28 November 2018 by Dispute Resolution Alert

The ambit of section 420 of the Companies Act

In the recent reported judgment of De Villiers v GJN Trust (756/2017) [2018] ZASCA 80, the Supreme Court of Appeal (SCA) considered, among other things, the ambit of s420 of the Act, as well as the effect of a s420 court order, whereby the dissolution of a company is declared void.

Section 420 of the Companies Act, No 61 of 1973 (Act), states:

When a company has been dissolved, the Court may at any time on an application by the liquidator of the company, or by any other person who appears to the Court to have an interest, make an order, upon such terms as the Court thinks fit, declaring the dissolution to have been void, and thereupon any proceedings may be taken against the company as might have been taken if the company had not been dissolved.”

In its judgment, the SCA considered the Goodman v Suburban Estates, Ltd (in liquidation) and others 1915 WLD 15 case. In this case, Mason J stated, with reference to s193 of the Transvaal Companies Act, No 31 of 1909 (which was similar to s420 of the Act) that the dissolution of a company should not be declared void “unless some unforeseen event such as the discovery of new assets has occurred or unless there has been some fraud or concealment practices or unless the dissolution has become either by reason of surrounding circumstances or through some contrivance of parties the instrument of injustice”.

The SCA further considered the Ex parte Liquidator Natal Milling Co (Pty) Ltd 1934 NPD 312 case. In this case, Hathorn J, with reference to s191 of the old Companies Act, No 46 of 1926 (which was also similar to s420 of the Act), pointed out that “according to my view the power of the Court to make an order declaring the dissolution to have been void is unlimited in any respect, and as the circumstances under which the section may be brought into operation are likely to vary in every case, it seems to me inadvisable to lay down any principle upon which the Court will act”.

The SCA agreed with the interpretation of Hathorn J in the Natal Milling case, and consequently held that s420 of the Act, “defies precise definition”, providing the court with a wide discretion to declare the dissolution of a company void.

The SCA further held that:

  1. The effect of a s420 court order is to revive the company and to restore the position that existed immediately prior to its dissolution. Thus, when a court order is granted declaring the dissolution of a company void in terms of s420 of the Act, the company is recreated as a company in liquidation, with the rights and obligations that existed upon its dissolution;
  2. It is not the aim of s420 of the Act to set aside the entire liquidation process of a company for purposes of commencing the liquidation afresh. All steps taken during the prior liquidation, up to the time of dissolution, will stand; and
  3. A s420 order does not have the effect that the company’s already-final first and final liquidation and distribution account will be reopened. Further assets of the company that are recovered by the liquidators after the company has been revived, must be dealt with in a further liquidation and distribution account in terms of s403 of the Act.
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