Presentation on corporate insolvency

 Liquidators.
 Provisions which apply to all Liquidations.
 Administration Orders

Corporate Insolvency

Corporate insolvency occurs when a company is unable to meet its financial commitments with
liabilities exceeding assets to the extent that it becomes impossible for the company to fully
discharge all the liabilities as they fall due. According to the Oxford Dictionary ‘It is a situation
where the liabilities of a person or economic entity exceed its assets.

Section 205 of the Companies Act states that a company is deemed unable to pay its debts if:

 A creditor to whom the company is indebted to has served the company a demand
requiring it to pay and the company fails to pay after three weeks of that demand.
 If the execution or other process issued on a judgment, decree or order in favor of a credit
against the company is returned by the Messenger of Court or Sheriff.
 If it is proved beyond reasonable doubt to the court that the company is unable to pay its
debts.

One of the legal tests of insolvency is whether a company’s liabilities fairly estimated exceed the
assets fairly valued; this is referred to as the balance sheet test, case: Ventor vs. Volkas Ltd
(1973). The other test is that of providing evidence of the company’s inability to pay debts as
they fall due, this is referred to as the commercial insolvency test.
The Liquidator

A liquidator has been defined in Goode Durrani and Murray SA Ltd v Stephenson (2) SA 1961
as “an independent umpire having a fiduciary duty towards the company, its members and the
creditors” (A liquidator has been defined in Goode Durrani and Murray SA Ltd v Stephenson (2)
SA 1961 as “an Nannette Chadwick).

In practice liquidators are usually chartered accountants as Section 272 does not list the
qualifications but rather the disqualifications of liquidators. It provides that the following
persons are disqualified from appointment.

a) An insolvent

b) A minor or any other person under some legal disability

c) A body corporate

d) A non-resident of Zimbabwe

e) Any person who has been disqualified from being a director

f) Any person removed from an office of trust by reason of misconduct.

g) Any person who fraudulently solicited support of creditors or contributors to appoint or vote
for him in that appointment of a liquidator.

h) Any person convicted of an offence involving dishonesty and sentenced to a fine exceeding
$100 or imprisonment without the option of a fin.

When a final order for liquidation has been granted the usual practice of appointing a liquidator
would be in terms of meetings held by creditors and contributions according to Section 219. The
wishes of the parties at the meeting are obviously considered.

Removal of a liquidator

The court can, on the application by the Master or any person having an interest in winding up,
remove any liquidator on the grounds set out in Section 273. These include

a) Absence from the country, ill health or any other factor interfering with the liquidator’s job.

b) Misconduct e.g. failure to satisfy lawful demands made by the Master.

c) Any other good cause – this phrase is there broad to cover any situation in which the court
may feel it is just and equitable to remove the liquidator.
Security

In terms of Section 274 the liquidator has to provide security for the performance of his duties
this is security, which is determined by the Master of the High Court. Until he has done so he
cannot act and if he fails to provide it he will be deemed to have resigned.

Powers of Liquidators

During the course of his administration a liquidator has a position of trust, which he owes to both
creditors and to the company.

The liquidator in terms of Section 221, 222 and 248 shall generally take over control of the
company and all its assets, collect debts owed realize all assets and then proceed to pay the
creditors and to the company.

Duties of Liquidators

a) In terms of Section 224 immediately after his appointment, the liquidator of a company being
wound up by court shall open an account in the name of the company in liquidator, in terms of
section 228 as read with the Companies (winding up) Rules it is also the duty of the liquidator to
settle a list of contributors.

b) In every mode of winding up, Section 277 provides that within 3 months if his appointment
the liquidator should summon a meeting of creditors and contributories and prepare a report
containing the following information.

i) The amount of capital issued subscribed and paid up and the estimated amount of assets and
liabilities.

ii) The causes of failure (if the company has failed)

iii) Whether the company has properly kept the books of accounts

iv) The progress of liquidation.

v) Any other matter, which he may think, fit that it needs directions from creditors or
contributors.

c) Proof of Claims

The most important reason for winding up a company is to protect the rights of creditors and to
enable to be paid out as much as possible. The liquidation’s other duty is therefore to receive
and decide on claims presented to him by the creditors (Section 220).
Undue preferences and collusive dealings

It is common that when persons are in financial problems they often try to put their assets out of
reach of the creditors by dispossessing themselves before being declared insolvent. This would
be intended to defeat the creditor’s claims. The companies Act and the Insolvency Act chapter
6:04 have a number of section which are designed to protect creditors.

Section 269 of the Companies act redresses this fraudulent activity. Every disposition made by
an insolvent at any time when his/her liabilities exceeds the assets in which has the intention of
preferring one creditor above the others may be set aside by the court as it is called an undue
preference. In companies an undue preference may also be properly called a collusive dealing.
This may have the effect of preferring on a creditor over the others.

Section 42 of the Insolvency Act Chapter 6:04 provides that any disposition within 6 month
immediately preceding the sequestration which has three effect of preferring one creditor against
the others may be set aside and the court would claim back the property provided at the time it
was made the assets of the insolvent were already less than his liabilities. This also applies to
companies.

Violable and undue preferences are collectively called impeachable transaction, which the court
is prepared to set aside. It is important to note that the principles applying to insolvency mutates
mutandis apply to companies.

Liquidator’s Account

Unless the Liquidator receives an extension of time, he must within 6 months of his appointment
lay before, the master an account of the receipts and payments and also a plan of distribution.
The liquidator will then give a notice is the gazette of the time and places at which the register
will lie for inspection. Interested persons can then make their objections. The Master, if he
considers an objection to be reasonable may request the liquidator to amend the account (Section
279)

Release of the Liquidator

After completing his task the liquidator would then apply to the Master for his release. The
remuneration shall be from the company.
Provisions which applies to all liquidations

There some provisions or duties of the liquidator within the Act which apply to both voluntary
and compulsory winding up.

 In all circumstances the Master of the High Court has the power to appoint Co-
Liquidators for all types of winding up [Sec 275 (1)].
In every situation these liquidators will be supposed to jointly perform their duties and
all of them will be jointly and severely liable for their actions during the discharge of
their duties Sec 275 (2).
 Duty to give security
Soon after appointment, the liquidator has to give security to the satisfaction of the
Master within a reasonable period of time. Before this is done the liquidator cannot act as
the liquidator Sec 274 (1).
If there are any costs in performing this duty or providing this information to the Master,
the cost will be included in the winding up cost Sec 274(2).

 The duty to keep books.

As soon as a liquidator is appointed whether in voluntary or compulsory winding up, the
liquidator has a duty to keep a proper record of transactions of the liquidation process
and the Master is empowered by the Act to request these books at any time and the
liquidator has to provide Sec 278 (1-2).
Administration order

According to the Insolvency Act Chapter 6:04 , there are three major reasons of placing a
company under Administration Order:

1. To rescue the company as a going concern.

2. To achieve a better results for creditors of the company than what they will get if the
company is placed under liquidation.
3. To realize property of the company with the aim of making a payment to secured or
preferential creditors of the company.

Application of Administration Order

There are four parties that may apply for an Administration Order to the court. These are:

1. The Directors of the company. The Directors may apply for an administration order when
they realize that the company is on the verge of collapse. .
2. The Company. The shareholders after a General Meeting with those resolutions may also
apply for the Administration Order to the Court.
3. Creditors of the Company. One or more creditors of the company may apply for the
Administration Order when they realize that the company is failing to meet its
obligations.
4. The Court. If a company fails to pay a fine imposed on it, the court may apply for a n
Administration Order.

When applying, the applicant has to state the name of the preferred Administrator which the
court may decline that appointment if it happens that there are some parties who will object.

However the court will only grant the Administration Order if it is satisfied that the company if
failing to pay its debts and that the Administration Order will achieve its purpose.

Effects of an Administration Order

If a company gets an Administration Order the following will be effected.

1. The company will not be put into liquidation.

2. Moratorium over debts. There is no creditor who can claim his dues when a company
secures an Administration Order. For creditors to claim their dues they will need the
court’s approval first.
3. If there are some outstanding petitions for winding up, they are all dismissed.
4. The powers of the Directors. The Directors will remain in office but their powers will be
suspended.

Termination of an Administration Order

The Administration Order has a life span of 12 months but can be extended by a court order or
by consent from creditors. It can also be terminated if:

1. If the Administration is deemed to be successful.

2. If the Administrator or creditors apply to the court to end the appointment.
3. If it is discovered that the applicant for an Administration Order has some improper
motives when he applied.
Reference List

ACCA Casebook,(2007). Financial Training Company: Corporate and Business Law – F4,
Harare.

Business and company: CIMA Study text.

Oxford Dictionary

Zimbabwe Companies Act Chapter 24:03 Government Printers, Harare