Compulsory winding up

Enyuka leased several properties to United. By June 2021 United had accrued arrears of over R1,2 million in rent due to Enyuka and a further almost R1,2 million to other landlord creditors. Consequently, Enyuka brought an application on 25 June 2021 for the compulsory winding up of United, on the basis of commercial insolvency. The compulsory winding up application was opposed by United, who denied its commercial insolvency. The court described this opposition as “unjustifiably opposing the application” for the purpose of delaying the compulsory liquidation. The court held that United’s opposition of the compulsory winding up application, despite knowing that it was commercially insolvent, was an abuse of the processes of the court. In addition to delaying the hearing of the application by filing opposing papers, United then also failed to file its heads of argument in the matter. According to the Gauteng Practice Directives at the time, this failure forced Enyuka to bring a further application to compel the filing of United heads of argument. This had to be done before Enyuka could apply for a hearing date in the liquidation application. In other words, this was an additional tactic by United to cause a further delay in the hearing of the compulsory liquidation.

The notice to comply was served on United on 26 January 2022. From the events that took place between United and Truval during this period, it was obvious to the court that the delays were not merely to avoid the inevitable liquidation of United, but to ensure the preferent payment of Truval and avoid the scrutiny of this preference.

Voluntary winding up

Meanwhile, on 6 December 2021 United, unbeknownst to Enyuka, adopted a special resolution for a winding up by creditors. This special resolution was registered by the Companies and Intellectual Property Commission (CIPC) on 2 February 2022. The attorneys for United only informed Enyuka’s attorneys about the resolution, and the voluntary winding up, a month later.

Difference in commencement dates

As a side note, due to inter alia Schedule 5, Item 9 of the Companies Act 71 of 2008 read with the amended Close Corporations Act 69 of 1984, most of the provisions of the Companies Act 61 of 1973 (Old Companies Act) are still applicable when it comes to the commercial insolvency of companies and close corporations.

In accordance with section 348 of the Old Companies Act, if Enyuka’s compulsory liquidation application had been successful, then the commencement date for the liquidation would have been the date upon which the liquidation application was launched – i.e. 25 June 2021.

Assuming that the special resolution had been correctly passed and registered with the CIPC the commencement of the voluntary would be the date upon which the resolution was registered with CIPC – i.e. 2 February 2022.

The importance of these two commencement dates is illustrated by the behaviour set out below.

Transactions between United and Truval

United, which was controlled by its members Daniel Louis Steiner and Craig Marc Burgin, was allegedly indebted to Truval, which was also controlled by Steiner and Burgin, for merchandise worth approximately R56 million.
Shortly before the compulsory winding up application was launched by Enyuka, the following events appeared to take place between United and Truval:

1. During March of 2021, United made significant payments to Truval to the disadvantage of other creditors.
2. On 15 March 2021, United executed a general notarial bond in favour of Truval, such bond being registered on 24 March 2021.
3. On 28 April 2021, Truval was granted relief after bringing an urgent application to perfect the pledge under the general notarial bond.
4. Truval took possession of United’s assets in accordance with such order.

The court emphasised that Steiner and Burgin were the members of both United and Truval and were in control of these corporations.

The court further stated, at paragraph 123 of the judgment, that these transactions illustrate collusive dealings between United and Truval to the detriment of other creditors.

In addition, if the commencement date of United’s liquidation was deemed to be only 2 February 2022 then the above actions of United and Truval would fall outside of the six-month period for the setting aside of voidable preferences as prescribed by section 29 of the Insolvency Act 24 of 1936.

It was against this backdrop that the court had to consider whether to set aside United’s special resolution for its voluntary winding up, which decision of course affected the deemed date of United’s liquidation. This was a decision which would have a material impact on the rights of the parties. The court’s consideration involved an interrogation of the status of the special resolution, the legislation governing it and the fraudulent nature of the conduct of Truval and United.

Defective special resolution

The court held that the voluntary winding up of an insolvent close corporation had to be done by way of special resolution in terms of the Old Companies Act.

At the meeting of members, section 363 of the Old Companies Act required that a statement of affairs of the close corporation be presented at the meeting. The court held that the purpose of the statement of affairs is to place members in a position to make an informed decision about the winding up of the close corporation during the meeting.

The court found that the special resolution (and statement of affairs) was “fatally defective and void”, holding that the statement of affairs failed to comply with section 363 of the Old Companies Act due to its “grossly incorrect and incomplete information”.

It was defective in that:

• it failed to disclose the pending application for compulsory liquidation;
• it was not supported by affidavits as required by section 363(4)(b) of the Old Companies Act;
• it failed to disclose the details of United’s creditors, including Enyuka; and
• it was self-contradictory in that it reflected discrepancies in the value of United’s unsecured creditors.
• The court also found that insufficient notice was given of the members’ meeting, which constituted a further fatal defect in the passing of the resolution.

The court ultimately found that:

“Under the circumstances I am persuaded that there are circumstances which make it undesirable for United’s winding up to continue on the basis of the purported voluntary liquidation. In my mind, keeping the voluntary liquidation in place would amount to a travesty of justice.”

It placed United under compulsory liquidation, with a commencement date of 25 June 2021. Punitive costs were granted against Truval.

Conclusion

This judgment is significant as it shows that the courts are prepared to “untangle the web” to ensure a lawful result for creditors. This judgment also highlights the importance of complying with compulsory requirements mandated by legislation when passing a special resolution for voluntary winding up.

If you are considering voluntary liquidation, we recommend that you consult with your legal advisors to ensure the proper procedures are followed and the notice contains the necessary information.