Brief Summary

Companies — Business rescue proceedings — Application for business rescue under section 131 of the Companies Act 71 of 2008 — Applicants seeking to commence business rescue for a financially distressed company — Court reiterating the need for motion proceedings to resolve legal issues based on common cause facts — Plascon-Evans rule applicable where disputes of fact arise — Court granting application for business rescue as company met criteria for being financially distressed.

Comprehensive Summary

Summary of Judgment

Introduction

This judgment concerned two interrelated applications heard in the South Gauteng High Court, Johannesburg. The first application (case number 2011/35199) was a motion application brought in terms of section 131 of the Companies Act 71 of 2008 for an order placing Farm Bothasfontein (Kyalami) (Pty) Ltd (referred to in the judgment as “the Company”) under supervision and commencing business rescue proceedings. The second matter (case number 2011/24545) was an eviction application brought by the Company against alleged occupiers of its immovable property.

In the business rescue application, the applicants were Oakdene Square Properties (Pty) Ltd (as an alleged cessionary of rights), Educated Risk Investments 54 (Pty) Ltd (as an alleged 40% shareholder), and two individuals associated with those entities (Dimetrys Theodosiou N.O. and Antonys Theodosiou N.O.). The respondents were the Company, Nedbank Limited (bondholder and 30% shareholder), and Imperial Holdings Limited (30% shareholder). Nedbank and Imperial opposed business rescue and sought, by counter-application, the final liquidation of the Company.

The procedural context included extensive pre-existing litigation between parties associated with the Company, including litigation about the validity of a lease of the Company’s principal asset and disputes about shareholding and control. In addition, Nedbank had obtained summary judgment against the Company, and execution steps were imminent when the business rescue application was launched, with the result that the moratorium associated with business rescue proceedings would prevent execution if business rescue were granted.

The general subject-matter of the dispute was whether, in circumstances where the Company’s major asset was immovable property (the “Kyalami racetrack complex”), and where there was substantial deadlock and multiple pending disputes, it was appropriate to commence business rescue or whether the Company should instead be placed into final liquidation, with the property sold under the supervision and powers of a liquidator.

Material Facts

The Company owned immovable property collectively described as the Kyalami racetrack complex, comprising (among other improvements) a motor racing circuit, pit complexes, an exhibition and conference centre, hospitality suites, workshops, offices, grandstands, and associated infrastructure, as well as two adjoining erven. The Company’s shareholding was recorded as 30% Nedbank, 30% Imperial, and 40% the MJF Trust (with Educated Risk alleging entitlement to that 40% stake).

It was common cause that the Company was financially distressed as defined in section 128(1)(f) of the Companies Act 71 of 2008. The Company had defaulted on its obligations and was unable to service debt, resulting in Nedbank obtaining summary judgment on 16 August 2011 for R31 578 095.11 plus interest and attorney-and-client costs, with the Company’s properties declared specially executable. The judgment recorded that interest was increasing the debt by approximately R320 000 per month because no payments were being made. It was also recorded as common cause that the Company’s total indebtedness to all creditors was approximately R67 million.

A central factual feature was that the Company’s only material revenue stream was rental derived from a lease of the immovable property. That lease was disputed and the subject of pending litigation (the “lease action”). It was further alleged that the revenue stream had been pledged and ceded to Oakdene, but in any event it was common cause on the papers that since March 2011 the Company had received no rental.

The history of the Company’s financing and control was intertwined with disputed transactions. In 2004 the Company obtained loan funding secured by a mortgage bond over the immovable property and Imperial and Imperial Bank became shareholders pursuant to a memorandum of understanding. It was alleged that a long-term lease was concluded (backdated) with Motortainment Kyalami (Pty) Ltd, a company associated with the MJF Trust; that lease’s validity was being challenged. In 2006 further disputes arose concerning alleged changes in trusteeship and rights in the Company connected to Educated Risk and the Theodosiou brothers (the “pre-emptive rights application”), also not finalised.

The papers further reflected that the Company’s financial statements recorded an alleged disposal of development rights to Motor Mall Developments (Pty) Ltd for R112 530 000.00 structured as an interest-free loan with no fixed repayment terms, with the auditors qualifying the recoverability of that amount. The status and consequences of those development rights were part of the broader set of disputes.

Nedbank and Imperial relied on an expert valuation suggesting a value of approximately R129 million for the Company’s properties, while the applicants relied on valuations suggesting the value was significantly higher (around R300 million). The court treated the precise valuation as unnecessary to determine for purposes of deciding business rescue versus liquidation.

It was also relevant that the Company had no employees, and that there was substantial deadlock and antagonism among stakeholders, with extensive contested issues and multiple pending actions and applications affecting the Company’s affairs and assets.

In the eviction application (case number 2011/24545), the Company sought to evict Kyalami Events and Exhibitions (Pty) Ltd and Motortainment Kyalami (Pty) Ltd (in provisional liquidation) (and certain cited office-holders) from the Company’s property. The Company’s stance there was that a purported cession of the disputed lease to Kyalami Events was invalid and a sham. The eviction application remained pending at the time of the hearing of these matters.

Legal Issues

The central legal issue in case number 2011/35199 was whether the court should, under section 131(4) of the Companies Act 71 of 2008, exercise its discretion to grant an order commencing business rescue proceedings. This required the court to consider whether the statutory jurisdictional elements were satisfied (including financial distress) and, critically, whether there was a reasonable prospect of rescuing the Company, as contemplated by section 131(4)(a), in the context of the statutory definition of “business rescue” in section 128(1)(b).

The dispute in substance concerned primarily the application of law to a contested factual matrix in motion proceedings, including how the court should treat factual disputes on affidavit and whether, on the accepted version, the applicants had established the factual foundation necessary for the court to find a reasonable prospect of rescue or a better return than liquidation. The court also had to consider evaluative matters inherent in the section 131 discretion, including the practicality and appropriateness of business rescue in the circumstances of the case.

A further issue was whether liquidation should be granted instead, given the counter-application and the court’s powers in section 131(4)(b) to dismiss the application and place the company in liquidation.

In case number 2011/24545, the issue became whether the eviction proceedings could continue once a final liquidation order was made in respect of the Company, and how section 359 of the Companies Act 61 of 1973 (continued in operation through transitional provisions) affected the continuation or suspension of civil proceedings by a company in liquidation.

Court’s Reasoning

The court began by emphasising the nature of motion proceedings, citing the principle that they are directed at resolving legal issues on common cause facts and are generally not suitable for resolving genuine disputes of fact. The court referred to the approach associated with the Plascon-Evans rule, and to authority indicating that in motion proceedings a final order may be granted only where the admitted facts and the respondent’s version justify that relief, unless the respondent’s denials are so untenable that they can be rejected on the papers. This framing was important because the papers were voluminous and the disputes numerous, and the court indicated that these disputes constrained what could properly be decided in motion proceedings.

Turning to the statutory framework, the court outlined the structure and philosophy of the business rescue provisions under the Companies Act 71 of 2008, including the definition in section 128(1)(b) and the requirements for a court-ordered commencement in section 131(4). The court stressed that section 131(4) confers a discretionary power. It also addressed the statutory threshold expressed as a “reasonable prospect” of rescue, agreeing with the view (expressed in the unreported Western Cape matter of Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Limited and Others) that “reasonable prospect” requires something less than a reasonable probability, and adding that a reasonable possibility could justify granting the order, depending on the facts.

Despite accepting that the Company was financially distressed, the court concluded that business rescue was not appropriate on the facts presented. A key reason was that, on the papers, neither side truly sought rehabilitation of an operating enterprise; rather, the dispute concerned whether the Company’s immovable property should be sold under business rescue or liquidation to realise the best value and settle debts. The court expressed difficulty with the applicants’ assumption that a business rescue practitioner would necessarily be more successful than a liquidator in obtaining market value for the property, particularly where a liquidator could also sell by private treaty or public auction at fair market value. The applicants, in the court’s view, provided no factual basis establishing that business rescue would yield a better return than liquidation.

The court regarded the extensive pending litigation and disputed transactions as a major obstacle to business rescue. It reasoned that a business rescue plan would have to account for uncertainties arising from multiple unresolved matters (including disputes over the lease, alleged cessions, alleged disposal of development rights, and contested corporate control), which would make a plan contingent and difficult for creditors to evaluate and vote upon with adequate information. The court noted the absence of evidence enabling a comparative assessment of the costs, time, and likely financial outcomes of continued litigation under business rescue versus liquidation. The open-ended nature of business rescue in complex contested circumstances was viewed as likely to cause delay and increased cost.

The court considered it significant that the Company had received no rental since March 2011 and that the continuation or recovery of that revenue stream depended on finalisation or settlement of the lease-related litigation, or on complex calculations of loss. The court concluded that liquidation would obviate some of these difficulties in a practical manner by shifting the focus to realising assets for creditors.

The court also attached weight to issues of governance and information. It noted that the Company’s latest financial statements had not been disclosed (other than a disputed statement from 2005), and that while a liquidator’s primary task is to gather and liquidate assets, a business rescue practitioner is required to conduct statutory investigations and would need access to proper financial records. The court observed that a practitioner might be forced into further proceedings to compel compliance with directors’ duties under section 142, which would increase cost and complexity.

Further, the court highlighted differences in statutory powers and protections between liquidation and business rescue. It noted that the Insolvency Act’s impeachable transaction provisions (sections 26–31) are available to a liquidator but not to a business rescue practitioner, and it expressed concern about the absence of a taxation mechanism for business rescue practitioner fees comparable to that applicable to liquidators. The court also pointed to the contentious nature of a practitioner’s power to suspend obligations under agreements (section 136(2)(a)) and the prospect that this could generate further litigation in an already heavily litigious environment.

The court treated the deadlock among stakeholders as an additional reason weighing against business rescue. It reasoned that liquidation is frequently an appropriate remedy in private-company deadlocks. It further accepted the respondents’ contention that any rescue plan would likely be rejected because Nedbank and Imperial collectively held 60% of the voting interests and had indicated opposition, and it considered that business rescue was therefore likely to be terminated and converted to liquidation in any event.

In deciding whether business rescue would deliver a better return than immediate liquidation (the “secondary goal” in section 128(1)(b)(iii)), the court held that, given the motion-proceedings constraints, it had to decide the dispute on the respondents’ allegations where disputes of fact existed. On that approach, the applicants had not shown that business rescue would yield a better return for creditors than liquidation.

In relation to the eviction application (case number 2011/24545), the court held that because it had ordered the Company’s final liquidation, the Company no longer had standing to proceed with the eviction application. The court applied the transitional regime in item 9 of Schedule 5 to the Companies Act 71 of 2008, which preserved relevant liquidation provisions of the Companies Act 61 of 1973, and held that under section 359 of the 1973 Act civil proceedings by the company are suspended until a liquidator is appointed. The future conduct of the eviction application was therefore for the liquidator (with creditor oversight) to decide.

Outcome and Relief

In case number 2011/35199, the court dismissed the business rescue application and granted a final liquidation order in respect of the Company. The applicants were ordered to pay costs, including the costs of two counsel where applicable. The costs of the counter-application for liquidation were ordered to be costs in the liquidated estate, also including the costs of two counsel where applicable.

The court further directed that the provisional or final liquidator sell the Company’s immovable property in the open market for not less than R129 000 000.00. If no sale at that price could be concluded within six months, the liquidator was authorised to sell the property “at best”.

In case number 2011/24545, the eviction application was suspended under section 359 of the Companies Act 61 of 1973 pending determination by the liquidator appointed in the liquidation. The issue of costs in the eviction application was deferred for later determination either by a future court or by the liquidator after submission and consideration of cost claims pursuant to section 359 of the 1973 Act.

Cases Cited

National Director of Public Prosecutions v Zuma [2009] ZASCA 1; 2009 (2) SA 277 (SCA).

Agrico Masjienerie (Edms) Bpk v Swiers 2007 (5) SA 305 (SCA).

Le Roux Hotel Management (Pty) Ltd and Another v E Rand (Pty) Ltd (FBC Fidelity Bank Ltd (under Curatorship), intervening) 2001 (2) SA 727 (C).

Bahnemann v Fritzmore Exploration (Pty) Ltd 1963 (2) SA 249 (T).

C.C.A. Little & Sons v Niven N.O. 1965 (3) SA 517 (SR).

Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Limited and Others (unreported, Western Cape High Court, case number 15155/2011).

Swart v Beagles Run Investments 25 (Pty) Ltd (Four creditors intervening) 2011 (5) SA 422 (GNP).

Dallinger v Halcha Holdings (1996) 14 ACLC 263.

Apco Africa (Pty) Ltd and Another v Apco Worldwide Inc [2008] ZASCA 64; 2008 (5) SA 615 (SCA).

Legislation Cited

Companies Act 71 of 2008 (including sections 7(k), 66(1A) as referenced via close corporations, 128, 129, 131, 132, 133, 135, 136, 140, 141, 142, 144, 150, 151, 152, 153, 155 and Schedule 5 item 9).

Companies Act 61 of 1973 (including sections 311, 359, 427 and Chapter 14 as preserved by transitional arrangements).

Insolvency Act 24 of 1936 (sections 26–31).

Banks Act 94 of 1990 (section 54).

Close Corporations Act 69 of 1984 (section 66(1A)).

United Kingdom Insolvency Act 1986 (Schedule B1 paragraph 3).

Corporations Act 2001 (Australia) (Part 5.3A).

Rules of Court Cited

No specific rule of court was cited by number in the judgment. The court referred to the general approach applicable to motion proceedings and the Plascon-Evans principle governing factual disputes on affidavit.

Held

The court held that, although the Company was financially distressed, the applicants had not established on the papers that there was a reasonable prospect of rescuing the Company within the meaning of section 131(4) read with section 128(1)(b) of the Companies Act 71 of 2008. In particular, the applicants failed to provide a factual foundation for the claim that business rescue would produce a better return for creditors or shareholders than liquidation, and the extensive deadlock and multiple pending disputes made business rescue impractical and likely to generate delay and cost.

The court held that final liquidation was the more appropriate remedy in the circumstances, including because the Company had no employees, its position was effectively reduced to realising property to satisfy creditors, and liquidation provided a more suitable framework (including liquidator powers and cost controls) to deal with the Company’s affairs.

The court further held that the eviction application brought by the Company had to be suspended following liquidation, and that its continuation was for the liquidator to decide, applying section 359 of the Companies Act 61 of 1973 as preserved by item 9 of Schedule 5 to the Companies Act 71 of 2008.

LEGAL PRINCIPLES

The judgment applied the principle that motion proceedings are ordinarily designed for the resolution of legal issues on common-cause facts and are generally inappropriate for the determination of genuine disputes of fact. Where factual disputes arise on affidavit, final relief may be granted only if the admitted facts together with the respondent’s version justify it, unless the respondent’s denials are demonstrably untenable on the papers (the approach associated with the Plascon-Evans rule).

The judgment applied and explained the statutory test under section 131(4) of the Companies Act 71 of 2008, emphasising that the provision confers a discretion on the court and requires, among other things, a showing of a reasonable prospect of rescuing the company. The court endorsed the view that “reasonable prospect” sets a threshold lower than “reasonable probability” and may in an appropriate case be satisfied by a reasonable possibility, depending on the facts.

The judgment applied the principle that where business rescue is invoked on the basis of achieving the “secondary goal” of a better return than liquidation (as contemplated in section 128(1)(b)(iii)), the applicant must place sufficient facts before the court to justify that conclusion, especially where the matter is decided on affidavit and material disputes of fact exist.

The judgment applied the principle that in circumstances of pronounced deadlock within a private company and where the company lacks an ongoing business capable of rehabilitation, liquidation may be the more appropriate mechanism to resolve the impasse and realise value for creditors, particularly where business rescue is unlikely to be supported by the requisite creditor vote and may become protracted.

The judgment applied the transitional principle in Schedule 5 item 9 of the Companies Act 71 of 2008 that specified liquidation-related provisions of the Companies Act 61 of 1973 continue to apply during the transition, and it applied section 359 of the 1973 Act to hold that civil proceedings by a company are suspended upon liquidation pending the appointment and decisions of a liquidator.