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[2021] ZAWCHC 20
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Montic Dairy (Pty) Ltd and Others v Mazars Recovery and Structuring (Pty) Ltd and Others (7523/19) [2021] ZAWCHC 20; 2021 (3) SA 527 (WCC) (10 February 2021)
IN
THE HIGH COURT OF SOUTH AFRICA
WESTERN
CAPE DIVISION, CAPE TOWN
REPORTABLE
CASE NO:
7523/19
In the matter between:
MONTIC DAIRY (PTY) LTD
(IN
LIQUIDATION)
First Applicant
PETER CHARLES
BOTHOMLEY
N.O.
Second Applicant
SALIM ISMAIL GANIE
N.O.
Third Applicant
ETHNE MARY VAN WYK
N.O.
Fourth Applicant
and
MAZARS RECOVERY &
RESTRUCTURING
(PTY) LTD
First Respondent
FENWICK NEIL
MILLER
Second Respondent
BYRON NORMAN
CHEVALIER
Third Respondent
STUART DANIEL
TERBLANCHE
Fourth Respondent
Bench: P.A.L.Gamble, J.
Heard: 16 September 2020
Delivered: 10 February 2021
This judgment was handed down electronically by circulation to the
parties' representatives via email and release to SAFLII. The
date
and time for hand-down is deemed to be 10h00 on Wednesday 10 February
2021.
JUDGMENT
GAMBLE, J:
INTRODUCTION
1.
This application concerns the remuneration of business rescue
practitioners (“BRP’s”) in circumstances where
the
company that was in business rescue is subsequently placed into
liquidation. The facts are relatively uncontroversial but the
law is
the subject of some debate between the parties.
2.
The applicant company, Montic Diary (Pty) Ltd (“Montic”
or “the company”), owned a dairy business at Heidelberg
in Gauteng. It ran into financial difficulty and commenced business
rescue proceedings on 2 November 2015 pursuant to an application
by
the company itself under s132(1)(a) of the Companies Act, 71 of 2008
(“the new
Companies Act&rdquo
;)
3.
The second and third respondents, who are employed by the first
respondent, Mazars Recovery and Restructuring (Pty) Ltd, (“Mazars”)
were the duly appointed BRP’s along with the fourth respondent
who was previously employed by Mazars: on 1 January 2016,
the fourth
respondent took up employment with Deloitte and Touche S.A. but
remained a BRP of Montic. At all material times, however,
Mazars was
responsible for the day-to-day administration of the business recue
proceedings and for the rendering of invoices on
behalf of the BRP’s
in respect of their remuneration and expenses.
4.
The BRP’s drew up a business plan for Montic which contemplated
the sale of the business to a certain Cesare Cremona. However,
although duly adopted, the plan came to nought when Mr. Cremona
defaulted on his obligations thereunder. Thereafter, and on 14
April
2016, Creighton Dairies (Pty) Ltd and eleven other creditors of
Montic commenced proceedings (“the Creighton application”)
in the North Gauteng High Court in Pretoria to place Montic into
liquidation. The Creighton application was enrolled for hearing
on
the unopposed motion roll in Pretoria on 31 May 2016.
5.
On 26 April 2016, the BRP’s resolved that there was no prospect
of rescuing Montic but nevertheless took the somewhat cynical
step of
filing a notice to oppose the Creighton application on 29 April 2016.
Then, on 13 May 2016, the BRP’s withdrew their
opposition to
the Creighton application and 3 days later (16 May 2016) launched
their own proceedings (“the BRP’s application”)
in
the same court for the discontinuation of the business rescue
proceedings and the final winding up of Montic under
s141(2)(a)
of
the new
Companies Act, on
the ground that there was no reasonable
prospect of the company being rescued. On 18 May 2016, the BRP’s
reinstated their
opposition to the Creighton liquidation application.
6.
On 14 June 2016 the BRP’s application to wind up the company
was granted and Montic was finally liquidated. Subsequent thereto
the
second to fourth applicants were appointed as liquidators to wind up
the company
7.
During May 2016, Mazars claimed to have unpaid bills for
disbursements and services allegedly rendered by the BRP’s to
the
distressed company. Accordingly, and while they were still in
control of Montic, the BRP’s caused two payments totalling
R1,5m to be made to Mazars: on 23 May 2016 an initial amount of
R500 000 was paid to it and on 2 June 2016 a further payment
of
R1m was made.
8.
The liquidators claim that these payments to Mazars are void in terms
of s341(2) of the Companies Act, 1973 (“the old Act”)
and
seek repayment of the amount of R1,5m to the company in liquidation.
Mazars and the BRP’s, on the other hand, contend
that the
payments were validly made. The matter is before this Court because
Mazar’s principle place of business is in Cape
Town.
9.
A virtual hearing of this matter was conducted on 16 September 2020
at which the liquidators were represented by Advs. J.C. Butler
SC and
M. Maddison of the local Bar while Mazars and the BRP’s were
represented by Adv. B.M.Gilbert of the Johannesburg Bar.
Both legal
teams filed detailed heads of argument as well as a combined bundle
of the relevant authorities and delivered full addresses
during the
hearing. The Court is indebted to counsel for their helpful
contributions that have assisted greatly in the drafting
of this
judgment. It is regretted that the consequences of the Covid-19
pandemic have delayed the delivery of this judgment.
THE SATUTORY FRAMEWORK
10.
In terms of Items 9(1) and (2) of Schedule 5 to the new Companies
Act, the relevant provisions of the old Act are preserved, and
apply
to the winding up of commercially insolvent companies such as Montic.
This preserves the provisions of s341(2) of the
old Act which
reads as follows:
“
341(2)
Every disposition of its property (including rights of action)
by any
company being wound up and unable to pay its debts made after
the
commencement
of the
winding up, shall be void unless the court otherwise orders.”
(Emphasis added)
11.
The commencement of winding up proceedings is still governed by s348
of the old Act which is to the following effect:
“
348.
A winding up of a company by the Court
shall be deemed to commence at
the
time of the
presentation
to the
Court of the application for the winding up.” (Emphasis added)
12.
The case thus presented on behalf of the liquidators is, at first
blush, relatively straightforward. On 16 May 2016, the BRP’s
presented their application to wind up Montic (then still under their
stewardship in business rescue). The two payments by the
BRP’s
to Mazars were made after that date (23 May and 2 June 2016) and the
company was finally wound up on 14 June 2016.
There is no
counter-application by the BRP’s for the Court to exercise its
discretion under the proviso in s342 and thus
it is argued by the
liquidators that the payments fall to be set aside without more.
13.
Not so fast, say the BRP’s. The payments can only be set aside
if they were dispositions of Montic’s property and,
they
confidently assert, they were not dispositions as contemplated under
s342(1). The BRP’s argument seeks to rely on the
following
contentions.
13.1
A purposive interpretation of s341(2) requires that payments made by
the company to the BRP’s during the relevant period
do not
constitute dispositions of its property within the meaning of the
section.
13.2
The interpretation of the section, and more particularly as to what
would constitute a disposition by the company of its property,
must
be informed by the subsequent (and therefore more recent) provisions
of chapter 6 of the new Companies Act relating to business
rescue,
and more particularly the BRP’s preferential entitlement to be
paid their remuneration and expenses during the business
rescue
proceedings.
13.3
The interpretation accords with s5(4)(a) of the new Companies Act
which expressly provides that if there is an inconsistency between
the provisions of that Act and a provision of any other national
legislation (which perforce would include the continuing operative
provisions of the old Act), the provisions of both Acts apply
concurrently, to the extent that it is possible to apply and comply
with one of the inconsistent provisions without contravening the
second, failing which the new Companies Act is to apply.
13.4
There is both South African and foreign judicial precedent in support
of the BRP’s argument that dispositions by the company
of its
property during the relevant period do not invariably constitute a
disposition of the company’s property falling within
the ambit
of s341(2) even where effectively there was a disposition by the
company of its property during the relevant period.
13.5
Lastly, a finding that the payments by the company to the BRP’s,
even though made during the relevant period, do not constitute
dispositions by the company of its property, is a desirable,
sensible, business-like and principled outcome supported by judicial
precedent.
THE BRP’S ARGUMENT IN JUSTIFYING THE PAYMENTS
14.
Mr. Gilbert pointed out in argument that the conundrum which
confronted the BRP’s in this matter is one which BRP’s
in
general will face in the proper discharge of their statutory function
when it is established that there is no reasonable prospect
of saving
the company. What is the BRP to do in relation to disbursements and
fees already incurred under business rescue but not
paid, and such
further fees and disbursements as may be incurred in the discharge of
the obligation to place the distressed company
under final
liquidation?
15.
The primary statutory duty of the BRP in this regard is regulated by
s141(2) of the new Companies Act.
“
141(2) If, at any time
during business rescue proceedings, the practitioner concludes that:
(a)
there is no reasonable
prospect for the company to be rescued, the practitioner must:
(i)
so inform the court, the
company and all affected persons in the prescribed manner; and
(ii)
apply to the court for an
order discontinuing the business rescue proceedings and placing the
company into liquidation;”
16.
But, the BRP’s counsel observed, those responsibilities do not
end when the BRP’s statutory duty to place the company
into
liquidation arises. Given that there may, for instance, be opposition
by an affected party to the liquidation application
with the
resultant delays, it is argued that the overall statutory duty of the
BRP to manage the company continues.
“
140(1) During a company’s
business rescue proceedings, the practitioner, in addition to any
other powers and duties set out
in this Chapter [6] –
(a)
has full management
control of the company in substitution for its board and pre-existing
management;”
17.
This duty ends, so it is said, only when the company is finally
placed into liquidation, as s132(2) of the new Companies Act
provides.
“
132(2) Business rescue
proceedings end when –
(a)
the Court –
(i)
sets aside the resolution
or order that began those proceedings; or
(ii)
has converted the
proceedings to liquidation proceedings;”
18.
In the interim, it is said, the BRP’s will continue to apply
their time and resources in managing the company and are thus
entitled to remuneration in that regard in addition to such expenses
as may be incurred in finalizing the winding-up application
itself.
It is inconceivable, counsel suggested, that the Legislature could
have contemplated that any payments made to the BRP’s
in that
period were to be considered void under s341(2).
19.
Should this proposition be upheld, said Mr. Gilbert, it would be a
significant disincentive to BRP’s to conclude that there
were
no reasonable prospects of rescuing the company and this in turn
would result in an unnecessary protraction of the business
rescue
proceedings where those proceedings ought already to have been
brought to an end. In such event, it was suggested, the integrity
and
legitimacy of the entire business rescue process would be seriously
undermined.
20.
Counsel stressed that it is precisely in circumstances such as these
- where the BRP is bound to conclude that there are no reasonable
prospects for rescuing the company - that the affected parties’
best interests are served by the BRP launching the requisite
liquidation application without fear that any such payments as are
made in the interim will become voided.
THE LIQUIDATORS’ REPLY
21.
Mr Butler submitted that there was no conundrum because the
provisions of s341(2), read with s348, was clear: after presentation
of the application for winding-up to the court (
in casu
16 May
2016) the company was precluded from making any payments to third
parties. The fact that the BRP’s sought to pay themselves
what
they claimed was due pursuant to the business rescue provisions of
the new Companies Act did not change the clear wording
of the old Act
in relation to the applicable procedure for winding up the company.
22.
The rationale for the limitation of the disposal of the assets of a
company that is facing liquidation is obvious. Once the application
to wind up is lodged with the court, the public at large is informed
of the true state of affairs in the company – essentially
that
it is unable to pay its debts and/or that its liabilities may exceed
its assets. The lodging of the application then results
in a
concursus creditorum
and the hand of the court is thus placed
on the insolvent company to preclude the dissipation of its remaining
assets otherwise
than in accordance with the scheme of payments
sanctioned under the old Act.
[1]
23.
Most certainly, the managers of the company are not be entitled to
demand payment of loans and/or emoluments due to them at that
stage.
They must wait their turn with the rest of the creditors and may then
only be paid in accordance with the ranking of claims
which the old
Act sanctions. How then can it be said that the BRP’s, who are
charged with the management of the same entity,
are entitled to
receive preference in respect of monies which they claim are due as a
consequence of services rendered to the company
in an endeavour to
save it from financial collapse?
24.
Mr. Butler noted that in advancing that argument, the BRP’s
seek to rely on s143 of the new Companies Act which provides
for
their remuneration in accordance with the stipulated circumstances,
as the case may be
[2]
.
Of importance in that regard is s143(5) which provides that –
“
143(5) To the
extent that the practitioner’s remuneration and expenses are
not fully paid, the practitioner’s
claim for those amounts will
rank in priority before the claims of all other secured and unsecured
creditors.”
In this case the BRP’s seek to push the envelope, as it were,
and interpret that subsection as entitling them to avoid the
strictures of s341(2).
25.
However, the liquidators argue that such an interpretation would
afford the BRP’s a preference not contemplated under the
winding up provisions of both the old Act and the new Companies Act.
Mr. Butler submitted that the BRP’s only have a preference
under s135(4) to payment of their remuneration from the free residue
after deduction of the costs of liquidation but before the
claims of
employees for post-commencement wages and other claims for post
commencement finance, whether those claims are secured
or not. This
much was confirmed by the Supreme Court of Appeal in
Diener
[3]
26.
Further, Mr. Butler stressed that the impact of the
ratio
in
Diener
was to grant BRP’s some form of preference for
their claims arising from the business rescue process but certainly
not the
so-called “super preference” that was contended
for on behalf of the BRP’s in that matter. The Supreme Court of
Appeal (“SCA”) put it thus.
“
[42] The two sections
upon which Diener’s argument is largely based are cases in
point. Section 135 concerns itself with post-commencement
finance and
it is in this context, i.e. while business rescue proceedings are in
place, that it creates a set of preferences for
the payment by the
company of certain of its unpaid debts. It does so as part of the
regulation of the affairs of the financially
distressed company. It
is only s 135(4) that is concerned with the consequences of a failed
business rescue, retaining the preferences
created in respect of
post-commencement finance on liquidation, subject only to the costs
of liquidation. This section, to the
limited extent that it has to do
with liquidation, says nothing of the ‘super-preference’
contended for over secured
assets. To the contrary, it creates in
favour of those claims listed in the section, a preference over
unsecured claims.”
[43] Section 143 is also not
concerned with liquidation. Instead, it regulates the BRP’s
right to remuneration during business
rescue proceedings: it concerns
the tariff in terms of which BRP’s are remunerated; the
additional contingency-based remuneration
that the BRP may negotiate,
and safeguards in that respect; and the BRP’s claim for unpaid
remuneration, which ranks ‘in
priority before the claims of all
other secured and unsecured creditors’. The reference to
secured and unsecured creditors
in the section must, in my view, be
understood to be a reference back to s 135: to those persons who
have, or have been deemed
to have, provided the company with
post-commencement finance, both secured and unsecured, and not to the
company’s pre-business
rescue creditors. Simply put, the
preference operates within this limited context. Henochsberg’s
commentary, referred to
in [37] above, seen in proper perspective is
consonant with that conclusion.” (Internal references omitted)
DISCUSSION
27.
I consider that, while the facts in
Diener
are not on all
fours with the present matter, the
ratio
therein certainly is
applicable here. The SCA has confirmed that s143 of the new Companies
Act does not relate to liquidation proceedings
while s341(2) and 348
of the old Act (and, for that matter s81
[4]
of the new Companies Act) do. There is thus no inconsistency or clash
between the various provisions of the two statutes.
28.
It has been established law for more than a century that the effect
of s348 is to establish the
concursus creditorum
at the time
that the application for winding up is lodged.
[5]
The retention of that provision from the old Act as part of the
overall matrix of the law relating to the winding up of companies
means that the Legislature intended it to apply both to insolvent
companies wound up under the old statutory dispensation and to
companies wound up under the new Companies Act where business rescue
proceedings have not achieved the desired result and s141(2)(ii)
is
implemented.
29.
It therefore follows that s341(2) proscribes the disposition of a
company’s assets after the lodging of an application to
wind up
(whether that application is at the behest of an ordinary unpaid
creditor or a BRP who concludes that the company cannot
be rescued)
while s143 only affords the BRP a limited measure of priority when
his/her claim for remuneration is considered by
the liquidator in the
winding up process.
30.
To grant the BRP’s the relief that they seek in this case would
require the Court to find that it is implicit in s143 that
they have
the right to be paid after the commencement of the winding up
process, before a final order is granted and before the
liquidators
have done their work to liquidate and distribute the assets in the
insolvent company. To import such an interpretation
into s143 would
be destructive of the whole basis of the winding up process which
recognises defined classes of creditors and affords
them priority in
respect of their claims according to such classes.
31.
Put differently, the BRP’s demand that they are entitled to be
paid after the establishment of the
concursus creditorum
and
ahead of secured creditors might conceivably result in the free
residue in the company being wiped out to the detriment of,
for
example, the holder of a first mortgage bond over the insolvent
company’s immovable property. The purpose and context
of
business recue is obviously not intended to destroy the rights of a
secured creditor.
[6]
32.
In my considered view, such a situation would not only undermine the
very basis of the law of insolvency but is to be regarded
as
unconscionable, particularly if the BRP’s were to pay out
excessive and/or unsubstantiated amounts. In this regard, it
must be
noted that at an enquiry already held in this matter in terms of s417
of the old Act, the commissioner (a retired judge)
expressed concern
about the extent of the payments which the BRP’s made to
Mazars, as well as the basis upon which the expenses
were allegedly
incurred.
33.
Counsel for the BRP’s cautioned against an interpretation of
the new Companies Act which might scare off BRP’s from
taking
appointments as such lest they are not remunerated for their
services. The flip side of that coin is that BRP’s are
to be
discouraged from embarking on business rescue exercises where there
is little prospect of salvaging the ailing company and
where their
involvement becomes no more than an exercise in self-enrichment.
34.
In
Diener
the SCA remarked as follows regarding the purpose of
business rescue.
“
[1]…Section 7(k)
of the 2008 Act provides that one of its purposes is ‘to
provide for the efficient rescue and recovery
of financially
distressed companies, in a manner that balances the rights and
interests of all relevant stakeholders’…
[28] Business rescue
is not an open-ended process. Its very rationale is that it must end,
either when its aim has been
attained, or when the realisation arises
that rescue is not attainable. To this end, s132(3) provides that if
business rescue proceedings
have not ended within three months of
commencement or a longer period sanctioned by a court, the BRP must
prepare a progress report
which he or she must update monthly until
the end of the business rescue proceedings…
[40]…
(T)he starting point is the context and purpose of ch 6 [of the new
Companies Act]. It is apparent, when regarded is
had to the central
provisions of ch 6, as I have done above, that it is intended to
create an efficient, regulated and effective
mechanism to facilitate
the rescue of companies in financial distress – as long as they
are capable of rescue – in
a way that balances the rights and
interests of the stakeholders.
[41]
Although the chapter makes provision for business rescue failing in
some instances, and hence allows for conversion of business
risk
proceedings into liquidation proceedings, its overwhelming focus is
on business rescue and the mechanics of business rescue,
rather than
on liquidation.”
35.
To that must be added that embarking on business rescue is not
intended to be utilised by the management of a company in financial
distress to obtain the respite afforded by the general moratorium on
legal proceedings in terms of s133 of the new Companies Act
in order
to rearrange the proverbial deck chairs on the Titanic.
36.
Responsible BRP’s, mindful of these parameters discussed by the
SCA, will thus not be encouraged to chase up unnecessary
costs in a
company that has little prospect of being rescued if they are aware
of the fact that they do not enjoy a privilege to
be remunerated
ahead of all other interested parties.
CONCLUSION
37.
In the light of the aforegoing, I conclude that the payments made by
the BRP’s herein to Mazars after their application for
an order
of liquidation had been lodged on 16 May 2016 is hit by the
provisions of s341(2) of the old Act and fall to be repaid
by Mazars.
ORDER OF COURT
Accordingly, the following orders are made:
1. It is declared that the payments by the first
applicant to the first respondent on 23 May 2016 in the amount
of
R500 000.00 (Five Hundred Thousand Rand) and on 2 June 2016 in
the amount of R1 000 000,00 (One Million Rand)
are void in
terms of section 341(2) of the Companies Act, 1973;
2. The first respondent, alternatively the second,
third and fourth respondents, the one paying the others to
be
absolved, are hereby directed to pay to the first applicant:
2.1 R1 500 000,00 (One Million Five Hundred Thousand
Rand);
2.2 Interest on R500 000,00 (Five Hundred Thousand
Rand) at the rate of 9,5% per annum calculated from 23 May
2016 to
date of payment
2.3 Interest on R1 000 000,00 (One Million
Rand) at the rate of 9,5% per annum calculated from 2 June 2016
to
date of payment;
3. The first, second, third and fourth respondents
are declared to be jointly and severally liable for payment
of the
first applicant’s costs of suit herein, including the costs of
two counsel where so employed, and are directed to
pay such costs,
the one paying, the others to be absolved.
GAMBLE, J
[1]
Henochsberg on the Companies Act
, APPI -20(1);
Herrigel NO
v Bon Roads Construction Co (Pty) Ltd
1980 (4) SA 669
(SWA);
Lane NO v Olivier Transport
1997 (!) SA 383 (C)
[2]
S143(1) read with s143(6) provides for a tariff in accordance with
which BRP’s may charge, while ss143(2) and (3) provide
for
BRP’s to agree with the company to charge an additional
contingency fee.
[3]
Diener NO v Minister of Justice and others
2018 (2) SA 399
(SCA) at [42]
et seq.
[4]
S81 provides for the winding up of a solvent company, inter alia, on
the application of its directors, shareholders, creditors
or a BRP
who has concluded that it is incapable of being rescued.
[5]
Walker v Syfret N.O.
1911 AD 141
at 160;166;
Adminstrator,
Natal v Magill, Grant and Nell (Pty) Ltd (in liquidation)
1969
(1) SA 660
(A) at 671G-H
[6]
Diener
[44]