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[2016] ZAWCHC 124
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Tyre Corporation Cape Town (Pty) Ltd and Others v GT Logistics (Pty) Ltd and Others (Rogers J) [2016] ZAWCHC 124; 2017 (3) SA 74 (WCC) (21 September 2016)
THE HIGH COURT OF SOUTH AFRICA
(WESTERN CAPE DIVISION, CAPE TOWN)
In the matters between
Case No: 13269/16 & 14203/16
DATE: 21 SEPTEMBER 2016
TYRE CORPORATION CAPE TOWN (PTY)
LTD
...................................
1st
APPLICANT
TYRE CORPORATION ON SITE SERVICES
DURBAN SALES (PTY)
LTD
......................................................................
2nd
APPLICANT
ROYAL FRONT LOGISTICS (PTY)
LTD
..................................................
3rd
APPLICANT
And
GT LOGISTICS (PTY)
LTD
............................................................................
RESPONDENT
GLEN
ESTERHUIZEN
..............................................................
1st
INTERVENING PARTY
MERCEDES-BENZ FINANCIAL
SERVICES (PTY)
LTD
.....................................................................
2nd
INTERVENING PARTY
Coram: ROGERS J
Heard: 16 SEPTEMBER 2016
Delivered: 21 SEPTEMBER 2016
JUDGMENT
ROGERS J:
Introduction
[1]
The applicants, who are
trade creditors of the respondent (‘GTL’), seek its
liquidation. The first intervening party
(‘Esterhuizen’),
who is GTL’s managing director and sole shareholder, has
responded by applying to have GTL placed
in business rescue.
Esterhuizen’s application is supported by the second
intervening party (‘MBF’). The applicants
were
represented by Mr Eloff SC leading Mr Lourens, Esterhuizen by Mr
Goodman SC leading Mr Traverso and MBF by Mr Harms.
[2]
The first and second
applicants are part of the same group. The third applicant is an
independent company. The applicants launched
their application on 27
July 2016 for hearing on 11 August 2016. GTL filed a notice of
opposition on 4 August 2016. Esterhuizen
served his business rescue
application on 11 August 2016. On the following day Hack AJ suspended
the liquidation proceedings and
directed that both matters be heard
on the semi-urgent roll on 12 September 2016. The matter was crowded
out. I heard it on 16
September 2016.
[3]
The applicants’
alleged claims total R3 381 582. Esterhuizen says that
there are ‘discrepancies’ relating
to about 20% of the
claims but admits that GTL owes the applicants a substantial amount.
The applicants’ claims have been
outstanding for some months.
It is clear on Esterhuizen’s own version that GTL is
commercially insolvent. Unless the business
rescue application
succeeds, GTL should be placed in provisional liquidation.
[4]
GTL, which began
operations in 2010, provides logistical and transport services
throughout South Africa. It has offices in Cape
Town, Johannesburg,
Durban and Port Elizabeth. It has 353 employees. Its customers
include substantial companies such as SA Breweries,
Compass Glass,
DHL, Aveng, Schenker, African Amines, Parmalat and Pioneer/Sasko.
[5]
GTL has a substantial
fleet of vehicles. The vehicles are financed in terms of instalment
sale agreements, financial leases and
rental agreements. Most of the
current fleet was acquired within the last two to three years. The
vehicle financiers are Absa,
Toyota, Wesbank, Standard Bank and MBF.
GTL’s
financial history
[6]
GTL’s audited
financial statements for the year ended 28 February 2015, which
contain comparative figures for the preceding
year, reflect the
following:
·
The company’s
fleet, at cost less accumulated depreciation, increased from
R12 225 358 to R54 909 679.
(The depreciation
policy is to write off the cost of vehicles over five years.)
·
Turnover
increased from R93 637 284 to R122 112 735 and
gross profit from R30 360 981 to R70 821 737.
·
Operating
expenditure increased from R25 467 384 to R63 595 037.
The main sources of this increase were increased
consulting expenses,
contract expenses (which I take to be outsourcing), depreciation,
equipment hire, insurance, vehicle expenses
and salaries. Most of
these increases would have been occasioned by the substantial
increase in the fleet.
·
Post-tax profit
increased from R3 549 658 to R5 250 414.
·
Retained income
increased from R4 149 954 to R9 400 368.
[7]
Esterhuizen
acknowledges that the company is currently experiencing financial
distress. He says GTL’s audited financial statements
for the
year ended 28 February 2016 have not been finalised. He has attached
to his founding affidavit a balance sheet of the company
as at 31
July 2016. I would have expected him to be able to present draft
financial statements for the year ended 28 February 2016
and
management accounts for the year to date.
[8]
Mr Eloff criticised the
draft balance sheet as being uncorroborated. There is merit in this
criticism, particularly since the balance
sheet seems to be
inconsistent with other information contained in the founding papers.
Taking the document at face value, the
vehicles comprise the bulk of
the fixed assets. The only other fixed assets are modest amounts in
respect of computer and office
equipment, furniture and fittings and
workshop equipment and a Cape Town property at R3,357 million
(elsewhere Esterhuizen says
that this property was bought during the
year ended 28 February 2015 for an amount of R3,8 million). The fixed
assets total R164 259 563.
The figure for vehicles has
increased from R63,969 million as at 28 February 2015 to about R160
million, reflecting substantial
further acquisitions. Esterhuizen
says that the company now has 190 vehicles.
[9]
The corresponding
long-term liabilities to the vehicle financiers and to the property’s
mortgagee total R125 210 924,
about double the borrowings
as at 28 February 2015. Shareholder loan accounts of R2 300 349
take the long-term liabilities
to R127 603 952.
[10]
The balance sheet
records current assets of R27 401 024, comprising modest
cash amounts and a ‘customer control
account’ totalling
R26 154 023, which I take to be amounts owing by GTL’s
customers.
[11]
The balance sheet
records current liabilities of R54 365 061, the main
components of which are a ‘supplier control
account’ of
R34 437 614, salaries and wages of R8 452 595, a
VAT/tax control account of R5 256 910
and R5 628 639
owed to Absa. These headings are not satisfactorily explained. The
‘supplier control account’
presumably includes trade
creditors such as the applicants. It may also include the current
component of the vehicle finance contracts
(ie the monthly debit
orders). From other information in the papers it appears likely that
the amount owed to Absa is in respect
of an overdraft.
[12]
These figures at face
value indicate that total assets exceed total liabilities by
R9 691 574 (which is the ‘retained
income’ as
at 31 July 2016) but that current liabilities exceed current assets
by R26 964 037. This is consistent
with a picture of
factual solvency but commercial insolvency. However, the liabilities
reflected in the draft balance sheet appear
to be understated, being
lower than figures furnished by Esterhuizen in the founding affidavit
and in the liquidation scenario
discussed later in this judgment.
According to the latest information furnished in the replying papers,
the amounts owing to Absa,
Standard Bank and MBF total R160,25
million. The relatively modest amounts which the liquidation scenario
reflects as owing to
Wesbank and Toyota increase GTL’s
liability to the five financiers to R162,61 million. This suggests
that GTL is not only
commercially but factually insolvent.
[13]
The only indications in
the balance sheet of the company’s recent operational
performance are the entries for retained income.
The opening figure
is R10 817 417, which in context presumably means the
retained income for the year ended 28 February
2016. Since retained
income for the year ended 28 February 2015 was R9 400 368,
this implies that the profit after tax
for the year ended 28 February
2016 was R1 417 049. There is then recorded a loss for the
year to date (March - July
2016) of R1 125 843, reducing
the retained income as at 31 July 2016 to R9 691 574. This
indicates a trend
of declining profits in the year ended 28 February
2016 turning to losses in the current year.
Actual
commercial or factual insolvency a bar to business rescue?
[14]
It is convenient here
to address an argument raised by the applicants against business
rescue. Mr Eloff submitted that the current
insolvency of a company
is an absolute bar to granting business rescue. He submitted further
that GTL was not only commercially
but factually insolvent.
[15]
For the legal part of
this argument, Mr Eloff cited
Merchant
West Working Capital Solutions (Pty) Ltd v Advanced Technologies and
Engineering Company (Pty) Ltd & Another
[2013]
ZAGPPHC 109 para 8 where Kgomo J said that it was clear from the
definition of ‘financially distressed’ that
a company
could not be placed in business rescue if it was already insolvent
.
[1]
The statement in
Merchant
West
is obiter. I
respectfully disagree with it. The definition of ‘financially
distressed’ in
s 128(1)
of the
Companies Act 71 of 2008
creates a threshold. Current commercial or factual insolvency is not
a prerequisite. This is understandable. But it does not follow
that,
because the company is already commercially or factually insolvent,
and thus obviously financially distressed, it can no
longer be the
subject of business rescue. Such an interpretation would be
inconsistent with
s 5(1)
read with
s 7
of the Act,
particularly paras 7(d) and (k), since it would oblige the court to
liquidate a company even though there might be
a reasonable prospect
of rescuing it.
[16]
It is clear from
Oakdene Square
Properties (Pty) Ltd & Others v Farm
Bothasfontein
(Kyalami) Pty Ltd & Others
2013 (4) SA 539
(SCA) para 7 that Brand JA regarded current commercial insolvency as
constituting ‘financial distress’. I see no reason
why
factual insolvency should be treated differently though it would not
matter for present purposes whether factual insolvency
was outside
the scope of the definition because the two legs of the definition
are disjunctive – one or other suffices. Naturally
the
existence and extent of commercial and/or factual insolvency may have
an important bearing on the prospect of rescuing a company
but they
cannot be a bar to a rescue application.
[17]
However, and even if
the proposition in
Merchant
West
were correct,
this would not, as Mr Goodman pointed out, be a bar to business
rescue since in terms of
s 131(4)(a)(iii)
the court can grant a
business rescue order if it is just and equitable to do so for
financial reasons, ie whether or not the company
is ‘financially
distressed’.
[18]
As to the factual part
of the argument, there was the criticism that the balance sheet as at
31 July 2016 is uncorroborated. That
criticism, as I have said,
appears to be justified. For the rest, the argument rested on the
proposition that ownership in the
vehicles was reserved to the
financiers and that it was thus wrong to treat them as assets. Since
the vehicles were treated as
assets in the audited financial
statements, I take this to be in accordance with generally accepted
accounting practice. Whether
it is the correct approach to valuing
assets and liabilities for legal purposes is debatable. The
accounting approach might be
justified on the basis that the
company’s long-term liability to the financiers is balanced by
a right of use and a right
to claim delivery in due course. It seems
to me to be unrealistic to ignore the value which is created by
paying off instalments
towards the ultimate acquisition of assets.
[19]
If, however, the law
requires one to disregard the value of the vehicles, one could not
then include the corresponding liabilities.
If it were otherwise,
many thriving businesses might be found to be factually insolvent. A
tenant with a 10-year lease is not factually
insolvent because he
owes all the rent but does not own the property. One would probably
regard the tenant’s obligation to
pay each month’s rent
as reciprocal to the landlord’s continued obligation to provide
occupation. If on this basis
one disregarded the value of the
vehicles and the corresponding liability to the financiers, GTL would
be factually insolvent because
its only assets and liabilities for
solvency purposes would be the current assets and liabilities, and
the latter exceed the former.
Even if this is so, for the reasons I
have stated it is not a bar to business rescue.
Causes and
effects of GTL’s financial distress
[20]
Esterhuizen attributes
the company’s current financial distress to the following:
(i) growing too fast without sufficient
management processes and
controls; (ii) poor financial management procedures; (iii) fuel
theft; (iv) failure to
invoice promptly. He says corrective
measures have been implemented. Additional administrative staff have
been employed and the
accounting system has been upgraded.
Outsourcing has been significantly reduced in order to improve GTL’s
margins. He describes
certain measures taken to combat fuel theft.
[21]
The applicants’
deponent, Mr Patrick Brown (‘Brown’), alleges that on
Esterhuizen’s own version he lacks
the ability to manage the
company and has been guilty of reckless if not fraudulent conduct. I
think Brown’s criticisms are
overstated. The company has
operated profitably for some years. The audited financial statements
as at 28 February 2015 and the
balance sheet as at 31 July 2016 show
that the company has undergone rapid expansion in the last two years.
Even if one disregarded
the recent balance sheet, it is not in
dispute that there has since February 2015 been a large increase in
GTL’s fleet. Although
Esterhuizen acknowledges that he has not
kept a proper grip on the expanded business, he has on his version
identified weaknesses
and taken corrective measures. I do not think
it fair to say that this is a business which he is not capable of
managing. At any
rate one cannot say that his presence as the
company’s controller justifies the conclusion that there is no
reasonable prospect
of rescuing the company.
[22]
The result of GTL’s
currently straitened circumstances is that certain trade creditors
who on Esterhuizen’s view are
not critical to the company’s
operations have not been paid. The applicants fall into this class.
The critical creditors,
according to Esterhuizen, are the financier
and Avis Fleet, Equestra and Scania. Scania until recently leased
vehicles to GTL.
The precise role played by Avis Fleet and Equestra
is unclear. If GTL defaulted on its obligations to the vehicle
financiers, they
would repossess the vehicles and GTL’s
business would grind to a halt. Esterhuizen says that GTL has
continued to honour
the monthly debit orders in favour of the
financiers. It is not in arrears to Equestra or Avis Fleet. The
company has also continued
to pay its employees.
[23]
In his founding
affidavit Esterhuizen said that the non-critical creditors, in
respect of whom GTL was in arrears, totalled R23 012 190.
As noted, the applicants make up R3 381 582 of this amount.
Esterhuizen annexed a schedule, “GE5”, listing
the
non-critical creditors under three headings: ‘transport
suppliers’, ‘expense suppliers’ and ‘statutory
expenses’. Included in the ‘statutory expenses’
were SARS (R1 million), provident fund contributions (R1 849 184)
and bargaining council contributions (R1 323 424). This
suggests that although GTL has continued to pay the amounts due
directly to employees, it is not honouring related employment costs.
[24]
In his replying
affidavit Esterhuizen has provided revised information about the
non-critical creditors (annexure “GE20”).
He no longer
includes the ‘statutory expenses’ in this category and
discloses that GTL owes SARS R7,09 million. The
non-critical
creditors (now limited to transport suppliers and expense suppliers)
total R17 336 402. The same two classes
totalled
R16 209 008 in “GE5”.
Three key
aspects
[25]
There are three key
aspects in assessing Esterhuizen’s proposal for rescuing the
company. The first is his contention that
the non-critical creditors
would receive no dividend in a liquidation. The second, which
features in the draft plan attached to
his founding affidavit, is
that the claims of non-critical creditors will be compromised at 40
cents in the rand. The third is
his projection of increased revenue
and profits in the year ahead. Esterhuizen is supported in his
assertions by the proposed business
rescue practitioner, Mr Daniel
Terblanche (‘Terblanche’). Terblanche is an associate
director in Deloitte Restructuring
Services. He has considerable
experience as a liquidator/trustee and more recently as a business
rescue practitioner.
The
liquidation scenario
[26]
I start with the
liquidation scenario. The present case is not one where the person
proposing business rescue says that business
rescue will provide a
better way of realising the business or its assets than liquidation.
The proposed business rescue has as
its object that the company
should continue trading and be restored to solvency. Accordingly, in
considering the costs of business
rescue as against liquidation, one
is not simply concerned with the differing costs of effectively
winding up the business but
with the costs associated with attempting
to save it on the one hand and wind it up on the other.
[27]
If he is appointed as
GTL’s business rescue practitioner, Terblanche has agreed to a
fee of R2000 p/h and a success fee of
R500 000. The success fee
will become payable once the rescue plan has been adopted and
substantially implemented within the
agreed time line. Terblanche has
not indicated how many hours he expects to spend on the assignment.
The process will last until
31 July 2017 when the last payment to the
non-critical creditors will be made, a period of approximately ten
months. If one assumes
a 22-day working month and that he works eight
hours p/d over the first six months and four hours p/d over the
remaining four months,
the hourly fee would come to R2,816 million.
This probably overstates the demands on his time. There would also be
the success
fee.
[28]
Terblanche has prepared
a liquidation scenario, “GE8”, which assumes that the
vehicles will be realised by the liquidator,
with the financiers as
secured creditors (see
s 84
of the
Insolvency Act 24 1936
). For
each encumbered vehicle asset account, he assumes liquidators’
fees of 10% plus VAT, auctioneering fees of 10% plus
VAT and modest
amounts for advertising and valuations. In respect of the mortgaged
property, the liquidators’ fee is 3%.
The fees and costs were
not placed in issue in the opposing papers. They would be very much
more than the business practitioner’s
fees.
[29]
The total assumed
forced sale proceeds of the vehicles are R114,8 million. This
represents a discount of about 28% as against the
historic cost less
depreciation (about R160 million). Based on GTL’s liability to
the financiers as provided to Terblanche
by management, each
encumbered vehicle asset account reflects a substantial shortfall.
The total shortfall in respect of vehicles
is R42 520 102.
Absa’s vehicle shortfall of R20 575 614 is, however,
reduced because it has further security
by way of a mortgage bond
over the Cape Town property, a cession of debtors and a notarial
bond. This reduces Absa’s shortfall
to R11 707 994
and the overall shortfall to R33 652 482.
[30]
Most of the secured
debt is owed to Absa, Standard Bank and MBF. In “GE8”
these liabilities, as provided to Terblanche
by management, are
recorded as being R49 107 114, R30 844 521 and
R59 719 513 respectively. In the
founding affidavit
Esterhuizen, despite confirming the information contained in
Terblanche’s liquidation scenario, provided
different figures:
R51 362 030 (Absa), R37 755 650 (Standard Bank)
and R61 661 443 (MBF). According
to information provided in
Esterhuizen’s replying affidavit and in MBF’s
intervention affidavit, the liabilities to
Absa and MBF are in fact
R55,89 million
[2]
and R76,95 million respectively. Esterhuizen says that the liability
to Standard Bank is R27,411 million. It is thus apparent that,
on the
assumed forced sale proceeds of the vehicles, the shortfall will be
more than reflected in “GE8”.
[31]
Esterhuizen and
Terblanche have not explained how they arrived at the forced sale
prices. No valuations have been furnished. It
is perhaps not
unreasonable to assume that in liquidation the forced sale proceeds
of the vehicles will be at a discount to market
value. Whether it
will be as much as (or more than) 28% I do not know. If one
recalculated the liquidation scenario assuming a
10% discount, one
would have forced sale proceeds of R144 million. After allowing
liquidators’ fees and auctioneering fees
at 10% each plus VAT
and the same valuation and advertising costs as in “GE8”,
the net proceeds available to the vehicle
financiers would be about
R111 million. This would still leave a considerable shortfall. Any
surplus from the Cape Town property
would go to Absa. (“GE8”
appears to assume that there is nothing owing on the Cape Town
property so that the full proceeds
of the property will be available
to reduce Absa’s shortfall in respect of vehicles. This is
inconsistent with the balance
sheet as at 31 July 2016 which reflects
a mortgage liability of R2 450 064. The identification of
Absa as the mortgagee
is also at odds with Esterhuizen’s
statement in the founding affidavit that the mortgagee is First
National Bank.
[3]
)
[32]
Brown criticised the
liquidation scenario for assuming that only 65% of the ceded book
debts would be recoverable in liquidation.
There is force in this
criticism, particularly since Esterhuizen says that most of GTL’s
customers are blue-chip companies.
However this assumption does not
have a material effect. The liquidation scenario assumes ceded
debtors of R9 870 776.
If one assumed full recovery, the
net additional amount available after allowance for further
liquidators’ fees would only
be R3 060 927. This
would go to Absa. Even on the basis that all vehicles, including
those financed by Absa, achieved
90% rather than 72% of their book
value, Absa’s shortfall would be such as to exhaust its
additional security in the form
of the mortgage bond, the cession of
debtors and the notarial bond.
[33]
There is another aspect
of the liquidation scenario calling for comment. The book debtors
ceded to Absa are said to have a face
value of R9 870 776.
This does not seem to be all debtors. There is evidence that Scania
has a cession of some debtors.
Furthermore the balance sheet as at 31
July 2016 has a ‘customer control account’ of R26 154 023
which I
take to be trade debtors. If that is so, then, subject to any
claim which Scania may have, there ought to be an additional
R16 283 247
available in the liquidation scenario.
Esterhuizen did not satisfactorily explain this omission in reply. On
the assumption that
this additional amount were available in
liquidation, general liquidation costs and certain preferent
creditors such as SARS and
Absa under its notarial bond would rank
ahead of concurrent creditors
(ss 97
–
102
of the
Insolvency Act). If
anything were left, the other financiers would
have a substantial shortfall and would thus rank with the
non-critical creditors.
On the probabilities the non-critical
creditors would recover less than 40 cents in the rand.
The
proposed compromise
[34]
I turn now to the
proposed compromise of non-critical creditors’ claims.
Esterhuizen’s proposed plan is that they will
receive 40 cents
in the rand which will be paid in quarterly instalments over the
period October 2016 to July 2017. These payments
will be funded by
the company’s operations and are thus tied up with
Esterhuizen’s revenue projections which I shall
consider
presently. Esterhuizen contends that if GTL gets relief by way of
this compromise, it will be able to meet its liabilities
to the
critical creditors as they fall due and to fund its future
operational expenses. Based on the information in the founding
papers, the relief would be about R13,8 million (60% of R23 million)
together with the cash flow advantage of staggering the interest-free
dividends of R9,2 million (40% of R23 million) over a ten-month
period
[35]
Mr Eloff argued that a
business rescue plan may not permissibly incorporate a compromise
with creditors. He submitted that a compromise
may only be achieved
by way of
ss 155.
I reject this argument.
Section 150(2)
of the
Act requires that the proposals in a business rescue plan must
include the extent to which the company is to be released
from the
payment of its debts. This provision read with
s 154
makes it
clear that a business plan may incorporate elements of a compromise
with creditors. The business rescue mechanism would
be sadly
deficient if it were otherwise. And it would be no answer to the
deficiency to say that where a company is in business
rescue any
compromise needed to restore it to solvency should be achieved under
s 155
since sub-section one of the latter provision excludes the
operation of
s 155
in the case of companies in business rescue.
[36]
There may, however, be
a different deficiency in the business rescue provisions of the Act.
In the case of a
s 155
compromise, creditors vote according to
classes. The compromise must be approved by at least 75% in value of
each class. In the
case of business rescue, by contrast, the only
requirement for approval is that the plan is supported by the holders
of more than
75% of the creditors’ voting interests actually
voted and by at least 50% of the independent creditors’ voting
interests
actually voted
(s 152(2)).
Section 131
does not confer
on the court a power to create classes of creditors or to vary the
provisions of the Act relating to the approval
of plans. Nobody in
the present case suggested that I had such a power. The absence of
such a provision is anomalous, particularly
since a plan which
affects the rights of the holders of any class of the company’s
securities requires class approval
(s 152(3)(c)).
[37]
This state of affairs
means that similarly placed creditors could be differentially, even
unfairly, treated and that a plan which
is advantageous to the
majority of creditors might be approved even though it is
disadvantageous to a minority. I am not concerned
with the remedies
which minority creditors might enjoy, after the commencement of
business rescue, if such a plan were approved.
At this stage the
company is not yet in business rescue. I am asked to place it in
business rescue on the basis that a plan along
the lines proposed by
Esterhuizen might be adopted and might restore the company to
solvency. If the proposed plan is unfair, this
would at least be
relevant to the exercise of the court’s discretion in deciding
whether to place the company in business
rescue.
[38]
To give an extreme
example, suppose that all the creditors of a distressed company are
concurrent and that the company could be
restored to solvency if it
were relieved of 20% of the claims. This could be achieved by
requiring all creditors to write off 20%
of their claims or by a plan
in terms whereof named creditors with claims constituting 20% of the
total were required to write
off all their claims. I can hardly
imagine that a court would allow a plan of the latter kind to go
forward just because it would
be supported by the majority.
[39]
The vehicle financiers,
who like the non-critical creditors are independent creditors, will
constitute more than 75% of the creditors’
voting interests and
more than 50% of the independent creditors’ voting interests.
They will thus be in a position to procure
the approval of the
proposed plan. It is currently proposed that the non-critical
creditors will receive 40 cents in the rand and
that the critical
creditors will continue to receive payment in full. It would not
occasion surprise if the critical creditors
were to approve the plan.
If the plan successfully restores the company to profitability, they
will receive payment in full. If
after the implementation of the plan
the company were to fold, they would still have the fallback of a
liquidation, this time without
competition from the non-critical
creditors.
[40]
In the present case the
fact that only the non-critical creditors’ claims will be
compromised is justified by counsel for
Esterhuizen and MBF on three
bases: (i) that the treatment is not in truth differential,
since all claims in arrears will
be compromised; (ii) that the
support of the critical creditors is necessary to enable the company
to remain viable; (iii) that
those critical creditors who are
vehicle financiers are secured creditors and would receive all the
proceeds from a liquidation.
I note that these justifications, if
valid, would apply even if after investigating the company’s
affairs the practitioner
were to find that GTL could only be restored
to solvency if the dividend to non-critical creditors was reduced to
20 cents or perhaps
to nil.
[41]
I reject the first
justification. The fact that certain creditors’ claims are in
arrears itself arises from differential treatment.
In the past number
of months Esterhuizen has chosen to ensure that critical creditors
are paid while non-critical creditors are
not.
[42]
The second
consideration likewise does not justify differential treatment. There
is no reason why the company’s restoration
to solvency should
be subsidised by creditors whom Esterhuizen regards as non-critical.
It is not so much that the goods and services
provided by the
non-critical creditors are not critical to GTL’s operations but
that Esterhuizen probably believes that he
can get similar goods and
services from other suppliers after starting with a clean slate.
Furthermore the amounts which GTL has
failed to pay non-critical
creditors might be very critical to the survival of those creditors.
This is illustrated by the desperate
email which Mr Khan, the owner
of the third applicant, wrote to SA Breweries on 15 July 2016
regarding GTL’s non-payment
for transport services provided to
GTL in the first three months of the year.
[4]
[43]
As to the third
consideration, it will be apparent from my discussion of the
liquidation scenario that in liquidation the vehicle
financiers, like
the non-critical creditors, will suffer a substantial loss. Their
concurrent claims will exceed those of the non-critical
creditors.
Yet the proposed plan, if it works, will not merely result in the
vehicle financiers recovering what they could in any
event have
recovered in the liquidation; they will receive every cent of their
claims on time, including the full profit on their
transactions with
GTL. The non-critical creditors, by contrast, are expected to accept
a 60% reduction in the face value of the
claims and to receive the
remaining 40% in instalments without interest over ten months,
despite the fact that their claims have
been due and payable for some
months.
[44]
I do not see how this
can be regarded as fair. It is no answer to say that in terms of the
plan the non-critical creditors will
get more than on liquidation.
The same is true of the financiers. The fact of the matter is that
the plan envisages that the vehicle
financiers will get 100 cents in
the rand on the portion of their claims which would be concurrent in
liquidation. Furthermore,
the fact that GTL is not currently in
arrears to the vehicle financiers and to the other critical creditors
must be the consequence
of the fact that the critical creditors have
been preferred over the non-critical creditors in recent months. In a
liquidation
the liquidator might be in a position to impeach some of
these payments.
[45]
It may be, in the light
of the liquidation scenario, that a plan which provides for a more
equitable distribution of the loss currently
to be borne by the
non-critical creditors could be devised. My rough calculations
indicate that the money which Esterhuizen proposes
to save for the
company by compromising the non-critical creditors at 40 cents in the
rand could be saved by an alternative scheme
in which all creditors,
including the financiers, write off 6% - 8% of their claims. But that
is not the plan which Esterhuizen
proposes and there is no evidence
that he has discussed it with the financiers. There is no evidential
basis for saying that such
a plan is likely to receive the requisite
approval.
[46]
Accordingly, and even
if the proposed plan would restore the company to solvency, I would
be disinclined to place the company in
business rescue. Quite apart
from this consideration, however, I have considerable difficulty with
the projections on which the
plan is premised. It is to these that I
now turn.
The
projections
[47]
Annexures “GE6”
and “GE7” to Esterhuizen’s founding affidavit
contain his projections for the company’s
revenue and
expenditure over the period August 2016 to February 2017. The revenue
is divided into three categories, ‘existing
revenue’
(revenue from existing contracts), ‘new contract revenue’
(additional contracts with existing customers),
and ‘other
income’. The ‘existing revenue’ is projected to
grow from R18,8 million in August 2016 to R28 060 750
in
February 2017. This is a 49% increase over seven months. The
projected ‘existing revenue’ over the seven-month period
is R167 380 500. The ‘new contract revenue’
starts at R1 million in September 2016 and jumps to R7,5 million
in
February 2017. The total ‘new contract revenue’ for the
seven-month period is R14,5 million. The ‘other income’
over the seven-month period is R33 million. Revenue from all sources
is thus projected to be R214 880 500.
[48]
Over the same
seven-month period expenses are projected to be R199 883 813.
The expenses include the monthly debit orders
in favour of the
financiers.
[49]
On these figures there
would be a profit of R14 996 687. It is from this surplus
that GTL would pay the dividend to non-critical
creditors, though
“GE6” assumes a compromise of 30 cents rather than 40
cents.
[50]
In his founding papers
Esterhuizen provided virtually no evidence in support of these
projections. This was pointed out in the opposing
affidavit. In his
replying affidavit Esterhuizen purported to explain the projections.
In regard to ‘existing revenue’,
he attached a
spreadsheet, “GE21”, comparing revenue by customer for
the financial year ended February 2016 and for
the six months from
March to August 2016. He included a projection for the period
September 2016 to February 2017. The projected
figures, he said, had
been obtained by applying a 6% increase to the average six-monthly
revenue for the period September 2015
to February 2016. This is
traditionally the busier period for GTL. Historically, Esterhuizen
said, the company’s customers
have agreed to a ‘standard
increase’ of 6%. Since the revenue for the period September
2015 to February 2016 averaged
R17 341 873 p/m, he
projected R18 382 386 p/m for the period September 2016 to
February 2017.
[51]
There are several
difficulties with Esterhuizen’s explanation (quite apart from
the fact that it was contained in his replying
affidavit). Since he
was purporting to explain his projection for ‘existing revenue’
in the founding affidavit, one
would expect a correlation between
“GE6” and “GE21”. The annexures are, however,
inconsistent with each
other. “GE6” projects
substantially more ‘existing revenue’ than “GE21”.
According to the later
annexure, the ‘existing revenue’
over the seven-month period August 2016 to February 2017 would be
R125 749 151
(August 2016 actual and September 2016 -
February 2017 projected). “GE6”, by contrast, projects
‘existing revenue’
for the same period of R167 380 500.
This is a difference of some R41,63 million. Even if the ‘new
contract revenue’
and ‘other income’ were accurate,
the profit of about R15 million projected in “GE6” would
become a loss
of R26,63 million. GTL would be unable to pay any
dividend to the non-critical creditors and would fall into arrears
with its critical
creditors.
[52]
Then there is the fact
that the actual August 2016 ‘existing revenue’ according
to “GE21” was R15 454 836.
In “GE6”, at a
time when Esterhuizen was still projecting the ‘existing
revenue’ for August 2016, the figure
was R18,8 million,
indicating a slippage in the very first month of R3,34 million.
[53]
I raised these matters
with Mr Goodman in argument. He returned to them in reply. I gathered
that he had certain instructions which
might explain the
discrepancies but he said that on the papers all he could point out
was that “GE6” listed certain
‘existing revenue’
customers whose names did not appear on “GE21”. This is
true. Conversely, though, there
are certain ‘existing revenue’
customers on “GE21” whose names do not appear on “GE6”.
There
are two possibilities. If Esterhuizen was seeking to explain
the ‘existing revenue’ projections made in his founding
affidavit (which is what his replying affidavit on a natural reading
indicates), the explanation does not come close to justifying
the
projections in “GE6”. If, on the other hand, Esterhuizen
was not comparing like with like, there is no explanation
at all. And
on either approach, the projections in “GE6” cannot be
reconciled with a mere 6% increase in average monthly
revenue in
comparison with the same period in the preceding year. The
projections in “GE6”, with their massive monthly
increases, bear no relation to the pattern of ‘existing
revenue’ income for the period August 2015 – February
2016.
[54]
In regard to ‘new
contract revenue’ and ‘other income’, Esterhuizen
in the replying affidavit provided generalised
information but did
not attach any further schedules explaining how he had arrived at the
projections contained in “GE6”.
[55]
In regard to the
projected expenditure (“GE7”), certain line items which
appear in the audited financial statements
are missing. These include
bad debts, contract expenses and depreciation. Bad debts were not
very large in the financial year ended
28 February 2015 (R292 879)
but with a substantial increase in projected income one would expect
at least some bad debt, particularly
since Esterhuizen and Terblanche
saw fit to assume only 65% recoverability in the liquidation
scenario. Esterhuizen’s revenue
projections assume that all
customers pay promptly and in full.
[56]
Contract expenses
(which I take to be outsourcing expenses) amounted to R7 592 911
in the financial year ended 28 February
2015. Esterhuizen says that
he has taken decisive steps to reduce the amount of outsourcing. He
has instructed staff that there
is to be no outsourcing without his
prior authorisation on a case-by-case basis. He expected outsourcing
to cost only R690 000
in July 2016. Even so, it does not appear
realistic to make no allowance at all for outsourcing expenditure
over the period August
2016 to February 2017. And Esterhuizen’s
resolve to minimise outsourcing may take strain following the recent
termination
of GTL’s relationship with Scania (more of this
below).
[57]
Esterhuizen may have
disregarded depreciation because it is a non-cash flow item. I
nevertheless observe that depreciation is in
the nature of a prudent
provision for the replacement of equipment with a limited lifespan.
Depreciation was R7,12 million during
the year ended 28 February
2015. With the more than doubling of the fleet’s size since
then, the depreciation allowance will
increase correspondingly. If it
were taken into account, GTL might well be loss-making over the
period August 2016 to February
2017 even if one accepted
Esterhuizen’s revenue projections.
[58]
Another concern is that
the projections in “GE6” and “GE7” only run
to February 2017. To have a 12-month
picture, one would need to carry
the projections forward to the end of July or August 2017. The period
March-August is, according
to Esterhuizen, the quiet period, so
projected turnover in that period would be lower. While some
operational expenditure (eg fuel)
might be variable, the debit orders
in favour of the financiers, salaries and so forth will still have to
be met. Furthermore,
the proposed plan envisages that the
non-critical creditors will be paid in instalments of R2,3 million in
each of April and July
2017. There is no indication that GTL will
keep its head above water in this period.
[59]
I repeat a point I made
earlier, which is that I would have expected Esterhuizen to be able
to furnish draft annual financial statements
or management accounts
for the year ended 28 February 2016 and for the period March - July
2016. The retained income entries in
the balance sheet as at 31 July
2016 could not exist without an income statement calculating GTL’s
post-tax profit/loss for
the year ended 28 February 2016 and for the
current year to date. Yet all that Esterhuizen has provided, and this
in reply, is
a spreadsheet with the turnover from some but perhaps
not all the important customers. Why is there no proper income
statement
including cost of sales and operating expenditure? One
cannot help but suspect that trading results for period post-dating
February
2015 have been held back because they would have made
unpleasant reading and cast serious doubt on the projections.
[60]
There is no evidence
that if GTL fails to meet the projections it will be able to secure
further funding. In the replying papers
Esterhuizen says, based on
information confirmed by Terblanche, that in business rescue
proceedings creditors holding cessions
of debtors often allow the
company to collect some or all of the debtors to fund operations.
That is not the point. Esterhuizen’s
projections already assume
that GTL will, despite the cession of debtors, receive all the
projected revenue. The difficulty will
arise if expenditure exceeds
revenue. I have already indicated why this might well be the case.
[61]
Apart from these
material problems with the projections of revenue and expenditure,
the liabilities of GTL seem to be a moving target.
I leave aside for
the moment the substantial differences between the liabilities to
Absa and MBF contained in the founding and
replying papers. The more
important figures in that regard are the monthly debit orders, where
Esterhuizen’s information
may well be reliable.
[62]
However, I have pointed
out the difference between the figures for non-critical creditors in
the founding and replying papers. The
figures for ‘transport
suppliers’ and ‘expense suppliers’ have increased
from R16 209 008 to
R17 336 402. Although the
creditors to be compromised have been reduced from R23 021 190
to R17 336 402,
this is not because the liabilities of the
company have decreased but because the creditors listed under
‘statutory expenses’
cannot be compromised. Esterhuizen
has not said in the replying papers that the company does not still
owe the amounts reflected
in “GE5” in respect of
provident fund and bargaining council contributions. The amount owing
to SARS has increased
from a projected R1 million to R7 million. This
suggests that the ‘statutory expenses’ exceed R12,8
million (as against
R6,6 million in “GE5”). These amounts
will have to be paid. Esterhuizen does not say that his projections
in the founding
papers make provision for payment in full of these
liabilities. On the contrary, in the founding papers these expenses
(at the
incorrect amount of R6,6 million) formed part of the arrears
creditors whose claims were to be compromised. If R12,8 million has
to be paid to the statutory creditors during the period of the
projection, this will use up almost all of the profit predicted
by
Esterhuizen in “GE6”.
[63]
If the non-critical
creditors to be compromised total R17,336 million rather than R23
million, a dividend of 40 cents will now save
the company R10,4
million rather than R13,8 million – R3,4 million less than
envisaged in the founding papers. The replying
papers do not explain
whether this reduced saving will be adequate. Given the increased
liability in respect of statutory expenses,
this is unlikely.
[64]
In the plan attached to
the founding affidavit Scania is treated as a critical creditor. In
the opposing papers Brown set out certain
developments regarding
Scania. On the day the business rescue application was delivered
Scania’s attorneys wrote to GTL stating
that the bringing of
the business rescue application without seven days’ prior
notice to Scania was a breach of the rental
agreements between Scania
and GTL. An alleged default judgment taken against GTL which had
remained un-rescinded for more than
ten days was also said to be a
breach. Scania elected to cancel the agreements and demanded the
return of its vehicles. On the
same day Scania’s attorneys
wrote to SA Breweries and Africa Amines notifying them that Scania
had elected to perfect its
cession of book debts and that they should
henceforth make payment to Scania.
[65]
In his replying
affidavit Esterhuizen alleged that Scania was not entitled to cancel
the rental agreements because he rather than
GTL had brought the
business rescue application and because no default judgment had been
granted against the company. He also anticipated
that if GTL were
placed in business rescue Scania would be prepared to permit the
company to continue renting the vehicles.
[66]
At the commencement of
argument Mr Goodman handed up a further affidavit providing updated
information regarding the attitude of
affected parties. This
affidavit had been served late the previous day. Mr Eloff handed up a
responding affidavit. In his supplementary
affidavit Esterhuizen said
nothing about Scania’s position. In Brown’s supplementary
answering affidavit he took Esterhuizen
to task for his failure to
disclose recent developments regarding Scania. From Brown’s
affidavit it appears that on 12 September
2016 Scania served an
urgent application (issued in the Cape Town Magistrate’s Court)
for the return of its ten vehicles.
An order for the return of the
vehicles was issued on 13 September 2016.
[67]
Brown attached Scania’s
application to his supplementary affidavit. From the attached
application it appears that Esterhuizen
had expressed a desire to
continue GTL’s relationship with Scania. The latter was willing
to do so subject to GTL’s
providing certain financial
information. GTL failed to do so. Scania also alleged that its debit
order of 3 September 2016 was
returned by GTL’s bank.
Esterhuizen subsequently claimed to have made payment on 5 September
2016.
[68]
Mr Goodman handed up
yet a further affidavit with Esterhuizen’s explanation for the
alleged omission, namely that the omitted
material was not relevant.
This is unconvincing. Esterhuizen confirms the dishonouring of the
debit order but says payment was
subsequently made. He confirms that
an order for the return of the ten vehicles was made. This was by
agreement with each side
to bear its own costs.
[69]
As far as I can see,
the ten Scania vehicles are not listed in the balance sheet as at 31
July 2016, presumably because the rental
agreements did not make
provision for GTL’s ultimate acquisition of ownership. There is
no evidence that GTL owes Scania
arrear rent, presumably because
Esterhuizen has treated Scania as a critical creditor. But until
recently the ten vehicles were
used by GTL in its operations and, as
noted, the business rescue plan treated Scania as a critical
creditor. Esterhuizen’s
projections in “”GE7”
include monthly rental to Scania. The fact that GTL has now had to
return Scania’s
vehicles must inevitably have some effect on
its business. Unless and until GTL can obtain the use of alternative
vehicles, its
turnover will be reduced or it will need to resort to
outsourcing.
[70]
All things considered,
Esterhuizen has not established reasonable grounds for a belief that
the company will achieve the projected
turnover and profits on which
the rescue plan depends (see
Oakdene
para 27). Something
more than a prima facie case or arguable possibility is needed.
Naturally projections involve an element of
speculation but here they
are so divorced from a factual foundation that they do not provide a
basis on which the court can assess
this company’s return to
solvency.
The
attitude of affected parties
[71]
Esterhuizen’s
supplementary affidavit evidence provides evidence about the attitude
of affected parties. Most employee groupings
have indicated their
support for business rescue. However UASA, a union representing 102
staff members, has reported difficulty
in obtaining member support,
listing various grievances, which include outstanding monies not paid
over to the provident fund and
the bargaining council. They do not
support business rescue as they believe they do not have the
guarantee that they will receive
their wages or that the company will
be able to secure the necessary funds. Esterhuizen’s reply to
UASA in regard to the
provident fund grievance is that these amounts
are paid on a monthly basis. In regard to the bargaining council, he
says that since
GTL pays employees when they off sick or on leave,
they are not prejudiced. The explanation regarding the provident fund
does not
seem to be consistent with the treatment of these
contributions in “GE5” as part of the arrears or with
Esterhuizen’s
projected expenditure, “GE7”, which
includes instalments towards arrear provident fund contributions. The
explanation
regarding the bargaining council is obviously
unsatisfactory.
[72]
Despite UASA’s
reservations, I accept that saving the company would be better for
employees than its liquidation.
[73]
As regards the
financiers, MBF has formally endorsed business rescue by intervening
to support it. Absa has indicated informally
that it does not think
that liquidation would be ‘ideal’. There is no indication
of the attitude of the other financiers.
Given the terms of the
proposed business rescue plan, it would not surprise me if the
financiers were content to go along with
it.
[74]
As to the non-critical
creditors, the applicants, whose claims total R3,38 million out of
the revised figure of R17,336 million,
oppose business rescue. In the
recent affidavit Mr Esterhuizen has furnished information indicating
that five creditors, whose
claims according to “GE20”
total R1 098 364, support business rescue. The remaining
non-critical creditors,
who are very numerous but whose claims are
mostly modest, have not responded.
[75]
Mr Esterhuizen as the
company’s sole shareholder supports business rescue. It is
unfortunate, however, that instead of assessing
business rescue in
good time he waited until the applicants brought a liquidation
application. If they had not done so he might
have continued just to
fob them off. Instead we have a reactive business rescue application
showing all the signs of having been
prepared in haste.
Conclusion
[76]
Although affected
parties are entitled to be heard in relation to a business rescue
application, and although their attitude is
relevant to the exercise
of the court’s discretion, the existence of a reasonable
prospect of rescuing the company is a factual
question, albeit
involving a value judgment. If the court concludes that reasonable
grounds for believing that the business can
be rescued have not been
established, the court cannot grant the application, even though many
affected parties may support business
rescue.
[77]
In the present case
reasonable grounds for a belief that GTL can be rescued have not been
established. Esterhuizen’s projections,
on which the plan
depends, are on the face of it unreliable, contradictory and not
based on reasonable grounds. In any event, I
think the manner in
which only non-critical creditors’ claims are to be compromised
is fundamentally unfair and objectionable.
[78]
For these reasons the
application for business rescue must fail and the company must be
placed in provisional liquidation. This
does not mean that a renewed
application for business rescue with better evidence, and taking into
account the concerns I have
have expressed about the fairness of the
current plan, cannot be brought: see
Richter
v Absa Bank Ltd
2015
(5) SA 57
(SCA). Indeed I think it would be very desirable for the
financiers, who are the largest creditors and have the necessary
in-house
expertise, to investigate, with the cooperation of the
provisional liquidator and management, the current financial position
of
the company with a view to making realistic projections and
presenting a more substantiated and equitable case for business
rescue.
[79]
Mr Goodman and Mr Harms
painted a grim picture of what will happen in the event of
liquidation – the immediate repossession
of all vehicles and
the cessation of the company’s business. The financiers may
well have the right to follow this course.
In view, however, of the
liquidation scenario presented by Terblanche, I would expect the
financiers, behaving rationally, at least
to investigate the
financial position of GTL more fully before taking such drastic
action, either with a view to supporting a renewed
business rescue
application or at least assessing whether their best interests would
not be served by allowing the liquidator to
trade and sell the
business as a going concern.
[80]
The applicants, having
obtained copies of GTL’s contracts with financiers in terms of
rule 35(12)
, have made the point that, except in the case of Standard
Bank, business rescue, like liquidation, is an event entitling the
financiers
to cancel. An order placing GTL in business rescue would
not deprive the financiers of this right (see
Murray
NO & Another v FirstRand Bank Ltd t/a Wesbank
2015
(3) SA 438
(SCA)). Neither course of action is thus risk-free for
GTL.
[81]
In regard to costs,
MBF’s intervention did not add materially to the applicants’
costs. I think that MBF should bear
its own costs. Esterhuizen must
bear the applicants’ costs of opposing the business rescue
application. Since the opposed
proceedings focused on the business
rescue application rather than the liquidation application, the
applicants’ costs of
seeking GTL’s liquidation should be
allowed in the liquidation on an unopposed basis. I indicated to Mr
Eloff that if I were
to dismiss the business rescue application I
might disallow part of the costs of preparing the opposing affidavit
on the basis
that it was unnecessarily prolix and repetitive and
contained inappropriate rhetorical and argumentative matter and
exaggerated
assertions. Mr Eloff, who came on brief after the
opposing papers were filed, left this in my hands.
[82]
I make the following
order:
(a) The business rescue application brought by the first
intervening party and supported by the second intervening party is
dismissed.
(b) The first intervening party is directed to pay the
applicants’ costs of opposing the business rescue application,
including
the costs of two counsel and the wasted costs of 12 June
2016, save that 50% of the costs which would otherwise have been
allowed
on taxation in connection with the preparation of the
applicants’ opposing papers will be disallowed.
(c) The second intervening party shall bear its own
costs.
(d) The respondent is placed in provisional liquidation.
(e) Interested parties are called upon to show cause, on
Thursday 26 October 2016 at 10h00 or as soon thereafter as counsel
may
be heard:
(i) why the respondent should not be placed in final
liquidation;
(ii) why the applicants’ costs should not be costs
in the liquidation.
(f) Service of this order shall be effected:
(i) by the sheriff on the respondent, employees, trade
unions and the South African Revenue Service;
(ii)
by publication once in the
Sunday
Times
and
Rapport
newspapers.
ROGERS
J
APPEARANCES
For
Applicants:
Mr
CM Eloff SC & Mr P Lourens
Instructed
by Leahy Attorneys Inc
c/o
Werksmans Attorneys Inc
1st
Floor, 5 Silo Square
V&A
Waterfront
Cape
Town
For
Respondent and 1st Intervening Party
Mr
BJ Manca SC & Mr N Traverso
Instructed
by: Webber Wentzel
15th
Floor, Convention Tower
Heerengracht
Foreshore
Cape
Town
For
2nd Intervening Creditor
Mr
Harms
Instructed
by: Strauss Daly Inc
c/o
13th Floor, Touchstone House
7
Bree Street
Cape
Town
[1]
See also
Sulzer
Pumps (South Africa) (Pty) Ltd v O&M Engineering CC
[2015]
ZAGPPHC 59 para 23;
Gormley v West City
Precinct Properties (Pty) Ltd & Another
[2012]
ZAWCHC 33
para 11.
[2]
The total facility is R59 756 065.
[3]
Para 67.2
[4]
Page 95 of the liquidation papers.