The Supreme Court of Appeal recently made judgement in respect of the test regarding factual insolvency vs. commercial in respect of the winding up proceedings in terms of Section 354 of the Companies Act 61 of 1973.

In a recent judgement handed down by the Supreme Court of Appeal, the commissioner for the South African Revenue Service (SARS) launched appeal proceedings against an order setting aside the winding up of Regiments Capital (Pty) Ltd.

On 18 November 2019, a provisional restraint order was granted in respect of the assets of Regiments Capital, which was instituted by the National Director of Public Prosecutions under the Prevention of Organised Crime Act, 121 of 1998, which relates to the assets of Regiments. Upon the restraint order being granted, Regiments participation in an "unbundling" transaction in respect of share ins CAPITEC Bank was halted.

On 16 September 2020, Regiments was placed in final winding up at the instance of an unpaid creditor.

On 26 October 2020 the restraint order previously granted was discharged, which prompted the application in court a quo. The application in court a quo was for the setting aside of the winding up order and was brought on an urgent basis. The application also prayed for the authorisation of the execution of the unbundling transaction. The aim was to realise the funds from the unbundling transaction for the benefit of Regiments.

The setting aside of the winding up order was heard before Valley J. The court issued a rule nisi where an independent attorney would supervise the implementation and unbundling of the transaction given the previous restrained order being discharged. The attorney was further directed to provide a report concerning all aspects of the implementation and unbundling transaction. A report was provided to the court as directed, and the appointed attorney received the amount of R36 348 950.00 as the proceeds of the "unbundling" transaction in trust for Regiments. Vally J accepted that the respective values of Regiments' interests in Kgoro and Little River were R513 million and R32 million, respectively. On the basis of this finding, Regiments' total assets (R545 million together with the liquid assets of R390 848 950) would amount to R935 848 950. That would exceed its total liabilities by R264 573 216. Vally J. continued and subsequently ordered that Regiments Capital winding up be set aside. He concluded that the papers show on a balance of probabilities that Regiments is, in the words of Mr. Pillay, "asset rich but cash poor," in other words, only commercially insolvent.

The appeal proceeding raised two main issues. The first issue to be determined was whether or not the setting aside of a winding up order under S354 of the Companies Act 61 of 1973 constitutes the exercise of discretion in the strict sense. The second issue for determination was whether Regiments was commercially solvent at the time of the hearing in the court quo.

"In terms of Section 354, the Court may stay or set aside winding-up.

(1) The Court may, at any time after the commencement of a winding-up, on the application of any liquidator, creditor, or member, and on proof to the satisfaction of the Court that all proceedings in relation to the winding-up ought to be stayed or set aside, make an order staying or setting aside the proceedings or for the continuance of any voluntary winding-up on such terms and conditions as the Court may deem fit.

(2) The Court may, as to all matters relating to a winding-up, have regard to the wishes of the creditors or members as proved to it by any sufficient evidence.'

The court found that the court a quo did not constitute the exercise of a true discretion. It was further held that the court misdirected itself on the facts and the laws and that the decision made was based on incorrect facts and wrong principles of law.

In respect of the second issue of the commercial insolvency of Regiments when the matter came before the court a quo. It was held that Regiments was factually insolvent. In the judgement of the SCA, it was concluded that it was undisputed that Regiments did not trade and that there was no prospect that it might do so in the future. In these circumstances, the judge held that he fails to see how a finding that Regiments was commercially solvent at the time of the decision of the court a quo could have justified the order as handed down. Van Der Merwe JA nevertheless proceeds to consider this issue.

The judgement of this court in Murray and Others v. NNO v. African Global Holdings (Pty) Ltd. and Others 2020 (2) SA 93 (SCA) para 31 is destructive of this argument:

'The argument about timing misunderstands the nature of commercial insolvency. It is not something to be measured at a single point in time by asking whether all debts that are due up to that day have been or are going to be paid. The test is whether the company "is able to meet its current liabilities, including contingent and prospective liabilities, as they come due" . . . .Determining commercial insolvency requires an examination of the financial position of the company at present and in the immediate future to determine whether it will be able in the ordinary course to pay its debts, existing as well as contingent and prospective, and continue trading.'

Therefore, the conclusion that the debt owed to SARS had to be factored into the equation based on the evidence provided in the matter, the tax assessments, in the minimum amount of R279 343 833, would have been issued in the immediate future. In the event, Regiments would be unable to settle the claims of all its current creditors, and it was subsequently held that Regiments was commercially insolvent.

It was concluded that, based on the evidence before the court a quo, Regiments was both factually and commercially insolvent. Considering the facts before the court, there was no basis for finding that the continuation of its winding-up was unnecessary or undesirable. It follows that the appeal must succeed and that it is unnecessary to consider the applications for leave to adduce further evidence on appeal.

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