Aspects Of Mercantile Law PDF

ASPECTS OF MERCANTIL E LAW ASML5122  Learning outcomes: LO1: Define all terminology relating to insolvency, sequestration and winding up. LO2: Name the methods of winding-up a corporation; LO3: Differentiate between voluntary and compulsory winding-up of a corporation; LO4: Discuss...

ASPECTS OF MERCANTIL E LAW ASML5122  Learning outcomes: LO1: Define all terminology relating to insolvency, sequestration and winding up. LO2: Name the 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 wind-up on status; property, civil legal proceedings; directors; LO6: Discuss the appointment and role of the liquidator; LO7: Discuss the creditors’ meeting; L08: Discuss the liability of directors, officers and members for the debts of the corporation; LO9: Discuss composition and compromise.  Introduction.Insolvency: When a person’ OR debtor’s liabilities exceed his estates. A debtor is only seen as insolvent once his estate is sequestrated by court. Sequestration = process whereby the court formally declares that a debtor’s estate is insolvent. It applies to the person’s estate and not to the person himself. Ex. Peter’s estate is being sequestrated. NOT Peter is being sequestrated. Only a natural person’s estate can be sequestrated. Companies are liquidated. Once a debtor’s estate is sequestrated – he is no longer called a debtor, because his legal status has changed to insolvent. Insolvent: Insolvent: a person who’s estate was sequestrated by court order. NB! If you were married ICOP – then both spouses statuses will change to that of insolvent. You remain insolvent until you are rehabilitated (by court order or after 10 years) Creditors: A person who you owe money or performance to. NOT all people qualify in SA. (Ex. If I loan my brother R50 I do not automatically become a credit in the legal sense) There are different kinds of ranking of creditors in SA: Secured creditors Preferent creditors Concurrent creditors Creditors: Secured creditors: Creditors who hold security over their claims. Ex. Mortgage bonds. The house is security for the loan. The security (the house) can be liquidated upon insolvency. The secured creditor is then paid out of the profits of the property after certain expenses are paid. If the profits of the property is insufficient – then the creditor has a concurrent claim for the outstanding balance. Creditors: Preferent creditors: Entitle to payment after secure creditors have been paid, but before all other creditors. They have a preferential claim, but they do not hold a security like secure creditors. They will only get paid if there is enough free residue in the estate after all the secure creditors have been paid. Ex. Funeral expenses, the cost of sequestration, income tax and salaries. The Insolvency Act 24 of 1936 can prescribe a maximum limit that may be preferential. Concurrent creditors: They are paid out of the free residue after preferent creditors have been paid Meetings of Creditors: Insolvency Act 24 of 1936 has a system of 4 meetings. These meetings are NB so that creditors may prove their claims, elect a trustee, issue instructions to this trustee and interrogate any relevant person. 4 types of meetings: 1st meeting 2nd meeting Special meeting General meeting  Creditors meetings: First meeting In terms of section 40 (1) of the Act, on receipt of the sequestration order. Master immediately informs the public of the first creditors meeting by notice in the Government Gazette. Goal of 1st meeting: Creditors can prove their claim Appointing a trustee and give him directions Interrogate the insolvent & relevant other persons Consider an offer of composition Second meeting Master will arrange the 2nd meeting – give proper notice. Creditors must provide proof of their claims. Trustee provide a report on state of affairs and receive new directions RE sale or recovery of assets. Creditors meetings: Special meetings Convened by the trustee (notice in Government Gazette) if he is required to do so by an interested person – normally to prove a claim against a debtor. This interested person must pay all expenses incurred as a result of this meeting. General meetings Called by Trustee (if required by Master/creditors representing 1/4th of the value of the claims) – Notice in GG and in 1 local newspaper where debtor resides/conducts business. Goal: Obtain direction from creditors RE any matter relating to the administration of the estate. The trustee: Appointed by the creditors. It is the trustee’s responsibility to act to the benefit of all the creditors, but also to not negatively affect the estate of the insolvent. A trustee may get reasonable payment for this job. The Master (of the High Court) may increase or decrease the amount of payment. There may be more than one trustee. Sequestration: The aim is to ensure that the insolvent’s creditors receive a fair and equitable portion of the debtor’s estate. There are 2 ways: Voluntary surrender Compulsory sequestration Sequestration = natural person Liquidation/winding up = juristic person (companies, cc’s trusts etc)  The winding-up of Companies and CC’s Companies and CC’s cannot be SEQUESTRATED, as Procedure to they are not considered to be DEBTORS in terms of sell the the INSOLVENCY ACT. (only natural persons are company’s sequestrated) assets, pay the When a company/CC becomes debts and INSOLVENT, divide any it can be WOUND UP under money left over the Companies Act / Close between the Corporations Act. members Winding up /liquidation may take place The winding up of a for reasons other than insolvency- company/CC is handled by a e.g. because the members no longer LIQUIDATOR under the wish to continue activities of the supervision of the MASTER. company/corporation. This is regulated by the COMPANIES ACT. Methods of initiating winding-up Companies and CC’s can be By a SPECIAL RESOLUTION wound up by a of the shareholders of a company or COURT ORDER a WRITTEN RESOLUTION of OR ALL the members of a CC COMPULSORY VOLUNTARY WINDING-UP WINDING-UP. Difference between voluntary and compulsory? (End result is the same) Voluntary: Compulsory: Commence through a special Initiated through an application resolution by the company’s to a competent court members or creditors. (accompanies by an affidavit). The application is usually brought by a creditor, but in some instances the company itself or shareholders or directors, or even the Master can start this process. Voluntary winding-up – the business wants to close itself Voluntary winding up of a company / CC can be initiated MEMBERS CREDITORS either by In both instances the it can only be a winding-up is initiated in A company/CC which MEMBERS’ voluntary the same way, CANNOT pay its DEBTS winding-up if there are i.e. by registration of the CANNOT use a NO CREDITORS resolution of members MEMBERS’ voluntary winding-up. CREDITORS will have a Or Commences when the SAY in the winding-up if the company is able resolution is properly process. to pay its debts in full REGISTERED at the (or they must provide Registrar of security to the Master Companies or of CCs. for debts of the company) Schulze et al p 485 Winding-up by court (compulsory) Who may apply in the case of an insolvent company? The company creditor/creditors One of more of the company members The Master a provisional/final judicial manager. Winding-up by court Who may apply in the case of a solvent company? The company – by means of special resolution Directors/shareholders or creditors if it is just and equitable to wind up the company. The company where a voluntary winding up is converted into a winding up by court Business rescue practitioner (no reasonable chance of saving the company) If there is a deadlock in management voting – the company, directors or shareholders Any shareholder if there is fraud, illegality or misuse of assets The Companies and Intellectual Property Commission or Takeover Regulation Panel if there is a failure to comply with a notice when there is fraudulent or illegal activity When can a company (solvent or insovlent) be wound up? Special resolution to do so Company started doing business before it received its certificate that it may do so Public company’s members have fallen below 7 Company has lost 75% of the shares in its business Company is no longer able to pay debts It appears to be the reasonable thing to do External company has been dissolved in the country in which it was incorporated It is just and equitable to wind-up the company (ex objective for forming the company is no longer possible, or illegal or no confidence in management etc) When can a company (solvent or insovlent) be wound up?... continue Business rescue proceedings indicate no reasonable prospect Directors or officers are acting in a illegal or fraudulent manner The company’s assets are being misused or wasted The company has failed to comply with compliance notices The consequences of winding-up STATUS of the company/CC The position Affects of the the: Its directors PROPERTY of a company Civil legal proceedings instituted by/against it Effects of winding up..continued Directors are divested of power Civil proceedings are stayed Master takes control of property Master must give notice in the until liquidators is appointed Government Gazette Business may only continue if Registrar must serve a copy of necessary for the winding-up order on all relevant person If insolvent, may not dispose of Directors must lodge a property statement of affairs with the Transfer of shares must be Master authorised by liquidator CIPC makes a record of the winding-up and that company does not exist anymore The Liquidator (there can be more than 1): The Master appoint a provisional liquidator: Member’s voluntary winding up – the person who is nominated and has a special resolution for the winding-up At a creditor’s voluntary winding-up and winding up by court – the person who is nominated in the 1st meeting of creditors. At least 2 meeting of creditors are required when winding up by court and creditor’s voluntary winding up. The purpose is to: Nominate a liquidator Prove claims Examine the company’s statement of affairs Interrogate any relevant person The Liquidator’s duties: Main duties are: Take custody of all property that belongs to the company Realise that property To use the proceeds to pay the costs of the process and the creditors To share the balance remaining among the shareholders The Liquidator has a fiduciary duty towards the company, its member and the creditors. He must consider the interest of the members as a whole and not the individual interest. The same applies for creditors.  The Liquidator’s duties – specific statutory duties: Provide relevant info to the Master Keep proper records Allow creditors and the Master to inspect these records Open a bank account in the company’s name and deposit all money received Examine the company’s transactions to see if directors contravened any act or committed any offence (so that they may be disqualified if they had) Submit a full report regarding this examination to the Master (who will forward it to the Director of Public Prosecutions if needs be) Report fully on the company’s affairs to the creditors Prepare a liquidation and distribution account – lodge it with the Master Distribute the estate, collect contributions, share remaining amount with members  Liability of directors (winding up of a company) Liquidator has a duty to investigate whether any person may be personally liable for the way in which its affairs were being carried on. Liability may arise in the following instances: If there has been a breach Any person who was of faith / trust in relation to knowingly a party to the the company or carrying on of the company’s if any property of the business in a reckless company has been way/with intent of misapplied or retained. defrauding creditors. May be declared liable by a court for A promoter, director or officer may be ordered by any / all of the debts and liabilities of court to repay money / restore property to the the company company  Liability may arise in the case of a close corporation in the following instances: Joint & several liability of member/s with the CC where the Close Corporations Act uses personal liability as a sanction for non-compliance with its provisions. Any person who was knowingly a party to the carrying on of the CC’s business in a reckless way/with intent of May be declared liable by a court for any / all of the defrauding creditors or for a fraudulent purpose debts and liabilities of the CC. If there is a gross abuse of the separate juristic personality of the CC Court may disregard separate existence and order that the person is personally liable. If CC is unable to pay its debts payments made to the members by reason of their membership may be recovered by liquidator if the payments were made within 2 years before the winding up and while the CC did not comply with the solvency and liquidity requirements;. If CC is unable to pay its debts liquidator may recover any salary paid to a member in his capacity as officer / employee within 2 years before the winding up if payment was not bona If a member/former member, officer, accounting officer or fide / reasonable; person involved in the formation of the CC has misapplied or retained money / property of the CC or is guilty of a court may order such person to contribute to the breach of faith in relation to the CC, assets of the CC  Composition & Compromise At times, it may be to the advantage of creditors to proceed to make: an ARRANGEMENT with the insolvent, rather than to proceed with sequestration. E.g. to pay the debt off over a period of time. In this case it is preferable for ALL creditors to be BOUND to the arrangement, since a dissenting creditor may otherwise still apply for the sequestration of the insolvent’s estate. Composition and compromise (Companies A company not engagedand CC’s) in business rescue proceedings can reach a COMPROMISE with its creditors or a class of creditors When the company has obtained the prescribed approval, it must apply to court for the SANCTIONING (endorse/authorise) of the compromise. The court will sanction the compromise if it is JUST and EQUITABLE