Certain sections of the 1973 Companies Act still apply to the winding up and liquidation of companies by virtue of the transitional arrangements in schedule 5 to the 2008 Companies Act. The main distinction on whether or not the 1973 Act or the 2008 Act applies centres around whether or not the company is solvent.
The problem of what is meant by a “solvent company” in sub item 9(2) of schedule 5 of the 2008 Companies Act was solved in Boschpoort Ondernemings v Absa Bank. It means a commercially solvent company.
Factual solvency is not, in itself, a reason for a company to be placed in liquidation.
A company is commercially insolvent if it is unable to pay its debts, even though its assets may exceed its liabilities. A company that is commercially solvent is wound up in terms of section 80 or 81 of the 2008 Companies Act. If the company is commercially insolvent it is wound up in terms of the 1973 Companies Act.
A company is factually insolvent if the company’s liabilities exceed its assets. But it may still be able to pay its debts. Most start-up companies may be factually insolvent. Factual solvency is not, in itself, a reason for a company to be placed in liquidation.
It is a well-settled practice of our courts that commercial insolvency justifies the liquidation of a company. The value of assets (other than cash) is notoriously elastic and highly subjective and is only one factor in regard to whether a company can pay its debts. This is the reason that the legislature retained the deeming provision in section 345 of the 1973 Act as to when a company is unable to pay its debts. This case settles the position that a commercially solvent company may only be wound up in terms of the 2008 Companies Act, irrespective of whether or not it is factually solvent. A solvent company cannot be wound up in terms of the 1973 Companies Act.
These days of course commercially or factually insolvent companies may be rescued by the new business rescue procedures.