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[2013] ZASCA 68
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Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others (609/2012) [2013] ZASCA 68; 2013 (4) SA 539 (SCA); [2013] 3 All SA 303 (SCA) (27 May 2013)
Links to summary
THE SUPREME COURT OF APPEAL OF
SOUTH AFRICA
JUDGMENT
REPORTABLE
Case No: 609/2012
In
the matter between:
OAKDENE SQUARE PROPERTIES (PTY) LTD
.............................
FIRST
APPELLANT
EDUCATED RISK INVESTMENTS 54 (PTY)
LTD
.....................
SECOND
APPELLANT
DIMETRYS THEODOSIOU
.............................................................
THIRD
APPELLANT
ANTONYS THEODOSIOU
..........................................................
FOURTH
APPELLANT
v
FARM BOTHASFONTEIN (KYALAMI) (PTY)
LTD
......................
FIRST
RESPONDENT
NEDBANK LIMITED
................................................................
SECOND
RESPONDENT
IMPERIAL HOLDINGS LIMITED
.................................................
THIRD
RESPONDENT
Neutral citation:
Oakdene Square Properties (Pty) Ltd
v Farm Bothasfontein (Kyalami) (Pty) Ltd
(609/2012)
[2013] ZASCA 68
(27 May 2013).
Coram:
Brand,
Cachalia JJA, Van der Merwe, Zondi et Meyer AJJA
Heard:
8
May 2013
Delivered: 27 May 2013
Summary:
Companies Act 71 of 2008
–
application for business rescue in terms of
s 131(4)
–
whether court’s decision amounts to exercise of discretion –
what applicant has to show to satisfy requirement
of ‘reasonable
prospect for rescuing the company’.
________________________________________________________________
ORDER
________________________________________________________________
On appeal from:
South
Gauteng High Court, Johannesburg (CJ Claassen J sitting as court of
first instance):
The appeal is dismissed with costs in
favour of second and third respondents, including in both instances,
the costs of two counsel.
________________________________________________________________
JUDGMENT
________________________________________________________________
BRAND JA
(CACHALIA
JJA, VAN DER MERWE, ZONDI ET MEYER AJJA CONCURRING):
[1] This appeal has its origin in an
application by the four appellants in the South Gauteng High Court,
Johannesburg, for an order
placing the first respondent, Farm
Bothasfontein (Kyalami) (Pty) Ltd (the company) under supervision and
commencing business rescue
proceedings as contemplated in chapter 6
of the
Companies Act 71 of 2008
. The second and third respondents not
only opposed the main application, but sought the liquidation of the
company instead. When
the matter came before Claassen J it was plain
that, unless the business rescue application was successful, the
winding-up of the
company would inevitably follow. In the event
Claassen J refused the business application with costs and granted
the liquidation
order sought. The appeal against that judgment, which
has since been reported
sub
nom Oakdene Square Properties (Pty) Ltd and others v Farm
Bothasfontein (Kyalami) (Pty) Ltd and others
2012
(3) SA 273
(GSJ), is with the leave of this court.
The parties
[2] I find it convenient to start with
an introduction of the appellants and the capacities in which they
were cited. The first
appellant is Oakdene Square Properties (Pty)
Ltd (Oakdene). The second appellant is Educated Risk Investments 54
(Pty) Ltd (Educated
Risk), while the third and fourth appellants are
Mr Dimetrys Theodosiou and his brother Antonys. Oakdene alleges that
it is a creditor
of the company, while Educated Risk contends that it
is a 40 per cent shareholder of the company. The two Theodosiou
brothers have
an interest in both Oakdene and Educated Risk. But for
their
locus standi
they
rely on the allegation that they are the trustees of the MJF Trust
which, so they say, previously owned the 40 per cent shares
in the
company now held by Educated Risk.
[3] The reason why the capacities of
the appellants are couched in such guarded terms is because they are
clouded by some of the
numerous disputes of fact that arose on the
papers. Small wonder therefore that the court a quo commenced its
judgment with a reference
to the observation by Harms DP in
National
Director of Public Prosecutions v Zuma
[2009] ZASCA 1
;
2009
(2) SA 277
(SCA) para 26 to the effect that motion proceedings such
as these are aimed at ‘the resolution of legal issues based on
common
cause facts’. They are simply not geared toward the
decision of factual disputes. In consequence, so Harms DP reminded
us,
it is well established that, where in motion proceedings disputes
of fact arise on the papers, the matter can only be decided on
the
respondent’s version of the disputed facts, unless that version
is so farfetched or clearly untenable that it can justifiably
be
rejected merely on the papers. 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. That approach
was rightly
adopted by the court a quo in dealing with the disputes of fact that
proved to be pertinent in this case and it goes
without saying that
that is also the course I intend to pursue.
[4] But, to complete the introduction
of the parties: the first respondent, as I have said, is the company.
The second respondent
is Nedbank Limited (Nedbank) and the third
respondent is Imperial Holdings Limited (Imperial). Unlike those of
the appellants,
the interests of Nedbank and Imperial in the matter
are not in dispute. These interests include the following: Nedbank
and Imperial
each holds 30 per cent of the shares in the company and
they are each owed R7.5 million by the company in the form of a
shareholder’s
loan. Moreover, Nedbank is a secured creditor and
has in fact obtained summary judgment against the company in the sum
of R31 247 099;
together with interest at 12 per cent per
annum (which runs in excess of R320 000 per month) from 1 June
2011; and costs.
The application
[5] The concept of ‘business
rescue’ had been introduced into our law for the first time in
Chapter 6 of the 2008
Companies Act which
came into operation on 1
May 2011. There have been several decisions in the High Court dealing
with these provisions. But this
is the first time that this court has
been called upon to interpret and apply some of them. From the nature
of things, a more detailed
analysis of the relevant provisions is
therefore bound to follow. Yet I find it helpful, for introductory
purposes, to state the
essential requirements for an application of
this kind. These are essentially to be found in
s 131
of the
Act, which provides in relevant part:
‘
131(1)
Unless a company has adopted a resolution contemplated in
section 129
[which provides for voluntary business rescue proceedings], an
affected person may apply to a court at any time for an order placing
the company under supervision and commencing business rescue
proceedings.
(2)
. . .
(3)
. . .
(4)
After considering an application in terms of subsection (1), the
court may –
(a)
make an order placing the company under supervision and commencing
business rescue proceedings, if the court is satisfied that
-
(i)
the company is financially distressed;
(ii)
the company has failed to pay over any amount in terms of an
obligation under or in terms of a public regulation, or contract,
with respect to employment-related matters; or
(iii)
it is otherwise just and equitable to do so for financial reasons,
and there is a reasonable prospect for rescuing the company;
or
(b)
dismissing the application, together with any further necessary and
appropriate order, including an order placing the company
under
liquidation.’
[6] With reference to
s 131(1)
,
the definition of ‘affected person’ in
s 128(1)
–
which is the definition section for purposes of chapter 6 –
includes a shareholder or creditor of the company. On
the face of it,
Educated Risk is the registered holder of 40 per cent of the shares
in the company. Although its entitlement to
those shares is disputed,
it therefore appears to qualify as an ‘affected person’.
In these circumstances the court
a quo found it unnecessary (in para
13 of its judgment) to resolve the disputes surrounding the
locus
standi
of the other three
applicants. I agree with this approach. ‘Financially
distressed’ is also defined, in
s 128(1)
(f)
,
to mean:
‘
.
. . that –
(i)
it appears to be reasonably unlikely that the company will be able to
pay all of its debts as they become due and payable within
the
immediately ensuing six months; or
(ii)
it appears to be reasonably likely that the company will become
insolvent within the immediately ensuing six months.’
[7] It is common cause that, although
the company appears to be factually solvent in that the value of its
assets, at least on the
face of it, exceeds its debts, it is unable
to satisfy the judgment debt in favour of Nedbank. This means that it
is both commercially
insolvent – for liquidation purposes –
and ‘financially distressed’ within the contemplation of
s 131(4)
(a)
(i).
More problematic is the further requirement imposed by the section;
that is, whether or not there was ‘a reasonable prospect
of
rescuing the company’. This question, I believe, can only be
resolved with reference to the background facts.
Background
[8] The company owns three immovable
properties adjoining one another which are held under separate title
deeds, namely, (a) portion
169 of the farm Bothasfontein, measuring
about 69 hectares in extent, which constitutes what is known as the
Kyalami Racetrack;
(b) erf 5 Kyalami measuring about 2.3 hectares;
and (c) erf 6 Kyalami, measuring about 1.3 hectares. On the papers
these properties
are jointly referred to as the ‘immovable
property’ and I find it convenient to follow the same
description.
[9] All the shares in the company were
previously held by the Automobile Association of South Africa (the
AA). During March 2004
the AA sold these shares to Mr Michael Fogg,
acting on behalf of the MJF Trust. A suspensive condition of the sale
provided that
the company would repay its debt of R42 million to the
AA. In order to do so, the company obtained a loan of R28 million
from Nedbank
against registration of a mortgage bond over the
immovable property. To raise the shortfall which, together with
expenses, amounted
to R15 million, the MJF Trust, represented by
Fogg, entered into a memorandum of understanding (the MOU), dated 29
June 2004, with
Imperial and a predecessor of Nedbank, known as
Imperial Bank Ltd. Since nothing turns on the difference in the roles
played by
Nedbank, on the one hand, and its predecessor, on the
other, I shall refer to them both as Nedbank.
[10] For present purposes, the main
features of the MOU were the following:
(a) Nedbank and Imperial undertook to
put up a bank guarantee for R15 million and each became entitled to
30 per cent of the shares
in the company.
(b) The MJF Trust, Imperial and
Nedbank would each nominate a director to the board of the company
with a chairman and a fifth director
to be jointly nominated by all
three.
(c) The MJF Trust undertook to
transfer the shares to Imperial and Nedbank; to appoint their
nominees as directors; and to sign
all documents necessary for the
appointment of the remaining directors. All this was to happen upon
registration of the mortgage
bond in favour of Nedbank.
[11] Nedbank and Imperial advanced the
R15 million in the form of shareholders’ loans of R7.5 million
each and the Nedbank
mortgage bond was registered. Despite all this,
the MJF Trust failed to comply with its obligations under the MOU. As
a result,
Nedbank and Imperial successfully brought an application in
the High Court to compel performance of these obligations. However,
when they eventually became members of the company, pursuant to the
High Court’s order, Nedbank and Imperial discovered that
in the
meantime, Fogg had caused the company to enter into a lease agreement
with Motortainment Kyalami (Pty) Ltd (Motortainment),
a company
wholly owned by the MJF Trust. In terms of the lease, Motortainment
became entitled to occupy the immovable property
of the company for
seven years, with the right of renewal for a further seven years,
terminating in 2018. What is more, Nedbank
and Imperial also
discovered that six days before they became members of the company,
Fogg and his wife had resigned as trustees
of the MJF Trust pursuant
to a cession transaction in terms of which the beneficiaries of the
MJF Trust – the Foggs and their
two children – ceded all
their rights in the trust to Educated Risk. These rights included the
40 per cent shareholding in
the company. Educated Risk, as we know,
is controlled by the two Theodosiou brothers. In consequence they
were also appointed as
the trustees of the MJF Trust, in which
capacities they controlled both the company and Motortainment.
[12] Following upon the discovery of
these transactions, Nedbank and Imperial launched two proceedings in
the High Court: first,
an action to set aside the lease to
Motortainment and, secondly, an application to enforce their alleged
pre-emptive right –
in terms of the articles of the company –
to the 40 per cent shareholding previously held by the trust, which
were now held
by Educated Risk. Neither case has been finalised. In
the meantime, Motortainment was liquidated at the behest of Absa Bank
Limited.
In an apparent attempt to avoid the consequences of this
liquidation, the Theodosiou brothers ceded Motortainment’s
rights
in terms of the lease to another company under their control,
Kyalami Events and Exhibitions (Pty) Ltd (Kyalami Events). This
caused
Nedbank and Imperial to bring a further application to the
High Court for the eviction of Kyalami Events and Motortainment (in
liquidation) from the immovable property. Shortly thereafter the
business rescue application was launched by the four appellants.
In
the event the business rescue application and the eviction
application were simultaneously heard by Claassen J in the court
a
quo. By virtue of the liquidation order granted in respect of the
company in the business rescue application, Claassen J ordered
that
the eviction application be suspended in terms of
s 359
of the
(old) Companies Act 61 of 1973, pending the appointment of a
liquidator for the company.
[13] Further events involving the
Theodosiou brothers were the following:
(a) According to a note in the
financial statements of the company for the year ended 31 December
2005, the company sold its rights
to develop its immovable property
to yet another company controlled by the Theodosiou brothers, at a
price of R112 530 000,
which is reflected as an interest
free loan by the company with no fixed terms of repayment. With
reference to this note, the auditors
of the company entered the
qualification that they were unable to verify the recoverability of
the purchase price.
(b) According to a letter written by
Antonys Theodosiou, as director of Kyalami Events, to his brother
Dimetrys, as director of
the company, on 2 August 2007, the company’s
‘income stream’ derived from its immovable property had
been ceded
to Oakdene. It is not clear what happened with that
‘income stream’ between 2 August 2007 and March 2011. But
it is
common cause that from the latter date the company received no
income from its assets. That seems to be the main reason why it was
in no position to reduce its liability to Nedbank under the mortgage
bond which in turn led to the latter obtaining judgment.
[14] Dimetrys Theodosiou is a director
of the company as nominee of the MJF Trust. The company also has two
other directors who
were nominated to the board by Nedbank and
Imperial. Initially the management of the company’s affairs was
largely left to
Theodosiou. As a result of the way in which he
performed this function, so Nedbank and Imperial alleged, they
decided that their
nominees should become more directly involved in
the company’s affairs. When they informed Theodosiou of that
decision, his
response was, however, that the company’s board
of directors had never been properly constituted. The basis he relied
upon
for that response was that the original tri-partite agreement,
embodied in the MOU, provided for a chairman and a fifth director
to
be appointed by mutual agreement, which had never occurred. Every
majority decision by the nominees of Nedbank and Imperial
that
Theodosiou found unacceptable was therefore simply met by the same
response that no valid decision could be taken by an improperly
constituted board. In the result the board became largely
dysfunctional. The fact that no further directors could be agreed
upon
created a catch-22 situation.
[15] Lastly, with regard to the
background facts, it is apparent that the business rescue application
was brought in the wake of
Nedbank’s arrangements of a sale in
execution pursuant to the High Court judgment in its favour for about
R31.5 million,
together with interest and costs. Understandably, in
the circumstances, the crux of the appellants’ case in their
founding
affidavit was that a forced sale in execution would be to
the detriment of the shareholders and creditors of the company. If
the
immovable property were to be sold in an execution sale, so they
contended, it would realise no more than R120 million. If, on the
other hand, the property were to be sold in the normal course, the
appellants said, it could realise its true market value which
was
determined by their experts at between R300 million and R350 million.
Hence the purpose of the business rescue application
was not to
ensure the continued existence of the company on a solvent basis. On
the contrary, the essential aim of the application
was formulated in
the appellants’ founding affidavit in the following way:
‘
In
the event of this Honourable Court granting the relief sought herein,
it will facilitate the sale of the Property by way of normal
means as
opposed to by way of a forced sale. . . .
The
further liabilities [of the company] . . . will be settled with the
balance of the funds (after settling [Nedbank]) realised
by way of
the normal and arm’s length sale of the Property in accordance
with the business rescue plan.’
[16] In their answering affidavit,
Nedbank and Imperial denied the valuation of the immovable property
by the appellants’
experts in excess of R300 million. For this
denial they relied primarily on a valuation by their own experts of
R97 million for
portion 169 of the farm Bothasfontein and R32 million
for erven 5 and 6 Kyalami, thus amounting to a total valuation of
R129 million
for the immovable property as a whole. Yet it seems that
no valuation on behalf of any party took note of either the alleged
alienation
of the company’s right to develop its property, or
the existing long term lease of the immovable properties which
endures
until 2018. The influence of these on the value of the
property is therefore unknown. But, on the face of it, the assets of
the
company are worth at least R129 million. Although the liabilities
of the company are also in dispute, it appears to be common cause
that they add up to no more than about R75 million. Again, purely on
the face of it and without any proper analysis, the company
thus
appears to be factually solvent.
[17] However, of greater significance,
with reference to the answering affidavits, was the position taken by
Nedbank with regard
to the execution sale. Since it was moving for
the liquidation of the company, so Nedbank said, it no longer
intended to pursue
the forced sale of the immovable properties in
execution. In this light, the whole purpose of the business rescue
application as
formulated in the founding affidavit – which was
to avoid a sale in execution – essentially fell by the wayside.
In
their replying affidavit the appellants nonetheless pursued their
application for business rescue on the basis that it would yield
a
better return than liquidation. They did so on the following three
grounds:
(a) A business rescue practitioner
would be able to realise the immovable property at a higher price
than a liquidator.
(b) The costs of a business rescue
practitioner are likely to be considerably lower than those of a
liquidator.
(c) The sale of the two Kyalami erven
forming part of the property would be sufficient to satisfy Nedbank’s
secured claim,
which would leave the business rescue practitioner in
a position to trade with the remaining 69 hectares of the farm
Bothasfontein.
The nature of the court’s
discretion under s 131(4)
[18] Against this background I can now
turn to the legal principles involved. First amongst these concerns
the intrinsic nature
of the decision taken by the court a quo when it
refused the business rescue application. The issue has its origin in
the contention
by Nedbank and Imperial that, because the decision by
the court a quo derived from the exercise of a discretion, this
court’s
authority to interfere with that decision is limited.
The contention has its roots in the well-established principle that a
court
of appeal is not allowed to interfere with the exercise of a
discretion merely because it would have come to a different
conclusion.
It may interfere only if the lower court had been
influenced by wrong principles of law, or a misdirection of fact, or
if it had
failed to exercise a discretion at all. The reason for the
limitation, it is said, is because, in an appeal against the exercise
of a discretion, the question is not whether the lower court had
arrived at the right conclusion, but whether it had exercised
its
discretion in a proper manner (see eg
Mabaso
v Law Society of the Northern Provinces
[2004] ZACC 8
;
2005
(2) SA 117
(CC) para 20). Equally well-settled, however, is the
principle that this limitation on interference only applies to the
exercise
of a discretion in the strict sense. What gives rise to the
emphasis on the ‘strict sense’ in this context, is that
the term ‘discretion’ is sometimes used in the loose
sense to indicate no more than the application of 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.
[19] Assuming therefore that the
court’s function under s 131(4) can be said to constitute
the exercise of a ‘discretion’,
the question remains
whether it is a discretion in the strict sense or not. The guiding
principles, I believe, are to be found
in
Knox
D’Arcy Ltd v Jamieson
[1996] ZASCA 58
;
1996
(4) SA 348
(SCA), which principles have been approved and applied by
the Constitutional Court on several occasions, eg in
Giddey
NO v J C Barnard & Partners
[2006] ZACC 13
;
2007
(5) SA 525
(CC) paras 19-23. As explained by Grosskopf JA in
Knox
D’Arcy
(at
361C-D), a discretion in the strict sense is confined to those
instances where the lower court could legitimately adopt any
one of a
range of options about which there may well be a justifiable
difference of opinion as to which one would be the most appropriate.
An award of general damages, for example, may vary from say R90 000
to R120 000. No award within that range could be
described as
‘wrong’. That is a discretion in the strict sense. Since
all these options would be legitimate, the choice
of any one of them
could therefore not be said to be inappropriate, as long as the
choice was properly made.
[20] Reference
to a ‘discretion’ without these attributes does not
convey the meaning of a ‘discretion in the
strict sense’.
Even if a discretion without these qualifications is described as a
‘wide discretion’, it conveys
no more than the meaning
that the court is entitled to have regard to a variety of diverse and
contrasting considerations in reaching
a conclusion. But in the end,
that conclusion will be either right or wrong. And if it is wrong,
the court of appeal will be bound
to interfere (
Knox
D’Arcy
at
361H-I). That is a ‘discretion’ in the loose sense. In
Media
Workers Association of South Africa and others v Press Corporation of
South Africa Ltd (Perskor)
[1992] ZASCA 149
;
1992
(4) SA 791
(A) at 795-796, Grosskopf JA sought to explain the concept
of a discretion in the loose sense with reference to the threefold
distinction
between matters of fact, matters of law and matters of
discretion. The third category would therefore include all those
issues
arising in litigation which cannot be classified as either
questions of fact or questions of law. These would include, for
example,
the question whether the defendant acted reasonably in the
circumstances; or whether the legal convictions of the community
require
the imposition of delictual liability for the purpose of
defining wrongfulness; or whether the applicant for an interdict has
an
alternative remedy (see eg
Transvaal
Property & Investment Co and Reinhold & Co v SA Townships
Mining & Finance Corporation Ltd and the Administrator
1938
TPD 512
at 521). As I see it, a discretion in the loose sense would
therefore indicate all instances where the court is required to make
a value judgment (see also M M Corbett – address at the First
Orientation Course for New Judges – ‘Writing a
Judgment’
(1998) 115
SALJ
116 at
125; Harms
Civil
Procedure in the Supreme Court
C1.39).
With hindsight it would perhaps be better not to refer to these
instances of a discretion in the loose sense as the exercise
of a
discretion at all, but as the exercise of a value judgment. But since
the terminology has become so well entrenched, we can
do no better
than to heed the caution sounded, eg in
Knox
D’Arcy
,
that the limitations on the powers of a court of appeal are confined
to the exercise of a discretion in the strict sense.
[21] With this rather lengthy prelude
I can now revert to the pertinent question: does s 131(4) afford
the court a discretion
in the strict sense or not? I think the short
answer is ‘no’. In a case such as this, the court’s
discretion
is bound up with the question whether there is a
reasonable prospect for rescuing the company. The other pertinent
requirement
in s 131(4), namely, that the company must be
financially distressed, seems to turn on a question of fact. As to
whether there
is a reasonable prospect of rescuing the company, it
can hardly be said, in my view, that it involves a range of choices
that the
court can legitimately make; of which none can be described
as wrong. On the contrary, as I see it, the answer to the question
whether there is such a reasonable prospect can only be ‘yes’
or ‘no’. These answers cannot both be right.
The position
is comparable to the decision whether or not the conduct of a
defendant in a case based on negligence met the standards
of the
reasonable person, or whether the negligent conduct should attract
legal liability and thus be regarded as wrongful. Hence
it involves a
value judgment. And if the court of appeal should disagree with the
conclusion, it is bound to interfere. Hence the
question is whether
we agree with the conclusion reached by the court a quo that the
appellants had failed to establish a reasonable
prospect of rescuing
the company.
The meaning of ‘rescuing the
company’
[22] The next
debate between the parties turned on what would constitute ‘rescuing
the company’ within the contemplation
of s 131(4)
(a).
This
debate has its origin in the definition of that expression in
s 128(1)
(h)
,
read with 128(1)
(b)
(iii).
According to s 128(1)
(h)
,
‘rescuing the company’ means ‘achieving the goals
set out in the definition of “business rescue”
in
paragraph
(b)
’
.
Section 128 (1)
(b)
in turn
provides:
‘“
Business
rescue” means proceedings to facilitate the rehabilitation of a
company that is financially distressed by providing
for-
(i)
the temporary supervision of the company, and of the management of
its affairs, business and property;
(ii)
a temporary moratorium on the rights of claimants against the company
or in respect of property in its possession; and
(iii)
the development and implementation, if approved, of a plan to rescue
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
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;’
[23] The
potential business rescue plan s 128(1)
(b)
(iii)
thus contemplates has two objects or goals: a primary goal, which is
to facilitate the continued existence of the company
in a state of
insolvency and, a secondary goal, which is provided for as an
alternative, in the event that the achievement of the
primary goal
proves not to be viable, namely, to facilitate a better return for
the creditors or shareholders of the company than
would result from
immediate liquidation. In this light the debate arose whether a
business rescue application can succeed where
the proposed rescue
plan provides for the secondary goal only. In other words, whether
the requirement of ‘rescuing the company’
as contemplated
in s 131(4)
(a)
is
satisfied where it is clear from the outset that the company can
never be saved from immediate liquidation and that the only
hope is
for a better return than that which would result from liquidation. In
A
G Petzetakis International Holdings Ltd v Petzetakis Africa
(Pty)
Ltd
2012
(5) SA 515
(GSJ) this question was answered in the negative. The
reason for this decision appears to be encapsulated in para 2 of the
judgment
which reads:
‘
Section
131(4) does not incorporate the alternative object of the . . .
rescue plan which is referred to in s 128, namely a plan
which could
result in a better return for creditors or shareholders than would
result from immediate liquidation. It seems that
the intention of the
legislature on this point is as follows:
[17.1]
The requirements for the granting of a s 131 rescue order include
that the company under consideration must have a reasonable
prospect
of recovery.
[17.2]
Once a company is under business rescue, its rescue plan may be aimed
at the alternative object, namely a better return than
the return of
immediate liquidation.’
[24] In
Australia it is accepted, on the other hand, that recourse to the
rescue provisions of that country’s Corporations
Act 50 of 2001
– which are not dissimilar in wording to our s 128(1)
(b)
–
need
not necessarily be to save the company from liquidation. In
Dallinger
v Halcha Holdings (Pty) Ltd
[1995]
FCA 1727
para 28, for example, the Federal Court of Australia held
that the statutory rescue machinery ‘should be available in a
case
where, although it is not possible for the company to continue
in existence, an administration is likely to result in a better
return for creditors than would be the case with an immediate
winding-up’. This also appears to have been the approach, at
least by implication, in
Propspec
Investments (Pty )Ltd v Pacific Coast Investments 97 Ltd
2013 (1)
SA 542
(FB) para 7;
Koen
v Wedgewood Village Golf & Country Estate (Pty) Ltd
2012
(2) SA 378
(WCC) para 17.
[25] Nedbank and
Imperial contended that we should endorse the approach in
Petzetakis.
In
support of this contention they referred to the dictionary meaning of
‘rescue’ and ‘rehabilitate’ both
of which
convey the notion of a return or restoration to a normal healthy
state. When s 128(1)
(b)
therefore
defines ‘business rescue’ as ‘proceedings to
facilitate the rehabilitation of a company’, so they
argued, it
is clear that these proceedings must be aimed at the achievement of
the primary goal in s 128(1)
(b)
(iii),
that is, to restore the company to the normal healthy state of
solvency. The secondary objective, to provide a better deal
for
creditors and shareholders than liquidation, so their argument
proceeded, can only be an alternative goal of the proposed rescue
plan. It follows, so they concluded, that a proposed plan which holds
out no hope for a return of the company to a state of solvency,
but
provides at best for achievement of the secondary goal, does not
amount to ‘rescuing the company’ as defined by
s 128(1)
(h)
read with
s 128(1)
(b).
In
consequence, such a plan fails to satisfy the requirement to that
effect in s 131(4)
(a)
.
[26] Although I
have no problem with the dictionary meaning of ‘rescue’
and ‘rehabilitation’ on which the
argument relies, it
fails to recognise, I think, that s 128(1)
(b)
gives
its own meaning to these terms, which does not coincide with these
definitions. As I understand the section, it says that
‘business
rescue’ means to facilitate ‘rehabilitation’, which
in turn means the achievement of one of two
goals: (a) to return the
company to solvency, or (b) to provide a better deal for creditors
and shareholders than what they would
receive through liquidation.
This construction would also coincide with the reference in
s 128(1)
(h)
to
the achievement of the goals (plural) set out in s 128(1)
(b).
It
follows, as I see it, that the achievement of any one of the two
goals referred to in s 128(1)
(b)
would
qualify as ‘business rescue’ in terms of s 131(4).
[27] The
interpretation that business rescue proceedings are not limited to
the return of the company to solvency is, in my view,
also supported
by the historical context of Chapter 6. With regard to judicial
management under the
1973
Companies Act
,
one of the prerequisites – in s 427(1)
(b)
of that
Act – was ‘a reasonable probability that, if [the
company] is placed under judicial management, it will be enabled
to
pay its debts or to meet its obligations and become a successful
concern’. In the light of this requirement it was held,
eg in
Millman,
NO v Swartland Huis Meubileerders (Edms) Bpk: Repfin Acceptances Ltd
Intervening
1972
(1) SA 741
(C) at 745A that:
‘
.
. . even though it might be more advantageous to dispose of the
business of the company as one under judicial management rather
than
as one in liquidation, this is not a factor that should influence the
Court to grant an order of judicial management in respect
of a
company which will in all probability never be able to discharge more
than a percentage of its liabilities.’
[28] The
rhetorical question that arises is: why, as a matter of common sense
and policy, should this be so? Why should a company
not be
temporarily protected against claims of creditors if that will, as in
the case of
Millman,
NO
,
allow the sale of the business as a going concern at optimum value,
in order to give creditors and shareholders a better return
than
would result from liquidation? Why should the law in these
circumstances insist on the requirement that the creditors eventually
be paid in full? It has been suggested that this insistence on an
eventual return to solvency was one of the reasons why the
institution
of judicial management turned out to be an ‘abject
failure’ (see eg Carl Stein and Geoff Everingham
The
New Companies Act Unlocked
(2011)
at 409). I believe it can be accepted with confidence that the
legislature did not intend to repeat the mistakes of the past.
Hence
the pertinent question is – did the appellants establish a
reasonable prospect of achieving any one of the two goals
contemplated in s 128(1)
(b)
on the
facts of this case?
A reasonable prospect
[29] This leads
me to the next debate which revolved around the meaning of ‘a
reasonable prospect’. As a starting point,
it is generally
accepted that it is a lesser requirement than the ‘reasonable
probability’ which was the yardstick
for placing a company
under judicial management in terms of s 427(1) of the
1973
Companies Act
(see
eg
Southern
Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd
2012
(2) SA 423
(WCC) para 21). On the other hand, I believe it requires
more than a mere prima facie case or an arguable possibility. Of even
greater significance, I think, is that it must be a reasonable
prospect – with the emphasis on ‘reasonable’ –
which means that it must be a prospect based on reasonable grounds. A
mere speculative suggestion is not enough. Moreover, because
it is
the applicant who seeks to satisfy the court of the prospect, it must
establish these reasonable grounds in accordance with
the rules of
motion proceedings which, generally speaking, require that it must do
so in its founding papers.
[30]
Self-evidently it will be neither practical nor prudent to be
prescriptive about the way in which the appellant must show a
reasonable prospect in every case. Some reported decisions laid down,
however, that the applicant must provide a substantial measure
of
detail about the proposed plan to satisfy this requirement (see eg
Southern
Palace Investments 265 (Pty) Ltd
)
paras 24-25;
Koen
v Wedgewood Village Golf & Country Estate
(Pty)
Ltd
2012
(2) SA 378
(WCC) paras 18-20). But in considering these decisions Van
der Merwe J commented as follows in
Propspec
Investments v Pacific Coasts Investments 97 Ltd
2013
(1) SA 542
(FB) para 11:
‘
I
agree that vague averments and mere speculative suggestions will not
suffice in this regard. There can be no doubt that, in order
to
succeed in an application for business rescue, the applicant must
place before the court a factual foundation for the existence
of a
reasonable prospect that the desired object can be achieved. But with
respect to my learned colleagues, I believe that they
place the bar
too high.
And at para 15:
‘
In
my judgment it is not appropriate to attempt to set out general
minimum particulars of what would constitute a reasonable prospect
in
this regard. It also seems to me that to require, as a minimum,
concrete and objectively ascertainable details of the likely
costs of
rendering the company able to commence or resume its business, and
the likely availability of the necessary cash resource
in order to
enable the company to meet its day-to-day expenditure, or concrete
factual details of the source, nature and extent
of the resources
that are likely to be available to the company, as well as the basis
and terms on which such resources will be
available, is tantamount to
requiring proof of a probability, and unjustifiably limits the
availability of business rescue proceedings.’
[31] I agree
with these comments in every respect. Yet, the appellants contended
that the bar should be set even lower than that.
Relying on the
reference in s 128(1)
(b)
to ‘the
development and implementation, if approved, of a plan to rescue the
company’ their argument was that the reasonable
prospect for
rescuing the company in s 131(4) demands no more than the
reasonable prospect of a rescue plan. According to
this argument, the
applicant for business rescue is therefore not required to show a
reasonable prospect of achieving one of the
goals contemplated in
s 128 (1)
(b)
.
All the applicant has to show is that a plan to do so is capable of
being developed and implemented, regardless of whether or
not it may
fail. Once it is established that it is the intention of the
applicant to develop and implement a rescue plan which
has that as
its purpose, so the argument went, the court should grant the
business rescue application even if it is unconvinced
that this will
result in the company surviving insolvency or even achieve a better
return for creditors and shareholders. I do
not agree with this line
of argument. As I see it, it is in direct conflict with the express
wording of s 128(1)
(h)
.
According to this section ‘rescuing the company’ indeed
requires the achievement of one of the goals in s 128(1)
(b)
.
Self-evidently the development of a plan cannot be a goal in itself.
It can only be the means to an end. That end, as I see it,
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 a liquidation process. I have indicated my
agreement with the statement in
Propspec
that the
applicant is not required to set out a detailed plan. That can be
left to the business rescue practitioner after proper
investigation
in terms of s 141. But the applicant must establish grounds for
the reasonable prospect of achieving one of
the two goals in
s 128(1)
(b)
.
Application to the facts
[32] In applying
the approach to ‘rescuing the company’
that I
thus subscribe to, it will be remembered that the appellants
initially set out to prove that business rescue would be better
than
a sale in execution of the judgment in Nedbank’s favour. When
Nedbank made it plain in its answering affidavit that
it no longer
intended to pursue a sale in execution, but that it sought a
liquidation of the company instead, the appellants had
to change
their tack. The case they then tried to make out in their replying
papers was that business rescue would be better than
liquidation. In
the process they proffered two options. First, that the immovable
property of the company be sold by the business
rescue practitioner
as a whole and that the proceeds be divided amongst the shareholders
after the creditors have been paid in
full. The second option they
suggested was that the two Kyalami erven be sold, whereafter the
business rescue practitioner could
pursue the business of the company
by utilising the rest of its property, which primarily consists of
the Kyalami race track. The
second option could perhaps also be
understood as a proposal to return the company to a state of
solvency, but that appears to
be neither here nor there. Overlooking,
for the moment, the general rule that the appellants are not allowed
to make out their
case in their replying papers, I propose to deal
with the two options they propose in turn.
[33]
My
problem with the proposal that the business rescue practitioner,
rather than the liquidator, should sell the property as a whole,
is
that it offers no more than an alternative, informal kind of
winding-up of the company, outside the liquidation provisions of
the
1973
Companies Act
which
had, incidentally, been preserved, for the time being, by item 9 of
schedule 5 of the 2008 Act. I do not believe, however,
that this
could have been the intention of creating business rescue as an
institution. For instance, the mere savings on the costs
of the
winding-up process in accordance with the existing liquidation
provisions could hardly justify the separate institution
of business
rescue.
A
fortiori
,
I do not believe that business rescue was intended to achieve a
winding-up of a company to avoid the consequences of liquidation
proceedings, which is what the appellants apparently seek to achieve.
[34] In any event, I believe that,
even on its own terms, the appellants’ proposal consisting of
not more than an alternative
winding-up, cannot be sustained. In
motivating this proposal the appellants relied on two grounds. The
first was that a business
practitioner would be able to obtain a
better price for the property than a liquidator. But I share the
court a quo’s difficulty
in understanding why this should be so
(see para 49(1) of the judgment). In short, this ground appears to
rest on no more than
pure speculation. Their second ground was that
the remuneration of the liquidator would exceed that of the business
rescue practitioner.
It departs from the premise that the fees of the
liquidator are calculated as a percentage of the assets of the
company, while
those of the business rescue practitioner are based on
a daily rate. The reasoning then proceeds on the supposition that the
business
rescue proceedings will be finalised within a period of one
year. This supposition seems to be highly questionable. I say this
particularly in view of the litany of litigation – which is
likely to occupy the business practitioner for many years to come
–
concerning the validity of the 40 per cent shareholding of Educated
Risk; the entitlement of Oakdene to the ‘income
stream of the
company’; the validity of the sale of the development rights of
the company; the validity of the long term
lease over the immovable
property of the company; the validity of the cession of that lease;
and so forth.
[35] Reference
to these transactions of doubtful validity, and the other sinister
aspects in the management of the company’s
affairs, lead me to
the conclusion that liquidation proceedings are in fact better geared
for the situation that arose in this
case. On the respondents’
version the company has been stripped of all its income and virtually
all its assets while under
the management of Dimetrys Theodosiou.
These allegations are, of course, denied by the appellants. But, as I
see it, that is not
the point. The point is that these are the very
circumstances at which the investigative powers of the liquidator –
under
s 417 and 418 of the
1973
Companies Act
–
and
the machinery for the setting aside of improper dispositions of the
company’s assets – provided for in the
Insolvency Act 24
of 1936
– are aimed. In this light I believe there is a very
real possibility that liquidation will in fact be more advantageous
to creditors and shareholders – excluding, perhaps, the
appellants – than the proposed informal winding-up of the
company
through business rescue proceedings.
[36] The appellants’ further
proposition, which involves the sale of the two Kyalami erven only,
raises more problems than
solutions. First amongst these is that it
starts out from the premise that the two erven can be sold for R32
million. It is true
that this is based on a valuation put forward on
behalf of Nedbank and Imperial. Nonetheless, the valuation pays no
heed, so it
seems, to the influence of either the alienation of the
rights to development of the company’s property or to the long
term
lease and it would be surprising, to say the least, if these
have no influence on the value of the property. But be that as it
may, even if the two erven were to be sold for R32 million, that
would not be enough to satisfy the judgment debt of R31.5 million
in
favour of Nedbank which has grown substantially in magnitude, due to
interest at the rate of R320 000 per month since June
2011. That
would leave all the other debts unpaid. In addition, the company
would still have no income because, on the appellants’
version,
the remainder of the property would still be leased on a long term
basis and the ‘income stream’ of the company
would still
be ceded to Oakdene. Hence there is no suggestion how the business
rescue practitioner would go about satisfying outstanding
debts. In
fact, it is not even clear where the remuneration of the business
rescue practitioner would come from.
[37] In these
circumstances I do not believe Nedbank and Imperial can be branded
unreasonable in their declared intent to oppose
any business plan in
line with either of the two options proposed by the appellants. The
court a quo regarded this declared intent
by the two major creditors
– and the holders of 60 per cent of the shareholding in the
company – as one of the reasons
why business rescue was doomed
to fail (see para 47). In argument before us the court a quo was
criticised for doing so. Authority
for this criticism was sought in
the following statement from
Nedbank
Ltd v Bestvest 153 (Pty) Ltd; Essa v Bestvest 153 (Pty) Ltd
2012 (5)
SA 497
(WCC) at para 55:
‘
In
the answering affidavit both [the major creditors] make it clear that
they are not in favour of any BRP plan, and that they will
vote
against it at any meeting to be convened by the business rescue
practitioner in terms of
ss 132(2)
(c)
and
152 of the Act. They accordingly urged the court not to sanction an
exercise in futility, and to rather make an order of winding-up.
Such
an approach appears, at first blush, to be a stratagem to advance the
argument for winding-up: one would have expected a responsible
creditor to be open to any proposal that may ultimately redound to
its benefit. Such an approach certainly does not accord with
the
overall purpose of BRP which, as I have demonstrated above, are aimed
at saving rather than destroying a business, and in which
consultation and consensus-seeking would be the point of departure.’
[38] If the
statement is intended to convey that the declared intent to oppose by
the majority creditors should in principle be
ignored in considering
business rescue, I do not agree. As I see it, the applicant for
business rescue is bound to establish reasonable
grounds for the
prospect of rescuing the company. If the majority creditors declare
that they will oppose any business rescue scheme
based on those
grounds, 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. In these circumstances I do not believe that the
court a quo can be criticised for having
regard to the declared
intent of the major creditors to oppose any business rescue plan
along the lines suggested by the appellants.
[39] In this
court counsel for the appellants proposed another version of the
company’s return to solvency which had not been
raised before.
According to this proposal, a sale of the immovable property and
payment of the creditors is likely to result in
a cash surplus. This
result, so the argument went, would in itself terminate the
commercial insolvency of the company. That, so
it seems to me, can be
said of any company which is commercially insolvent, but factually
solvent. Though the simple logic of the
argument cannot be faulted, I
do not believe it constitutes a ‘business rescue’ within
the meaning of s 128(1)
(b)
(iii).
What the section requires is ‘the continuing existence of the
business of the company on a solvent basis’. A
company which
merely exists to own cash in the bank, has lost its
raison
d‘être
.
Unless there is a real possibility that the cash in the bank will
lead to the resurrection of the company’s business, the
requirements of s 128(1)
(b)
(iii)
had thus not been satisfied. In view of the history of irreconcilable
differences between the shareholders, that possibility
can safely be
excluded in this case. It follows that, in my view, the court a quo
cannot be criticised for finding that, on the
facts of this case,
business rescue proceedings were not appropriate and that liquidation
of the company was the preferred remedy.
[40] In the result the appeal is
dismissed with costs in favour of second and third respondents,
including in both instances, the
costs of two counsel.
________________
F D J BRAND
JUDGE OF APPEAL
APPEARANCES:
FOR APPELLANTS: D Mahon
INSTRUCTED BY: Schindlers Attorneys
JOHANNESBURG
CORRESPONDENTS: Webbers
BLOEMFONTEIN
FOR SECOND
RESPONDENT: A Subel SC
A C Botha
INSTRUCTED BY: Lowndes Dlamini
SANDTON
CORRESPONDENTS: Lovius Block Attorneys
BLOEMFONTEIN
FOR THIRD
RESPONDENT: J J Brett SC
E Kromhout
INSTRUCTED BY: TWB-Tugendhaft Wapnick
Banchetti & Partners
SANDTON
CORRESPONDENTS: Lovius Block Attorneys
BLOEMFONTEIN