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Void Dispositions and the Court's Discretion to Validate Them

25 July 2013

Routledge Modise

The effects of trading with a company against which a liquidation application has been brought cannot be overstated. This article considers the consequences of such transactions and in particular, addresses section 341 of the Companies Act 61 of 1973  which provides that all dispositions made by a company subsequent to liquidation are considered void, unless the court orders otherwise.

In terms of section 348 of the Companies Act, a winding-up by the court is deemed to commence "at the time of the presentation to court of the application for the winding-up". In terms of section 352, voluntary winding up commences when the relevant special resolution of members is registered with the Registrar of Companies.

Winding up establishes a concursus creditorum that is aimed at ensuring that the company's property is collected and distributed amongst its creditors in the prescribed order of preference. The formation of the concursus creditorum is the rationale behind section 341; a liquidated company should not make dispositions that would result in the preference of one creditor over another.

Further, one of the consequences of being placed in liquidation is that the powers of the directors cease; the company's property is deemed to be in the custody of the Master and, thereafter, the liquidator. It is said that the "hands of the court" are placed over the company and, therefore, it follows that unauthorised dispositions by the company should be declared invalid.

The invalidity of post-liquidation dispositions is however, not set in stone. Section 341(2) states: "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." Thus, the section provides that all dispositions made after winding-up are automatically void, unless the court utilises its discretion to order otherwise.

According to Professor Blackman, a pivotal question for a judge to consider when exercising his discretion is whether the payments were made so as to allow the company to carry on business for the benefit of its creditors. Furthermore, in the case of Lane NO v Olivier Transport[1] the learned judge reiterated that the court must strike a balance between what is fair towards the applicant and what is fair to the creditors of the liquidated company.

Consequently, the court's discretion may be exercised in favour of the applicant in terms of section 341 (2) if the following factors are present:

  • The disposition was made bona fide.
  • The disposition was made for the purpose of carrying on business in the normal course.
  • The disposition was made to carry on business, and thus for the benefit of creditors.
  • A balance has been struck between the fairness towards creditors and the fairness towards the applicant.

In the recent case of Excellent Petroleum (Pty) Ltd (in liquidation) v Brent Oil (Pty) Ltd[2] the court considered its discretion in terms of section 341(2). In this case, the liquidated company had, after the commencement of the winding-up, made payments to the defendant for the purchase of diesel and illuminated paraffin. It was common cause between the parties that the defendant bore the onus of establishing facts to persuade the court to use its discretion and order that the post winding-up payments were not void.

The material facts on which the court relied in coming to its decision were that the defendant bore no knowledge of the pending application for liquidation of the plaintiff. To the best of its knowledge, the defendant believed that the plaintiff was utilising the petrol and diesel in the open market to continue operating in the usual course and scope of its business and that the plaintiff utilised the proceeds of the resale of the diesel to finance further purchases from the defendant. So it could not be said that such dispositions were made with the intention of preferring specific creditors, but rather to keep the business afloat. Further, all transactions between the plaintiff and the defendant were of a cash nature and thus did not raise the necessity for the defendant to investigate the credit details of the plaintiff. The defendant, upon learning of the provisional liquidation of the plaintiff, immediately stopped making deliveries to the plaintiff.

In considering its discretion to "order otherwise", the court considered the opinion put forward by Meskin.[3] At page 680 it is stated that the court's discretion is controlled by the general provisions which apply to any discretion held by the court. Generally, the court's decision must be based on a determination of what would be just and fair in the circumstances of the case, bearing in mind the purpose of the subsection. In the specific instance of voidable dispositions, it is stated that the disposition must be no more than the " bona fide carrying on of the company's ordinary operations." Thus, in an instance where one creditor is preferred over others, the court should not validate the disposition. The "just and fair" requirement is reiterated by Blackman et al. in Commentary on the Companies Act. Thus, the court must make its decision on a case-by-case basis and based on the specific facts and circumstances of the parties involved.

In this case, the judge found that the bona fides of the defendant was "beyond question" and thus exercised its discretion by ordering that the post winding-up disposition be declared valid.

While the general position in terms of section 341 remains that dispositions made after winding-up are void, case law provides examples of the court exercising its discretion to order otherwise. Ultimately, however, judgement on the issue will be made on a subjective, case-by-case basis. The party wishing to have the disposition declared valid bears the onus of providing the court with sufficient evidence of the bona fides natures of the transaction, the fairness towards creditors as well as itself and that the transaction was concluded with the purpose of carrying on business in the ordinary course.

[1] 1997 (1) SA 383 (CPD)
[2] 2012 (5) SA 407
[3] Meskin et al. Henochsberg on the Companies Act, Lexis Nexis, (2012)

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