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The term 'insolvency' has also long been associated with winding up. Thus, when the
company is insolvent, it can be subjected to formal legal proceedings 2 which will
confer retrospective legal significance to an earlier state of insolvency which at the
time it first arose had no impact in law. 3 Once an order has been made in respect of
winding up, the liquidator will scrutinize the directors‟ past activities and ascertain
any action which can be declared void by the court. The purpose is to increase the
company‟s pool of assets for distribution among creditors.
The solvency concept has been acknowledged as a relevant concept in protecting
creditors‟ interests and has begun to seep into companies legislation as evidenced in
the area of capital maintenance. 4 The law which prohibits distributions being made to
shareholders if the company could not maintain its solvency thereafter is to prevent
misallocation of wealth from the company to shareholders, since such act will not
benefit the company. 5 Creditors, on the other hand, will be in a precarious position.
There is a possibility for the company to be subjected to winding up for failure to
maintain its solvency. In such situations, payment to unsecured creditors will be
based on the pari passu principle and the chance of being paid in full is doubtful.
Another area in which the solvency notion has left its trail is directors‟ duties,
particularly in relation to trading whilst the company is insolvent. Directors often
claim that they have the interests of the company as well as creditors in mind when
deciding to trade when the company‟s finances are in a risky position. 6 The directors‟
goal by continuing to trade when the company‟s finances are unstable is to turn the
company back into profitability and so as to be able to save the company. However,
2 Legal proceedings here refer to the winding up procedures both voluntary and by the court‟s order,
receivership and administrative order.
3 Roy Goode Principles of Corporate Insolvency Law (Sweet & Maxwell, London, 2005) at 83.
4 Austin and Ramsay above n1 at [20-160].
5 Mike Ross Corporate Reconstructions Strategies for Directors (CCH, Auckland, 1999) at 71.
6 Ibid.
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