, QUESTION 1(a)
With reference to the applicable statutory framework and 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 in liquidation law
The South African law of company liquidation distinguishes between factual solvency and
commercial insolvency, with courts prioritising the latter when determining whether a
company should be wound up.
A company is factually solvent where its total assets exceed its total liabilities
(Cassim et al, Contemporary Company Law, 2023).
This is a balance-sheet approach, focusing on net asset value rather than liquidity.
In contrast:
A company is commercially insolvent where it is unable to pay its debts as they
become due in the ordinary course of business, even if assets exceed liabilities
(Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA)).
Statutory framework governing liquidation
The Companies Act 61 of 1973 remains relevant for winding-up applications:
Section 344(f): a company may be wound up if it is unable to pay its debts.
Section 345: presumption of inability to pay debts where a company fails to comply
with a creditor’s demand within three weeks.
These provisions reflect a liquidity-based test, not a balance-sheet test.
With reference to the applicable statutory framework and 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 in liquidation law
The South African law of company liquidation distinguishes between factual solvency and
commercial insolvency, with courts prioritising the latter when determining whether a
company should be wound up.
A company is factually solvent where its total assets exceed its total liabilities
(Cassim et al, Contemporary Company Law, 2023).
This is a balance-sheet approach, focusing on net asset value rather than liquidity.
In contrast:
A company is commercially insolvent where it is unable to pay its debts as they
become due in the ordinary course of business, even if assets exceed liabilities
(Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA)).
Statutory framework governing liquidation
The Companies Act 61 of 1973 remains relevant for winding-up applications:
Section 344(f): a company may be wound up if it is unable to pay its debts.
Section 345: presumption of inability to pay debts where a company fails to comply
with a creditor’s demand within three weeks.
These provisions reflect a liquidity-based test, not a balance-sheet test.
