Identifying the missing link in section 81(1)(d)(iii) of the Companies Act 71 of 2008: A case for innovative approach to handling solvent companies overwhelmed by deadlock

• Jurisdiction: South Africa
• Citation: (2018) 5(1) Journal of Comparative Law in Africa 110
• Date: 16 August 2019
• Pages: 110-134
• Published date: 16 August 2019

110

IDENTIFYING THE MISSING LINK IN SECTION

81(1)(D)(III) OF THE COMPANIES ACT 71 OF

2008: A CASE FOR INNOVATIVE APPROACH

TO HANDLING SOLVENT COMPANIES

OVERWHELMED BY DEADLOCK*

Shandukani Muthugulu-Ugoda**

Abstract

The winding-up provisions in sections 79–81 of the Companies 71 of 2008

pertaining to solvent companies have been the subject of pivotal judgments in recent

times. There are two areas of this judicial trend that call for academic commentary.

The first is clarification of the deadlock principle, as well as the breath and scope

of the ‘just and equitable’ ground for winding-up in terms of section 81(1)(d)

(iii) of the Act. The second and most critical aspect relates to the ‘missing link’

in section 81(1)(d)(iii). This link refers to the lacuna arising from the fact that

the just and equitable winding-up provisions do not countenance any deviation

from the statutory prescriptions once the factual grounds for just and equitable

winding-up have been established. The real problem with this drastic remedy lies

in the bludgeoning of a solvent company because of corporate paralysis. To that

extent, the absence of a purpose-built shotgun remedy to tackle corporate stalemate

suggests that the relevant provisions operate out of step with modern developments

in other jurisdictions. This article argues that section 81(1)(d)(iii) is in dire need of

reform to bring it in line with the spirit, purport and objects of the Companies Act,

especially those behind Chapter 6 of the Act, which has introduced the innovative

business rescue mechanism into the South African corporate law landscape.

Key words: deadlock, just and equitable, winding-up, solvent companies,

remedy

Les dispositions relatives aux liquidations prévues aux articles 79 à 81 du

Companies Act 71 de 2008 relatives aux sociétés solvables ont fait l’objet de

jugements déterminants ces derniers temps. Il y a deux tendances dans cette série

de décisions judiciaires qui nécessitent un commentaire académique. La première est

* This work was undertaken while the author was a research fellow in 2017 at the Centre for

Comparative Law in Africa (CCLA) under the Olu Akinkugbe Business Law in Africa Fellowship

administered by the CCLA, Faculty of Law, University of Cape Town. The author gratefully

acknowledges the Olu Akinkugbe Fellowship and the Centre for Comparative Law in Africa.

** LLB LLM (UNIVEN) LLD Candidate (University of Fort Hare). Lecturer in Mercantile

Law Department, Nelson R Mandela School of Law, University of Fort Hare. An earlier version

of this article was written under the supervision of Professors Patrick Osode, Mtende Mhango and

Mr Tumo Maloka, whom I would like to thank for their invaluable guidance and critical reviews.

I would like to thank two anonymous reviewers for their very helpful comments. Any errors and

omissions in this paper, however, remain the sole responsibility of the author.

(2018) 5(1) Journal of Comparative Law in Africa 110

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IDENTIFYING THE MISSING LINK IN SECTION 81(1)(D)(III) OF THE

COMPANIES ACT 71 OF 2008 111

la clarification du principe de l’impasse, ainsi que l’ampleur et la portée du motif

« juste et équitable » de liquidation en vertu de l›article 81 (1) d) (iii) de la Loi.

Le deuxième aspect le plus critique concerne le « chaînon manquant » à l›article

81 (1) (d) (iii). Ce lien renvoie à la lacune découlant du fait que les dispositions

de liquidation justes et équitables n›autorisent aucune dérogation aux prescriptions

légales une fois établis les motifs factuels de liquidation juste et équitable. Le

vrai problème avec ce remède drastique réside dans le matraquage d›une entreprise

solvable à cause de la paralysie de l›entreprise. Dans cette mesure, l›absence d›un

remède artificiel spécialement conçu pour s›attaquer à l›impasse dans laquelle

se trouvent les entreprises laisse penser que les dispositions pertinentes vont à

l›encontre des développements récents dans d›autres juridictions. Cet article soutient

que l›article 81 (1) d) (iii) a absolument besoin d’être réformé pour l’aligner sur

l’esprit, le but et la portée de la Loi sur les Sociétés, en particulier ceux qui se

trouvent à la base du chapitre 6 de la Loi, qui a introduit le mécanisme innovant de

sauvetage des entreprises dans le paysage du Droit des Sociétés en Afrique du Sud.

Mots-clés: Impasse, juste et équitable, liquidation, entreprises solvables, remède

INTRODUCTION

Ever since the celebrated pronouncements of Lord Wilberforce in

Ebrahimi v Westbourne Galleries Ltd,1 the ‘just and equitable’ principle has

been long established as a veritable ground for winding up companies

paralysed by deadlock. Law reports in the Commonwealth are replete

with instances where courts have been asked to exercise their discretion

to grant a ‘just and equitable’ order to wind up solvent companies in

circumstances featuring deadlock.2 Across jurisdictions, court judgments

generally postulate that judicial discretion under the just and equitable

ground is circumscribed by the principle that winding up of a solvent

company is a measure of last resort. This has been evident in jurisdictions

like Australia, Canada and United Kingdom.

1 Ebrahimi v Westbourne Galleries Ltd 1973 AC 360 (hereinafter referred to as Ebrahimi).

2 Palmieri v A Paving Co (1999) 48 BLR (2d) 130 (BCSC); Johnson v WS Johnson and Sons Ltd

(1979) 95 DLR (3d) 495 at 513; Kidner Investment Ltd v Totem Mercury Holdings Ltd 2017 BCSC

205; [2017] BCWLD; Keho Holding Ltd v Noble 1987 ABCA 84, 1987 AWLD 859 [1978] CLD 864;

Gallelli Estate v Bill Gallelli Investment Ltd [1994] 5 WWR 217; [1994] AWLD 275; Re White Castle

Inn Ltd 1946 Carswell Ont 295 [1946] OWN 773; Keho Holdings Ltd v Noble (1987) 78 AR 131,

38 DLR (4th) 386 (Alta CA) at para 53; CIL Inc v Vilar Industries Ltd (1991) 72 Man R (2d) 245,

[1991] MJ No 110 (Man QB); Wittlin v Bergman (1995) 25 OR (3d) 761 (Ont CA) at 762–63; Falus

v Martap Developments 87 Ltd 2012 ONSC 2301, 2 BLR (5th ) 292 (Ont SCJ).

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