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[2020] ZAGPJHC 255
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Standard Bank of South Africa Limited v C and E Engineering (Pty) Ltd and Others; Standard Bank of South Africa Limited v C and E Engineering (Pty) Ltd (18085/20; 16611/20) [2020] ZAGPJHC 255 (14 August 2020)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
CASE NO: 18085/20
In
the matter between:
THE
STANDARD BANK OF SOUTH AFRICA LIMITED
Applicant
and
C
AND E ENGINEERING (PTY) LTD
First
respondent
MAHOMED
MAHIER TAYOB N O
Second
respondent
COMMISSIONER,
COMPANIES AND INTELLECTUAL PROPERTY COMMISSION
Third
respondent
CASE NO: 16611/20
In
the matter between:
THE
STANDARD BANK OF SOUTH AFRICA LIMITED
Applicant
and
C
AND E ENGINEERING (PTY) LTD
(IN
BUSINESS RESCUE AS DULY REPRESENTED BY
MAHIER
TAYOB N O IN HIS CAPACITY AS DULY APPOINTED BUSINESS RESCUE
PRACTITIONER)
Respondent
J U D G M E N T
KEIGHTLEY,
J
:
INTRODUCTION
1.
This judgment concerns two related applications that came before me
in the urgent court. The applications involve the same parties
and
the same events. In the circumstances, while they remain separate
applications for different relief, it is convenient to deal
with them
in one judgment. In both matters the applicant, Standard Bank (or the
bank), aims to protect its rights as creditor in
respect of the first
respondent, C and E Engineering (Pty) Ltd (the company), as its
debtor. Mr Tayob acts on behalf of the company
as the appointed
business rescue practitioner.
2.
Under case
number 16611/20, Standard Bank obtained an
ex
parte
provisional
order on 14 July 2020 (the perfection order) permitting it to perfect
its security held under a General Notarial Bond
by taking possession
of the company’s movable property. It executed the order on the
same day. Mr Tayob applies to anticipate
the return day of the
perfection order under Uniform Rule 6(8), or alternatively, for its
reconsideration under 6(12)(c). In either
event, he seeks to have the
perfection order discharged on the basis that it was not lawfully
sought and granted.
This is
because on 7 July 2020 the directors had filed a resolution placing
the company in business rescue under s129(1) of the
Companies Act
[1]
(the Act). Standard Bank opposes this relief, contending that the
perfection order is not invalid. I will call this the perfection
application.
3.
Under case number 18085/20, Standard Bank applies to set aside the
resolution taken by the board of directors to place the company
under
supervision and in business rescue. The bank wants an order declaring
that the business rescue proceedings have ended, as
well as an order
placing the company under provisional winding up. Mr Tayob, opposes
the relief. He wants an order that he be given
60 days within which
to determine whether there is a reasonable prospect of the company
being rescued. I will call this the business
rescue application.
4.
There was some debate between the parties as to whether the correct
starting point is with the perfection order application,
or with the
business rescue application. The appropriate approach, in my view,
should be determined having considered the common
factual substratum
underpinning both applications.
FACTUAL
BACKGROUND
5.
In opposing the business rescue application, Mr Tayob did not take
issue with most of the factual averments contained in the
founding
affidavit. The same holds true in respect of the perfection
application. In the circumstances, much of the factual background
in
both matters is common cause.
6.
The company entered into five facility agreements with Standard Bank.
As security under the agreements, Standard Bank holds,
among other
forms of security, a cession of the company’s book debts, and
the General Notarial Bond over all the company’s
movable
property. The company is in breach of the facility agreements, with
the result that it is indebted to the bank in the sum
of R44 million.
It is common cause that Standard Bank is the company’s major
creditor.
7.
Since approximately March 2020, Standard Bank was in communication
with the company about its precarious financial state, and
its breach
of the agreements. The Bank exercised its rights under the cession of
book debts. In May 2020, the company admitted
that it was in
financial distress and it transmitted to Standard Bank a
comprehensive business proposal and proposed terms for
the repayment
of the amounts owing, while it continued to trade. It is not
necessary to set out the details of these proposals,
save to say that
they were fairly comprehensive.
8.
In turn, Standard Bank indicated its willingness to accommodate the
company, on various conditions. The parties conducted a number
of
virtual conferences with a view to trying to reach an accommodation
between them. The company failed to make its own proposed
repayment
in May, indicating that it was struggling to recover book debts. No
repayments were made for June or July.
9.
After further communication between the company and Standard Bank, a
final agreement was transmitted to Mr Bateman, one of the
directors
of the company, for signature. This was on 3 July 2020. No response
was forthcoming from Mr Bateman. When Standard Bank
tried to follow
up with Mr Bateman on 6 July 2020, it could not raise him
telephonically. Nor did Mr Bateman respond to an email
on 7 July
2020.
10.
Between 7 and 8 July, and without telling Standard Bank of its
intentions, the company transferred funds, amounting to R1 843
125.11, from its overdraft account held with Standard Bank to certain
entities associated with Mr Bateman and other directors.
This was
contrary to Standard Bank’s instructions that no further funds
should be drawn against that account without the
bank’s
consent.
11.
This is how matters stood as at the first week of July. In light of
the company’s conduct, Standard Bank moved urgently,
and on an
ex parte
basis, to obtain the perfection order. It indicated
in its founding affidavit that it feared that the company might
resort to placing
itself in business rescue, and for this reason it
was imperative for Standard Bank to perfect its rights of security.
As I have
indicated, the perfection order was obtained on 14 July
2020.
12.
On the same day, Standard Bank moved to execute the order. The
Sheriff, together with certain agents of the bank attended at
the
company’s premises for purposes of attaching and inventorying
the company’s movable property. As far as Standard
Bank was
concerned, it had perfected its rights as a secured creditor under
the General Notarial Bond by taking possession of the
movable
property.
13.
What Standard Bank did not know, at the time it applied for and was
granted the perfection order, and when it executed the order,
was
that on 7 July 2020 the company’s directors had passed a
resolution to commence business rescue proceedings. The resolution
was accompanied by sworn statements from the directors, including Mr
Bateman. The resolution was filed in terms of s129(1) of the
Act on
the same day, with the effect that as from 7 July 2020 the company
was in business rescue.
14.
It is significant that the adoption of the resolution coincided with
Mr Bateman, without explanation, cutting off communications
with
Standard Bank. It is also significant that the transfers from the
company’s overdraft account amounting to R1,8 million
were made
after the directors resolved to place the company in business rescue.
None of this is contested, or even answered by
Mr Bateman in the
papers before court.
15.
Standard Bank provided further uncontested evidence that Mr Bateman
acted both actively and passively to mislead the bank as
to the fact
that it had commenced business rescue. Mr Bateman was present when
the perfection order was executed on 14 July 2020.
In fact, the
perfection order was served on Mr Bateman. However, he failed to
inform any of Standard Bank’s agents who were
present, that the
company was in business rescue.
16.
It was only on the 14 or 15 July 2020 that the company’s
attorney advised Standard Bank’s attorney (in response
to a
question directed by the latter) in a telephone conversation that the
company had placed itself under business rescue. And
it was only on
16 July 2020 that Mr Tayob provided Standard Bank, as an affected
person, that the company had commenced business
rescue proceedings.
The notice was accompanied by, among other things, the resolution of
the company to commence business rescue
and the accompanying sworn
statements of the directors, and an agenda for the first meeting of
creditors scheduled for 22 July
2020.
17.
Mr Tayob accepts that the notice was not published within five
business days, as required under s129(3) of the Act.
18.
Standard Bank took legal advice concerning its position. According to
this advice, it accepted that it would probably have to
file an
urgent application to court to protect its position by
inter alia
,
seeking an order terminating business rescue proceedings and placing
the company under provisional liquidation. However, it held
off
proceeding to file an application at court pending the first meeting
of creditors. Standard Bank’s legal representatives
attended
that meeting.
19.
At this meeting, Mr Tayob tabled a resolution that he be provided
with an extension of 60 days within which to prepare a business
reduce plan. The resolution was voted on with all creditors other
than Standard Bank voting in favour of the resolution. It is
common
cause that the vote was based on the numerical majority of creditor’s
present, and not on the basis of the relative
weighting of the voting
rights each creditor.
20.
Mr Tayob also told the meeting that if funds in the amount of R10
million were recovered from Standard Bank, which had exercised
its
rights under its agreements with the company, this would make
business rescue possible. In other words, if these funds were
recovered, according to Mr Tayob, the company could be rescued as a
going concern.
21.
Standard Bank served the business rescue application on 23 July 2020.
In the notice of motion, it gave the respondents until
4pm on 28 July
to file its answering affidavit, with the matter being placed on the
urgent court roll of 4 August 2020.
22.
On 28 July, Mr Tayob’s attorneys filed the answering affidavits
in both the business rescue application and the perfection
order
application. Simultaneously, they also set the latter down for
hearing on 4 August.
URGENCY
OF THE BUSINESS RESCUE APPLICATION
23.
Mr Tayob opposed the business rescue application on the grounds that
it lacked urgency. He submitted that given the magnitude
of the
relief sought in the application, there was no reason why Standard
Bank could not obtain redress in the ordinary course.
He pointed out
that with the appointment of himself as the business rescue
practitioner, there had been a “changing of the
guard”,
and that Mr Bateman and the other directors were no longer in charge
of the company. As such, it was submitted on
behalf of Mr Tayob, that
Standard Bank did not have anything further to fear from any alleged
underhand activity on their part
that might undermine its interests
in the company’s assets.
24.
Mr Tayob also argued that to permit the application to proceed by way
of urgency would undermine the purpose of the business
rescue
provisions of the Act. The business rescue process was designed to
afford time to
25.
the business rescue practitioner to fulfil certain obligations. To
hear the matter as an urgent application, so counsel for
Mr Tayob
argued, would prevent this to the detriment of the other creditors
who had voted to permit Mr Tayob an extended period
to fulfil his
duties. In short, a recurring theme of the submissions made on behalf
of Mr Tayob was that the application was premature.
26.
Mr Tayob’s submissions go further. He says that the urgent
application constitutes an abuse of process in that its real
purpose
is to protect the perfection order, and hence Standard Bank’s
status as a secured creditor, in circumstances where
that order ought
never to have been granted because of the pre-existing business
rescue process.
27.
It is not unusual in this division of the High Court for matters
involving business rescue and liquidation to be placed on the
urgent
court roll. Nor is it unusual for them to be dealt with on an urgent
basis by the court. This division has a relatively
commercially-heavy
case load. It is understood that there is often an element of
inherent urgency in business rescue and related
matters.
28.
Of course, this does not mean that all matters of this nature must be
treated as urgent. Obviously, the court must have regard
to the facts
of the matter at hand. In this case, Standard Bank seeks to challenge
the validity of the resolution adopted by the
directors placing the
company in business rescue. It does so against the backdrop of facts
that suggest that the resolution may
not have been adopted for the
bona fide
purposes of business rescue, but rather to frustrate
Standard Bank’s rights under the General Notarial Bond, and as
the company’s
major creditor. The vulnerability of the business
rescue proceedings is compounded by the common cause fact that Mr
Tayob did not
afford notice to affected parties within 5 days of the
commencement of proceedings as required in s129(3).
29.
In light of these facts, I cannot accept Mr Tayob’s contention
that the application is an abuse of process. Standard Bank
challenges
the business rescue process on what appear for all intents and
purposes to be reasonable grounds. There can be no question
that as
the majority creditor which holds security in the form of a General
Notarial Bond, it cannot be accused of having abused
the urgent
process by proceeding to court to attempt lawfully to undo the
process in terms of which its rights of security have
been affected.
30.
In circumstances where the very underpinnings of the business rescue
process are quite legitimately challenged by a creditor
with an
obvious and substantial interest in the matter, it seems to me to be
self-evident that the matter is urgent. This is particularly
so when
there is uncontested evidence placing real doubt on the
bona fides
of directors in resolving to place the company in business rescue
in the first place. It is in the interests not only of Standard
Bank,
but indeed of all creditors, for the legal challenge to be disposed
of sooner rather than in the ordinary course.
WHICH
APPLICATION SHOULD LEAD PROCEEDINGS?
31.
Mr Tayob contends that the court should first consider the perfection
order application, and only thereafter, the business rescue
application. His reasoning for this submission is that the perfection
order was granted after the company was placed in business
rescue.
Thus, it was granted contrary to the general moratorium on legal
proceedings against a company in business rescue as provided
in
s133(1) of the Act. That section provides that:
“
During business
rescue proceedings, no legal proceeding, including enforcement
action, against the company, or in relation to any
property belonging
to the company, or lawfully in its possession, may be commenced or
proceeded with in any forum except-
(a) with the written
consent of the practitioner; (or)
(b) with the leave of the
court and on any terms the court considers suitable; …”
32.
Mr Tayob submits that Standard Bank did not seek leave under
s133(1)(b). Accordingly, the perfection order ought never to have
been granted. As I understand it, the argument proceeds to the effect
that to consider the business rescue application first would
be to
permit Standard Bank to circumvent its problem with non-compliance of
that section. This would cement Standard Bank’s
position as a
secured creditor, to the detriment of other creditors. It would give
retrospective effect to an order, and a secured
creditor status, that
ought never to have been given legal recognition in the first place.
33.
On the papers in both applications before me it is common cause that
but for the pre-existing business rescue resolution of
7 July 2020,
Standard Bank was entitled to take steps to perfect its General
Notarial Bond. The common denominator of the disputes
between the
parties is thus the validity of the business rescue resolution, and
whether the business rescue process initiated by
that resolution
should continue or be terminated. This is the material issue at the
heart of both applications. The outcome of
that inquiry, which is
directly addressed in the business rescue application, will have
important consequences for the perfection
order application. For this
reason, the appropriate route forward is to consider the business
rescue application first, and thereafter
to consider the protection
order application.
THE
RELEVANT STATUTORY PROVISIONS
34.
I have already made reference to s133(1) insofar as it pertains to
the moratorium placed on legal proceedings against a company
under
business rescue.
35.
Section 129(1) permits the board of a company to commence voluntary
liquidation proceedings. It provides that:
“
Subject to
subsection (2)(a), the board of a company may resolve that the
company voluntarily begin business rescue proceedings
and place the
company under supervision, if the board has reasonable grounds to
believe that-
(a) the company is
financially distressed; and
(b) there appears to be a
reasonable prospect of rescuing the company.”
36.
A
resolution has no effect until it has been filed.
[2]
Section 129(3) requires the company, within five business days of
filing the resolution, to publish a notice of the resolution
to every
affected person, including a sworn statement
of the
facts relevant to the grounds on which the board resolution was
founded. It must also appoint a business rescue practitioner.
In
terms of s129(5)(a):
“
If a company fails
to comply with any provision of subsection (3) or (4) … its
resolution to begin business rescue proceedings
and place the company
under supervision lapses and is a nullity”.
37.
In
Panamo
Properties (Pty) Ltd and Another v Nel N O and Others
,
[3]
the Supreme Court of Appeal considered the meaning and effect of this
provision. It held
that:
“
If there is
non-compliance with the procedures to be
followed once business rescue commences,
the resolution lapses
and becomes a nullity and is liable to be set aside under
s130(1)(a)(iii). In all cases the court must be
approached for the
resolution to be set aside and business rescue to terminate.”
Consequently,
the failure to comply with the procedural requirements of s129(3)
does not, without more, invalidate and put an end
to business rescue
proceedings. It does no more than render the proceedings liable to
being set aside. To give effect to the invalidity,
and to terminate
the business rescue proceedings, an order of court is necessary.
38.
Section 130 is particularly relevant in this case. It deals with
objections to a company resolution to commence business rescue.
It
provides, in relevant part as follows:
“
(1) Subject to
subsection (2), at any time after the adoption of a resolution in
terms of section 129, until the adoption of a business
rescue plan in
terms of section 152, an affected person may apply to a court for an
order—
(a) setting aside the
resolution, on the grounds that
(i) there is no
reasonable basis for believing that the company is financially
distressed;
(ii) there is no
reasonable prospect for rescuing the company; or
(iii) the company has
failed to satisfy the procedural requirements set out in section 129;
…
…
(5) When considering an
application in terms of subsection (1)(a) to set aside the company’s
resolution, the court may—
(a) set aside the
resolution—
(i) on any grounds set
out in subsection (1); or
(ii) if, having regard to
all of the evidence, the court considers that it is
otherwise just and
equitable to do so;
(b) afford the
practitioner sufficient time to form an opinion whether or not—
(i) the company appears
to be financially distressed; or
(ii) there is a
reasonable prospect of rescuing the company,
and after receiving a
report from the practitioner, may set aside the company’s
resolution if the court concludes that the
company is not financially
distressed, or there is no reasonable prospect of rescuing the
company; and
(c) if it makes an order
under paragraph (a) or (b) setting aside the company’s
resolution, may make any further necessary
and appropriate order,
including—
(i) an order placing the
company under liquidation; or … .”
39.
In
Panamo
Properties
,
the SCA held that the word “or” between sub-paragraphs
(i) and
(ii)
of
s130(5)(a)
should
be
read
conjunctively
as
“and”.
In
other
words,
an affected
person who wishes to apply to have a company resolution to enter
business rescue set aside on the grounds provided in
s130(1) must not
only establish that ground, but must, in addition, satisfy the court
that it would be just and equitable that
the resolution be set
aside.
[4]
40.
Finally, s134 deals with protection of property interests. In
particular, for purposes of the present case, s134(3) provides
that:
“
If, during a
company’s business rescue proceedings, the company wishes to
dispose of any property over which another person
has any security or
title interest, the company must-
(a) obtain the prior
consent of that other person, unless the proceeds of the disposal
would be sufficient to fully discharge the
indebtedness protected by
that person’s security or title interest; …”
THE
BUSINESS RESCUE APPLICATION
41.
Standard Bank objects to the company resolution placing it in
business rescue. It asks the court to set aside the resolution
and to
terminate the business rescue proceedings. Allied to this, Standard
Bank asks the court to place the company under provisional
liquidation. As to the first leg of relief, Standard Bank relies on
the following grounds of objection outlined in s130(1)(a):
41.1. First, the company
failed to comply with the procedural requirements set out in s129(3)
rendering the resolution and business
rescue proceedings liable to be
set aside under section 130(1)(a)(iii).
41.2. Second, and in any
event, there is no reasonable prospect for rescuing the company,
which renders the resolution objectionable
under s130(1)(a)(ii).
41.3. Third, and in
addition to either of the above two grounds, it is just and equitable
in the circumstances of this case to set
aside the company resolution
and to terminate the business rescue proceedings.
42.
In response, not only does Mr Tayob oppose the relief, but he has
filed a counter- application, seeking from the court an order
under
s130(5)(1)(b) giving him a period of 60 days within which to
determine whether there are reasonable prospects of rescuing
the
company.
43.
As to the failure to comply with the provisions of s129(3), it is
common cause that neither the company, nor Mr Tayob gave the
affected
parties notice that the company had commenced business rescue within
5 days of the date on which the resolution was filed.
It is clear
from
Panamo Properties
that this in itself does not
automatically render the resolution and the business rescue
proceedings a nullity. An order of court
is required to have this
effect. Further, in deciding whether or not to set aside the
resolution, the court will still have regard
to whether it would be
just and equitable to do so.
44.
This means that the meat of the present matter is to be found in the
second ground of objection, considered together with the
question of
justice and equity. An underlying consideration, arising from the
particular facts, is whether the company resolution
was taken for the
bona fide
purposes of business rescue. There is an intertwined
relationship in this case between the issue of whether there are
reasonable
prospects of rescue, the issue of justice and equity, and
the
bona fides
of the company’s conduct.
45.
It is not in dispute that the company is in financial distress, and
Mr Tayob accepts this. Indeed, in the sworn statements signed
by the
directors in terms of s129(3), the deponents expressly acknowledge
that the company is in financial distress and that “
it
appears reasonably unlikely that it will be able to pay all its debts
as they fall due and payable within the ensuing six months
.”
46.
The background facts set out earlier demonstrate that the company’s
financial distress was evident from earlier this year,
with the first
letter of demand being dispatched in March 2020. This was followed by
Standard Bank invoking its rights under the
cession of book debts in
April 2020. Two months prior to the company resorting to business
rescue, it compiled a business proposal
which it put to Standard
Bank. However, the respondent was unable to comply with its proposed
terms of repayments in May, June
and July. The correspondence between
the parties indicates that the company was reliant on the continued
use of the overdraft facility,
or its book debts, in order to
continue to trade. In other words, it was reliant on Standard Bank
being willing to extend the company
further financial support under
the facility agreements.
47.
In their sworn statements, the directors did not state that there
were reasonable prospects of rescuing the company. The statements
are
simply silent in this regard. This is a noteworthy omission, as
s129(1)(b) requires that a resolution to place the company
in
business rescue must be based on reasonable grounds to believe not
only that the company is in financial distress, but also
that there
are reasonable prospects of it being rescued. The resolution in this
case does not comply with this fundamental statutory
requirement.
48.
Moreover, Mr Tayob, as the business rescue practitioner, has
indicated that he does not yet have sufficient information at this
disposal to make a proper determination as to whether there are
reasonable prospects of the business being rescued. He does not
have
recent financial statements and related material from the company. It
is for this reason, he says, that he should be afforded
time to make
a proper assessment as to whether the company can be rescued. It is
to be noted, however, that this is not the stance
he took in the
first meeting of creditors. The minutes of that meeting record Mr
Tayob’s view that if R10 million was recoverable
from Standard
Bank, the business could be rescued. It is not clear what he based
this view on, and Mr Tayob does not address this
contradiction in his
answering affidavit.
49.
Business rescue is aimed at the rehabilitation of a company in
financial distress. The process envisages that ultimately there
will
be an adoption of a plan to rescue the company in a manner that:
“
maximises the
likelihood of the company continuing in existence on a solvent basis
or, if it is not possible for the company to
so continue in
existence, results in a better return for the company’s
creditors or shareholders than would result from the
immediate
liquidation of the company”.
[5]
50.
As the SCA
explained in
Oakdene
[6]
a company does not have to establish a reasonable probability that it
can be rescued. It is required only to establish a reasonable
prospect, which entails a lower bar. However, it still requires more
than a mere
prima
facie
case
or an arguable possibility. It must be based on reasonable grounds,
and not speculation.
[7]
The
company does not have to set out a detailed plan as to how the
rehabilitation might take place. However, it must establish
grounds,
i.e. facts that would show that there is a reasonable prospect of
either of the two goals cited above being met.
[8]
51.
Mr Tayob says that in order to permit him to do his duty under the
Act, the court should act prudently and afford him more time
to
conduct his investigations into the prospects of rescue. I have
no quarrel with Mr Tayob’s submission as a general
principle.
Of course a court should not run headlong into terminating business
rescue proceedings without proper consideration
of the facts and
interests involved. However, there will be cases where the prudent
path is to terminate business rescue rather
than to afford the
business rescue practitioner more time to consider the company’s
position. This is precisely such a case.
52.
As I have already noted, the company has already attempted to
restructure its affairs. It engaged with Standard Bank in this
regard
and proposed a repayment schedule, but was unable to meet its own
commitments. In light of this, it is perhaps not surprising
that the
directors avoided dealing with the prospects of the company being
rescued in their sworn statements.
53.
It is also significant, as I have already indicated, that prior to
adopting the resolution, the company was dependent on further
financial resources being made available to it from Standard Bank by
way of further drawdowns on the overdraft facility. Standard
Bank has
indicated that it will not be prepared to extend any further
facilities to the company. In fact, it made its position
to the
company clear in its letter dated 1 July 2020. There is thus no
prospect of post-commencement finance being extended by
Standard Bank
for purposes of rehabilitation of the company under business rescue.
54.
The prospect of post-commencement finance is critical to the
prospects of rehabilitation. Without it, a company that is in
financial distress is unlikely to be able to restructure its
operations so as to enable it to trade in solvent circumstances. It
is also unlikely that unless there is a reasonable prospect of
post-commencement finance, the business rescue process will be in
the
best interests of creditors. Where the major creditor, which
previously provided the company with financial facilities, turns
off
the tap because of the company’s default on its obligations,
this does not bode well for the company’s post-commencement
prospects.
55.
The only
prospective source of financial injection into the company in this
case is the collection of book debts. However, there
are substantial
obstacles in the way of this option. Significantly, Standard Bank
holds security over the book debts under the
cession. In order for Mr
Tayob to use the book debts for purposes of keeping the company in
business, he would need the consent
of Standard Bank, as a secured
creditor, under s134(3). Standard Bank expressly states it will not
give consent. In light of the
amounts owed to Standard Bank, and the
failure by the company to meet its previous proposals of payment, it
can hardly be said
that Standard Bank’s declared intent is
unreasonable or
mala
fides
.
Its stance cannot be ignored, and should be given due consideration
by the court
.
[9]
56.
Mr Tayob indicates that there may be difficulty for Standard Bank in
asserting its rights of security over some of the book
debts, as they
may be subject to
pacta de non cedendo
. He points to one
agreement containing such a clause. There is no other evidence that
this presents a pervasive problem that would
serve to undermine
Standard Bank’s rights of security over the book debts. If some
debts are subject to a provision of this
nature, this is an issue
that can be dealt with in winding up, should such an order be made.
What is clear is that the evidence
of one contract with a
pactum
de non cedendo
is insufficient to treat Standard Bank at this
stage as anything other than a secured creditor in respect of the
book debts of the
company.
57.
In any event, as Standard Bank shows through the financial analysis
contained in its affidavits, there is little more than R4
million
currently owed to the company by its debtors. This sum is quite
obviously inadequate to keep the company afloat and to
service its
debts, including the R44 million owed to Standard Bank.
58.
On this basis alone, it seems to me that there would be very little
to be gained by granting Mr Tayob an additional 60 days
to consider
whether the company can be rescued. There is simply nothing before
the court to support the prospect of such an outcome,
let alone a
reasonable prospect.
59.
However, there are other facts that weigh heavily against the
continuation of the current business rescue proceedings. There
are
strong indications from the facts leading up to, and taking place
immediately after, the adoption of the company’s resolution
to
go into business rescue that the resolution was not adopted
bona
fide
with a view to achieving the purposes of business rescue.
60.
Prior to 6 July 2020 the company and Standard Bank were involved in
an ongoing process of trying to reach agreement on how the
company
could meet its obligations under the facility agreements. The company
had not honoured its previous proposals. Nonetheless,
shortly before
the resolution was taken, there seemed to be a prospect of reaching
agreement. Instead, and without reverting to
Standard Bank, the
directors adopted the business rescue resolution. Mr Bateman’s
conduct shows that he actively avoided
playing open cards with
Standard Bank.
61.
There can be no question on the evidence before me that there was a
deliberate tactic on the part of the directors secretively
to adopt
the resolution in order to obstruct Standard Bank in the exercise of
its rights. This inference is reinforced by the fact
that even after
the resolution was adopted, and Standard Bank executed the perfection
order, Mr Bateman did not tell the bank’s
agents that the
company was in business rescue. Moreover, and very significantly,
transfers of R1,8 million were made out of company
accounts after the
resolution had been adopted. Mr Bateman did not answer the damning
allegations relating to his conduct in this
regard. He simply signed
a standard, general confirmatory affidavit in support of Mr Tayob’s
answering affidavit.
62.
Had the company been
bona fide
in resolving to enter business
rescue, one has to ask why it did not share this information with its
major creditor, Standard Bank,
with whom it was in discussions at the
time. Why did it keep the information from the bank even after the
resolution had been adopted?
If it was
bona fide
in its
resolution, why were transfers made after the resolution’s
adoption to entities associated with the directors?
63.
It has been
held by Spilg J in this division
[10]
that the Act presupposes that a resolution under s129(1) is taken in
good faith, and that this is a relevant consideration in the
determination of whether it is just and equitable to set it aside.
The facts of this case demonstrate the importance of this
observation.
They also demonstrate how the elements of prospects of
rescue, justice and equity, and
bona
fides
are
intertwined.
64.
Here, there are no facts to indicate that the company can be
rehabilitated. Had there been reasonable prospects of rehabilitation,
the obvious route for the company would have been to pursue its
discussions with Standard Bank. Instead of doing so, however, it
secretly adopted a business rescue resolution, transferred monies
from its accounts to connected creditors, and then kept Standard
Bank
in the dark. This conduct is the antithesis of what would be expected
of the directors of a company that
bona fide
had prospects of
being rescued.
65.
I find that there is no reasonable prospect of the company being
rescued. The absence of
bona fides
on the part of the company
in adopting the resolution confirms what the financial facts
establish in this regard. In this case it
follows axiomatically that
it would be just and equitable to set aside the resolution. This will
not be to the detriment of other
creditors, as this relief does not
stand on its own. As I deal with below, it will be coupled with an
order placing the company
in provisional winding up. The liquidator
appointed under that process will have greater investigative powers
than Mr Tayob as
a business rescue practitioner. In the
circumstances, the alternative route of liquidation will better serve
the interests of all
creditors than continuing to keep the company
under business rescue.
WINDING
UP
66.
In terms of s130(5)(c)(i), when a court sets aside a resolution
placing the company in business rescue it may at the same time
make
an order placing the company under liquidation. Given the facts in
this case, the requirements for such an order may be dealt
with
briefly.
67.
It is undisputed that the company is commercially insolvent. This
much was expressly confirmed by the directors in their sworn
statements accompanying the business rescue resolution. There they
stated that it was unlikely that the company would be able to
meet
its debt obligations as they fall due for the next six months. The
company’s debt to Standard Bank is also not placed
in dispute,
nor is the fact that the company has been unable to service its
repayment obligations to the bank under the various
facilities.
68.
These common cause facts demonstrate clearly that the requirements
for winding up are satisfied. Prior to the hearing of the
matter the
court was provided with evidence that the Master had issued the
necessary security bond, and that service of the liquidation
application had been effected on the requisite persons and entities.
69.
It is accordingly appropriate that the order setting aside the
resolution and terminating business rescue proceedings should
be
accompanied by an order placing it in liquidation.
THE
PERFECTION ORDER APPLICATION
70.
It is common cause that the perfection order was granted on an
ex
parte
basis at the time that the company had been placed under
business rescue. It is also common cause that at the time that
Standard
Bank sought, and Lamont J granted, the perfection order, the
bank had no knowledge of this fact. Indeed, the company had gone out
of its way at that stage to conceal the business rescue from Standard
Bank.
71.
At face value, the order was obtained at a time when there was a
statutory moratorium on any enforcement proceedings being taken
against the company. Section 133(1) establishes this moratorium by
providing that such action may only be taken with the written
consent
of the business practitioner or with leave of the court. Quite
obviously, in this case, where Standard Bank had no knowledge
of the
business rescue, it was unable to pursue either of these routes in
order to perfect its rights as a secured creditor under
the General
Notarial Bond.
72.
Mr Tayob contends that because the perfection order was obtained in
contravention of s133(1)(a) or (b), it ought never to have
been
granted. On this basis, he anticipated the return date of the
provisional perfection order, and contended that it ought to
be
discharged. Standard Bank counters with a plea for the perfection
order to be confirmed.
73.
The fate of
the perfection order is not as simple as Mr Tayob suggests.
The implied
premise of his case is that because Standard Bank did not comply with
s133(1)(a) or (b) the perfection application and
order granted are a
legal nullity. But this premise is flawed. In
Chetty
[11]
the SCA considered the question of whether proceedings instituted by
a creditor without consent of the practitioner, or leave of
the court
ought to be invalidated for this reason. The Court cautioned that the
consent requirement under s133(1)(a) should not
be mischaracterised
as a jurisdictional condition.
[12]
Further:
“
Section 133(1) was
enacted to protect a company under business rescue against claims
from creditors. Its object is to prevent the
practitioner being
inundated with legal proceedings without sufficient time within which
to consider whether or not the company
should resist them and to
prevent the company that is financially distressed from being dragged
through litigation while it tries
to recover from its financial woes.
Its effect is to stay legal
proceedings
, except
in those circumstances mentioned in s 133(1)(a) - (e). The creditor
may initiate or continue the proceedings in terms of
s 133(1)(a) with
the consent of the practitioner.
But s133(1)(a) is not a
shield behind which a company not needing the protection may take
refuge to fend off legitimate claims.
Thus, s133(1)(b) …
permits a creditor to seek the court’s imprimatur to initiate
or continue legal proceedings against
the company in the event of a
practitioner’s refusal to give consent, or directly, even
without the permission of the practitioner
having been sought. So
s133(1)(a) is not an absolute bar to legal proceedings being
instituted or continued against a company under
business rescue. This
is a strong indication that non- compliance with the section is not
to be visited with the sanction of a
nullity.
Moreover, there is no
other indication in the section that non-compliance carries with it
the implication that the proceedings are
a nullity. ”
[13]
(my
emphasis)
74.
The Court
concluded that properly construed, non-compliance does not in and of
itself invalidate legal proceedings instituted without
the business
rescuer’s consent.
[14]
75.
It is evident from this decision that at heart the consent and leave
requirements, s133(1)(a) and (b) have a procedural and
pragmatic
purpose. They are not intended to non-suit a creditor who, like
Standard Bank in this case,
bona fide
seeks to enforce its
rights in circumstances where its lack of knowledge of the company’s
status results in the non-compliance
with s133(1)(a) or (b). To do so
would place form over substance, and would elevate what are
essentially requirements directed
at procedure to the status of a
substantive jurisdictional requirements.
76.
The effect of the section is to stay the initiation or further
conduct of proceedings unless consent or leave is obtained. It
does
not, on its own, nullify them. A court can refuse leave, in which
case the stay will persist, or it may grant leave, in which
case
proceedings may commence or continue.
77.
A court could also, as Mr Tayob asks this court to do, set aside an
order granted without leave. But this is not the automatic
result for
an order obtained without consent or leave of the court. As the SCA
pointed out in
Chetty
, leave or consent is not a
jurisdictional requirement, and non-compliance does not render the
proceedings a nullity. It is implicit
in this that a court has a
discretion to set aside an order obtained without leave or consent,
but is not obliged to do so.
78.
What this means is that in a case like the present, the fact that the
perfection order was obtained without consent or leave
is a factor
the court must consider on the return day, or on reconsideration, of
the provisional order. The court may discharge
or set aside the
provisional order for want of compliance with the consent or leave
requirement. However, it would be perfectly
proper for a court to
refuse to set aside or discharge such on order on the grounds of
non-compliance with s133(1)(a) or (b) in
appropriate circumstances.
79.
The present matter is a good example of a situation where there is no
warrant for staying, or reversing the perfection proceedings.
Standard Bank acted in good faith in instituting its perfection
application and obtaining and executing the perfection order. It
cannot be faulted for failing to comply with the requirements of
s133(1). In fact, it was the conduct of the directors of the company
that led to this state of affairs.
80.
What is more, I have found that it is just and equitable to set aside
the resolution placing the company in business rescue.
Quite
obviously, no point would be served by setting aside or discharging
the perfection order in these circumstances. Standard
Bank acted
bona
fide
in obtaining the order in the first place. It ought not to
be deprived of its secured creditor status because it was actively
prevented
from complying with the section in the first place.
81.
For these reasons, I find no merit in Mr Tayob’s contention
that the perfection order ought to be discharged.
82.
There is a
second reason why Mr Tayob’s quest to have the perfection order
discharged must fail. Section 130(5)(c) gives a
court the power to
make any further and necessary orders when it sets aside a business
rescue resolution and terminates business
rescue proceedings. In
Alderbaran
(Pty) Ltd and Another v Bouwer and Others
[15]
the Western Cape Court found that the specific orders contemplated
in
sub-paragraphs
(i)
and
(ii)
of
that
section
did
not
constitute
a
numerus
clausus
of
orders that a court may make when setting aside a resolution. The
court held further that:
“
To my mind the
rationale for the wide discretion conferred on the court in
s130(5)(c)to grant 'any further necessary and appropriate
order’
is to equip the court to deal equitably with the various
circumstances which may arise and require regulation following
the
setting-aside of a s129 resolution and termination of business
rescue. The discretion must be exercised judicially, and the
only
limit on the further order which may be made is that it must be both
necessary and appropriate.”
83.
The court went on to find that it was necessary and appropriate to
make an order confirming the validity of a sale in execution
of
property that had taken place before the creditor in question was
aware that the debtor had been placed in business rescue.
The
circumstances of that case were virtually on a par with those in this
matter.
84.
I align myself with the approach adopted and conclusion reached by
the Court in
Alderbaran
in this regard. If the only case
before me was the business rescue application, I would have confirmed
the validity of the perfection
order through the exercise of my
discretion under s130(5)(c) for the same reasons as the court did in
Alderbaran
. As matters stand, however, I am faced, at the same
time, with an application to set aside the perfection order, and a
counter-application
to confirm it under a separate case number, and
in separate proceedings. In my view, the procedurally correct
approach for me to
adopt is to grant the appropriate relief under the
perfection order application. The orders set out below make provision
for this.
CONCLUSION
AND ORDERS
85.
For all of the reasons set out above I find that Standard Bank is
entitled to the relief it seeks in terms of the business rescue
application, including an order placing the company in provisional
liquidation. I am also satisfied that there is no legal basis
for
discharging or setting aside the perfection order. The effect of this
is that the perfection order remains a valid order and
Standard Bank
is entitled to whatever rights of security flow from it.
86.
As the company is now in liquidation, the costs of the applications
must be costs in the winding up.
87.
I make the following orders:
ORDER
UNDER CASE NUMBER 18085/2020
1.
This application is urgent and compliance with the forms and service
provided for in the rules of court are dispensed with to
the extent
required or necessary.
2.
It is declared that:
1.1. the resolution taken
by the board of directors of the first respondent and filed on 7 July
2020 is set aside; and
1.2. the business rescue
proceedings of the first respondent have ended.
3.
The first respondent is placed under provisional winding up.
4.
All persons who have a legitimate interest in this matter are called
upon to put forward their reasons why this court should
not order the
final winding up of the first respondent on
26 October 2020
at
10:00 am or so soon thereafter as
counsel
may be heard.
5.
A copy of this order shall be served on the first respondent at its
registered address.
6.
A copy of this order shall be published forthwith once in the
Government Gazette.
7.
A copy of this order shall be forwarded to each known creditor by
prepaid registered post or electronically receipted telefax
transmission.
8.
A copy of this order shall be served on:
7.1. every known trade
union representing employees of the first respondent, if any;
7.2. the employees of the
first respondent, if any, by affixing a copy of the order to any
notice board to which the employees have
access inside the first
respondent's premises, or if there is no access to the premises by
the employees, by affixing a copy to
the front gate, where
applicable, failing which to the front door of the premises from
which the first respondent conducted any
business at the time of the
presentation of the application; and
7.3. the South African
Revenue Service.
9.
The costs of this application, including the costs occasioned by the
first and second respondents opposing this application,
shall be
costs in the winding up of the first respondent, and the costs of the
applicant are to include the costs of two counsel.
ORDER
UNDER CASE NUMBER 16611/2020
1.
The provisional order granted under the above case number by Lamont J
on 14 July 2020 is confirmed and made final.
2.
The costs of the application, including the costs of the respondent
anticipating the return day and opposing the order shall
be costs in
the winding up of the first respondent, and the costs of the
applicant are to include the costs of two counsel.
________________________
R KEIGHTLEY
JUDGE
OF THE HIGH COURT
GAUTENG
LOCAL DIVISION, JOHANNESBURG
Date
of hearing: 05 AUGUST 2020
Date
of judgment: 14 AUGUST 2020
Appearances:
Counsel
for the Applicant: Adv. JE SMIT Adv. De Oliveira
Instructing
Attorneys: Jason Michael Smith Inc. Attorneys
Counsel
for the Respondents: Adv. D Prinsloo
Instructing
Attorneys: Roestoff Attorneys
[1]
Act 71 of 2008
[2]
Section 129(2)(b)
[3]
2015 (5) SA 63
(SCA), confirmed in Eravin Construction CC v Jacobus
Nicolaas Bekker N O and Another
[2016] ZASCA 30
(30 March 2016)
[4]
Panamo Properties, above, paras 31-33
[5]
Section 128(1)(b) read with s128(1)(h)
[6]
Oakdene Square Properties (Pty) Ltd & Others v Farm
Bothasfontein (Kyalami) (Pty) Ltd & Others 2013 (4) SA 539 (SCA)
[7]
Para 29
[8]
Para 31
[9]
Oakdene, above, para 38
[10]
Griessel and Another v Lizemore and Others
2016 (6) SA 236
(GJ),
paras 82-87
[11]
Chetty t/a Nationwide Electrical v Hart and Another NNO
2015 (6) SA
424
(SCA)
[12]
At para 37
[13]
At paras 39-41
[14]
At para 42
[15]
Alderbaran (Pty) Ltd and Another v Bouwer and Others
2018 (5) SA 215
(WCC)