Orion Real Estate Limited v ERF 195 Elma Park Limited and Others (3708/2021) [2023] ZAGPJHC 501 (17 May 2023)

78 Reportability

Company Law

Brief Summary

Business Rescue — Conversion from liquidation to business rescue — Applicant sought to convert liquidation proceedings of ERF 195 Elma Park Limited to business rescue under the Companies Act, 2008 — Sixth respondent, a body corporate and creditor, opposed the conversion — Key issue involved the transfer of Erf 257, necessary for business rescue, from SBD Investments back to the first respondent — Consent order granted allowing conversion to business rescue and requiring transfer of Erf 257 — Costs of the proceedings ordered to be costs in the business rescue.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings concerned an application by Orion Real Estate Limited (the applicant) to convert the liquidation of ERF 195 Elma Park Limited (in liquidation) (the first respondent) into business rescue proceedings in terms of section 131 of the Companies Act 71 of 2008, together with ancillary relief. The applicant cited the joint provisional liquidators of the first respondent as additional respondents, as well as the Master of the High Court (Johannesburg).

The Body Corporate Elma Park (the sixth respondent), a creditor and an affected person in relation to the first respondent, was granted leave to intervene and opposed the conversion to business rescue on various grounds. During the hearing, developments regarding the availability of a key property asset led to engagement between the applicant and the sixth respondent, culminating in an agreed consent order converting liquidation to business rescue and directing the transfer of that property.

Although the principal relief (conversion to business rescue) was resolved by consent, the parties could not agree on the incidence of costs. The court accordingly reserved judgment on costs and later delivered a separate decision determining how costs should be dealt with in light of the conversion and the parties’ evolving positions.

The dispute related generally to the appropriate mechanism for dealing with the financially distressed first respondent’s assets—specifically whether liquidation should continue or be converted to business rescue—and, following settlement of that aspect, how the costs of the conversion application should be allocated in circumstances where the conversion was achieved through a consent order reached after clarifications made during oral argument.

Material Facts

The first respondent’s principal assets comprised sectional title units in the Elma Park sectional title scheme, consisting of two retail commercial units and seventeen residential units. The remaining units in the scheme were residential units owned by other persons. The court treated as significant that the commercial units potentially represented a substantial component of value, but that realising or “unlocking” this value was tied to the availability of parking.

A central factual feature was the position of a separate property, Erf 257 Elma Park Extension 2 Township (Erf 257). It was treated as common cause that Erf 257 was important to any successful business rescue because it would constitute the necessary parking area, particularly for the commercial retail units.

The court recorded that, after a winding-up application against the first respondent had been launched but before a provisional winding-up order was granted, the applicant (then still in control of the first respondent) caused Erf 257 to be transferred from the first respondent to its subsidiary, SBD Investments (Pty) Limited. After the appointment of provisional liquidators, they instituted proceedings under section 341(2) of the Companies Act 61 of 1973 to have Erf 257 returned to the insolvent estate of the first respondent. On the papers before the court, no opposing papers had been filed in those section 341(2) proceedings. The court noted that the launching of the business rescue application would in any event have the effect that those proceedings would be suspended.

In opposing business rescue, the sixth respondent raised, among other objections, that a major obstacle to business rescue and to unlocking value in the first respondent’s assets was that Erf 257 needed to be “returned” to the first respondent. In response, the applicant’s attorneys had made a tender indicating it was “willing to consider” making Erf 257 available for purposes of advancing business rescue. During argument, the court raised concerns that the earlier correspondence did not clearly amount to a firm commitment to make Erf 257 available.

After taking instructions, counsel for the applicant clarified that Erf 257 would indeed be made available on condition that the first respondent was placed into business rescue, so that the business rescue practitioner could have the property available in advancing rescue. It was also conveyed that SBD Investments, as the transferee and registered owner, was agreeable to being joined and to being bound by an order directing transfer of Erf 257 to the first respondent.

Following a stand-down to enable discussions, the applicant and the sixth respondent reached agreement on a consent order, which the court granted. The liquidators, who had filed a notice to abide, were approached regarding the proposed consent order and raised no objection.

The only aspect left for determination was costs, with the applicant contending that its costs should be costs in the business rescue, and the sixth respondent contending that the applicant should not recover costs from the business rescue and should instead pay the sixth respondent’s costs.

Legal Issues

After the consent order resolved the substantive relief converting liquidation to business rescue, the central legal question that remained for determination was a costs allocation question, namely whether the costs of the applicant (and/or the sixth respondent) should be borne by one of the parties directly, or instead treated as costs in the business rescue of the first respondent.

This was primarily a matter of judicial discretion applied to the circumstances of the case. The dispute did not turn on resolving contested evidence through credibility findings; instead, it required a value judgment about what costs order would be appropriate given the conversion to business rescue, the parties’ conduct during the proceedings, and the practical implications for the prospects of a successful rescue.

A subsidiary issue, in the court’s framing, was how a costs order might affect the dynamics between the parties going forward, and whether a particular costs order might create an impediment to the cooperative engagement necessary for business rescue to succeed.

Court’s Reasoning

The court approached the question of costs in the context that the matter had culminated in a consent order converting liquidation to business rescue and compelling the transfer of Erf 257 from SBD Investments to the first respondent. In that setting, the court considered it important that the parties’ remaining dispute concerned costs only, and that the business rescue process would require a degree of cooperation between affected parties to be effective.

The applicant argued that it had been substantially successful because the conversion to business rescue it sought was granted, and therefore its costs should be treated as costs in the business rescue. The sixth respondent, by contrast, contended that the applicant should not be permitted to recover costs from the business rescue and should instead pay the sixth respondent’s costs. The sixth respondent’s submissions included that, absent the court’s engagement during argument and the resulting clarified tender to “return” Erf 257, success would have been unlikely given the difficulties the court raised with the applicant’s case as argued.

The court identified as persuasive the submission that, once business rescue was to proceed, an order requiring one party to pay the other’s costs (instead of making costs costs in the business rescue) would likely fuel ongoing friction between key stakeholders and thereby hamper the prospects of a successful rescue. The court treated this as a practical consideration bearing directly on the appropriateness of the costs order in the circumstances.

The court also assessed the applicant’s position in light of the clarified tender by its subsidiary (SBD Investments) to transfer Erf 257 back to the first respondent. On this basis, the court accepted that the applicant now had a real vested interest in advancing business rescue rather than using it as a dilatory tactic. This assessment was relevant to the court’s discretionary evaluation of what costs order would best support the business rescue process.

In addition, the court considered that making the sixth respondent’s costs costs in the business rescue would give impetus to the sixth respondent to cooperate in a successful rescue, since the likelihood of recovering its costs would be improved if the rescue succeeded. The court noted that a successful business rescue was unlikely to entail anything less than the costs of the application being paid in due course.

The court further reasoned that, if business rescue failed and liquidation resumed, then treating the parties’ costs as costs of business rescue would have the appropriate preference in the insolvency ranking, as provided for in Chapter 6 of the Companies Act 71 of 2008.

Finally, the court expressly refrained from determining, in its reasons on costs, the merits of the sixth respondent’s various objections concerning the applicant’s conduct leading up to and during the winding-up. It recorded that this restraint followed from the consent order resolving the substantive dispute, while noting that this did not mean the sixth respondent’s concerns were without merit.

Outcome and Relief

The court confirmed the consent order (granted by agreement between the applicant, the sixth respondent, and SBD Investments) converting the liquidation of the first respondent to business rescue and directing the transfer of Erf 257 to the first respondent, with ancillary provisions including authorising the sheriff to sign transfer documents should SBD Investments fail to do so, and providing that the transfer costs would be costs in the business rescue.

On the reserved issue of costs, the court exercised its discretion to order that both the applicant’s costs and the sixth respondent’s costs would be costs in the business rescue of the first respondent.

No punitive costs order was made. The effect of the order was that neither party was required to pay the other’s costs directly; instead, the costs were to be dealt with within the business rescue framework.

Cases Cited

No cases were cited in the judgment.

Legislation Cited

Companies Act 71 of 2008 (section 131; Chapter VI).

Companies Act 61 of 1973 (section 341(2)).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, following the conversion of the first respondent’s liquidation to business rescue by consent, and having regard to the need to avoid further friction between affected parties and to promote the prospects of a successful business rescue, it was appropriate that the costs of both the applicant and the sixth respondent be treated as costs in the business rescue of the first respondent. The court therefore ordered that the applicant’s costs and the sixth respondent’s costs would be costs in the business rescue.

LEGAL PRINCIPLES

A court retains a discretion in relation to costs, and in exercising that discretion it may take account of the practical consequences of a costs order on the ongoing relationship and cooperation between stakeholders, particularly in a business rescue context where cooperation may be important to achieving the statutory objectives of rescue.

Where liquidation is converted to business rescue and disputes are resolved through a consent order, the allocation of costs may appropriately be structured in a manner that supports the functioning and prospects of the business rescue proceedings, including by treating parties’ costs as costs in the business rescue rather than awarding costs against one party in favour of another.

In circumstances where business rescue may later fail and liquidation may resume, costs characterised as costs in the business rescue may have the preference provided for under the statutory framework governing business rescue (as referenced by the court in relation to Chapter 6 of the Companies Act 71 of 2008).