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FreepikIn this particular case, Wheatcor, the company in liquidation, made certain payments to the respondent, being Cultigrain, after the commencement of its winding up but before the provisional liquidation order was granted.
The court had to determine whether these payments were void or valid under section 341(2) of the Companies Act 61 of 1973 (Old Companies Act), which regulate dispositions of company property made after the commencement of winding-up proceedings.
Facts of the case
The effective date of Wheatcor's liquidation was 8 September 2020. A provisional order of liquidation was granted on 23 September 2020, and the order was made final on 8 December 2020.
During the period from 9 September to 23 September 2020, being after the commencement of the winding up of Wheatcor but before the provisional order of liquidation was granted, Wheatcor made payments totalling R4,797,374 to Cultigrain. These payments were for invoices issued between 28 August and 11 September 2020.
It is these payments which the applicants sought to be declared void in terms of section 341(2) of the Old Companies Act. In addition, the applicants also requested judgment for this amount.
In response, Cultigrain filed a counter-application seeking to validate these payments under the same provision as a judge is entitled to exercise their discretion in terms of section 341(2).
All creditors are treated equally
Section 341(2) of the Old Companies Act states that:
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.
The case under discussion highlights that the purpose of this provision is to ensure that once a concursus creditorum (meeting of creditors) is formed, all creditors are treated equally, preventing preferential treatment. This protection arises from the date of the commencement of the winding-up proceedings, being when the application to the court is made.
Section 341(2) of the Old Companies Act allows a person to approach the court to either void such dispositions or validate it.
Voiding of disposition
If a person relies on section 341(2) to void a disposition, the applicant must show the following to the court:
- there was a disposition made;
- the party making the disposition was unable to pay its debts at that time; and
- such dispositions were made after the commencement of the winding up.
Validation of disposition
If a person relies on this section to validate the dispositions that occurred after the commencement of the winding up proceedings, the person relying on this clause bears the onus to establish circumstances justifying the making of such an order. Courts grant such an order in extremely limited circumstances, as the creation of such an order is inconsistent with purpose of section 341(2) of the Old Companies Act.
Julian Jones, Joon Chong, Caellyn Eedes and Rohan Baijnath 19 Nov 2021
The discretion to validate such dispositions vests with the court and is guided by principles set out in Lane NO v Olivier Transport [1997], such as:
- good faith and honest intentions of the parties;
- whether the disposition was in the ordinary course of business;
- whether the recipient was aware of the pending liquidation; and/or
- whether the disposition benefitted the estate or unfairly preferred one creditor.
Discussion of case
It was common cause that Wheatcor made dispositions to Cultigrain after the date of commencement of the winding up of the company. In application of the test to void a disposition as discussed above, Judge Holderness further held that Cultigrain was unable to rebut any positive evidence of Wheatcor being commercially insolvent. Naturally, the dispositions were void unless the court exercised its discretion to validate it.
The court distinguished between two categories of payments when it considered whether to exercise its discretion to validate the dispositions from 9 September to 23 September, being:
- payments for deliveries before the effective date (8 September 2020); and
- payments for deliveries after the effective date.
Payments for deliveries before the effective date
For the former, the deliveries had been completed before the winding up of Wheatcor, and only the payments were outstanding. Since these transactions were effectively concluded before the formation of the concursus, Cultigrain would form part of the meeting of creditors. Dispositions made afterward unfairly preferred Cultigrain and were thus deemed void.
As a result, payments of R2,267,660, which were for deliveries made before the execution date, were declared void and recoverable by the liquidators.
Nivaani Moodley, Shane Johnson, Cameron Rajoo, Julian Jones and Caellyn Eedes 6 May 2021
Payments made after the execution date
For the latter, the deliveries and corresponding payments both occurred after the effective date. These were treated as part of executory agreements (contracts where obligations remained outstanding on both sides).
The court emphasized that for payments made for deliveries that occurred after the execution date, the appointed liquidators would have had the election of abiding by the agreement and accepting delivery or to refuse delivery. There cannot, however, be an acceptance of delivery without tendering payment if both occurred after the meeting of creditors was established. Allowing otherwise would unjustly enrich Wheatcor and disadvantage Cultigrain.
The court was therefore persuaded to validate only those payments relating to deliveries made after 9 September 2020, amounting to R2,674,349, as Cultigrain acted in good faith, was unaware of the liquidation application, and the transactions augmented the estate’s value – even marginally.
In conclusion, Holderness exercised her discretion in terms of section 341(2) of the Old Companies Act in favour of declaring only the dispositions by Wheatcor in respect of deliveries made by Cultigrain after the effective date valid. The remaining dispositions were void.
Significance of the judgment
This judgment provides critical guidance on the interpretation and application of section 341(2) of the Old Companies Act within the context of liquidation proceedings.
It delves into the intricate task of balancing the interests of individual contracting parties with the overarching principle of equality among creditors, a cornerstone of the insolvency framework.
Importantly, the judgment reaffirms that although courts are vested with discretionary powers under the Old Companies Act, such discretion is not unfettered. Rather, it is to be exercised sparingly and only in circumstances where the validation of a post-liquidation transaction does not undermine or threaten the integrity of the concursus creditorum.
Holderness’ decision stands out as both critical and well-reasoned. It reflects the nuanced understanding of the core objectives of liquidation law – namely, the fair and orderly distribution of assets. Ultimately, this case strengthens the jurisprudential framework around post-liquidation transactions and offers much-needed clarity in a complex and often contentious area of the law.
