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[2016] ZAGPJHC 284
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Cordeiro Holdings CC and Others v Market Demand Trading 254 (Pty) Ltd and Others (2016/24747) [2016] ZAGPJHC 284 (6 September 2016)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE
NO: 2016/24747
In
the Matter between:
CORDEIRO
HOLDINGS
CC
First
Applicant
THE
SPAR GROUP LTD
Second
Applicant
ABSA
BANK LTD
Third
Applicant
and
MARKET
DEMAND TRADING 254 (PTY) LTD
(IN
BUSINESS RESCUE)
First
Respondent
RICH
REWARDS TRADING 143 (PTY) LTD
(IN
BUSINESS RESCUE)
Second
Respondent
RANJITH
CHOONILALL N.O.
Third
Respondent
COMPANIES AND
INTELLECTUAL
PROPERTIES
COMMISSION
Fourth
Respondent
JUDGMENT
Headnote:
Business
Rescue,
sections 129
,
130
,
150
of the
Companies Act 71 of 2008
Application
by creditors to set aside resolutions passed ito
section 129
by the
distressed companies placing themselves in business rescue on ground
that business rescue practitioner had not filed a plan
within the
prescribed time and thereupon convert proceedings into liquidation
proceedings – counter application for court’s
sanction to
an extension of 60 days to file plan
Panamo
Properties (Pty) v Nel
2015 (5) SA 63
(SCA) applied
– what is just and equitable governing outcome
Laxity
of Business rescue Practitioner in meeting
section 129
deadlines
warranted censure, but on the facts, the circumstances facing him
provided some mitigation
Key
issue on the facts was whether there was a reasonable prospect of
business rescue saving the business – the prospects
were not
reasonable – Two retail outlets which were grossly underfunded
from inception fell out with both the bank, to whom
it owed a sum of
R27m which could not be funded by sales revenue the servicing costs
of which amounted to half the turnover of
the shops, and with the
franchisor who had stopped supplies and had indicated an unequivocal
desire to terminate the relationship,
litigation about the validity
of the termination being carried on in parallel to the business
rescue proceedings. In addition,
one shop was in dispute with the
landlord, the first applicant, who was pursuing eviction proceedings
in parallel with the business
rescue proceedings. The envisaged
plan relied heavily on the shops trading for the period of the
extension, but was short
on ideas about capital injection. On a
conspectus of such circumstances there were no reasonable prospects.
Held:
The business rescue proceedings were set aside, and a provisional
order of winding up ordered, costs to costs in the
liquidation.
Sutherland
J:
Introduction
[1]
The real controversy in this application is about whether or not
business rescue proceedings should be set aside and the proceedings
be converted into winding up proceedings or the business rescue
practitioner, the third respondent (Choonilall) be granted an
extension within which to present a business rescue plan.
[2]
The parties are called by their names. The fourth respondent did not
participate. The second applicant (Spar) filed a replying
affidavit
but had prior to the hearing withdrawn from the application and
tendered the respondents’ costs. The role it played
in the saga
shall not go unremarked upon. All references to various Sections are
to the
Companies Act 71 of 2008
.
[3]
Several ancillary matters troubled the parties. The application to
set aside the resolutions passed by the Market Demand and
Rich
Rewards, first and second respondents in terms of
section 129
of the
Companies Act 2008
, began life as an urgent application. The parties
agreed to submit the fate of when the matter would be heard to the
deputy judge
president. He allocated a date inconvenient to the
respondents and declined to revise it. An appetite persisted to
address the
question of urgency, but in my view the question of
urgency was overtaken by his directive. Further, the respondents, in
addressing
the application to set aside the resolutions and wind up
the two companies, filed a counter claim pursuant to
section 150(5)
seeking the court to sanction a 60 day extension of time to file a
business plan. They supported that counter application and answered
the initial application in a single affidavit. The applicants
in turn replied and answered in a single affidavit. It was
argued
that the counterclaim was not properly opposed. I took the view that
albeit that the papers might suffer from a procedural
incoherence,
the substance of the controversies had been traversed and no useful
purpose was to be served by any fuss over the
process. Another
complaint by the respondents about the contents of the applicants’
replying affidavits and an application
to strike out various passages
was, ultimately, not persisted with. Other points about the attesting
of affidavits raised in the
papers were abandoned.
A
history of the Critical events in the litigation
[4]
It is manifestly obvious that the two companies are severely
financially distressed. The respondents themselves confess that
they
were underfunded from when the present owner, the Inarman Family
Trust, (represented by Premchand Kandhai Inarman, a trustee
and the
sole director of both companies) bought the businesses in 2014.
Market Demand ran the Squeeze In shop. Rich Rewards ran
the Crestview
shop. The Trust borrowed R27m from Absa to buy the two business. Absa
has security for the loan, although on these
papers the full extent
is not really apparent. As regards working capital, Absa
provided, initially, a R5m overdraft but
reduced it later to R3m. In
September 2015, Absa cancelled overdraft facilities altogether after
a long period of bickering.
[5]
The businesses ran as Spar outlets. To do business as a Spar
shop one joins the Spar guild, of which Spar, itself, is
a
“distribution’ member. Supply from Spar was critical to
maintaining stock levels with which to trade in credible
circumstances. Poor payment resulted in a stop put on supply until
arrears were paid. About R3m was owing. This decision by Spar,
self-evidently, precipitated what the respondents appropriately
describe as a catastrophe. Respondents say that stock purchases
were
being made from the takings of the day before. The Crestview shop
closed in April 2016 owing to inadequate stock levels to
trade
effectively.
[6]
On 4 April 2016, the Spar Guild purported to terminate their
membership; the validity of which is still in dispute. However,
it is
not disputed that the relationship between the Guild and its members
can be terminated on a month’s notice. The
fact of the
unpaid debts led to Spar perfecting a notarial bond, eventually
obtaining an order on 22 April 2016.
[7]
When the intention of Spar to perfect its bond was made known to the
companies, it became plain to them that they could not
carry on with
business as usual. Thus, on 21 April 2016 the companies moved an
application for business rescue in the High Court
in Durban. That
application got postponed. The two companies then passed resolutions
on 25 April 2016, in terms of
section 129
, to put themselves into
business rescue. Choonilall was promptly appointed the business
rescue practitioner on the same day. Of
no little significance, on
that same day Spar was paid R3m by an unnamed ‘Third party’.
[8]
Choonilall was at once faced with multiple challenges to address.
First, the lease of the Squeeze In premises was in dispute.
An
eviction application against Market Demand, which ran the Squeeze In
shop, had been instituted in August 2015 by the landlord,
Cordeiro,
the first applicant, and this attack had to be fended off. Cordeiro
has no relationship with Rich Rewards. Second, Spar,
as a result of
the termination or alleged termination of membership of the Spar
Guild, marched on the businesses and removed the
branding and other
business equipment. Choonilall on 12 May, (16 days after his
appointment) launched a spoliation application.
On 24 May a consent
order restored the
status
quo ante
,
albeit that the physical return and reinstallation took some time.
According to Spar, only by 21 June was restoration complete.
[9]
On 30 May 2016, 34 days after his appointment, Choonilall asked the
creditors for an extension to produce a business plan, ie
9 days
after the statutory 25 days had run out within which to present a
business plan. They refused. Why a request was not made
earlier is
unexplained.
[10]
Six weeks after that refusal, the applicants instituted the
application to set aside the resolutions and obtain a winding up
order. The matter was set down in the urgent court, as alluded to
above. Whilst awaiting the DJP’s directive, on 28
July
2016, the counter -application for an extension was filed. The DJP,
on 12 August, directed the matter to be set down for hearing
on 31
August 2016.
[11]
From the bar, I was informed that the litigation over the eviction of
Market Demand from the premises it let from Cordeiro
and the validity
dispute over the cancellation by the Spar Guild of the two companies’
membership remains pending and are
unlikely to reach a court until
2017. The market Demand shop is about three kms from the Crestview
shop run by Rich Rewards. The
Market Demand shop was moribund
at the time of the hearing. In an uncontested supplementary affidavit
it is stated that the Crestview
shop had resumed trading since18
August 2016, a fortnight before the hearing.
Evaluation
The
relief sought
[12]
The applicants (now minus Spar) want the setting aside of the
resolutions, and with them out of the way, a winding up of the
two
companies, alternatively, Choonilall ought to be ordered to give
security, if the business rescue of Rich Rewards is to continue.
[13]
They also sought leave to sue in terms of
section 133(1)(b)
which
provides that a court’s leave is needed to sue a company in
business rescue. In the hearing it was argued they did
not need that
by virtue of the provisions of
section 130(5)(c)
which expressly
refers to a conversion to winding up proceedings. However they had
not cited
section 130(5)(c)
in the notice of motion. I am of the view
that they need not invoke
section 133(1)(b)
to seek the relief
sought, because
section 130(5)(c)
read together with
section 133
implies that
section 133
does not apply to the setting aside of a
resolution or the conversion into liquidation proceedings. Moreover,
the omission of an
express allusion, in the notice of motion, to
section 130(5)
(c) as the provisions in terms of which the winding up
is sought, in the context of the relief sought as a whole, is of no
moment
because it is obvious to the informed reader that
section
130(5)(c)
is envisaged.
[14]
The counter application is straight forward;
Section 150
(5) (a)
provides for a business plan to be presented within 25 days or ‘such
longer time as may be allowed by the court,
on application by the
company...’ Choonilall is in control of the companies. He asks
for 60 days, ie, two months, whereupon
he shall file a plan.
Self-evidently he wants to base a proposal on the trading record.
The
principles to be applied
[15]
Counsel are
ad
idem
that the decision in
Panamo
Properties (Pty) Ltd & Another v Nel & Others
2015 (5) SA 63
(SCA)
governs
the application. In that matter Wallis JA clarified the meaning to be
attributed the provisions of
section 129.
Where there is a failure to
comply with
section 129
(as there is in this case as regards the
timelines) the provisions which cause the resolutions to lapse do not
also mean that the
business rescue proceedings lapse too.
Notwithstanding such a lapse of the resolutions the proceedings
remain in existence unless
as court orders otherwise. What is
required is that a court, in deciding whether to order the cessation
of business rescue proceedings,
must have regard to any
non-compliance with
section 129
and
‘
having regard to all of the evidence [consider whether] it is
otherwise just and equitable to do so.’ This means that
the
non-compliance is no more than a door that opens to the prospect of
an order setting aside the resolutions.
Choonilall’s
conduct
[16]
That Choonilall ought to have applied for the extension before the
expiry of the 25 days, ie, before 20 May 2016, is plain.
He asked for
an extension from the creditors when he was already 9 days late. He
does not say why he missed the deadline, and so
it can be imputed to
him that he was remiss. However, I am inclined to take an empathetic
view of the ostensible tardiness, owing
to the scale of drama with
which he was confronted in the period since his appointment. It is
however, unimportant to nit-pick
his conduct because even were he to
have been derelict (which I do not accept I can find on these papers)
the sins of omission
function merely to set the table for a debate
about what is just and equitable in the given circumstances.
[17]
Section 150(5)
does not prescribe any particular norms for the
evaluation of the merits of an application for an extension.
Self-evidently, a
consideration must be that the plan could not have
be presented earlier. Why that might be so is wholly fact-specific.
Moreover,
it seems to me to also be the case that such an application
is not to be refused simply because a plan
could
have been prepared earlier; the threshold is not impossibility of a
quicker presentation, nor an explanation for non-compliance
that is
free from blemish, but rather, ought to be weighted towards the
absence of prejudice to any affected party and the reasonableness
of
affording more time to the rescue practitioner to compose a viable
plan if he contends that there is some impediment that rationally
inhibits him from presenting a plan earlier. This need not imply that
a creditor, or any other stakeholder, does not suffer some
inconvenience.
[18]
In my view the peculiar circumstances facing Choonilall, would have
inclined me towards being sympathetic to his plea for an
extension,
were it not for certain objective factors to which I shall allude in
due course. When the request was initially made
and rebuffed, on 31
May 2016, Choonilall had, shortly before, taken steps to try halt the
eviction of Market Demand from the Squeeze
In shop and had extracted
a climb-down from Spar who consented to restoring the paraphernalia
necessary to get trade to resume.
The Crestview shop had shut.
The predicament of the two companies was summed up by him in his
report of 11 July 2016. It
is appropriate to cite it in full:
“
As
previously advised, the two Spar supermarkets, being franchises owned
by the aforesaid companies are under business rescue. I
report on
their progress as follows:-
1.
Business Rescue proceedings of both entities commenced on 26 April
2016.
2.
The Spar Group (franchisor) and its Guild submitted that their
agreement with
the companies under supervision were terminated prior
to Business Rescue, and the entities dispute such termination.
3.
Notwithstanding being advised that the companies were under business
rescue,
the Spar Group removed, among other things all their signage
and computer equipments and points of sale hence totally disabling
their trading operation.
4.
The invariable consequence of such removal was that the stores could
not serve
customers as all the items had bar codes and had to be
scanned at the point of sales.
5.
A High Court application was brought on the urgent basis, in the
Pretoria High
Court, for an order directing Spars to re-instate the
stores forthwith into their trading condition.
6.
It come as no surprise that Spar quickly consented to the order to
re-install
the equipment and to restore the stores into their trading
condition.
7.
However, although the court order had stipulated the time frame for
such re-installation,
it took much longer. Save for a few outstanding
issues, the store would recommence trading on or about 13 July 2016.
8.
Post-commence finance is now available to re-open the Crestview Spar
to trade.
9.
A meeting of creditors and employees was held on 12 May 2016 at which
they were
fully appraised of the closure of the stores and the
pending High Court application.
10.
Upon grant of the order, all the affected persons were informed and
thereafter weekly reports
were published to them, advising them
further that no business plan would be published within the 25
working days of my appointment
for the reasons aforementioned.
11.
An extension of time was sought from the creditors by written
communication and although
the majority in number did not oppose the
request, ABSA, opposed same.
12.
I advise that I have had the opportunity of more fully investigating
the affairs of both
entities and further to the report presented
after my preliminary investigations on 12 May 2016, I report as set
out below.
13.
MARKET DEMAND t/a SQUEEZE IN
13.1. This store
does not have a long term lease agreement and it presently monthly
tenant.
13.2. There is a
dispute between the previous tenant, Sharp Move CC and /or Market
Demand and the Landlord with
regards to arrear rentals in the sum of
approximately R900 000.00.
13.3. Until this
issue is resolved, it is unlikely that Market Demand will obtain the
written lease. However,
the company will be in negotiations with the
landlord when attempting to resolve the arrear rental issues.
13.4. Until
Market Demand secures at least a long term lease, it would not be
prudent to operate this store.
13.5. In the
meanwhile, the remaining stocks will be removed from this store to
the Crestview Spar to commence
trading on 13 July 2016.
14.
RICH REWARDS t/a CRESTVIEW SPAR
14.1. A long term
lease has been secured with landlord.
14.2.
Negotiations will take place with the Spar Group/Guild to resolve the
dispute of its membership of the Guild
and to reinstate the purchase
of stocks from the Spar Group, failing which the pending application
in the Pretoria High Court will
be proceeded with.
14.3.
It is only after a month of trading that a proposed business rescue
plan will be published.”
[19]
This letter is a frank account of the travails that had passed.
Why a ‘preliminary’ investigation occurred
only on 12 May
is unexplained. At that time both shops were not trading. The Spar
spoliation had been resolved. He recognises the
vulnerability of the
lease controversy about the premises of the Squeeze In shop of Market
Demand. He updates the reader that the
lease at Crestview has been
secured. The Spar Guild membership issue is being addressed. Most
important of all, he reports on fresh
finance that has been accessed
that can, he claims, facilitate Crestview re-opening. He states
(rather than asks) that a plan will
be forthcoming in a month; ie by
mid-August.
[20]
Nevertheless, Choonilall is properly to be criticised because, in the
face of the creditors’ refusal of his extension
request on 31
May, six weeks later he merely assumes he can proceed unilaterally.
What
is just and equitable on these facts?
[21]
What is just and equitable is the key issue in the matter. The heart
of the resistance to the applicant’s case and the
foundation of
the counter- application is identical; ie, now that Spar is no longer
harrying the businesses, Choonilall wants a
chance to let the store
(or stores) trade for two months so that he can, premised on such
activities, compose a plan. The delay
is producing a plan is,
supposedly, the result of Spar’s scorched earth tactics of
cutting off supplies and later de-branding
the stores.
[22]
The counter argument to this scenario, which is independent of
Choonilall’s unexplained ostensible laxity, is that a
revival
of trade is fanciful. In my view, there is force in that argument.
The initial, failed, business plan of the two companies
was to
service the debts from trading revenue. It failed. The Absa debt
alone requires repayments per annum of R4,608,000 a sum
equal to half
the projected upper estimate of turnover for both shops trading under
uncompromised circumstances. With only
one shop to rely on how
such revenue is expected to be forthcoming is unexplained, even with
severe cost-cutting. Over and above
that factor, there is the
financial drain of the other litigation, and the risk of termination
of membership of the Spar Guild.
No argument is advanced why that
battle is tipped in favour of the companies on either matter.
Moreover, where is the stock for
resale being sourced and how is it
being paid for? How are the shelves to stocked, and with what funds?
Spar will not supply
them. Save for stating that sum of R1.2 m
to restock is available, these vulnerabilities are not addressed. The
source of the funds
is ostensibly the Trust, yet no information is
offered about what resources it has left after the rear-guard efforts
already embarked
on, especially when it is said that a Third party
had to step up to pay the R3m to Spar, an indication that the Trust
was not able
to do so. The absence of critical information
about sources of additional funding and the logic inherent in the
request for
a two month to try to trade is that the hoped-for future
trading revenue is a key component of the envisaged strategy. Were
the
strategy to re-capitalise the businesses, that fact would have
been stated. The reluctance of Absa to afford overdraft facilities
does not bode well for a prospect that a rational investor would see
value in contributing to the rescue.
[23]
I was invited to examine what had been envisaged in the attempted
application in terms of
section 131
in the High Court, Durban. The
founding affidavit spelled out several cost cutting measures,
promised tighter management, a desire
to stave off retrenchments in
the short run, and said that in addition to paying off some arrear
costs R1.2 was available to restock
the Crestview shop which had
ceased trading owing to low stock levels.
[1]
These were measures undertaken by the directors rather than
Choonilall. The scenario is hardly rosy. Cost cutting, though
commendable,
does not address the problem of working capital in the
short term.
[24]
Section 130(1)(a)(ii)
contemplates that if there is ‘no
reasonable prospect of rescuing the company’ the resolution may
be set aside. In
my view that is the case. What Choonilall is really
asking for is a chance to gamble with the businesses. In a gamble the
unexpected
can sometimes be achieved. The flaw in the case for the
respondents is less in the absence of detail than in the absence of a
viable
strategy.
Conclusions
[25]
As a result, despite the sterling efforts of Choonilall to
rehabilitate these companies from the predations of their creditors,
what he is tasked with is saving two shops that cannot deliver
adequate revenue, one of which with an extremely tenuous claim to
lease premises and which is at present dormant, and another whose
future is dependent on its continued membership of the Spar Guild,
which is unequivocal that it does not want Rich Rewards as a member,
and may terminate membership on a month’s notice.
[26]
In my view, the prospects are not reasonable. To the extent the
bleakness of the present condition might be blamed on Spar’s
actions, it must not be overlooked that the critical difficulties in
trading stem from the desire of Spar to distance itself from
these
businesses, a stance which began before the spoliation and has been
sustained even after what was owed (save for a not significant
sum in
dispute) was paid. Self-evidently the Spar brand reputation is more
important to Spar than a continued relationship.
[27]
Without question, the law inclines a Court to save a business rather
than let the creditors ravage it, but if reasonableness
is the
threshold, the expectations articulated here are inadequate to clear
it. The fate of the workers is a matter of concern
but in my view the
prospects of preserving their jobs is hopeless, even if a business
rescue plan could be composed, as self-evidently,
cost-cutting cannot
spare the staff.
[28]
The prayer to convert the proceedings into liquidation proceedings,
as contemplated by
section 132
(2) (a) (ii), is appropriate. In my
view a provisional order is appropriate. A proper investigation into
the circumstances can
proceed in the usual way.
Costs
[29]
The applicants have sought punitive costs against Choonilall. In my
view their complaints do not warrant such a sanction. In
my view
Choonilall has been earnest in his efforts, albeit lax about meeting
statutory deadlines, in respect of which I am willing
to accept that
there is some mitigation.
The
Order
[30]
An order is made thus:
30.1. The
respondents’ counter-claim is dismissed.
30.2. The
applicants claim as set out hereunder is granted.
30.2.1. The
Resolutions of 25 April 2016 by the first and second respondents
are set aside.
30.2.2. The first
and second respondents are provisionally wound up.
30.3.
The costs of the application and counter application shall be costs
in the winding up.
______________________________________
Roland
Sutherland
Judge
of the High Court,
Gauteng
Local Division, Johannesburg
Hearing:
31 August 2016
Judgment:
6 September 2016.
For
First and Third Applicants:
Adv
T Ossin,
Instructed
Werthschroder Inc
For
First to Third respondents:
Adv
M Hellens SC, with him, Adv S K Dayal,
Instructed
by Jailall & Associates Inc
[1]
Paragraphs
19.2 – 26 of the founding affidavit of Maharaj.