A recent judgment in the High Court of South Africa (Cape Town) – Muller NO and Another v Cultigrain (Pty) Ltd – has clarified how payments made by a company under winding-up—both before and after the commencement of liquidation (also known as concursus creditorum)—are treated in terms of the Companies Act 61 of 1973. Specifically, it deals with section 341(2) of the Act, which in broad terms provides that dispositions of a company's assets made after liquidation proceedings have started may be void, unless a court orders otherwise.
This judgment offers practical guidance for businesses that may unwittingly be caught out when dealing with a company in financial distress and highlights the importance of due diligence, especially when it appears that a trading partner may be close to insolvency.
When a company is placed under winding-up, the law automatically triggers what is known as a concursus creditorum. This means that:
- The rights of all creditors to be paid from the company's assets become "frozen" at the date the liquidation application is submitted to court.
- No creditor may take steps that would give it an unfair advantage over other creditors.
- Certain payments (or "dispositions") made by the company after that date can be rendered void.
The purpose of this rule is to protect the principle that creditors should rank equally according to the nature and priority of their claims, and no one creditor should be preferred to the detriment of others.
Key Facts of the Case
- Parties: The liquidators (Applicants) of a company called Wheatcor (Pty) Ltd took legal action against Cultigrain (Pty) Ltd (Respondent).
- Core Issue: Wheatcor, having run up debts, was placed under liquidation. Cultigrain had continued to deliver grain to Wheatcor, and Wheatcor made various payments to Cultigrain shortly before and after liquidation proceedings were launched.
- Section 341(2) of the Companies Act 1973 states that these payments (dispositions) are automatically void unless the court orders otherwise (often referred to as "validating" or "validation").
The Court's Reasoning
1. Default Position—Void Dispositions
Under section 341(2), any payment or disposition of property by a company once the winding-up proceedings are underway (from the date the application is lodged) is presumed void. This is to stop the company from preferring certain creditors, and it prevents the dissipation of assets that should be available to the general body of creditors.
2. Court's Discretion to Validate
A court has the power to "validate" or confirm that these otherwise void payments remain effective. The party seeking validation – in this case, Cultigrain – must persuade the court that it is fair and just, and that other creditors are not unfairly prejudiced.
3. Ordinary Course of Business vs. Preference
The court examined whether payments were made in the ordinary course of the company's (Wheatcor's) business or whether they improperly advantaged Cultigrain at the expense of other creditors.
If transactions are genuinely part of a normal, arms-length commercial arrangement, that may count in favour of validation.
However, if they result in a creditor getting paid ahead of others—especially when the company has already lost the ability to pay all its debts—courts are reluctant to allow such payments to stand.
4. Executory Contracts and Deliveries
The court drew an important distinction between deliveries made before and after the date liquidation proceedings commenced:
- Deliveries before the liquidation date: Any payment made after liquidation started for deliveries that had occurred earlier typically amounts to preferring that supplier over other creditors, so it is usually not validated.
- Deliveries after the liquidation date: The court recognised that if a creditor delivers fresh goods or services after liquidation has commenced, and the company (through its liquidators) actually benefits from these goods, it may be fair to validate the payments for those post-liquidation deliveries. Otherwise, the liquidators (and by extension, the company's creditors) would be unjustly enriched: they keep the goods but do not pay.
5. Outcome
- Some payments that Wheatcor made were declared void (and thus had to be repaid to the liquidators) because they related to deliveries prior to the liquidation date.
- The court validated (allowed) those payments that directly corresponded to new deliveries of grain made after liquidation had commenced. The logic is that Wheatcor's estate and its creditors effectively received an asset (grain) in return, so nullifying those payments would be unfair to Cultigrain.
Are there practical lessons for businesses?
Monitor Financial Health of Clients: If you are supplying goods or services on credit terms, be aware of any "red flags" indicating a client might be facing insolvency.
Stay Informed of Liquidation Proceedings: If you learn (or suspect) that a client is in the process of being wound up, obtain legal advice on how to proceed with further deliveries and payments.
Consider Adequate Security: Where possible, protect your interests by taking security or other collateral. This can help reduce the risk of having payments later declared void if your client goes insolvent.
Good Faith Is Key: Courts are more likely to validate transactions that are honest, arms-length, and in the normal course of business, especially if the company's estate has actually benefitted from your supply.
The Muller NO and Another v Cultigrain (Pty) Ltd decision underscores that payments made by a company after liquidation proceedings commence are generally void, unless a court sees good reason to declare them valid. For businesses, the judgment highlights the importance of managing credit risk and understanding the legal implications when a counterparty is near (or under) liquidation.
Should you find yourself in a similar situation – supplying goods to a financially distressed or potentially insolvent client – seek timely legal advice. Proper measures and awareness of the law can help minimise the likelihood that payments received will later be set aside, and it can also assist in protecting your interests within the company's insolvency process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
