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[2020] ZAGPPHC 45
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Daffue v Espach and Others (45341/19) [2020] ZAGPPHC 45 (28 January 2020)
REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
DIVISION, PRETOR
I
A
CASE
NO: 45341/19
DATE:
20/1/2020
In
the matter between
:
JOHANNES
MARTINUS DANIEL DAFFUE
Applicant
And
JOHAN
ESPACH
First
Respondent
CROCODILE
COTTAGE PROPERTIES (PTY) LTD
Second Respondent
(In
liquidation)
CROCODILE
RIVER HOUSE (PTY) LTD
Third Respondent
(In
liquidation)
JOHANNES
ZACHARIAS HUMAN MULLER N.O
Fourth Respondent
ANA
PAULA DE OLIVEIRA N.O
Fifth Respondent
(In
their capacities as joint provisional liquidators of
the
Second and Third Respondents)
THE
COMPANIES AND INTELLECTUAL
PROPERTY
COMMISSION Sixth
Respondent
ABSA
BANK
LTD Seventh
Respondent
JUDGMENT
RANCHOD,
J
Introduction
[1]
The applicant in this matter seeks an
order that the second and third respondents
,
both solvent companies that are under
final liquidation (in both of which he holds a 50% shareholding and
the first respondent the
remaining 50%), be placed under business
rescue
,
alternatively
that the order by which the companies were placed in liquidation be
set aside on the ground that it was obtained in
his absence
.
[2]
The application was initially launched in the
urgent court on 17 July 2019.
Judgment
was handed down on 22 July 2019 by Van Der Schyff AJ
,
who struck the matter off the roll with
costs for lack of urgency
.
There
was a further alternative prayer in the urgent application
viz
,
for an
i
nterim
order which would enable the companies to trade pending the
subsequent hearing of the business
rescue
and or rescission application
.
The
matter having been struck off the urgent roll the further alternative
prayer is no longer relevant.
The
facts
[3]
Van Der Schyff AJ handed down a written
judgment in which the facts are succinctly set out and I can do no
better than take the
liberty of repeating them here to avoid the
proverbial
'reinvention
of
the wheel.' They appear at paragraphs [4] to [5
.
13]
of the judgment:
'
[4]
Despite the fact that the documents filed in this application amount
to approximately
720
pages
,
the facts underpinning the application
are quite simple
.
It
can essentially be summarised as follows
:
two solvent companies with the same two
shareholders were
liquidated in
an
application brought
in
terms
of
s 81
of the
Companies Act, No 71 of
2008
.
One shareholder now wished to prevent
the dissolution of the companies and preserve them as a going
business concern
(sic),
whi
l
e
the other shareholder could not care less for the economic value of
the companies but just wants to realise his shareholding and
shake
the proverbial dust off his feet.
[5]
A more detailed exposition of the facts
,
is
as
follows
:
5.1
The applicant and the first respondent
started a business enterprise around 1997
.
They founded two companies
.
The one company acquired an immovable
property while the other company leased the property and conducted
the
trading
business
.
5.2
They were the only shareholders and both
were managing directors
.
The
business was operated akin to a partnership and based on mutual
trust.
5.3
However the relationship
between the companies
'
two
shareholders-cum- managing directors deteriorated
in
the face of mutual disillusionment
,
internal
wrangling
and distrust.
5.4
The
applicant and first
respondent
found
it
impossible
to
work together and were frequently at loggerheads
.
To
their
credit
,
however
,
they
succeeded in concluding a management agreement in 2016 which
inter
alia
that
(sic)
provided for
:
5.4.1
the first respondent's resignation as a
joint
managing
director and employee of the third respondent
;
5.4.2
a dividend pre-payment of R20 000
,
00
,
or
pro
rata
share
thereof
,
to
be made on a monthly basis to the first
respondent
;
and
5.4.3
the
appointment of an independent manager
5.5
At this stage
,
the acrimony between the applicant and
the first respondent did not paralyse and seriously interfere with
the normal operations
of the companies after the agreement was
concluded
.
5.6
The
first respondent left the property as agreed and for a period of
approximately
13
months
,
he received on a monthly basis
the
R20 000
,
00
dividend pre-payment as provided for in the agreement.
5.7
From
February 2018 there was an interruption in the continuum of monthly
dividend pre-payments
.
Thereafter
sporadic payments were made to the first respondent. The applicant's
explanation is that the trading company
went
through
a
difficult period that
is
often
experienced during the first six months of the year
,
but as business picked up it was
possible to make payments again
,
hence
the payments commenced again in the second half of the year.
5.8
The
first respondent
,
convinced
that the applicant was
intent
on
causing him financial harm and dishonouring the agreement
,
instituted liquidation proceedings in the High Court and premised the
liquidation application on the dual basis that
(i)
he
is
a
creditor of the companies because he did not receive all the dividend
pre-payments he was entitled to
,
and
(ii) a deadlock exists which can only be resolved through
liquidation
.
5.9
Both the second and third respondent
companies were finally wound up on 10 April 2019
,
despite both being solvent companies.
The final winding-up orders were granted in the absence of the
applicant. Despite him being
represented by an attorney
,
the applicant contends that he was not
aware of the date on which the final liquidation applications were
set down.
5.10
The applicant contends that he became
aware that the companies were finally
liquidated
on 20 May 2019
.
He attempted to negotiate with the
provisional liquidators to allow the companies to trade
whilst in
liquidation
.
The provisional liquidators
were prepared to agree but subject to the consent of both
shareholders
.
The
first respondent refused to consent to the continued trading. It is
evident from the first respondent
'
s
approach that he has no
interest
in
trading through the second and fourth
[sic]
respondents as prospering companies
.
He
,
as
I
have mentioned
,
desires the dissolving of the
companies and liquidating is
[sic]
50% shareholding thereby severing
ties with the applicant for good
.
5.11
On 28 June 2019 the applicant delivered
the notice of motion and founding affidavit to the first respondent
'
s
legal representative
.
The
application was also delivered by email to the fourth and fifth
respondents on 28 June 2019 and by Sheriff on 01 July 2019
.
Service on the sixth respondent was
effected by email on an undisclosed date and by Sheriff on 03 July
2019
.
Service on the seventh respondent was done by email on 28 June 2019
.
Service on the South African Revenue
Service and the Master of the High Court was effected by email on 14
and 15 July 2019 and by
hand on 16 July
.
5.12
The
matter was enrolled for hearing in the urgent court on 16 July 2019
and was argued on 17 July 2019
.
5.13
By
this time the relationsh
i
p
between the parties has deteriorated to the extent that they
completely distrust each other - a fact evinced by the tone in which
the affidavits filed in this application were drafted and the content
of the affidavits
.'
[4]
It is only the first respondent who
opposes the application.
[5]
As stated earlier
,
it is common cause that there is a
deadlock in the management of the companies and to break that
deadlock an agreement was concluded
in December 2016 between the
applicant (Daffeu) and the first respondent (Espach) in
terms of which an
independent third party financial
manage
r
was
appointed and Espach no longer participated in the management of the
two companies
.
[6]
For the sake of convenience I will refer
to the second respondent as the
'
property company
'
and the third respondent as the
'
trading
company
.
'
[7]
As is pointed out earlier, the applicant
contends that rather than liquidating the two solvent companies they
should be placed under
business rescue
.
[8]
Espach contends that the request for
business
r
escue
is an abuse of proceedings and is clearly an afterthought.
[9]
The deadlock does not appear to have
been resolved as Van De
r
Schyff
AJ pithily put it
i
n
sub-paragraph 5
.
13
of her judgmen
t.
Discussion
[10]
Before a Court can order a business rescue
,
there
has to be a reasonable prospect - with the emphasis on
'
reasonable
'
-
that the business can be rescued
.
Mere
speculative suggestions are not enough
.
The
basis fo
r
business
rescue must be set out in the founding pape
r
s
.
[1]
[11]
The
applicant wants to conflate the two companies
.
He
cannot do so. It is abundantly clear from the papers that the
property company
is
not
in financial distress. According to
its
2019
financial statements the property company has a favourable cash
balance in its ASSA cheque account
of
R311
968
,
00
and trade debtors of R65 078
,
00.
[2]
[12]
The concept of a financially distressed
company has been defined
in
section 28
of
the
new
Companies Act
,
71
of 2008
.
The
definition reads as follows:
'
Financially
distressed
In
reference to
a
particular
company at
any
particular
time
,
means
that
-
(i)
It appears to be reasonably
unlikely that the
company
will
be
able
to pay all
of
its
debts
as
they
fall due and payable
within
the
immediate ensuing si
x
months
;
or
(ii)
It
appears
to
be reasonably likely
that
the company will
become insolvent
within
the
immediate
ensuing
six
months
.
'
[13]
It is clear from the papers that the
property company has enough money in its account to pay all
its
creditors and even leave a surplus
.
However on the applicant's
own
version there can be no rescue of the
trading company, if the rescue is not linked somehow to that of the
property
company
.
Without hav
i
ng
the benefit
of
the
asset of the property
company,
the trading
company
cannot
trade
.
[14]
In
Oakdene
supra,
[3]
the
Supreme Court of Appeal confirmed the decision in the Court of First
Instance
,
where
Claassen J listed the various considerations which will assist a
court in deciding between a business rescue and a liquidation
if the
court is faced with both options
[4]
.
In that case the Learned Judge preferred a liquidation over a
business rescue for
inter
alia
,
the
following reasons:
14.1
A
liquidator will be able to sell assets as good as a business
practitioner
.
[5]
14.2
The
fact that there are a number of pending court cases and litigation
pending militates against a business rescue
.
[6]
14.3
A
liquidation will be better if there is uncertainty as to what
happened to company funds and income
,
and
if the financial statements have not been finalised
.
(In
this matter before me this point is particularly apt in the instance
of the trading company in which there are no financial
statements
.)
[7]
14.4
Business
rescue proceedings are open ended and could probably result only in
further applications to court which would simply
cause
delays and which would frustrate creditors and shareholders.
[8]
14.5
Importantly
,
for purposes of this case, liquidation
was held to be more appropriate in the case of a deadlock. In the
words of Claassen J:
'
Where
deadlocks occur in private or domestic companies
,
liquidation
has often been regarded as the most appropriate remedy to unravel the
deadlock in existence between the creditors and
or the shareholders.
[9]
14.6
Claassen J then continued:
'
If
a
business
rescue
order
were to be granted in this case
,
it is highly unlikely that it
will be terminated and converted to liquidation proceedings in terms
of
section 132(2)(a)(ii)
as
a
result
of the deadlock and unwillingness of the antagonists to
cooperate.
'
14.7
The
advantage of a business rescue practitioner mediating cannot apply to
this case because of all the disputes and this was a pertinent
finding made by Claassen J in
Oakdene.
[10]
14.8
There
is no provision for the taxation of the fees
,
costs
or expenses of a business rescue practitioner
,
whereas
a liquidator
'
s
costs are subject to taxation. There
i
s
independent control over the costs of a liquidation
.
[11]
[15]
The companies were liquidated on the basis of the
'
just
and equitable
'
ground.
A recognised feature of liquidation on that ground is a deadlock in
the management as well as grounds analogous to those
for the
dissolution of partnerships.
[12]
[16]
The applicant contends that it is precisely because of the deadlock
that an independent
third party was appointed as manager
.
Hence
,
the
argument seems to be
,
Espach
cannot rely on deadlock as a ground for liquidation of the companies.
However
,
it
is clear from the papers that the deadlock was not finally resolved.
[17]
The leading authority for a liquidation on the just and equitable
ground
,
in
recent times, appears to be
Thunder
Cats Investments 92 (Pty) Ltd &
Another
v Nkonyane Economic Prospecting
&
Investments
(Pty) Ltd
.
[13]
[18]
In
Thunder Cats
the
court held that the
'just and
equitable ground in
section 81(1)(d)(iii)
retained its wide scope and
should not be interpreted so
as
to
include only matters similar to the other grounds stated in
section
81(1)
.'
The
company was solvent, but the court held
that the lack of trust between the shareholders rendered the
operations of the company dysfunctional
,
justifying its winding-up
.
The court confirmed that the
disappearance of its substratum
;
a
deadlock
;
oppression
and grounds similar to the dissolution under the just and equitable
ground could all justify winding up of the company.
[19]
In
Thunder
Cats
the court held that a deadlock
does not mean that there has to be a
'
complete
deadlock'
,
but
the deadlock principle is founded on the analogy of partnership and
is confined to small domestic companies in which the shareholders
share confidence and trust similar to that existing between partners
in regard to partnership business
.
[20]
I am not persuaded by Daffue
'
s
submission that the employment of a manager resolved the deadlock.
Even if it did there are still grounds analogous to those for
the
dissolution of partnerships, namely, a complete loss of trust and
confidence between the parties
,
which
is common cause.
[21]
There is a further aspect. Daffue has
not put up a defence in this application against the facts set out in
the founding affidavit
in the liquidation application. To put it
another way-there is no 'good cause' for the setting aside of the
winding-up of the companies
as contemplated in
section 35
of the
previous
Companies Act.
[22
]
A
final aspect is that Daffue says he was not aware of the date on
which the liquidation application was set down and it was granted
in
his absence
.
The
facts
in this matter are in various respects similar to that of
Herbst
v Hessels NO
&
Andere.
[14]
In
that case the company was also allegedly solvent and although the 50
%
shareholder
knew about the liquidat
i
on
application he later alleged in an application for rescission that he
was advised by his attorney that there is nothing that
he can do
about the application
.
He
then applied to court on the basis that the creditor who had applied
to court for the liquidation actually had no
locus
standi
and
no claim against the company
.
Eloff
J as he then was
,
analysed
the requirements for a rescission of a l
i
quidation
.
The
court referred with approval to
t
he
remarks of Claassen J in
Aubrey
&
Cramer
v Wells NO
1965
(4) SA 304
(W) in which the court held at 305
:
'
The
application is an e
x
traordinary
one and one which would be granted it at all in only rare cases
.
[15]
[23]
The court endorsed the principle that
generally unde
r
both
section 354
of the
Companies Act and
section 149
of the Inso
l
vency
Act:
'
Unusual
or spec
i
al
or e
x
ceptional
cir
c
umstan
c
es
must e
x
ist
in order to ju
s
tify
su
c
h
relief
'
The
court also
a
pproved
the approach that a court in a resc
i
ssion
application will not reassess the merits
,
whether the defences have been raised or
not
,
and i
t
is not good enough for an applicant in a
rescission to raise grounds which would have constituted a good
defence on the merits to
the liquidation proceed
i
ngs
.
[24]
On the applican
t's
own version there are deep fa
c
tual
disputes
.
His
attempt in reply to restrict the factual disputes to the
i
nterpretation
of the management agreement
i
s
clearly an afterthought.
[25]
In all the circumstances
,
the
application
is
dismissed
with costs
.
Ranchod
J
Judge
of the High Court
Appearances
Appearance
for the Applicant:
Adv M Louw
Instructed
by JF van Deventer Inc c/o
Manong
Badenhorst Attorneys Castel Walk Corporate Park, Block C
43
Nossob Street
Erasmuskloof
Pretoria
Appearance
for the First Respondent: Adv MP
Van Der Merwe SC
Instructed
by Weavind & Weavind
Attorneys
361
Oberon Avenue
Glenfield
Office Park
,
Block
E
Faerie
Glen
Pretoria
[1]
Oakdene
Square Properties v Farm Bothasfontein (Kayalami)
2013
(4) SA 539
(SCA) at par 29
[2]
Answering affidavit, par 53, p370.
[3]
See footnote 1.
[4]
Oakdene
2012 (3) SA 273
(GSJ) at par.49.
[5]
Oakdene
a
quo
at
287C.
[6]
287F.
[7]
Oakdene
at
288B.
[8]
Oakdene
at
288F.
[9]
APCO
Africa (Pty) Ltd
&
Another
v APCO Worldwide Inc
[2008] ZASCA 64
;
2008
(5) SA 615
(SCA) at par.29 and 30.
[10]
At 289G
[11]
Oakdene
at
290E.
[12]
Re
Yenidje Tobacco
Co
Ltd
(1916)
2 CH 426
(CA).
[13]
2014 (5) SA 19 (SCA).
[14]
1987 (2) SA 1
05 (T)
[15]
Herbst
at
108G.