Brief Summary

Business Rescue — Application for business rescue — Director and creditor of company applying for winding-up — Employees applying for business rescue under Companies Act — Business rescue plan not adopted due to creditor's vote against it — Court considering reasonable prospect of business rescue succeeding — Requirement for applicant to establish grounds for reasonable prospect of achieving goals of business rescue — Court finding sufficient basis for continuation of business rescue proceedings and potential for better return for creditors than liquidation.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings concerned an application under section 153(7) of the Companies Act 71 of 2008 to set aside a creditor’s vote against a business rescue plan on the basis that the vote was inappropriate, and to have the plan treated as adopted.

The matter was heard in the Western Cape Division of the High Court, Cape Town, before Dlodlo J. The parties cited were Taillifer Dale Collard as applicant, Jatara Connect (Pty) Ltd as first respondent (a company placed under business rescue), Edcon Limited as second respondent (a creditor), South African Revenue Services as third respondent, and the Companies and Intellectual Property Commissioner as fourth respondent. Although the judgment explains that the employees of Jatara Connect had brought the business rescue-related applications (including the section 153(7) application), the case was enrolled under the cited parties in the caption.

The procedural history began with a winding-up application launched by the applicant (a director and creditor of Jatara Connect) on 8 August 2016. In response, Jatara Connect’s employees brought an application in terms of section 131(1) of the Companies Act 71 of 2008 to place the company under business rescue, which was granted by Baartman J on 7 September 2016. A business rescue plan was later prepared and then amended by the business rescue practitioner, but at the meeting of affected persons on 24 November 2016 the plan was not adopted because Edcon, in its capacity as a creditor, voted against it. The present proceedings were precipitated by the employees’ attempt to set aside that vote under section 153(7).

The dispute’s general subject-matter was whether the continued business rescue process, which was intended primarily to enable the company to pursue arbitration proceedings against Edcon for alleged breach of contract and thereby produce a better return for employees and creditors than liquidation, should be allowed to proceed notwithstanding Edcon’s opposing vote.

2. Material Facts

Jatara Connect conducted the business of an outbound call centre, requiring significant and costly infrastructure and software. Jatara Connect was part of a group of companies. It was wholly owned by Jatara Holdings (Pty) Ltd, and another subsidiary in the group was Jatara Travel (Pty) Ltd. The subsidiary companies were geared primarily to do work for Edcon.

On 28 July 2014, Jatara Connect concluded a written agreement with Edcon Limited to provide call centre services, including contacting Edcon’s customers to sell Edgars Club Card products. The agreement contained an exclusivity provision, preventing Edcon from contracting with another party for similar services. The relationship between the parties later deteriorated.

An undisputed feature of the factual matrix was that the parties’ dispute was referred to arbitration by agreement, culminating in the appointment of Advocate Smalberger SC as arbitrator. Jatara Connect contended it had a significant damages claim against Edcon arising from Edcon’s breach of the service agreement, and the business rescue plan treated that arbitration as central to achieving a better outcome for employees and creditors than liquidation.

The judgment records that Jatara Connect alleged it discovered Edcon was not supplying sufficient data for the volume of sales calls historically made, and that Edcon was using another call centre in breach of the exclusivity term. Jatara Connect gave notice of cancellation of the contract on 5 July 2016. These allegations formed the basis for the intended arbitration claim referred to in the business rescue plan.

At the time of cancellation, Jatara Connect employed approximately 140 call centre staff. The business rescue plan did not envisage continuation of ordinary business operations; instead it envisaged pursuing the arbitration to achieve a better return for creditors and employees.

The business rescue practitioner, Charl de Waal Boshoff, initially formed the view that there was no reasonable prospect of rescue, but after engagements with employees (who wanted the arbitration pursued), he concluded there was a reasonable prospect of achieving a business rescue objective and produced an amended business rescue plan.

The amended plan contemplated, among other things, repayment of a loan by an associated company (Jatara Travel) to Jatara Connect in the amount of R743 509.32, voluntary termination agreements by employees, and that the applicant would fund the arbitration and furnish security if necessary. The plan proceeded on the basis that success in arbitration would enable payment of employees’ claims in full and provide creditors with a better dividend than in liquidation.

It was common cause that at the meeting of affected persons on 24 November 2016, all creditors including SARS and the employees voted in favour of the plan, except Edcon, which held 40.8% of the voting interest and voted against it. As a result, the statutory voting threshold in section 152(2)(a) was not met, and the plan was not adopted.

Certain issues raised by Edcon were disputed in the sense that Edcon relied on alleged “untoward details” and purported irregularities in the management of the company and its inter-company arrangements. Edcon contended, among other things, that funds received from Edcon and Clicks were deposited into Jatara Travel’s account and that the corporate separateness between entities was not maintained. Edcon argued that the plan assumed it would receive nothing, whereas liquidation would allow recovery of assets from Jatara Travel and directors and permit enquiries. The judgment records that the business rescue practitioner’s investigation under section 141 was reflected in the amended plan, and that the plan indicated no evidence was found of the alleged irregularities asserted by Edcon.

3. Legal Issues

The central legal questions were whether, under section 153(7) of the Companies Act 71 of 2008, Edcon’s vote against the amended business rescue plan was inappropriate, and if so, whether it was reasonable and just to set the vote aside and grant consequential relief treating the plan as adopted.

The dispute required the court primarily to apply statutory criteria to a defined set of facts, including an evaluation of motive and justification for the vote. It therefore involved a mixture of the application of law to fact and an evaluative/value judgment as contemplated by section 153(7), which expressly directs a court to weigh interests and estimated returns on liquidation against what is provided for in the plan.

A further issue addressed in the reasoning was the proper approach to assessing “reasonable prospect” of achieving a business rescue objective, particularly where the plan does not contemplate continued trading but rather a better return to creditors than liquidation, and how that assessment bears on whether the opposing vote was appropriate.

4. Court’s Reasoning

The court began by situating the matter within the statutory framework and policy orientation of business rescue. It noted that the Companies Act 71 of 2008 recognises business rescue as legitimate not only when it aims to restore solvency, but also where it aims to secure a better return for creditors than immediate liquidation, referring to the definition in section 128(1)(b) and to authority recognising this as a legitimate object.

In considering whether there was an objectively grounded basis for the plan’s rescue objective, the court referred to principles that an applicant must place a factual foundation for a reasonable prospect of achieving at least one of the statutory goals of business rescue. The court emphasised that “reasonable prospect” requires a possibility resting on objectively reasonable grounds, and accepted that the amended plan provided a foundational basis suggesting that a better return could be achieved through pursuing arbitration against Edcon, particularly in light of the practitioner’s conclusion that there was a reasonable prospect of success.

The court also invoked the legislative preference for business rescue and the public interest considerations described in decided cases, including the socio-economic consequences of liquidation, especially for employees. It treated the fact that employees would be paid in full and that creditors would likely be better off under the plan, if arbitration succeeded, as an important contextual factor against preferring winding-up.

Turning to the specific statutory test under section 153(7), the court identified the relevant statutory considerations, namely the interests represented by the person voting against the plan, the plan’s provision for those interests, and a fair and reasonable estimate of the return for that person if the company were liquidated. It also accepted that where a single creditor effectively prevents adoption of a plan, it must exercise its vote in good faith, and it cited authority dealing with the obligation not to vote for a collateral purpose.

On the facts before it, the court drew what it described as the only “irresistible inference” that Edcon voted against the plan with the sole intention of frustrating the arbitration proceedings against it. The court’s reasoning for this inference rested on multiple considerations drawn from the record, including that the arbitration funding would be provided by the applicant and not by company resources, and that Edcon would be in no better position upon liquidation than under continued business rescue. The court reasoned that liquidation would involve preferent ranking for SARS, and on the court’s assessment Edcon would receive no dividend at all on winding-up, whereas the practitioner expressed the view that the plan would likely provide a better return to creditors than winding-up.

The court addressed Edcon’s stated justification that liquidation was necessary to enable investigations and potential proceedings against directors and related entities, including reliance on enquiries and potential claims. It noted the practitioner’s statutory duties under section 141 to investigate and report on reckless trading, fraud, or contraventions of law, and read the amended plan as reflecting compliance with those duties and as indicating that no evidence was found of the irregularities alleged by Edcon. The court questioned why the practitioner’s investigation under section 141 should not be treated as sufficient, particularly in light of the cost and funding implications of liquidation processes and enquiries.

In dealing with Edcon’s reliance on section 424, the court rejected the contention that such relief was only available upon liquidation. The court interpreted section 424(1) as permitting an application by a creditor “whether it be in a winding-up … or otherwise,” and it treated liquidation as likely to increase administrative costs, potentially serving an improper end by undermining the pursuit of claims against Edcon.

The court referred to an approach described as a two-stage inquiry in a case concerning section 153(7): first determining whether the vote was inappropriate, and then considering whether it is reasonable and just to set it aside. The court nevertheless adopted what it described as a holistic approach, weighing the competing outcomes of business rescue and liquidation for creditors generally and the employees in particular.

Ultimately, the court weighed Edcon’s interests against those of employees and other creditors who supported the plan, and concluded that Edcon did not bring a fair and open mind to the plan and that its vote was inappropriate. In light of that finding and the statutory balancing required, it concluded it was reasonable and just to set the vote aside.

5. Outcome and Relief

The court granted Edcon’s application to admit a further affidavit, with no order as to costs in respect of that interlocutory step.

On the merits, the court declared Edcon’s vote against the amended business rescue plan at the meeting of affected parties on 24 November 2016 to be inappropriate and set it aside.

The court further declared that the business rescue plan tabled at that meeting was adopted by the affected parties of Jatara Connect.

Edcon was ordered to pay the costs of the application.

Cases Cited

Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others [2013] 3 ALL SA 303 (SCA).

Propspec Investments v Pacific Coast Investments 97 2013 (1) SA 542 (FB).

Koen and Another v Wedgewood Village Golf and Country Estate (Pty) Ltd and Others 2012 (2) SA 378 (WCC).

Commissioner; South African Revenue Service v Beginsel NO and Others 2013 (1) SA 307 (WCC).

Copper Sunset Trading 220 (Pty) Ltd v Spar Group Ltd and Another 2014 (6) SA 214 (SCA).

Employees of Solar Spectrum Trading 83 (Pty) Ltd v Afgri Operations Ltd, unreported judgment of the North Gauteng High Court delivered on 8 May 2012, case number 6418/2011 (reference to paragraph 37).

Paruk and Others v Parker, Wood and Co. 1917 AD 163.

Kanderssen (Pty) Ltd v Bowman NO 1980 (3) SA 1142 (T).

Zulman and Others v Schultz 1924 TPD 24.

Shoprite Checkers (Pty) Ltd v Berryplum Retailers CC and Others, Gauteng case number 47327/2015 (ZAGPPHC) 255.

Legislation Cited

Companies Act 71 of 2008 (sections 7(k), 128(1)(b), 128(1)(b)(iii), 130(1)(a)(ii), 131(1), 141(1), 141(2)(c), 152(2), 152(2)(a), 153(1), 153(7), and Item 9(1) of Schedule 5).

Companies Act 61 of 1973 (sections 424(1), 417 and 418).

Insolvency Act 24 of 1936 (sections 89 and 99).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that Edcon’s vote against the amended business rescue plan, cast at the meeting of affected persons on 24 November 2016, was inappropriate for purposes of section 153(7) of the Companies Act 71 of 2008, and that it was reasonable and just to set the vote aside.

The court held further that, once the vote was set aside, the business rescue plan was to be treated as adopted by the affected parties.

The court also held that Edcon should bear the costs of the section 153(7) application, while granting leave to admit a further affidavit without a costs order on that interlocutory issue.

LEGAL PRINCIPLES

The judgment applied the principle that business rescue under the Companies Act 71 of 2008 may legitimately pursue either the primary goal of restoring a company to solvency or the secondary goal of achieving a better return for creditors or shareholders than immediate liquidation, and that establishing a “reasonable prospect” requires an objectively grounded factual basis.

In applying section 153(7), the judgment proceeded on the basis that a court may set aside a creditor’s vote against a business rescue plan where the vote is inappropriate and where it is reasonable and just to do so, having regard to the interests represented by the dissenting voter, the plan’s treatment of those interests, and a fair estimate of the return on liquidation.

The judgment further applied the principle that where a creditor’s vote is exercised for a collateral purpose rather than in an honest belief that it is in the interests of the estate and creditors as a whole, the vote lacks good faith and may be set aside. It treated the assessment as one requiring a holistic evaluation of whether business rescue or liquidation would better serve the body of creditors and affected persons in the circumstances.

The judgment also proceeded on the basis, drawn from its reading of section 424(1) of the Companies Act 61 of 1973, that reckless trading relief under that provision may be pursued by a creditor “in a winding-up … or otherwise,” and was not accepted as a justification for opposing business rescue on the premise that liquidation was a prerequisite.

Collard v Jatara Connect (Pty) Ltd and Others (23510/2016) [2017] ZAWCHC 45; 2018 (5) SA 238 (WCC) (14 March 2017)