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[2018] ZANCHC 91
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C Rock (Pty) v H.C Van Wyk Diamonds Ltd and Others (2355/2018Â ) [2018] ZANCHC 91 (7 December 2018)
IN THE HIGH COURT OF
SOUTH AFRICA
(NORTHERN
CAPE HIGH COURT, KIMBERLEY)
CASE
NO.: 2355/2018
Date heard: 24,25-10-2018
Date delivered:
07-12-2018
In
the matter between:
C
Rock (PTY) LTD
Applicant
And
H.C Van Wyk Diamonds LTD
1
st
Respondent
(In
provisional liquidation
)
D.T Majiedt NO
2
nd
Respondent
K.C Monyela
NO
3
rd
Respondent
A.D Draai NO
4
th
Respondent
(In their capacities as appointed joint liquidators
for the 1
st
Respondent)
All Known Creditors of the First
5
th
to 68
th
Respondents
Respondent as Per Annexure “A”
to the founding Affidavit
Diacore South Africa (Pty) Ltd t/a Ascot
Diamonds
69
th
Respondent
Standard Bank of South Africa
Limited
70
th
Respondent
Bondeo 140
CC
Intervening Party
Rietput Delwery
CC
Intervening Party
CORAM:
WILLIAMS J
JUDGMENT
WILLIAMS
J:
1.
The applicant, C Rock (Pty) Ltd
(C-Rock) launched an application on 25 September 2018 that the 1
st
respondent, HC Van Wyk Diamonds (Pty) Ltd (VWD), be placed under
supervision and that business rescue proceedings commence under
s
131(1) read with s 131(4) of the Companies Act 71 of 2008 (the Act).
2.
In order to contextualise this
matter it is necessary to briefly set out the history of the
proceedings leading up to the application
in
casu
.
2.1
During the latter half of 2016 C Rock brought applications for the
liquidation of VWD and the companies Saxendrift Mines (Pty)
Ltd
(Saxendrift) and Rockwell Resources RSA (Pty) Ltd (Rockwell RSA), on
the basis that the companies could not pay its debts.
Provisional liquidation orders were granted in respect of all three
companies on 23 March 2017.
2.2
Thereafter, during April 2017 three creditors of the companies in
provisional liquidation Ascot Diamonds (Pty) Ltd (Ascot),
Just Tracks
and Brenda Barretto applied for the companies to be placed under
supervision and for business rescue proceedings to
commence.
The business rescue orders were granted on 18 May 2017.
2.3
On 21 September 2017, the Standard Bank of South Africa Limited
(Standard Bank) obtained orders, (i) uplifting the general moratorium
on legal proceedings against a company in business rescue; and (ii)
for the provisional perfection of a notarial special and general
covering bond held over the movable property of Saxendrift, to the
value of R12.7 million alternatively R10.7 million.
2.4The
business rescue proceedings in respect of the three companies were
discontinued on 22 September 2017 pursuant to an application
brought
by the business rescue practitioners, (BRP’s) who
simultaneously obtained a further order for the provisional
liquidation
of the companies.
2.5
The three companies have since been in provisional liquidation.
The extended return date being during February 2019.
3.
The 2
nd
,
3
rd,
and
4
th
respondents are the appointed joint provisional liquidators of VWD,
Rockwell RSA and Saxendrift (the liquidators) in their capacities
as
such. The 5
th
to 68
th
respondents are cited as the known creditors of VWD.
4.
On 10 September 2018 the
liquidators scheduled an auction at which the mining and prospecting
rights belonging to VWD and two rights
vesting in Saxendrift were
sold to Bondeo 140 CC (Bondeo) for an amount of R46 million as well
as certain immovable property for
a purchase price of R400 000.00.
At
the same auction the remaining mining and prospecting rights
belonging the Saxendrift were sold to Rietput Delwery CC (Rietput)
for an amount of R14 million.
5.
The liquidators initially had
until 2 October 2018 to confirm or reject the offers submitted by the
purchasers mentioned in the
preceding paragraph. The launching
of this business rescue application has had the effect however, in
terms of s 131 (6)
of the Act, that all liquidation proceedings are
suspended including the liquidators’ ability to sell the assets
of VWD,
Saxendrift and Rockwell RSA. The situation has now been
created where the liquidators cannot accept the offers to purchase
the property sold at the auction. After negotiations with
Bandeo and Rietput the liquidators were however able to extend
the
period for acceptance of the offer until 22 October 2018.
6.
The liquidators, Ascot and
Standard Bank oppose the application for business rescue. On 19
October 2018 the liquidators brought
an urgent application,
incorporating their opposing affidavit to the business rescue
application, that C-Rock’s application
be heard on an urgent
basis and be dismissed with costs. Rietput and Bondeo
(henceforth referred to herein as the purchasers)
filed an
application to be heard on the same day to intervene in the business
rescue application as respondents and as applicants
in the urgent
application brought by the liquidators.
On
19 October 2018, the applications were postponed as a whole, to be
heard on 24 and 25 October 2018.
Application
to intervene
7.
The first order of business on
24 October was the determination of the purchasers’ application
to intervene, which was opposed
by C-Rock. In short and as I
understand it C-Rock’s opposition is based on the following:
7.1
Since the purchasers are not affected persons as defined in the Act,
they have no right to participate in business rescue proceedings
as
provided for in s 131(3). (The Act defines in s 128 thereof an
“affected person” as, a shareholder or creditor of
the
company, any registered trade union representing employees of the
company and, in the case of employees not so represented,
then each
of those employees or their respective representatives.).
7.2
As such the purchasers have to
prove a legal interest in the proceedings in order to succeed with an
application to intervene.
This Mr Lourens for C-Rock argues,
the purchasers cannot do since the sale had either been suspended
together with all liquidation
proceedings when the business rescue
application was issued or the sale had lapsed since the due date for
the acceptance of the
offers has passed – and cannot be
extended by agreement between the purchasers and the liquidators
while the business rescue
application is pending.
8.
The business rescue application
was launched 4 business days before the due date for acceptance of
the purchasers’ offers
by the liquidators. Mr Lourens was
constrained to concede that the timing of the application was not
merely co-incidental
but that it was intended to stop the sale of the
companies’ assets pending the determination of the business
rescue application.
C-Rock is of the opinion that the prices
obtained are too low and prejudicial to C-Rock who is a concurrent
creditor of VWD to
the tune of about R212 million. There is
nothing untoward in this approach of course, provided that a proper
case for business
rescue is made out and the application is not an
abuse of the process.
9.
The business rescue application
has suspended liquidation proceedings (s131 (6) of the Act), which of
course includes the sale of
the assets of DWD. Although the
extended due date for acceptance has passed, Mr Heystek for the
purchasers informs that the
purchasers are willing to accept a late
acceptance and to further extend the offers to buy the assets.
The liquidators have
confirmed in their opposing affidavit that they
intended to accept the offers. It seems to me in these
circumstances that
the offers to purchase the assets of DWD have not
lapsed since it is the offeror’s prerogative whether to extend
the due
date or not. See
Manna
v Lotter and Another
2007(4) SA 315 (CPD) paragraph 26.
10.
The suspension of the sale
brought about by the business rescue application does not mean that
the purchasers have permanently lost
all their rights in terms of the
sales, only that the transactions have been placed on hold, but may
be revisited in future.
As such the purchasers have in my view
a direct and substantial interest in the subject matter of this
application. In addition
they also bring information to the
table which is relevant to the determination of the business rescue
application.
11.
That being the case, I granted
the application by the purchasers to intervene as respondents in the
business rescue application
and applicants in the urgent application.
Urgency
12.
Which now brings me to the
issue of urgency. With the exception of C-Rock the other
parties before me support the liquidators
in their application that
the business rescue application be determined as a matter of urgency.
13.
The liquidators maintain that
the urgent adjudication of the business rescue application is
warranted since the application has
suspended liquidation proceedings
and the liquidators are unable to continue with the winding-up
process. A hearing of the
application in due course will, based
on the current state of the court roll, probably only occur during
the third term of 2019.
In the mean time the mines and assets
of the companies have to be maintained, secured and insured at a cost
of approximately R340,000,00
per month while there is not enough
money to do so. Standard Bank as a secured creditor has thus
far been willing to fund
these expenses on overdraft. The
amount owing to Standard Bank at present is approximately R3.7
million and will only increase
with the inevitable delay caused by a
hearing in due course and which would result in enormous prejudice to
the body of creditors.
14.
Quite astoundingly in my view,
C-Rock, the party which one would have expected to be most anxious to
have the application dealt
with expeditiously opposed the urgent
application. The basis of the opposition is that even if there
had been no application
for business rescue and the sale of the
assets to the purchasers proceeded, the liquidators would in any
event have had to make
provision for the costs of maintenance,
security and such with regards to the assets of the companies for a
period much longer
that the date of hearing of the application in due
course, since the sale of the mineral rights is subject to the
suspensive condition
that the Minister, in terms of
s11
of the
Mineral and Petroleum Resources Development Act, 2002
, grants his
approval of the transfer of the mineral rights to the purchasers.
Such approval, according to C-Rock could take
up to two years.
Therefore the argument goes, the liquidators would on either scenario
be liable for the expenses referred
to for quite some time and that
these expenses do therefore not render the application urgent.
15.
What C-Rock has failed to take
into account however is the affidavit of the purchasers in their
intervention application.
Therein it is stated and confirmed
that the representative of the purchasers, an attorney, Mr Japie Van
Zyl, has been in discussions
with the Regional Manager: Department of
Mineral Resources: Northern Cape Region, Mr Pieter Swart, who has
given an undertaking,
given the circumstances of the case, to
fast-track the required ministerial consent for the transfer of the
mineral rights.
Attempts would be made to facilitate the
transfer within 6 months of submission of an application for transfer
of the rights.
16.
In addition to the above, the
purchasers had reached an agreement with the liquidators that pending
ministerial consent for the
transfer of the mining rights –
which they were confident would be granted in light of their history
in the mining industry,
their expertise, financial and general
ability to meet the requirements for such a transfer – that
they be appointed as contractors
to conduct prospecting and mining
operations under the mining rights and take over the obligations and
the liabilities in relation
to maintaining the mining rights.
17.
I was satisfied in the
circumstances that urgent determination of the matters was justified.
Consequently and once I was satisfied
that the liquidators had given
all the affected parties notice of the application that the business
rescue application be heard
on an urgent basis, I granted the
application and the matter proceeded, though not without further
preliminary skirmishes.
18.
C-Rock initially disputed the
locus standi
of all the parties opposing the business rescue application. Standard
Bank’s
locus standi
as an affected party (a creditor) was conceded at the hearing of the
application when I allowed Mr Tsangarakis on behalf of Standard
Bank,
to file a further affidavit to which was attached a Deed of
Suretyship whereby VWD bound itself as surety for the indebtedness
of
Saxendrift towards Standard Bank.
19.
Before I proceed to deal with
the disputed
locus standi
of the opposing parties it is important to note that C-Rock in its
founding affidavit describes the application for business rescue
of
VWD as “
one in a
trilogy of inseparably inter-related applications which essentially
have, as their principal concern and objective, the
pursuit of orders
placing VWD Rockwell and Saxendrift (collectively “the
companies”), under supervision and for business
rescue
proceedings to commence in relation to the said entities.”
20.
It appears to be common cause
that the companies have been dependent on each other for survival.
Rockwell RSA does not trade
and is described as an investment/holding
company which served as a vehicle through which its Canadian
shareholders, Rockwell Diamonds
Inc. (RDI), held their stakes in the
South African Rockwell enterprises particularly VWD and Saxendrift.
Saxendrift
holds most of the mining equipment which VWD leases from it for its
mining operations, as well as certain mining and
prospecting rights.
VWD has as its principal concern one mining enterprise known as
Wouterspan Mining Operations and holds
the mining and prospecting
rights which sustain its mining operations at Wouterspan and owns the
immovable property on which Wouterspan
is situated.
21.
As a result of the
inter-related nature of the relationship between the companies, and
to prevent an unnecessary proliferation of
applications, the parties
have agreed that only the VWD application be prosecuted on the basis
and understanding that success in
the VWD application for business
rescue will result in success in the Saxendrift and Rockwell RSA
applications. Conversely
failure of the VWD application will
necessarily result in failure in the other two applications.
Locus
Standi
22.
Mr Lourens for C-Rock contends
that the liquidators have no
locus
standi
to participate in
the business rescue application since, by virtue of s361 (2) of the
1973
Companies Act, if
they are unable to perform their duties, the
assets of VWD would rest in the Master. There being no
authorisation or directive
by the Master for the liquidators to
oppose the business rescue application, the liquidators have no
standing in these proceedings.
S
361(2)
reads as follows:
“
in
any winding-up of any company, at all times
while
the office of the liquidator is vacant or he is unable to perform his
duties
, the property
of the company shall be deemed to be in the custody and under the
control of the Master.”
23.
S 131(6) of the Act provides
for the suspension of “
liquidation
proceedings”
once an
application for business rescue is made, until the court has
adjudicated upon the application or the business rescue proceedings
end, if the court makes the order applied for. “
Liquidation
proceedings”
in this
context has been said in Richter v Absa Bank Limited 2015(5) SA 57
(SCA) at paragraphs 9-12, not to alter the significance
of what is
meant by “liquidation” – which historically has
been used in the context of dissolving a company.
Reference is made
to Cilliers and Benade; Corporate Law, 3
rd
ed at 494 where “
liquidation”
is described as follows:
“
. . . The process of
dealing with or administering a company’s affairs prior to its
dissolution by ascertaining and realising
its assets and applying
them firstly in the payment of creditors of the company according to
their order of preference and then
by distributing the residue (if
any) among the shareholders of the company in accordance with their
rights, is known as the winding-up
of liquidation of the company.”
24.
The function of a provisional
liquidator is not to liquidate a company. His or her function
is essentially that of a receiver
pendente
lite
, ie to assume control
and to superintend the administration of the property and affairs of
the company pending the appointment
of the liquidator. See
Henochsberg on the
Companies Act 71 of 2008
, volume 2; APPI –
152(1).
25.
On an interpretation of
“
liquidation
proceedings”
as
described in the Richter matter, the functions of a provisional
liquidator stands unaffected by the suspension of liquidation
proceedings as per s 131 (6) of the Act. In my view therefore
they have not been rendered “
unable
to perform”
their
duties in terms of s 361(2) of the
1973 Act.
26.
The
extended powers in terms of s386 (5) granted to the liquidators by
order of Court on 27 October 2017 may be a different matter.
These mainly aim to advance the winding-up process and are clearly
liquidation proceedings as envisaged in s 131(6). The
normal
powers of the (provisional) liquidators are in my view however not
affected.
[1]
27.
Even if I am wrong in this
regard and the custody and control of the companies’ assets now
rest in the Master, the failure
by the liquidators to obtain the
requisite authority for purposes of litigation is not fatal to the
proceedings. In
Patel
v Paruk’s Trustee
1944
(AD) 569, the Appellate Division held that the fact that the trustee
in an insolvent estate has not obtained the consent of
the Master or
the creditors to institute legal proceedings on behalf of the estate
does not invalidate such proceedings.
Similarly in
Waisbrod
v Potgieter and Others
1953(4) SA 502 (W), Ramsbottom J said the following at 507 G-H,
“
I
think that the provisions of secs 130(2) (a) and 142(4) were enacted
for the protection of creditors and contributories and to
prevent the
assets of the company from being squandered in useless litigation.
As between himself and the company the liquidator
requires to be
authorised before he embarks on litigation, and if he does so without
the prescribed authority the Court may refuse
to allow him his costs
out of the assets of the company and he may have to pay them
himself. But that does
The
references in the above quotation are to the 1926 Act but the
principle pertaining to a liquidator’s authority to litigate
remains the same.
28.
A further argument in relation
to the
locus standi
of
the liquidators is that they are not affected persons as defined in
the Act and therefore have no right to participate in the
application. The argument is that the provisions of s 136(4) of
the Act cannot confer
locus
standi
on the liquidators
at this stage since it envisions them becoming creditors only upon
the conversion to business rescue proceedings,
should the application
be successful. At present therefore, so the argument goes, the
liquidators are contingent or prospective
creditors – and the
Act makes no provision for such creditors as affected persons.
S
136(4) reads as follows:
“
(4)
If liquidation proceedings have been converted into business rescue
proceedings, the liquidator is a creditor of the company
to the
extent of any outstanding claim by the liquidator for any
remuneration due for work performed, or compensation for expenses
incurred, before the business rescue proceedings began.”
29.
Whilst it may be that the
liquidators do not fall within any of the categories of affected
persons as defined in the Act, there
can be no doubt in my view that
an application by them to intervene on behalf of the company and in
the interest of the body of
creditors would have been successful.
An application by the liquidators to intervene has however been
rendered unnecessary
by C-Rock itself by citing the liquidators as
respondents. As such they are entitled to participate in these
proceedings
as respondents and have the right to oppose the
application if they so choose. The suggestion by Mr Lourens
that they would
only be entitled to report to the court on
information within their knowledge and which would be of assistance
in determining the
application has no merit. In such an
instance mere service of the application on the liquidators would
have sufficed, as
is provided for under s 131(2) (a).
30.
The opposition by C-Rock to the
locus standi
of the liquidators is nothing else but opportunistic and in my view
amounts to an abuse of the process.
31
.
Ascot claims to be a
creditor of VWD in the amount of R259 million arising from money lent
and advanced to Rockwell RSA and on-lent
to VWD and which claim
against VWD was ceded by Rockwell RSA to Ascot in
securitatem
debiti.
32.
C-Rock takes issue with Ascot’s
status as an affected person on the basis that, (i) Rockwell RSA has
abandoned its claim against
VWD; or (ii) Rockwell RSA’s claim
against VWD has been subordinated. Therefore, the argument
goes, Ascot is at best
(based on the subordination scenario) a
contingent or prospective creditor of VWD.
33.
The assertions above are made
with reference to a Memorandum of Agreement entered into between VWD
and Rockwell RSA during March
2017, wherein Rockwell RSA agreed to
assist VWD by subordinating its claim(s) against VWD in favour and
for the benefit of other
creditors of VWD. The relevant terms
of the agreement are
inter
alia
that:
33.1
Rockwell RSA subordinates so much of its claim against VWD as would
ensure that the balance of VWD’s liabilities (excluding
the
claims of Rockwell RSA) do not exceed VWD’s assets;
33.2
Rockwell RSA warrants that its claims against VWD have not been ceded
to any third party and that no third party has any interest
in those
claims;
33.3
In the liquidation of VWD it (Rockwell RSA) will not prove or tender
to prove a claim in respect of its subordinated claim
which proof
would diminish or reduce any dividend payable to other creditors.
Accordingly in the event of liquidation of
VWD, Rockwell RSA abandons
that claim to the extent that it would reduce the dividend payable to
other creditors;
33.4
The subordination shall remain in force and effect for so long as the
liabilities of VWD exceed its assets; and
33.5
Rockwell RSA agrees that until such time as the assets of VWD exceed
its liabilities, it shall not be entitled to demand or
sue for or
accept repayment of the whole or part of its subordinated claim.
34.
This agreement between Rockwell
RSA and VWD ignores completely the cession and pledge agreement
entered into during May 2015 whereby
Rockwell RSA ceded its claim
against VWD to Ascot in securitatem debiti, and to which VWD was a
signatory party together with Rockwell
RSA and Ascot.
35.
Purely on the papers before me,
the subordination agreement entered into between Rockwell RSA and VWD
is worthless since it is settled
that unless otherwise agreed, a
cession in securitatem debiti in any event results in the cedent
being deprived of the right to
recover the ceded debt, retaining only
the bare dominium or a “
reversionary
interest”.
See
Picardi Hotels Ltd v
Thekwini Properties
(Pty)
Ltd 2009(1) SA 493 SCA at 496 C-E.
36
.
Without any suggestion of
an agreement between Ascot and Rockwell RSA that Rockwell RSA could
either abandon or subordinate its
claim against VWD (which if there
had been such an agreement I would have expected Ascot to be a party
to the subordination agreement),
the normal consequences of a cession
in
securitatem debiti
stand
and Ascot is substituted as the creditor.
37.
That being said, Mr Lourens
made allowance during argument for the fact that I may find that the
cession trumps the subordination
agreement, in which event he
proferred alternative arguments.
38.
Firstly, that during May 2018
when the cession was concluded, the shares which Rockwell RSA held in
VWD constituted the greater
portion of Rockwell RSA’s assets.
Consequently the cession constitutes a disposal by Rockwell RSA of
the greatest portion
of its assets which in terms of s 112 of the Act
could only be validly done if the disposal had been approved by a
special resolution
of the shareholders and in compliance with certain
requirements in terms of the Insolvency Act.
39.
The argument has no merit. In
Alexander
and Another NNO v Standard Bank Merchant Bank Ltd
1978(4) SA 730 (WLD), Viljoen J held at 741 H-742B that since the
cedent in a cession in
securitatem
debiti
retained a
reversionary right during the currency of the cession, a cession in
securitatem debiti
is
not a disposal in terms of s 228 of the 1973 Act, which is the
forerunner to s 112 of the Act.
40.
Secondly, the contention is
that the R259 million loan made by Ascot tot Rockwell RSA constitutes
financial assistance as contemplated
in s 45 of the Act, which
requires a special resolution by the board of Ascot to sustain its
validity. Since Ascot had failed
to provide a copy of the
special resolution despite being challenged by C-Rock to do so, it
has failed to show that the loan was
lawfully extended to Rockwell
RSA, that the cession is lawful and enforceable and hence failed to
prove the necessary
locus
standi
to participate in
the VWD business rescue application.
41.
S45 deals with financial
assistance between related and inter-related companies. Related
and inter-related entities are defined
in s2 of the Act, with the
control of one over the other being integral. The argument is
that since Ascot owns 20% of the
shares in RDI, which in turn own
100% of the shares in Rockwell RSA, Ascot therefore indirectly holds
20% of the shares in Rockwell
RSA. How Ascot would be able to
directly or indirectly control the business of Rockwell RSA and
consequently VWD (via the
cession) based on 20% shareholding eludes
me.
This
argument lacks any merit.
42.
In any event, even if there had
been any merit in the arguments against Ascot’s
locus
standi
in these proceedings
(which I have not found), Mr Spiller for Ascot has argued, quite
correctly, that it would not be in the interest
of justice to deny
Ascot participation in these proceedings, given the agreement between
the parties that the fate of the DWD business
rescue application
would be determinative of the rescue applications pertaining to the
other two companies.
43.
Surprisingly, and though I made an order allowing the purchasers to
intervene in the application, Mr Lourens persevered with
his argument
that the purchasers have no
locus
standi
to participate in
this application. However as I made no restrictions on the
participation of the purchasers in this application,
the purchasers
have the same rights as the other parties to the application.
44.
In the premises C-Rock’s points
in
limine
regarding the
locus
standi
of the opposing
parties are dismissed. I have dealt in detail with the specific
grounds upon which the
locus
standi
of the parties have
been challenged for the reason that the liquidators and Ascot have
implored me to specifically order that C-Rock
pay the costs of the
opposition to their
locus
standi.
I will revert
to this issue when I deal with the costs of the application.
45.
Be that as it may, after all the objections raised by C-Rock, I can
finally deal with the merits of this application.
The
merits
46.
As mentioned herein-before the three companies were previously placed
in business rescue on 18 May 2017. Mr TJ Murgatroyd
and Mr PF
Van der Steen were appointed as business rescue practioners (BRPs)
for the companies. Five months later and on
22 September 2017
the BRPs were granted orders for the discontinuation of the business
rescue proceedings and for the companies
to be placed in provisional
liquidation.
47.
The facts relating to the business rescue operations conducted by the
erstwhile BRPs are contained in the founding affidavit
to the
application brought by the BRPs for the discontinuation of business
rescue and for provisional liquidations and can be summarised
as
follows:
47.1
Shortly after their appointment the BRPs were informed by
representatives of the board of directors of RDI of a prospective
purchaser or investor in the companies and requested them to continue
the operations of the companies without any radical interventions
other than cost-cutting measures until such a transaction was
finalised.
47.2
In order to enhance the saleability of and preserve the assets of the
companies the BRPs
inter
alia:
47.2.1
Procured post commencement financing (PCF) in the amount of R13
million;
47.2.2
Paid the salaries of the 304 employers of VWD up to 31 August 2017.
Rockwell and Saxendrift had no employees;
47.2.3
Paid critical suppliers in order to continue with mining operations;
47.2.4
Consulted and engaged with a qualified geologist Stephan Le Roux to
conclude a correct and optimal mining plan after it was
determined
that the previous mining plan and model was inappropriate. The
operations of the mine were thereafter refocused
using the new mining
plan to ensure optimal recovery of diamonds and revenue generation
for the companies.
47.2.5
Managed to generate significant diamond recoveries (albeit
insufficient) over the period June to August 2017.
47.3
Notwithstanding the attempts to reinvigorate the mining operations
the BRPs determined at the beginning of September 2017 that
it would
no longer be possible to operate the companies without further
funding.
47.4
Therefore, following upon the potential investor/purchaser indicating
that it was not in a position to submit an offer or provide
PCF, the
BRPs decided it prudent to stop all mining operations at Wouterspan
(the VWD Mine) as of 8 September 2017 and retain only
a core
compliment of employees to take care of and maintain the mine and
equipment. The rest of the employees were asked
to vacate the
property immediately.
48.
The reasons given for the failure of the business rescue are as
follows.
48.1
The plant and equipment of the companies are generally of poor
quality and require significant cash injections to restore it
to a
state at which it would consistently achieve the desired mining
values and diamond recovery;
48.2
The companies no longer have the funds or access to funds to restore
the plant and equipment in order to achieve the above
objectives;
48.3
Excluding repairs and maintenance for September 2017 (which would
amount to approximately R6 million), the expected monthly
shortfall
is approximately R12 million to R13 million.
49.
As at close of business on 8 September 2017 after paying the salaries
of employees and essential post-commencement suppliers,
the aggregate
nett bank balance of the companies was approximately R28 000,00.
50.
Accordingly, the BRPs concluded that there was no reasonable prospect
for the companies to be rescued.
51.
Since 8 September 2017 the VWD mine has not been operational.
52.
C-Rock contends in its founding affidavit to the present business
rescue application that the erstwhile BRPs were mistaken in
their
diagnosis of the problems plaguing the profitability of the
companies, most likely due to their inexperience in the diamond
mining industry.
53.
C-Rock claims to have experience in the mining industry for 30 years
and in the diamond mining industry specifically, for 18
years.
It alleges to have identified three aspects of VWD’s enterprise
that can be meaningfully restructured to pursue
a successful rescue
of the companies. The proposal is as follows:
53.1.
Firstly, the staff component at VWD can be reduced from 304 to 150
employees and still be fully operational.
53.2
Secondly, VWD’s diamonds should be sold in the open market, at
least temporarily under the proposed business rescue regime,
and not
in terms of the VWD and Ascot take-off agreement. The
contention is that the diamonds would likely achieve an increased
revenue of between 25% and 30% in the open market as opposed to the
revenue generated under the take-off agreement.
53.3
Thirdly, VWD requires PCF in order to kick-start the wetplant into
operation and VWD into operational and commercial mining.
C-Rock in this regard commits to providing the necessary PCF to
implement the proposed restructuring of the companies’ affairs
provided that it be appointed a consultant and manager of the mining
opera ration during the business rescue proceedings at a management
fee of R900 000.00 per month.
54.
C-Rock has prepared and annexed cash-flow forecasts over a 36 month
proposed business rescue regime on the basis of a reduction
in the
number of employees and that VWD’s diamonds be sold in the open
market. Accordingly it contends that with only
the minimal
restructuring which it proposes, the companies will gradually return
to profitability within the next 6 months whereafter
it will be able
to start servicing its pre-commencement debts. Such debts, it
is projected, will be extinguished by the 20
th
month into the restructuring if compromised at 50c in the rand, by
the 26
th
month if compromised at 75c and if not compromised, by the 32
nd
month into the restructuring. Thereafter and within a period of 36
months VWD would be free of pre-commencement debt and likely
debt-free.
55.
Needless to say, the liquidators, supported by the other opposing
parties, are highly critical of the feasibility of the proposal
put
forward by C-Rock and its motive behind it. Besides C-Rock being the
applicant in the initial liquidation applications against
the
companies, C-Rock vehemently opposed the previous business rescue
applications before the orders were eventually obtained by
agreement. In fact, in its opposing papers to the previous
business rescue applications C-Rock stated
inter alia
that:
“
It
is quite clear that the launch of the three business rescue
applications of HC Van Wyk, Saxendrift and Rockwell is a stratagem
to
frustrate the winding-up of the three companies, and to sterilise the
function of the provisional liquidators”;
“
The
business rescue applications have no prospect of success”;
and
“
Rockwell
is entirely dependent on a dividend income stream from Saxendrift and
HC Van Wyk. Both of these companies are hopelessly
insolvent
and are incapable of trading themselves out of insolvency and cannot
be restored to profitability.”
56.
At the time the above statements were made, the businesses of the
companies were still operational. At present the mining
operations have been suspended for more than a year. The
liquidators aver that with the passage of time all previous mining
plans had become outdated and irrelevant, the mining fleet
inoperative, the plant rusted and partially stripped. There is
currently no electrical or water supply at the mine and C-Rock’s
proposal does not provide for the substantial reconnection
fees.
Major funding will be required to clear the mining site of waste
material and to provide infrastructure. Repairs
would have to
be undertaken to the mining fleet before any mining can commence.
These basic expenses, being just the tip
of the iceberg are not
catered for in C-Rock’s proposal.
57.
In addition further critical difficulties with C-Rock’s
proposal are highlighted by the opposing parties, in particular
the
liquidators. I do not intend to refer to each and every problem
raised and refer to only the following:
57.1
C-Rock has failed to deal at all in its proposal with the necessary
rehabilitation liability, which is estimated by the liquidators
at
more than R42 million and which will increase as soon as further
mining operations are undertaken;
57.2
C-Rock does not disclose in its founding affidavit the amount of PCF
it proposes to inject into the business rescue operation,
neither its
ability to do so. The liquidators maintain that their investigations
have shown that at least R50 million will be required
to get the mine
operational again;
57.3
C-Rock has failed to explain why and how the proposed sale of
diamonds in the open market will create increased income;
58.4
C-Rock has failed to provide factual information to support the
conclusion that a reduced staff compliment will have a positive
effect or that the mine can operate successfully with the drastically
reduced employees it suggests. The liquidators state
that at
least 3 shifts are required per day for a 24 hour operation.
Each shift requires a certain number of skilled employees.
Employees ordinary work 8 days with 4 days leave. The
liquidators are of the view that it would be impossible to
successfully
operate a fully fledged alluvial diamond mine with the
number of employees suggested.
58.5
C-Rock’s cash projections are not reliable since it has failed
to provide historic financial information on which its
estimations
are based.
58.6
C-Rock has failed to disclose that should business rescue prove
successful i.e. the assets of the companies exceed its liabilities,
the subordinated debts of certain creditors will revive. The
biggest of which is a debt exceeding R1 billion owed by Saxendrift
to
N10C Resources Inc.
59.
C-Rock has attempted to address the difficulties raised by the
liquidators in its replying affidavit. As can be expected the
opposing parties immediately went on the offensive and I was urged to
ignore any new matter raised in reply which should rightfully
have
been addressed in the founding affidavit.
60.
It hardly needs mentioning that in terms of the rules of motion
proceedings, an applicant is required to make his case in the
founding affidavit. Save in exceptional cases, a court will not
allow an applicant to make or supplement a case in a replying
affidavit. The reason is obvious – the respondent would
not in the normal course have the opportunity to respond to
such new
matter. No explanation whatsoever is given for the inclusion in
the replying affidavit of matter which should have
been in the
founding affidavit. Two glaring examples hereof are the
take-off agreement between VWD and Ascot for the sale
of diamonds to
Ascot, which is alleged to have been disadvantageous to VWD and the
disclosure of the amount of PCF which C-Rock
proposes to provide.
61.
Another well founded criticism is the inclusion in C-Rock’s
papers (both founding as well as replying affidavit) of lengthy
annexures without identifying the specific portions on which reliance
is placed. In
Swissborough Diamond Mines (Pty) Ltd and
Others v Government of the Republic of South Africa and Others
1992(2) SA 279 (T) at 324 F-H it was said that:
“
Regard
being had to the function of affidavits, it is not open to an
applicant or a respondent to simply annex to its affidavit
documentation and to request the Court to have regard to it.
What is required is the identification of the portions thereof
on
which reliance is placed and an indication of the case which is
sought to be made out on the strength thereof. If this
were not
so the essence of our established practice would be destroyed.
A party would not know which case must be met.”
62.
Prime examples hereof are annexures “C”, “D”
and “E” to the founding affidavit – the
founding
affidavits of C-Rock in the initial applications for the liquidation
of the companies, and annexure “M” to
the replying
affidavit – a Technical Report on the Wouterspan Alluvial
Diamond Project which runs into some 124 pages, to
name but a few.
This is simply not permissible.
63.
Mr Vorster for the liquidators has argued that I would be entitled to
strike out the whole replying affidavit. He is no doubt
correct,
however I am inclined to adopt the approach of Harms ADP in
Van
Zyl v Government of the Republic of South Africa and Others
2008(3)
SA 294 (SCA) at paragraph 46 and “
shall
nevertheless have regard to the reply to the extent that it contains
relevant and admissible material that impact on the merits
of the
case.”
64.
That being said, very little has been achieved by C-Rock in its
attempt to bolster its case in the replying affidavit.
Its
three-pronged proposal to bring about the turnaround of the companies
remains speculative at best.
65.
Although identifying previous employees who are willing to take up
employment again, C-Rock has still not explained how the
mining
operations could be sustained to the extent it proposes with only 50%
of its previous employees, except for the say so of
Mr MJ Van
Niekerk, the sole director of C-Rock and the deponent to its
affidavits. He states in the replying affidavit that
C-Rock
knows the labour related needs of the mining operation since it
designed, developed and erected VWD’s mining plant,
was
involved and included in its mining activities from an operational
perspective and had advised VWD on operational aspects on
its crisis
committee. I will revert to the significance of this statement
in due course.
66.
With regards to the proposed temporary cessation (during the course
of the business rescue proceedings) of the sale of diamonds
to Ascot,
the liquidators have in broad terms outlined the terms of the
take-off agreement with Ascot in their opposing affidavit
as follows:
“
34.4
The Ascot payment terms were as follows:
(a)
90% of the price offered for the diamonds would be paid within 24
hours after concluding the deal;
(b)
In lieu of the remaining 10%, VWD would afford Ascot an opportunity
to cut and polish the diamonds, and to sell the diamonds
in the open
market. Thereafter, VWD would receive 50% of the profit earned
by Ascot. This amount was usually higher
than the outstanding
10% of the purchase price, and resulted in additional income.”
67.
C-Rock attached the take-off agreement to its replying affidavit to
the opposing affidavit of Ascot. Significantly the
take-off
agreement does not restrict the sale of VWD’s diamonds only to
Ascot. It provides for an arrangement whereby
Ascot will have
the right of first refusal on the marketing and beneficiation of all
special stones i.e. stones equal to or greater
than 10 carats.
That upon an identification of a special stone the parties shall meet
and negotiate on a market valuation
and purchase price. If the
parties cannot agree thereon, RDI may market such diamond
independently of Ascot to an agreed
third party. Prior to
selling such diamond to the third party, RDI must offer such diamond
back to Ascot at the third party
price. Should Ascot decline
the offer, then RDI may sell the diamond to the third party.
68.
The liquidators contend further in their opposing affidavit that
historically Ascot has assisted VWD financially during tough
times
through
inter alia
a loan in 2011 and a debenture transaction
in 2014 and that their investigations suggested that the relationship
with Ascot has
been beneficial for the companies. This was met
by C-Rock in reply with a reference to a document titled “
NED
Review September 2015”
wherein Rockwell supposedly confirms
that VWD’s diamonds were sold off to Ascot at “
persistent
price under-achievement in comparison to market-based pricing, of
20-25%.”
On inspection of the report referred to, the above
quotation appears to refer to sales and marketing prices achieved for
mines referred
to as “
NJK”, “R/H”
and
“
S/X”.
Whether any of these mines belong to VWD is
not apparent. Lest my criticism of C-Rock’s reference to this
document, without
explanation to place it in context, appears to be
unnecessary nitpicking on my part, it must be remembered that
Saxendrift at one
stage conducted mining operations and the mines
referred to in abbreviated fashion could very well have belonged to
Saxendrift
and not VWD. It is common cause that VWD conducted
mining operations at Wouterspan, which does not appear to be any one
of
the mines referred to in the report. Be that as it may,
C-Rock has failed to show factually or comparatively that the sale
of
VWD’s diamonds in the open market would achieve the increased
prices as alleged.
69.
The issue of PCF remains a challenge. In its replying affidavit
C-Rock states that it commits itself to PCF of R10 million
and that
the required PCF is not only available in cash but also in the form
of yellow machinery and mining equipment.
C-Rock
has refused to rise to the challenge by the liquidators to prove its
financial ability to provide the proposed PCF.
Meanwhile the
deponent to Ascot’s opposing affidavit, Mr BA Josselowitz
states that he had been approached by a Mr Glenn
Norton, a senior
executive of C-Rock, during late September 2018, who informed him of
C-Rocks intention to apply for a business
rescue order and requested
Ascot’s support in putting up some of the capital required by
C-Rock for PCF purposes. In
return C-Rock would continue to
dispose of all rough diamond production via Ascot throughout the
business rescue operation.
Josselowitz informed Norton that
Ascot had no interest in being associated with C-Rock whereupon
Norton responded by saying that
he would contact other creditors or
parties in an attempt to raise PCF.
70.
C-Rock’s Van Niekerk admitted that Norton had a conversation
with Josselowitz regarding the business rescue application,
but
denies that the conversation was along the lines as alleged by
Josselowitz. An affidavit by Norton setting out his version
of
the conversation was promised but no such affidavit has been
forthcoming. In these circumstances I have to accept the
version of Josselowitz, which reflects adversely on C-Rock’s
ability to provide the proposed PCF and the
bona
fides
of its contention
that the sale of diamonds in the open market, as opposed to Ascot,
would be beneficial to the turn-around of
VWD. In any event one
can only wonder how C-Rock will get the mining operations to be fully
functional and profitable with
PCF of R10 million when the erstwhile
BRPs failed to do so with PCF of R13 million and an operational mine.
71.
C-Rock’s reply to the criticism levelled at its cash flow
projections unfortunately does very little to allay the concerns
raised. Van Niekerk states
inter
alia
that C-Rock had been
part of the “
reality”
that had circumscribed
VWD’s present circumstances from a diamond mining operational
prospective and that its projections
are therefore founded on
reality. That C-Rock can rent the necessary yellow machines from
Saxendrift or if that proves to be a
problem, it has its own mining
fleet which can be used in the mining operations. The environmental
liability, it is alleged, is
only payable on demand and in any event
C-Rock proposed to rehabilitate concurrently with the mining, which
is a common practice
and which would reduce the financial exposure.
The reconnection of the water and electricity supply would be no big
problem, and
so forth.
72.
A further bone of contention between C-Rock and the liquidators is
the wet plant. C-Rock has attached to its founding
affidavit a
valuation of the wet plant dated October 2016. Therein the value of
the wet plant is reckoned at R119 million and is
based on a completed
wet plant. C-Rock which was responsible for the construction of the
wet plant maintains that the plant has
been completed and is
operational. The erstwhile BRPs were of the view however that
significant cash injections are required to
restore the plant and
equipment to enable it to consistently achieve the desired mining
volumes and diamond recoveries. The
liquidators allege that
whereas C-Rock had been contracted to construct a wet plant of at
least three production lines, only the
first production line has been
completed and that it will require substantial sums of money to bring
the wet plant into full operation.
73.
Whilst it appears from its founding affidavit that C-Rock realises
the need for money to be pumped into the wet plant –
stating
that PCF will be provided to “
kick
start”
the wet plant,
the replying affidavit seems to suggest that the wet plant is fully
operational. C-Rock states in reply that it
had completed four lines,
that the erstwhile BRPs had removed one line, but that the remaining
three lines were fully operational
as at 8 September 2017 when the
BRPs ceased all mining operations.
74.
There is obviously a dispute of fact pertaining to this issue, but
what is clear on their own version is that funding is required
for
the wet plant. The amount needed is however not canvassed in C-Rock’s
papers.
75.
S 131(4) of the Act provides the following:
“
(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.”
(Own
highlighting)
In
Oakdene Square Properties (Pty) LTD and Others v Farm
Bothasfontein (Kyalami) (Pty) Ltd and Others
[2013] 3 All SA 303
(SCA), the Supreme Court of Appeal dealt with amongst others the
issue of a reasonable prospect which an applicant has to show
of
rescuing a company.
Brand
JA states at paragraph 29 that while it is generally accepted that a
reasonable prospect is a lesser requirement than the
reasonable
probability which was the yardstick for placing a company under
judicial management in terms of the 1973 Act:
“
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.”
76.
Intrinsic to the requirement of a reasonable prospect for rescuing
VWD seems to be an explanation of the circumstances pertaining
to the
financial failure of VWD, since a rescue proposal needs to address
and rectify those circumstances. See
Southern
Palace Investments 265 (Pty) Ltd v Midnight Storm Investments
386
Ltd 2012(2) SA 423 (WCC) at paragraph 24. C-Rock has failed to deal
in the founding affidavit with the circumstances leading
to the
downfall of DWD despite its director, Van Niekerk, having sat on
VWD’s crisis committee and executive committee during
2016,
albeit, as stressed by Van Niekerk, relating purely to “
operational”
matters. In
addressing C-Rocks omission to deal with the reasons for the failure
of DWD, Van Niekerk states that C-Rock is
a creditor at arms length
of DWD, does not know the internal financial dealings of DWD and has
played open cards with the court
by attaching the erstwhile BRPs
affidavit, which deals with the reasons for DWD’s downfall.
77.
Ironically, and most probably why the reasons for VWD’s
downfall were not specifically dealt with in the founding affidavit,
two of the reasons the BRPs provide relate to C-Rock, that is, “
.
. . ineffective oversight of the contract miner C-Rock Mining
Proprietary Limited (C-Rock) and the lack of timely completion of
the
Wet Plant Project.”
In these circumstances it cannot in my view, be made out that C-Rock
is a creditor at arms length, and cannot reasonably
be expected to
know the reasons for the financial predicament of VWD.
78.
Standard Bank and Ascot, both substantial creditors of VWD have
indicated that they will not vote in favour of the business
rescue
proposal put forward by C-Rock. Moreover Standard Bank has
stated that it will not release any of the assets over
which its
perfection lies to the proposed BRP for use in the business rescue
plan, nor extend overdraft facilities while business
rescue
operations take place.
79.
In all of the above circumstances I am of the view that the
application for business rescue cannot succeed. The application
is
ill-conceived. C-Rock has failed to place cogent evidence
before court to support the existence of a reasonable prospect
of
business rescue and in my view relies purely on conjecture and
speculation.
Costs
80.
I see no reason why costs should not follow the result. However
as mentioned, the liquidators and Ascot have asked that
I make a
separate cost order with regard to the opposition of their
locus
standi.
I do not see
the purpose of such an order. The
locus
standi
issues were dealt
with simultaneously with the merits and can have no separate cost
implication.
81.
Mr Vorster for the liquidators has however made submissions with
regard to a punitive cost order which I intend to entertain.
C-Rock has referred to the liquidators in their affidavits and even
heads of argument as incompetent. The liquidators are
experience professionals and such an epitaph is not only
inappropriate but also not justified. It is completely unacceptable.
In addition, the extent and manner in which the liquidators’
participation in this application were challenged, where they
were
only performing their duty in the interest of the company and the
body of creditors, should not be allowed to be prejudicial
for the
general body of creditors in terms of costs C-Rock has received
prior warning of the cost order the liquidators intended
to request.
In
the circumstance the following orders are made:
a)
The business rescue application
is dismissed.
b)
The applicant is to pay the
costs of the application in the following manner:
(i)
The costs of the 2
nd
,
3
rd
and 4
th
Respondents (the joint provisional liquidators) on the scale as
between attorney and client;
(ii)
The costs of Diacore South
Africa (Pty) Ltd trading as Ascot Diamonds and Standard Bank of South
Africa Limited on the party and
party scale; and
(iii)
The costs of the application to
intervene by Bandeo 140 CC and Rietput Delwery CC (the intervening
parties) on an opposed basis.
CC
WILLIAMS
JUDGE
For
Applicant :
Adv. P Lourens
De Vries Inc c/o Van de
Wall Inc
For
2
nd
, 3
rd
, 4
th
, Respondents: Adv
J Voster
Brooks & Braatveldt
Inc
c/o Adrian Horwitz &
Associates
For
Ascot Diamonds: Adv
L M Spiller
Haarhoffs Inc
For
Standard Bank:
Adv S Tsangariakis
Hugo Mathewson &
Oosthuizen
For
the intervening parties: Adv
AM Heystek
Japie Van Zyl Attorneys
c/o Roux Welgemoed &
Du Plooy
[1]
The judgment of the SCA in GCC Engineering & others v Lawrence
Maroos & others, (901/2017)
[2018] ZASCA 178
(3 December 2018)
supports this view.