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[2016] ZASCA 178
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Firstrand Bank Limited v Normandie Restaurants Investments and Another (189/2016) [2016] ZASCA 178 (25 November 2016)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 189/2016
In
the matter between:
FIRSTRAND
BANK LIMITED
APPELLANT
and
NORMANDIE
RESTAURANTS INVESTMENTS
FIRST RESPONDENT
DIMITRI
PHILIPPOU
SECOND RESPONDENT
Neutral
Citation:
FirstRand Bank v Normandie
Restaurants
189/2016
[2016] ZASCA 178
(25
November 2016)
Coram:
Lewis, Cachalia, Tshiqi, Willis and Dambuza
JJA
Heard:
10 November 2016
Delivered:
25
November 2016
Summary:
Companies Act 71 of 2008
: business rescue proceedings:
whether a company which is in financial distress has reasonable
prospects of being rescued as envisaged
in
s 131(4)
(a)
of the Act: a final order for winding-up of
the company more beneficial for the creditors.
ORDER
On
appeal from:
Western Cape Division of the
High Court, Cape Town (Mantame J sitting as court of first instance):
1
The appeal is upheld with costs including costs
of two counsel, where so employed.
2
The order of the high court is set aside and is
substituted as follows:
‘
2.1
The application for an order placing the first
respondent, (Normandie Restaurants Investments (Pty) Ltd) under
supervision and commencing business rescue proceedings in terms of
s
131(1)
and (4) of the
Companies Act 71 of 2008
, under case
no:10652/2015, is dismissed with costs.
2.2
The application for the winding-up of Normandie Restaurants
Investments (Pty) Ltd, (the respondent under case
no: 1997/2015), is
granted and Normandie Restaurants Investments (Pty) Ltd is placed
under final winding-up, with costs.’
JUDGMENT
Tshiqi
JA (Lewis, Cachalia, Willis and Dambuza JJA concurring)
[1]
This appeal has its
origin in two related applications namely, an application by the
appellant, First Rand Bank Limited (the Bank),
for the final
winding-up of the first respondent, Normandie Restaurants Investments
(Pty) Ltd (Normandie) and an application by
the second respondent, Mr
Dimitri Philippou for an order placing Normandie under supervision
and commencing business rescue proceedings
as contemplated in Chapter
6 of the Companies Act 71 of 2008, (the
Companies Act). Mr
Philippou
also sought an order declaring and directing, in terms of
s 131(6)
of
the
Companies Act, that
the liquidation proceedings instituted by the
Bank pending under case 1997/15 – be suspended, until the court
had adjudicated
upon the business rescue proceedings. The Bank
opposed this application. The two applications served before Mantame
J in the Western
Cape Division of the High Court, Cape Town (the high
court). The high court granted the orders sought, dismissed the
liquidation
application and ordered the Bank to pay the costs of
opposing the business rescue application and the costs of the
liquidation
application. This appeal is with the leave of this court.
[2]
Normandie is a property
owning company and the registered owner of Erf 46472, Rondebosch,
Cape Town. Its only source of income is
rental that it obtains from
letting the property. Normandie’s sole directors are Mr
Philippou and his mother, Ms Zoe Philippou
and its sole shareholder
is the Zoe Philippou Family Trust, of which Mr Philippou is a
trustee. Its assets comprise the property
and debts owed to it, in
particular, by the Zoe Philippou Family Trust, which owes it over R3
million. Its creditors, according
to the draft distributions account
prepared by Normandie, and attached to the application for business
rescue, are:
a)
The Bank, in the amount
of R2,7 million;
b)
The South African
Receiver of Revenue (SARS), in the sum of approximately R1,6 million;
c)
The City of Cape Town,
in the sum of approximately R242 000;
d)
An amount owed to an
entity known as African Renaissance Trading Company (ARTC) in the
amount of approximately R178 882; and
e)
A loan account in the
amount of R810 861.
[3]
The property was
previously let by Normandie to an entity known as Zelkar Investments
156 CC, which operated a restaurant under
the name and style of
Stardust. Normandie was able to meet its payment obligations to the
bank from the rent it received from Stardust.
Stardust’s
tenancy came to an end on 31 October 2013 when it moved to larger
premises. From that date, Normandie experienced
financial
difficulties and failed to make proper payments to the Bank around
March/April 2014. The dire financial state of affairs
of the business
is evident from unpaid debit orders from May to December 2014. This
was confirmed through correspondence between
Mr Philippou and the
Bank in which he requested the Bank to give him a three month
moratorium on payments so that he could negotiate
a new lease with
another prospective tenant.
[4]
It is common cause that
Normandie concluded a new lease agreement with an entity known as
Warthog Pub (Pty) Ltd (Warthog). However,
soon after the new lease
agreement was concluded, Warthog defaulted in its obligation to pay
the rental. This was in part due to
Warthog’s difficulty in
obtaining a liquor licence because the property was not zoned for
commercial use.
[5]
Meanwhile, Normandie’s
financial woes continued as its debts remained unpaid. As prefaced,
the Bank, in terms of
s 344
(f)
read with
s 345(1)
(c)
of the Companies
Act 61 of 1973 (the 1973 Act), initiated winding-up proceedings
against Normandie because it was unable to pay
its debts –
particularly its debt to the Bank. Normandie opposed the application
citing amongst other defences the fact that
it had secured Warthog as
a new tenant. It also indicated that its financial difficulties
resulted in part from the dispute between
it and Warthog. It then
stated that it was in settlement negotiations with Warthog. If the
dispute was settled, Warthog would pay
rental in the amount of R37
500 per month. The agreement with Warthog also contained an
escalation clause and an option of a ten
per cent turnover rental,
should the income from the trading activities exceed the base rental
income. Normandie further averred
that in the event that the
settlement negotiations did not succeed, it had been contacted by
several brokers who represented leading
franchise names such as Ocean
Basket and Cattle Baron, who were showing an interest in hiring the
premises. It thus requested the
court to exercise its discretion in
favour of refusing the application for winding-up so that it could
secure an alternative tenant
in the hope that this would generate
sufficient rental income to meet its obligations to its creditors.
[6]
The Bank opposed
Normandie’s attempt to stave off the liquidation. In its
answering affidavit it specifically denied that
the rental income
would be adequate to settle Normandie’s indebtedness. It
highlighted that the situation had worsened as
a result of further
arrears and interest that had since accrued, and pointed out that the
whole amount of R2,7 million was, as
a result of the ongoing default,
then due and payable. The Bank referred to other debts which it
alleged were also due and payable
to it by Normandie relating to an
overdraft cheque facility, Normandie’s suretyship obligation to
ARTC and a further amount
due by Normandie for ARTC’s overdraft
facility. It stated that all these amounts had been due and payable
in July 2014.
[7]
Before the application
for the winding-up was heard, Normandie applied for a postponement
and for leave to file a counter-application
for business rescue
proceedings. The Bank opposed the application. The court, however,
postponed the Bank’s application for
winding-up and ordered
that it be heard together with Normandie’s proposed counter
application for business rescue. It also
granted an order joining Mr
Philippou as a second respondent in those proceedings and further
directed Mr Philippou to pay an amount
of R490 000 into the
trust account of the Bank’s attorneys, apparently in
part-payment of arrear instalments due to
the Bank.
[8]
Mr Philippou launched
the business rescue application on behalf of Normandie. In essence he
agreed that Normandie was in financial
distress and had failed to pay
amounts due and payable to its creditors but alleged that there was a
reasonable prospect of rescuing
it through the rental it would
receive from Warthog. He attached a proposed business rescue plan
compiled by potential business
rescue practitioners. He also attached
an addendum to the original lease agreement concluded with Warthog in
terms of which the
new commencement date of the lease agreement would
be May 2015. In terms of the agreement the base rental would be an
amount of
R37 230 per month. It also contained an escalation clause
and an alternative option of a ten per cent turnover rental, should
the
income from the trading activities exceed the base rental income.
The lease would be for a period of three years with a further
option
to renew it for another three years. Its other terms provided that
the responsibility for all repairs and maintenance of
the property
would be that of the tenant, including the amounts payable for
municipal costs as well as rates and taxes.
[9]
The Bank opposed the
application for business rescue and filed an affidavit by Mr
Swanepoel, a manager in its business recovery
department, who
contended that there were no reasonable prospects of rescuing
Normandie. He referred to the fact that Normandie’s
indebtedness to the bank as at 23 January 2015 (being the date on
which the certificates of balance attached to the founding affidavit
in the winding-up application), was in the amount of R3 577 652.
He attacked the proposed business rescue plan on the
basis that it
was incoherent, lacked particularity on how Normandie would pay the
debts on a monthly basis, and, in particular,
emphasised that the
amount of rental from Warthog would be insufficient for payment of
the monthly expenses. He also pointed out
that there was in any event
no prospect that the proposed business plan would be passed as
contemplated in s 152(2)
(b)
of the Act, as the
Bank, which is a major creditor, would vote against it. In conclusion
Mr Swanepoel submitted that the application
for business rescue
appeared to be no more than an attempt by Mr Philippou to protect his
mother’s trust (the Zoe Philippou
family trust) from
Normandie’s creditors. In this regard he referred to a loan of
R1 422 589 from Normandie to
the trust when Normandie was
in a financial crisis. The loan was reflected in Normandie’s
2011 financial statements. According
to Mr Swanepoel this loan was
one of the issues that needed further investigation by a liquidator.
[10]
In reply, and in an
apparent response to the allegation that the rental income would not
be adequate for settling the monthly expenses,
Mr Philippou stated
that any monthly shortfall would be financed by the directors by way
of post commencement finance. He also
said that further monthly
payments of R20 000 would be made by the Zoe Philippou family
trust. He conceded, however, that
this additional amount, which
according to him, would be available for distribution to the
creditors, was not reflected in the
draft business rescue plan
attached to the founding affidavit.
[11]
The court a quo granted
the application for business rescue finding that after the
‘perfection’ of the business rescue
plan, ‘…it
will meet reasonable prospects of rescuing Normandie… back to
its solvency. There will be no prejudice
to the affected party as
according to the five year plan focus the bank will be guaranteed
monthly distributions’. The court
regrettably did not give any
reasons for this finding and as a result this court has no idea of
what informed the decision of the
court a quo. M M Corbett in his
article ‘Writing a Judgment’
(1998) 115
SALJ
116
at 118
explained the importance of furnishing reasons in the following
manner:
‘
The
true test of a correct decision is when one is able to formulate
convincing reasons (and reasons which convince oneself) justifying
it. And there is no better discipline for a judge than writing (or
giving orally) such reasons. It is only when one does so that
it
becomes clear whether all the necessary links in a chain of reasoning
are present; whether inferences drawn from the evidence
are properly
drawn; whether the relevant principles of law are what you thought
them to be; whether or not counsel’s argument
is as well
founded as it appeared to be at the hearing (or the converse); and so
on.’
(
See
also
National
Director of Public Prosecutions v Naidoo & others
[2011]
ZASCA 143
;
2011 (1) SACR 336
paras 18-20.)
The
failure by the judge a quo to furnish the reasons for its finding
deprived this court as well as counsel arguing this matter
of an
opportunity to properly evaluate its factual and legal chain of
reasoning.
[12]
Turning to the
provisions of the Act, s 131(4) of the Act states that a court may
make an order placing a company under supervision
and commencing
business rescue proceedings, if it is satisfied that:
i)
the company is in financial distress
ii)
. . . ; or
iii)
it is otherwise just and equitable to do so
for financial reasons,
and
there is a reasonable prospect for rescuing the company…’
[13]
The parties are in
agreement that Normandie was in financial distress, as envisaged by s
128(1)
(f)
of the Act, at the time the application was brought and that it had
failed to pay amounts due to the Bank and the other creditors.
What
Mr Philippou (on behalf of Normandie) had to prove to the court in
order to succeed in the application was that it was just
and
equitable, for financial reasons, to grant the order, and that there
was a reasonable prospect for rescuing the business.
[14]
A court’s
assessment of whether there is a reasonable prospect for rescuing a
company does not entail the exercise of a narrow
discretion but
involves a value judgment. Where the ‘discretion’
exercised by the lower court was one in the loose
sense of a value
judgment, the limitation imposed on the authority of the court of
appeal to interfere does not apply. In that
event the court of appeal
is both entitled, and in fact duty bound, to interfere if it would
have come to a different conclusion.
(See
Oakdene
Square Properties (Pty) Ltd & others v Farm Bothasfontein
(Kyalami) (Pty) Ltd & others
[2013]
ZASCA 68
;
(2013) (4) SA 539
(SCA) (
Oakdene
Square Properties
)
para 18. See also
Newcity
Group (Pty) Limited v Pellow NO (Rezidor Hotel Group South Africa
(Pty) Limited First Affected and Party Non-Unionised Employees
Second
Affected Party)
[2014] ZASCA 162
; 2014 JDR 2155 (SCA para 16.)
[15]
As the Bank has
submitted, a ‘reasonable prospect’ requires more than a
prima facie case, an arguable possibility or
mere suggestive
speculation. It must be a prospect based on reasonable grounds. (See
Oakdene Square
Properties
para
29.) In appropriate circumstances, the interests of the creditors, as
opposed to those of the company or its shareholders,
should carry
more weight. (See
Oakdene
Square Properties (Pty) Ltd & others v Farm Bothasfontein
(Kyalami) (Pty) Ltd & others
2012 (3) SA 273
(GJ) at 288G-H.)
[16]
An applicant must
establish reasonable grounds in accordance with the ordinary rules of
pleadings in motion proceedings, ie in the
founding affidavit. (See
Oakdene Square
Properties
para 3.)
Motion proceedings such as these are aimed at the resolution of legal
issues based on common cause facts. They are not
geared towards
deciding factual disputes. To the extent that disputes of fact exist
in the affidavits filed by the parties, the
matter must be decided on
the Bank’s version unless it is so far-fetched, or clearly
untenable that it can justifiably be
rejected merely on the papers.
(
Plascon-Evans
Paints Ltd v Van Riebeeck Paints (Pty) Ltd
[1984] ZASCA 51
;
1984
(3) SA 623
(A) at 635A-D. See also
National
Director of Public Prosecutions v Zuma
[2009]
ZASCA 1
;
2009 (2) SA 277
(SCA) para 26.) What is more, it makes no
difference to this approach that, as in this case, motion proceedings
have been dictated
by the legislature. Neither does it make any
difference where the legal or evidential onus lies. (See
Oakdene
Square Properties
para
3.)
[17]
The Bank, in its
answering affidavit, illustrated convincingly why there were no
reasonable prospects of rescuing Normandie. It
had not been paid for
over a year and Normandie’s interest obligations to the Bank
were, at the time, in the region of R37
000 per month comprising:
R28 112,09 in respect of the loan account; R3 012,40 in
respect of the overdraft account; R4 303
in respect of a loan
account to ARTC; and R1 590,36 in respect of ARTC’s
overdraft. The amount available from the rental
is R37 320 per
month and the balance available after payment of the Bank’s
interest obligations would be a mere R320.
That amount would clearly
be inadequate as it would not be able to cover payment of the Bank’s
capital amount or any reasonable
instalments flowing therefrom and
would also not cover payment for SARS’s admitted liability in
the amount of R1,6 million.
[18]
Mr Philippou has
alleged that the SARS liability would be negotiated by the business
rescue practitioners but there is no basis
to conclude that SARS will
agree to re-negotiate the debt. He has also undertaken to settle
Normandie’s indebtedness to the
City of Cape Town personally,
but has not given reasons why he had not, if he was in a position to,
done so earlier. He has also
undertaken to pay the fees of the
business rescue practitioners personally but this does not affect
Normandie’s overall financial
predicament.
[19]
Section 128(1)
(b)
envisages that
measures to be taken in order to facilitate the rehabilitation of the
company should provide for
temporary
supervision, and
for a
temporary
moratorium of the
rights of the claimants against the company. They are not meant to
provide companies with a mechanism with which
to delay payments to
creditors with no feasible plan of ever paying its debts, or a means
of restructuring its debts over lengthy
periods of time.
[20]
The temporary measures
envisaged by the Act are aimed at maximising the likelihood of the
company continuing in existence on a solvent
basis and at creating a
better return for the creditors and shareholders. As stated in
Oakdene Square
Properties
(para
31):
‘
The
development of a plan cannot be a goal in itself. It can only be the
means to an end. That end, … must be either to restore
the
company to a solvent going concern, or at least to facilitate a
better deal for creditors and shareholders than they would
secure
from the liquidation process.’
The
measures proposed in the business rescue plan will, in my view, not
provide for a temporary solution as envisaged in s 128(1)
(b)
.They
do no more than plan a long-term debt management process.
[21]
I am also not persuaded
that the objectives envisaged in s 128(1)(b)(iii) of the Act will be
attained if Normandie is placed in
business rescue. As mentioned,
s
128(1)(b)(iii) of the Act envisages a plan aimed at rescuing the
company by restructuring its affairs, business, property, debt
and
other liabilities, and equity in a manner that maximises the
likelihood of the company continuing in existence on a solvent
basis,
and where this is not possible, to maximise return for the company's
creditors or shareholders than would otherwise be the
case from the
immediate liquidation of the company. If the full rental were to be
applied to the capital owing to the Bank, it
would take Normandie
approximately eight years to pay it. In the meantime interest
accruing on the decreasing capital balance and
the SARS debt,
together with any possible penalties that may be imposed, would
accumulate and remain unpaid with no plan in place
on how to pay
them. If only the interest due to the Bank is paid, then the full
capital amount would remain outstanding and there
is no indication of
how and when the capital amount would be paid. The City and the Debt
Restructuring Practitioners would be dependent
solely on Mr
Philippou’s
bona
fides
and his
ability to pay from his own resources. Regarding the liability to
SARS, Normandie’s counsel submitted that the company
hopes to
negotiate a settlement with SARS but there is no indication that SARS
will be amenable to such a compromise. The fact
that SARS has not
opposed the application does not in itself show that they will do so.
[22]
Counsel for Normandie,
when confronted with this difficulty, contended that it could be
resolved through re-financing of the debt
with another financier. He
was, however, unable to state that such an option has ever been
pursued, could proffer no explanation
as to why this was not done
earlier and could obviously not state, with any confidence, that such
attempts would be successful.
The fundamental difficulty, of course,
is that this assertion was made by counsel, from the Bar without any
support for it in the
papers.
[23]
The other fundamental
problem for Normandie is that the Bank is understandably unwilling to
grant Normandie any further indulgence
concerning its debts. On the
contrary, Mr Swanepoel has stated that the Bank will use its position
as a major creditor to vote
against the adoption of the business
rescue plan. To this Mr Philippou has intimated that the business
rescue practitioners would
have to utilise the provisions of s
153(1)
(a)
(ii)
read with s 153(7) of the Act to approach the court in order to set
aside the vote against the plan. In so saying he overlooks
the fact
that such an application is not for the asking and the company would
have to prove to the court that the stance by the
Bank was
unreasonable. In the event that the company does not succeed in
setting aside the vote against the adoption of the plan,
the business
rescue proceedings will come to an end. In
Oakdene
Square Properties
(para 38), this court said:
‘
If
the majority creditors declare that they will oppose any business
rescue scheme… I see no reason why that proclaimed opposition
should be ignored. Unless, of course, that attitude can be said to be
unreasonable or mala fide. By virtue of s 132(2)
(c)
(i)
read with s 152 of the Act, rejection of the proposed rescue plan by
the majority of creditors will normally sound the death
knell of the
proceedings. It is true that such rejection can be revisited by the
court in terms of s 153. But that, of course,
will take time and
attract further costs. Moreover the court is unlikely to interfere
with the creditors’ decision unless
their attitude was
unreasonable’
[24]
I accept that in
appropriate cases placing a company under supervision and in business
rescue is preferable to the option of liquidation.
I also align
myself with the following dictum in
Koen
& another v Wedgewood Village Golf & Country Estate
(Pty) Ltd
2012 (2) SA 378
(WCC) para 14, where the court stated:
‘
It
is clear that the legislature has recognised that the liquidation of
companies more frequently than not occasions significant
collateral
damage, both economically and socially, with the attendant
destruction of wealth and livelihoods. It is obvious that
it is in
the public interest that the incidence of such adverse socioeconomic
consequences should be avoided where reasonably possible.’
This
matter is, however, different in that there is no fear that
collateral damage would eventuate if Normandie is liquidated. In
effect, it owns only one asset and derives its business from the
rental only. It has no employees. Placing it under business rescue
will accordingly not save any jobs or livelihoods. It will not
preserve any services as it does not provide any. It will not reduce
the number or type of goods or products available to the public as it
does not produce anything.
[25]
A further concern with
the proposed business rescue plan is that its viability is solely
dependent on the continuity of the business
relationship between
Normandie and a single tenant, Warthog. If for any reason the lease
between the two parties came to an end,
Normandie and the Bank would
be back to where they are presently. This would also be the case if,
after the three year period,
which is the duration of the rental
agreement, Warthog decides not to exercise its pre-emptive right of
renewal. Thus, the proposed
business rescue plan falls woefully short
of providing the information required in terms of s 150(2) and (3) of
the Act and providing
information on which an assessment of
reasonable prospects could be made. (See
African
Banking Corporation of Botswana Ltd v Kariba Furniture Manufactures
(Pty) Ltd
[2015]
ZASCA 69
;
2015 (5) SA 192
(SCA) para 32.)
[26]
There is accordingly no
basis to find that there is a reasonable prospect of rescuing the
business. The Bank has submitted that
if this court upholds the
appeal, the requisites for a winding-up have been established and
that a final winding-up order should
be made. I agree with the Bank
that placing Normandie in liquidation is the only viable option to
ensure that it pays its debts.
The property will probably be sold and
its proceeds will be applied for that purpose. When regard is had to
the correspondence
between Mr Philippou and the Bank in which he
stated that the debit orders would be unpaid, and in which he
requested the Bank
for a three month moratorium, the inference that
Normandie is commercially insolvent is inescapable. In so far as
Normandie filed
an unliquidated counterclaim to the winding-up
application, this does not raise a dispute as to its indebtedness
(See
Ter Beek v
United Resources CC & another
1997
(3) SA 315
(C) at 334A-C) and it cannot be set off against the Bank’s
claim. (See
Standard
Bank of South Africa Ltd v Renico Construction (Pty) Ltd
2015
(2) SA 89
(GSJ) para 9 and
Standard
Bank of South Africa v R-Bay Logistics
CC
2013 (2) SA 295
(KZD) paras 61 and 62.) The counterclaim thus has
no bearing on whether an order for the winding-up should be granted
or not.
[27]
This then brings me to
whether a provisional, as opposed to a final winding-up order should
be granted. As mentioned, a company
will in terms of s 344
(f)
of the 1973 Act, be liable to be wound up when it is unable to meet
its debts. No useful purpose would be served by granting a
provisional order. All the relevant issues have been canvassed by
both parties in the papers. There are no employees who could
be
affected by the order, SARS issued a notice to abide, and the City,
which was aware of the application elected not to participate
in the
matter. The matter has been going on for a long time and nothing has
been done to salvage the business from its precarious
financial
situation. A provisional order would simply delay the inevitable, and
would be prejudicial to the interests of the creditors.
In the event
Mr Philippou manages to devise a plan to save the business from
liquidation, this can be done even after a final order
has been
granted.
[28]
I make the following
order:
1
The appeal is upheld
with costs including costs of two counsel, where so employed.
2
The order of the high court is set aside
and is substituted as follows:
‘
2.1
The application for an order placing the first
respondent, (Normandie Restaurants Investments (Pty) Ltd) under
supervision and commencing business rescue proceedings in terms of
s
131(1)
and (4) of the
Companies Act 71 of 2008
, under case
no:10652/2015 is dismissed with costs.
2.2
The application for the winding-up of Normandie Restaurants
Investments (Pty) Ltd, (the respondent under case
no: 1997/2015), is
granted and Normandie Restaurants Investments (Pty) Ltd is placed
under final winding-up, with costs.’
___________________
ZLL
Tshiqi
Judge
of Appeal
APPEARANCES
For
Appellant:
J Muller SC
Instructed
by:
De Klerk & Van Gend Inc., Cape Town
McIntyre Van der Post
Attorneys
Bloemfontein
For
Respondent:
G W Woodland SC and C N Cutler
Instructed by:
Thomson Wilks Attorneys,
Cape Town
Honey Attorneys,
Bloemfontein