Dispositions made by a company that is being wound up | The court’s role

Liquidation_Barnard_Inc

WESSEL HERBST

Commercial Litigation

In a recent Supreme Court of Appeal matter- Pride Milling Company (Pty) Ltd v Bekker NO and Another – the SCA was asked to decide on circumstances in which it would be appropriate for a court to validate a disposition made by a company that is being wound up. And more particularly, whether a court may validate dispositions made after a provisional winding-up order has been granted but prior to the grant of a final order.

The joint liquidators of the estate of Irfan Sohail Trading (Pty) Ltd (“Irfan”) contended that the payments that Irfan made to the Appellant (“Pride Milling Company (Pty) Ltd”) had constituted voidable dispositions. The joint liquidators asserted that the aforementioned payments were to be set aside due to the fact that they were made after the effective date of the winding-up application.

The material facts that were set out by the joint liquidators – being that the aforesaid payments by Irfan to the Appellant – were not disputed by the Appellant. Rather, the Appellant focused its argument on that the payments had to be validated in terms of the Section 341(2) of the Companies Act, 61 of 1973 (“1973 Act”) “(2) Every disposition of its property (including rights of action) by any company being wound-up and unable to pay its debts made after the commencement of the winding-up, shall be void unless the Court otherwise orders.”

In Engen Petroleum Ltd v Goudis Carriers (Pty) Ltd, the court had held that the primary purpose of Section 341(2) is to address the anomaly that occurs because of the retrospective invalidation of dispositions by a company which were initially lawful and valid. This statement is deemed to be incorrect.

Section 341(2)’s predominant purpose is to declare that all dispositions made by a company that is being wound-up, should be deemed as void. Taking the above into consideration, Section 341(2) should be read together with Section 348, which provides that the winding-up of a company by a court shall be deemed to have commenced at the time of the presentation of the application for the winding-up of the company to the court.

It was held as common cause that the provisional winding-order against Irfan was granted on 29 June 2017 and the effective date being 5 May 2017. The effect of a winding-up order is to establish the concursus creditorum. This entails that the claim of each creditor falls to be dealt with as it existed at the time when the court granted the provisional order.

In this regard, a company is being wound-up on the granting of a provisional winding-up order of liquidation. Once this stage is reached, the court no longer has any of its powers that were bestowed upon it in terms of Section 341(2). The court will have no power to permit a company being wound-up to make dispositions of its assets. With reference to the case at hand, the court held that validating the payment would mean that the Appellant would be left to enjoy the benefit of its claim, against Irfan, being settled in full, whilst the other creditors would have had to be content with the remainder of the estate.

The Appellant argued that the above contention was wrong and that the court still has the requisite power to approve the dispositions up and until the return date for the final winding-up order. The court argued that the Appellant’s approach would restore the status quo of Irfan’s estate and would render the provisional order as ineffectual. Furthermore, the court held that the Appellant’s argument was unsustainable for it contains the seeds of its own destruction.

The court’s discretion to allow disposition of assets after the winding-up of the company, Meskin stated that the court’s discretion is only controlled by the general principles which is applicable to every kind of judicial discretion. Each court must decide what would be just and fair in the prevailing circumstances of the case. The court has the requisite discretion to validate a disposition should this disposition amount to result of the company acting bona fide to carrying on with its business in its ordinary course.

The court held that the given the effect of Section 341(2), a party that approaches the court to seek that the court orders otherwise, would therefore need to establish its entitlement to its relief that it seeks. Therefore, the party bears of the onus of proof to persuade the court with clear evidence as to why the court should order otherwise.

The High Court exercised a discretion in the true sense with its order and the voidable disposition. The Appellant failed to provide the Supreme Court of Appeal with sufficient evidence to why it should order otherwise, and the appeal was dismissed with costs.

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