, PLEASE USE THIS DOCUMENT AS A GUIDE ONLY
a) With reference to the applicable statutory framework and authoritative case law, provide a
detailed analysis of the legal meaning of “solvent” and “insolvent” for purposes of company
liquidation. On this basis, advise Gumdrops on the likelihood of Banca Ltd succeeding in its
application for a winding‑up order.
Legal meaning of solvent and insolvent
Under South African company law, the concepts of “solvent” and “insolvent” for purposes of
liquidation are primarily derived from the Companies Act 71 of 2008 (the “2008 Act”) and the
Insolvency Act 24 of 1936, as read with common law and case law interpreting winding-up
provisions under the old Companies Act 61 of 1973 (which remains relevant for winding-up
proceedings commenced under the old regime, but for companies under the 2008 Act, the grounds
for liquidation are now set out in section 81 of the 2008 Act, read with the 1973 Act Schedule 5,
Item 9).¹
However, the core distinction between solvency and insolvency in winding-up applications is as
follows:
Solvency (balance-sheet solvency): A company is balance-sheet solvent where its assets fairly
valued exceed its liabilities, including contingent and prospective liabilities. This is an
accounting-based test. Section 4(1)(a) of the 2008 Act provides a general solvency test: “A
company satisfies the solvency test if, considering all reasonably foreseeable financial
circumstances of the company at the time, the assets of the company, fairly valued, equal or
exceed the liabilities of the company, fairly valued.”²
Insolvency (commercial or “actual” insolvency): A company is commercially insolvent (or
“factually insolvent”) where it is unable to pay its debts as they fall due in the ordinary course
of business, even if its assets exceed liabilities. This is known as the cash-flow or liquidity test.
Section 4(1)(b) of the 2008 Act provides: “A company satisfies the liquidity test if, considering
all reasonably foreseeable financial circumstances of the company at the time, the company
will be able to pay its debts as they become due in the ordinary course of business for a period
of 12 months after the date on which the test is considered.”³
Which test applies for winding-up?
For a winding-up application by a creditor under section 81(1)(c) of the 2008 Act, read with section
344(f) of the 1973 Act (as preserved), a creditor must show either that:
the company is unable to pay its debts (the liquidity test); or
it is just and equitable to wind up the company (which may include balance-sheet insolvency
but is wider).
¹ Schedule 5, Item 9 of the Companies Act 71 of 2008 read with section 344 of the Companies Act 61 of 1973.
² Section 4(1)(a) of the Companies Act 71 of 2008.
³ Section 4(1)(b) of the Companies Act 71 of 2008.
a) With reference to the applicable statutory framework and authoritative case law, provide a
detailed analysis of the legal meaning of “solvent” and “insolvent” for purposes of company
liquidation. On this basis, advise Gumdrops on the likelihood of Banca Ltd succeeding in its
application for a winding‑up order.
Legal meaning of solvent and insolvent
Under South African company law, the concepts of “solvent” and “insolvent” for purposes of
liquidation are primarily derived from the Companies Act 71 of 2008 (the “2008 Act”) and the
Insolvency Act 24 of 1936, as read with common law and case law interpreting winding-up
provisions under the old Companies Act 61 of 1973 (which remains relevant for winding-up
proceedings commenced under the old regime, but for companies under the 2008 Act, the grounds
for liquidation are now set out in section 81 of the 2008 Act, read with the 1973 Act Schedule 5,
Item 9).¹
However, the core distinction between solvency and insolvency in winding-up applications is as
follows:
Solvency (balance-sheet solvency): A company is balance-sheet solvent where its assets fairly
valued exceed its liabilities, including contingent and prospective liabilities. This is an
accounting-based test. Section 4(1)(a) of the 2008 Act provides a general solvency test: “A
company satisfies the solvency test if, considering all reasonably foreseeable financial
circumstances of the company at the time, the assets of the company, fairly valued, equal or
exceed the liabilities of the company, fairly valued.”²
Insolvency (commercial or “actual” insolvency): A company is commercially insolvent (or
“factually insolvent”) where it is unable to pay its debts as they fall due in the ordinary course
of business, even if its assets exceed liabilities. This is known as the cash-flow or liquidity test.
Section 4(1)(b) of the 2008 Act provides: “A company satisfies the liquidity test if, considering
all reasonably foreseeable financial circumstances of the company at the time, the company
will be able to pay its debts as they become due in the ordinary course of business for a period
of 12 months after the date on which the test is considered.”³
Which test applies for winding-up?
For a winding-up application by a creditor under section 81(1)(c) of the 2008 Act, read with section
344(f) of the 1973 Act (as preserved), a creditor must show either that:
the company is unable to pay its debts (the liquidity test); or
it is just and equitable to wind up the company (which may include balance-sheet insolvency
but is wider).
¹ Schedule 5, Item 9 of the Companies Act 71 of 2008 read with section 344 of the Companies Act 61 of 1973.
² Section 4(1)(a) of the Companies Act 71 of 2008.
³ Section 4(1)(b) of the Companies Act 71 of 2008.
