS
APPLICATIONS TO WIND-UP COMPANIES & CLOSE CORPORATIONSThe new Companies Act 71/2008 regulates the liquidation of "solvent" Companies and Close Corporations whilst the old Companies Act 61/1973 and the Close Corporations Act 69/1984 still applies insofar as the liquidation of "insolvent" Companies and Close Corporations are concerned. If a Company or Close Corporation is insolvent (commercially or de facto) and thus unable to pay its debts, a creditor may apply to the appropriate Division of the High Court in South Africa (or Magistrates' Court in case of a Close Corporation) for an order that a Company or Close Corporation be wound-up/liquidated. A Court has discretion to grant such an order. It is important to note that the Applicant creditor does not have to prove an advantage to creditors (as in the case of sequestration proceedings).
The Company (or Close Corporation) itself, a creditor, a member (shareholder) or certain official may in certain other instances also apply to the High Court for such an order (see section 344 of the old Companies Act).
INSOLVENCY ENQUIRIES & INVESTIGATIONS
INSOLVENCY ENQUIRIES & INVESTIGATIONSInsolvency enquiries are an important tool in investigating the affairs of an individual or company which fell foul to an order for his/her/its sequestration or its liquidation.
The main purposes of these interrogations are:
1to seek out and recover hidden or concealed assets;
2to determine whether the insolvent or company was a party to any impeachable transaction;
3to determine whether any civil claims can be instituted against directors and officials of companies in liquidation in terms of section 424 of the Companies Act;
4to determine the validity and enforceability of any claims which any creditor make against the insolvent person or entity.
Types of inquiries/interrogations:
1Interrogations regarding proof of claim as per section 44 of the Insolvency Act.
2General interrogation at a meeting of creditors as per sections 64 & 65 of the Insolvency Act and sections 414 & 415 of the Companies Act.
3Master’s examinations as per section 152 of the Insolvency Act.
4Examination by Commissioners as per section 417 of the Companies Act.
5Enquiries under section 423 of the Companies Act (by the Court)
Impeachable transactions refer to those transactions entered into by an individual or company, prior to insolvency or liquidation, in circumstances where his/her/its liabilities exceeded the assets. Briefly stated, these transactions are:
1Dispositions without value
ADVICE ON POTENTIAL LIABILITY OF DIRECTORS & MEMBERS
POTENTIAL LIABILITY OF DIRECTORS OF COMPANIES & MEMBERS OF CLOSE CORPORATIONS
DIRECTORS of a COMPANY:The business and affairs of a company must be managed by or under the direction of its board of directors. The term "director" has a wider meaning than includes an alternate director, a prescribed officer, or a person who is a member of the committee of the board of directors, or a member of the audit committee, irrespective of whether the person is also a member of the board of directors.
The sources of a director's duty towards his/her Company are to be found in our Common law, the new Companies Act 71/2008 (see section 76), the Statutes of the Company and the employment contract (if any) concluded between the Company and the director.
The most important of these duties are:
1the fiduciary duty of a director to act loyal to his company (in other words the duties to act in the best interest of the Company, to act within the powers conferred onto him/her, to act with an unfettered discretion, not to divulge or use confidential information belonging to the Company etc.);
2the duty to act with the necessary care and skill.
When these duties were breached under the old Companies Act, the Company (and not the members of the Company) had the right to institute legal proceedings to prevent any further transgressions of these duties or to recover damages suffered as a direct result of the breach of the abovementioned duties.
Under the new Companies Act, not only the company, but also certain person (which includes the members of the Companies) may elect to proceed in terms of section 165 (2) of the Act to serve a demand upon a company to commence or continue legal proceedings, or take legal steps to protect the legal interest of the company. Should the company fail to do so, such person/s may then apply to the High Court for leave to bring proceedings in the name and on behalf of the company. This will of course include legal proceedings against a recalcitrant director.
A cause of action to proceed with a claim against a director may also arise if a director transgresses an obligation which arose as a result of a contract which was entered into between the director and the Company.
A Company's remedy to hold directors accountable for breach of the abovementioned statutory, common law and or any contractual duties, should be clearly distinguished from the statutory right of third parties (creditors, members, liquidators, judicial managers or the Master) to hold the directors of a Company liable for all or some of the debts of the Company, which arose as a direct result of the director/s having acted fraudulently or recklessly. This important statutory provision is found in section 424 of the old Companies Act, which section still applies under the new Act. It is often used by the creditors of a Company (in liquidation) to hold the directors of the Company accountable if such directors acted fraudulently or recklessly in conducting the affairs of the Company. The decision by the Supreme Court of Appeal in Philotex (Pty) Ltd v JR Snyman 1998 (2) SA 138 (SCA) indicates that our courts are indeed prepared to use section 424 as an effective measure to control directors’ actions.
MEMBERS of a CLOSE CORPORATION:
As in the case of directors of a Company, the law (by virtue of sections 42 and 43 of the Close Corporations Act 69/1984 “the Act”) imposes a fiduciary duty and a duty to act with skill and care on the members of a Close Corporation. The aforementioned Act specifically states that these duties are owed to the Close Corporation as a result of which only the Close Corporation can institute legal action against members transgressing these obligations.
In circumstances where a member of a Close Corporation feels that he/she is being prejudiced by the manner in which the other members conduct the affairs of the Corporation, he/she can approach the High Court or Magistrates’ Court for relief (see section 49).
It is important to note that the members of a Close Corporation can in certain circumstances be held liable for some or all of the debts of a Close Corporation. The most important of these circumstances are when:
1the business of the Close Corporation was conducted recklessly or with gross negligence or with the intent to defraud (see section 64 of the Act);
2the office of accounting officer has been vacant for 6 (six) months (see section 63 (h);
3Master’s examinations as per section 152 of the Insolvency Act.
4a person participated in the management of a Close Corporation in circumstances where he/she was an unrehabilitated insolvent. (see section 63 (g).
5(see section 63 for more detail).
Members of a Close Corporation should also take note of section 70 of the Close Corporations Act which makes provision for the repayment of distributions paid to members, when the Close Corporation was insolvent (see section 70 for more detail).
ADVICE ON TRUST LAW & COMPANY LAW
ADVICE ON & OPINIONS ON TRUST LAW & COMPANY LAW
The inter vivos trust is an important instrument in estate planning and plays an important role in the commercial world. Trustees and beneficiaries should be well versed in the basic legal principles of a trust and what their respective rights and duties are insofar it relates to Trusts in general and the Trust Deed in terms of which they were appointed as such.
Many trustees, beneficiaries and creditors of a inter vivos “discretionary” trust have a misguided believe that once assets are placed in the hands of trustees, it is automatically safeguarded against any of the settlor’s or beneficiaries’ creditors. The decision of the Supreme Court of Appeal in the case of Badenhorst v Badenhorst 2006 (2) SA 255 (SCA) confirmed that our courts, when confronted with a “sham trust” (when the settler or one of the trustees has too much control over trust assets and trust decisions so that the other trustees act as mere nominees and do not exercise independent judgement), will refuse to recognize the trust, with the result that the trust assets are open to attack by creditors and spouses. It is important to take note that that our courts will look at how the trust was managed, who exercised effective control and not merely at the paperwork.
COMPANY LAW (including Close Corporations):
The heart and soul of any society which is built upon the foundations of capitalism is its Company Laws. In South Africa law, the rules governing Companies and Close Corporations are found inter alia in the Companies Act 71/2008, the Close Corporations Act 69/1973 and the Common law. Important topics that are dealt with in the aforementioned Acts are for instance, the raising of capital via the issue of shares, the different functions of directors and the general meeting of members, capital maintenance rules, loans to directors, selling the major part of the business of a Company, personal liability of directors and members, liquidations etc.
RESOLVING COMMERCIAL DISPUTES & NEGOTIATING WITH CREDITORS
RESOLVING COMMERCIAL DISPUTES & NEGOTIATING WITH CREDITORSA business has many different creditors such as trade creditors, commercial banks, the Receiver of Revenue, employees etc., each with a claim against the business which has to be assessed individually. When the need to negotiate with creditors arise as a result of a commercial dispute or some unforeseen event (such as adverse economic conditions or an unforeseen event that severely impacted on the cash flow of a business) it is important to have a clear understanding on relevant legal issues such as:
1Whether the creditor holds any real security (such as a notarial bond, mortgage bond, landlord’s hypothec, lien etc.) for his claim.
2Whether the "indirect proprietor" of the business (in the case of a Company Close Corporation or business trust) has signed surety for the obligations of the business.
3The strength of the evidence (documentary or oral) available to prove or disprove a claim.
4The procedural mechanisms available to enforce a claim.
5The worst case scenario, in the event that negotiations fail and the business has to file for liquidation or ends up with a judgment ordering it to pay the creditor.
6The legal costs involved in obtaining a formal judgment on the claim via the formal legal procedures available in our civil law.
RESCUE SCHEMES FOR COMPANIES IN FINANCIAL DISTRESS
BUSINESS RESCUE MECHANISMSPrior to the enactment of the new Companies Act 71/2008 (“the new Act”) the South African legal system was based on a creditor friendly system which made it difficult to implement business rescue mechanisms, especially in circumstances where a company was already severely distressed from a financial point of view.
The new Companies Act brought about a fundamental turnaround in the approach to business rescue by moving away from a creditor friendly system and replacing it with a business rescue regime under which temporary protection is afforded to the Company/Close Corporation against its creditors whilst an attempt is being made by a duly appointed business rescue practitioner to rescue the Company.. In what follows a very brief summary is provided of the mechanisms available to rescue companies in financial distress:
BUSINESS RESCUE i.to. section 129:
- Chapter 6 of the new Act contains a new business rescue regime which replaced the dysfunctional Judicial Management procedure under the old Act. Under the new regime, business rescue is defined as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
- The temporary supervision of the Company (or Close Corporation) and of the management of its affairs, business and property;
- The placing of a moratorium on the enforcement of claims against the company, whilst an attempt is being made to rescue to Company.
- The appointment of a business rescue practioner who will attempt to rescue the Company by investigating its affairs, negotiate with creditors and propose a business rescue plan for adoption.
- Presenting a liquidation scenario and convincing creditors to accept a rescue plan which would place them in a better position compared to a liquidation scenario, will play a major role in all attempts to rescue a Company.
- If the attempt to rescue the business fails, the only and final solution would be for the Company to be placed in liquidation.
- Business rescue proceedings have to comply with strict time limits and attempts to rescue the Company will have to be effective and decisive.
Compromise/Scheme of Arrangement with Creditors i.t.o. Section 155 of the Companies Act:
- Compromises and schemes of arrangements are tools with which a Company can be rescued. In practice it can take many different shapes and forms depending on the commercial circumstances. In essence its main aim is to present the creditors of a financially distressed Company with a commercially sensible proposal (a compromise or scheme of arrangement) on which they will have to vote and which will place them in a better position compared to a liquidation scenario. From a business rescue point of view, the procedure usually entails the following:
- Someone, known as “the financial Proposer” of the compromise or scheme, presents the board of the Company or its liquidators with an arrangement or compromise of the Company’s financial obligations to its creditors or members or class of creditors.
- The board of the Company or the liquidator then proposes the proposal to creditors at a duly convened meeting of the creditors.
- At the meeting, held under the supervision and direction of a duly appointed chairman, the creditors submit their votes on the proposal and if the statutory majority of creditors vote in favor of such a meeting (i.e. 75% in value of the creditors or any class of them, present in voting in person or by proxy), the proposal is adopted.
- Once adopted the Proposer will approach the High Court for an order which sanctions the compromise or arrangement.
- The proposal will become binding and effective once the court order which sanctions the compromise or arrangement is filed with the Commission in Pretoria.
- The financial Proposer will acquire the claims of the creditors and usually end up as a prominent member and creditor of the Company, thereby exercising control over the Company’s affairs.
- A definite downside to section 155 schemes or compromises, are the fact that they are relatively expensive to consider and implement (Valuations of property, preparation of a detailed proposal, creditors’ meetings, appointment of and payment of a Chairman & Receiver for creditors, application to High Court for Sanctioning, lots of documentation etc.).
NB!! The importance of obtaining advice on the implementation of an applicable rescue mechanism when the early signs of commercial cancer (inability to pay debts & cash flow problems) are on the horizon cannot be over emphasized.
CORPORATE RECOVERIES (Book debts)
CORPORATE RECOVERIES (BOOK DEBTS > R50 000)The book debts of a business are a valuable item on the balance sheet of any business. Because of its direct impact on the cash flow of a business, the effective and expedient recovery of these debts is essential for the continuous survival of a business entity. If not properly managed any neglect in this regard may have disastrous consequences for any business enterprise.
The effective recovery of book debts requires a solid understanding of Magistrates’ Court and High Court Procedures, legal costs and Insolvency Law. In circumstances where there is no dispute as to the existence and enforceability of a debt owed by a Company or Close Corporation, the effective and expedient recovery of such debts may best be served by the use of liquidation procedures to obtain payment from a debtor. This is a highly specialized method of recovery and requires a thorough understanding of insolvency law, company law and the law of evidence.
DUE DILIGENCE INVESTIGATIONS
DUE DILIGENCE INVESTIGATIONSPrior to finalizing a sale of business or taking control of a Company via acquiring the majority of its shares, the prudent purchaser would verify that he/she is in fact buying what the purchaser purports to be selling and that he/she has obtained and analyzed all the important information which might impact on his decision to buy the business or shares. In essence, the purpose of a due diligence investigation is for the purchaser to avoid finding any “skeletons in the cupboard” subsequent to having acquired the business or the shares.
Prior to instructing a professional to conduct a due diligence investigation it is important to decide what information is important from a business point of view and to compile a checklist. The next step is to require the seller to furnish the information and then to analyze it on receipt thereof.
It is important to distinguish between a legal due diligence and a financial due diligence. The former focuses on the rights and obligations pertaining to existing legal agreements, trade marks, licenses and legal risks in general, whilst the later focuses on financial information such as turnover, tax, costs etc.
COMMERCIAL AGREEMENTS: drafting various commercial agreements including but not limited to Shareholders’ Agreements, Association agreements, Sale of Shares, Sale of Business, Terms & Conditions, Lease AgreementsAdvice on the following commercial agreements is offered:
3Sale of Shares & Membership interests
4Sale of Business Agreements
5 Basic terms & conditions for business enterprises
ADVICE ON CONTRACTSThe principle of "pacta sunt servanda" (meaning "contractual obligations should be honoured") is a well known principle of the South African Law of Contract. Because of this fundamental principle pertaining to our South African Law of Contract, the Courts will only deviate from it in exceptional circumstances. As a result of this, it is important for people to read and understand the terms and conditions of a contract which they stand to enter into or which they are currently negotiating. They should be under no illusion as to what are the obligations which they agree to fulfill. Failure to understand or to comply with a contractual obligation may have adverse consequences such as a claim for contractual damages, etc.
Important topics relating to the law of contract which regularly features in commercial practice are:
2Restraint of trade clauses
4Remedies on breach of contract
PROPERTY TRANSACTIONS:The acquiring and disposal of property (immoveable property such as residential, commercial and farming property; moveable property such as vehicles & equipment; intellectual property etc.) is an integral feature of modern day economic activity. As a direct consequence of the value attached to property, purchasers and sellers should be well advised of the inherent risks, the best practice procedures and tax consequences when involved in any property transaction.
The acquisition and disposal of immoveable property can be effected via a written deed of sale or via a public auction. In recent times, there was a considerable increase in the disposal of immoveable property via public auction. The reason for this increase can be attributed to advantages such as the fact that there is no ceiling on the selling price which can be achieved, transparency of the process and the avoidance of lengthy stretched out negotiations prior to concluding the sale.