Corporate Winding-Up and Insolvency Law Quiz

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Questions and Answers

What can a liquidator recover from a member if the payment was not bona fide within two years of winding up?

All dividends distributed to the member

Any bonuses paid to the member

Any loans given to the member by the CC

Any salary paid to the member in his capacity as officer/employee (correct)

What may the court order if someone is guilty of misapplying money or property of the CC?

The person may be exempt from further legal action

The company must dissolve immediately

The person must repay only part of the misapplied funds

The person must contribute to the assets of the CC (correct)

What is preferable for creditors when reaching an arrangement with an insolvent?

All creditors should be bound to the arrangement (correct)

Only the largest creditor should be involved

Only unsecured creditors should participate

Dissenting creditors should be allowed to opt out

What is required for a company to reach a compromise with its creditors?

Prescribed approval and application to court for sanctioning Signup and view all the answers

Under what condition will a court sanction a compromise?

If it is just and equitable Signup and view all the answers

What is the primary aim of sequestration?

To ensure creditors receive a fair portion Signup and view all the answers

Which process is applicable exclusively to natural persons?

Sequestration Signup and view all the answers

What entity is specifically responsible for overseeing the winding-up of a company?

Liquidator Signup and view all the answers

What term describes the process of winding-up a company or Close Corporation when it becomes insolvent?

Compulsory liquidation Signup and view all the answers

How can companies be wound up voluntarily?

Through a special resolution of shareholders Signup and view all the answers

What distinguishes compulsory winding-up from voluntary winding-up?

Who initiates the process Signup and view all the answers

What can trigger the winding-up of a Close Corporation apart from insolvency?

A unanimous decision by members Signup and view all the answers

Which of the following is NOT a method to initiate winding-up of a company?

By an official inquiry Signup and view all the answers

Under what condition can a company be wound up due to the actions of its directors or officers?

If directors are acting illegally or fraudulently Signup and view all the answers

What must occur before a voluntary winding up can be converted into a winding up by the court?

Evidence of fraud or illegality Signup and view all the answers

Which situation does NOT justify winding up a company?

The company has been operating for less than a year Signup and view all the answers

What happens to a debtor's legal status once their estate is sequestrated by court order?

They are no longer called a debtor but become insolvent. Signup and view all the answers

What is one consequence of winding up a company?

Civil proceedings against the company are stayed Signup and view all the answers

Which type of creditors are entitled to payment after secured creditors have been paid?

Preferent creditors Signup and view all the answers

Who has the authority to appoint a provisional liquidator?

The Master of the court Signup and view all the answers

Which of the following best describes the process of sequestration?

It is a court declaration of an individual's estate as insolvent. Signup and view all the answers

What distinguishes voluntary winding-up from compulsory winding-up?

Voluntary winding-up is a decision made by the shareholders. Signup and view all the answers

In what scenario is a company unable to dispose of its property?

If the company is insolvent Signup and view all the answers

What action must directors take during the winding-up process?

Lodge a statement of affairs with the Master Signup and view all the answers

What term is used for creditors who hold security over their claims?

Secured creditors Signup and view all the answers

Which of the following statements is incorrect regarding the impacts of winding-up?

Winding-up changes the status of the corporation irreversibly. Signup and view all the answers

What is a primary reason for a company to enter business rescue proceedings?

If there is no reasonable prospect of saving the company Signup and view all the answers

Who is responsible for overseeing the liquidator's actions during the winding-up process?

The creditors' meeting Signup and view all the answers

Under which condition does a debtor remain insolvent?

Until the court orders rehabilitation or after ten years Signup and view all the answers

What is the primary goal of the first creditors meeting under the Insolvency Act 24 of 1936?

To appoint a trustee and allow creditors to prove their claims Signup and view all the answers

Who can convene a special meeting of creditors?

The trustee, if requested by an interested person Signup and view all the answers

What distinguishes preferent creditors from concurrent creditors in the context of an estate?

Preferent creditors are paid from free residue after secured creditors Signup and view all the answers

What happens during the second creditors meeting?

Creditors must review their claims and the trustee provides a report Signup and view all the answers

What is the responsibility of the trustee appointed by the creditors?

To benefit all creditors without harming the estate Signup and view all the answers

How is notice for the first creditors meeting communicated?

By notice in the Government Gazette Signup and view all the answers

What is a key function of general meetings of creditors?

To obtain direction from creditors regarding estate matters Signup and view all the answers

Under what condition may a trustee's payment be adjusted by the Master of the High Court?

Based on the workload of the trustee Signup and view all the answers

What may lead to personal liability for members of a close corporation under the Close Corporations Act?

Non-compliance with the Act's provisions Signup and view all the answers

In what scenario can a court disregard the separate juristic personality of a close corporation?

In cases of reckless business conduct Signup and view all the answers

What can a court order concerning payments made to members from a close corporation if it is liquidated?

Payments made within 2 years can be recovered if solvency conditions are unmet Signup and view all the answers

Under what condition can a promoter or director be held liable for the debts of a close corporation?

If they knowingly engaged in deceitful practices Signup and view all the answers

What constitutes a gross abuse of the separate juristic personality of the close corporation?

Using corporate funds for personal expenses extensively Signup and view all the answers

What kind of liability is a member of a close corporation subject to under the Close Corporations Act for debts incurred?

Joint and several liability with the corporation Signup and view all the answers

What action can a court take against a member who participates in business recklessly?

Hold them personally liable for corporate debts Signup and view all the answers

What is the result if a member of a close corporation defrauds creditors?

They may be declared liable for all debts of the corporation Signup and view all the answers

Study Notes

Aspects of Mercantile Law

Learning Outcomes:
- LO1: Define terminology related to insolvency, sequestration, and winding up.
- LO2: Identify methods of winding up a corporation.
- LO3: Differentiate between voluntary and compulsory winding up of a corporation.
- LO4: Discuss grounds for winding up.
- LO5: Explain the impact of winding up on status, property, civil legal proceedings, directors.
- LO6: Explain the appointment and role of the liquidator.
- LO7: Discuss the creditors' meeting.
- LO8: Explain the liability of directors, officers, and members for the debts of the corporation.
- LO9: Discuss composition and compromise.

Introduction

Insolvency: Occurs when a person's or debtor's liabilities exceed their assets. A debtor is considered insolvent once their estate is sequestrated by a court.
Sequestration: The formal declaration by the court that a debtor's estate is insolvent, affecting the estate, not the individual. Only natural persons' estates can be sequestrated. Companies are liquidated.
Insolvent Status: A person whose estate has been sequestrated by court order. If married, both spouses are considered insolvent. Insolvent status remains until rehabilitated by court order after 10 years.

Creditors

Creditor Definition: A person to whom money or performance is owed. Not all relationships constitute a creditor in a legal sense.
Creditor Types (Ranking):
- Secured creditors: Have security (e.g., mortgage bonds) over their claims that can be liquidated in the event of insolvency.
- Preferential creditors: Paid after secured creditors, but before other creditors. Examples include funeral expenses, estate taxes, and salaries, with a maximum limit for preferential claims.
- Concurrent creditors: Paid after preferential creditors from any remaining free residue of the estate.

Creditors' Meetings

Insolvency Act 24 of 1936: Contains a structure for four meetings.
Meeting Types:
- First meeting: Creditors prove their claims, select a trustee, and provide direction to the trustee for the estate.
- Second meeting: Creditors give further directions regarding the estate to the trustee.
- Special meetings: Called by the trustee, if required, to address concerns from interested parties regarding the estate.
- General meetings: Primarily for creditors to direct trustee to take actions regarding the estate.

The Trustee

Appointment and Role: Appointed by creditors, tasked with acting in the best interest of all creditors, without negatively affecting the insolvent estate. The Master of the High Court can adjust the payment amount for the trustee.

Sequestration

Aim: To ensure fair and equitable distribution of the debtor's estate amongst creditors.
Methods:
- Voluntary sequestration
- Compulsory sequestration

Winding-Up of Companies and Close Corporations (CCs)

Distinctions: Companies and CCs cannot be sequestrated; they are wound up.
Winding-Up Process: Companies/CCs may be wound up under the Companies Act or the Close Corporations Act, under the supervision of the Master, for reasons other than insolvency.

Methods of Initiating Winding-Up

Court Order: Compulsory winding up.
Special Resolution: Voluntary winding up.
Written Resolution: Voluntary winding up for CCs.

Differences Between Voluntary and Compulsory Winding-Up

Voluntary: Initiated by a special resolution of the company's members or creditors.
Compulsory: Initiated by an application to a competent court (accompanies by affidavit).

Voluntary Winding-Up

Member's Voluntary Winding-Up: Company can proceed with winding-up if all creditors are paid or security provided.
Creditor's Voluntary Winding-Up: Only applicable if the company cannot fulfill its debt obligations. Relevant creditors must be represented in the process.

Winding-Up by Court (Compulsory)

Who can initiate?: The company, creditors, company members, the Master, or a provisional/final judicial manager. Initiated in cases of insolvent or solvent companies, based on various criteria.

When Can a Company Be Wound Up?

Solvency Considerations: A company may be wound up if it is in crisis regarding business, finances, or ongoing operations.

Effects of Winding-Up

Director Impacts: Losing powers; Master takes control of company property.
Legal Proceedings: Legal proceedings are suspended or stayed.
Property: Master needs to be notified and relevant parties and documents recorded in the estate.

The Liquidator

Appointment: The Master appoints a provisional liquidator during winding-up processes.
Responsibilities:
- Taking custody of company property
- Realizing company property
- Paying process costs and creditor debts
- Distributing remaining assets to relevant parties
- Adhering to statutory duties

The Liquidator's Duties

Main duties:
- Custodian of company property
- Realize company assets
- Responsible for process and creditor costs
- Distributed any remaining assets
Fiduciary Duty: Duty to act in the best interests of the company, members, and creditors.

The Liquidator's Statutory Duties

Record Keeping: Maintenance of relevant company records.
Administrative Actions: Bank account opening and monitoring/reporting to the Master/relevant authorities.
Reporting/Compliance: Report company transaction findings to the Master/relevant authorities regarding compliance considerations.
Company Management: Providing reports of company affairs, liquidation, and distribution plans/accounts to appropriate officials.

Liability of Directors

Investigation: Liquidator has a duty to investigate possible liabilities of company directors.
Liability Types:
- Breach of faith or trust toward the company
- Misapplication or retention of company property
- Reckless company management
Consequences: Promoter, director, or officer maybe ordered to repay money or restore property.

Liability of Directors in Close Corporations (CCs)

Breach of Faith: Gross abuse of CC separate juristic personality.
Inability to Pay Debts: CC's inability to meet its debt obligations.
Misapplication/Retention of Funds: Liability for misapplication/retention of funds.

Composition and Compromise

Alternative to Sequestration: Agreement between creditors and insolvent to pay the debt over time.
Necessity for Agreement: For an effective compromise, all creditors must agree to the terms. A dissenting creditor can pursue an individual avenue to settle the outstanding debt.

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Description

Test your knowledge on the processes and legalities of corporate winding-up and insolvency. This quiz covers various aspects including the recovery from members, court orders for misapplication of funds, and the conditions for court-sanctioned compromises. Dive deep into the intricacies of company law and creditor arrangements.