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[2015] ZAKZPHC 21
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Resource Washing (Pty) Ltd v Zululand Coal Reclaimers Proprietary Limited and Others (10862/14) [2015] ZAKZPHC 21 (20 March 2015)
IN
THE HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL
DIVISION, PIETERMARITZBURG
CASE NO: 10862/14
In the matter
between:
RESOURCE WASHING
(PTY)
LTD
............................................................................................
APPLICANT
and
ZULULAND COAL
RECLAIMERS PROPRIETARY LIMITED
...............................
FIRST
RESPONDENT
(Under business
rescue Registration number 2008/024439/07)
MUHAMMED ASIF
LATIB
.....................................................................................
SECOND
RESPONDENT
MUHAMMED ASIF LATIB
NO
..................................................................................
THIRD
RESPONDENT
COMPANIES AND
INTELLECTUAL
PROPERTY
COMMISSION
.....................................................................................
FOURTH
RESPONDENT
JUDGMENT
Date of hearing 3
March 2015
Date of judgment
20 March 2015
D.
PILLAY J
Parties
[1] Resource Washing
Proprietary Limited is the applicant, a creditor of the first
respondent, Zululand Coal Reclaimers (ZCR), a
company under business
rescue. Muhammed Asif Latib is the second respondent in his personal
capacity and the third respondent in
his capacity as the business
rescue practitioner (BRP). The Companies and Intellectual Property
Commission is the fourth respondent;
it does not oppose this
application. The opposing respondents are collectively referred to as
the respondents.
[2] The applicant
seeks an order granting ‘to the extent necessary’ leave
in terms of s 133 of the Companies Act 71
of 2008 (the Act) to launch
these proceedings to set aside the resolution in terms of s 130(1)(a)
and 130(5)(a) of the Act and
declaring the business rescue
proceedings in respect of ZCR to have terminated, and for the
provisional winding up of ZCR. The
applicant abandoned its challenge
to the validity of the respondent’s resolution.
Opposition
in limine
[3]
On the eve of the hearing of the application the respondents
delivered supplementary heads of argument objecting
in
limine
to
the application on the ground that the applicant failed to apply in
advance in terms of s 133 to obtain leave to launch proceedings
against ZCR. Incorporating an order in terms of s 133 in an
application instituting the legal procedures as this application does
was allegedly not compliant with s 133 because it deprived the court
of an opportunity to give directions about the future course
of the
application, (such as issuing an order for the appointment of an
independent party to assess the effects of business rescue
and
liquidation proceedings on the creditors and the shareholders and to
report to the court). To enable the applicant to institute
its s 133
application disjunctively from the main proceedings counsel for the
respondents sought an adjournment.
[4]
Senior counsel who appeared for the respondents was not the counsel
who had prepared the heads of argument. He acknowledged
that in the
answering affidavit the respondents had stated that consent in terms
of s 133 was ‘not' required. Notwithstanding
the absence of any
evidence from the deponent to the answering affidavit counsel
nevertheless persisted that the word ‘not’
was a
typographical error or an erroneous concession to which the
respondents were not bound. For the submission that s 133 imposed
a
statutory moratorium on legal proceedings against a company under
business rescue, non-compliance with which rendered this application
premature the respondents relied on
Merchant
West Working Capital Solutions (Pty) Ltd v The Advanced Technologies
and Engineering Company Limited
(13/12406)
[2013] ZAGPJHC 109 (10 May 2013) para 67 and
Msunduzi
Municipality v Uphill Trading
14
(Pty) Ltd and
Others
case
number 11553/2012 27 June 2014 (unreported).
Moodley
v On Digital Media (Pty) Ltd and Others
2014
(6) SA 279
(GJ) which the applicant submitted defeated the
respondents' objection
in
limine,
was
also relied on by the respondents.
[5]
In
Merchant
the
court dismissed the application for amendment in which the applicant
sought ‘ex
post
facto'
leave
to institute proceedings in terms of s 133(1)(b). It reasoned that
the moratorium applied to all legal proceedings unless
the exception
in (a) to (f) in s 133 applied.
1
That the proceedings amounted to legal proceedings was not in
dispute.
2
The court rejected Merchant's distinction between legal proceedings
generally which were prohibited by s 133(1) and those launched
for
the perfection of security which the applicant contended were not
prohibited. Merchant was seeking substantive relief that
included an
order authorising the Sheriff to attach and deliver a helicopter over
which it had a cession and a pledge as security
and for perfecting
the attachment.
3
On these facts and legal submissions
Merchant
is
distinguishable from this case as will emerge below.
[6]
In
Msunduzi,
the
court dismissed an application in terms of s 133{1 )(b) firstly
because it seemed to the court that the applicant, a municipality,
was not a regulatory authority which the Act defined as ‘an
entity established in terms of national or provisional legislation
responsible for regulating an industry, or sector of an industry’.
Consequently Msunduzi did not fall into the exception
in subsection
(f) which permits a regulatory authority to institute legal
proceedings in the execution of its duties after written
notification
to the BRP.
4
[7]
Secondly, it was not disputed that Msunduzi did not notify the BRP in
terms of subsection (f). There was good reason for such
notice prior
to commencing legal proceedings, the court opined, it gave the BRP an
opportunity to investigate and resolve the matter
thus avoiding
litigation. Lastly, it was not permissible to apply from the bar for
leave in terms of s 133.
5
On these facts and legal submissions
Msunduzi
is
also distinguishable from this case as will be shown.
[8]
Moodley
above
pertinently addresses the interpretation and application of s 133 and
the ambit of the moratorium on legal proceedings.
Moodley
considered
the application of s 133 'in so far as it was required’ to
proceed with an application against the company and
its BRP for
declaratory relief that certain share transactions were not in
accordance with the adopted business rescue plan.
6
The court concluded:
‘
[10]
...Legal proceedings, such as the present case, which seeks that an
adopted business rescue plan be executed and implemented
strictly
according to its terms and in accordance with the applicable
conditions of the
Companies Act, are
legal proceedings against the
business rescue practitioner
and
the
company in business rescue in connection with the business rescue
plan. They are not legal proceedings against the company or
property
belonging to the company or lawfully in its possession within the
meaning of
s 133(1).
[11]
Section 133
, therefore, finds no application in legal proceedings
against the company in business rescue and its business rescue
practitioner
in connection with the business rescue plan, including
its interpretation and execution towards implementation ... The
applicant
does not acquire the leave of this court as
contemplated
in
s 133(1
)(b) of the
Companies Act to
proceed with the present
proceedings.’
7
[9]
In conning to this conclusion the court found
Redpath
Mining South Africa (Pty) Ltd
v
Marsden
NO
8
to
be wrongly decided and declined to follow it, preferring instead the
academic opinion of
Henochsberg
on the
Companies Act 71 of 2008
,
9
Redpath
was
an application to interdict the BRP and the company under business
rescue from implementing the business rescue plan pending
proceedings
to be instituted within two weeks of the interdict being granted.
That application was prefaced by an application in
terms of
s 133(1
)(b). The learned judge who had a month earlier pronounced in
Merchant
reiterated
his opinion that
s 133(1)
‘calls for a complete moratorium in
the clearest and unambiguous terms’.
10
However, he accepted that ‘only in exceptional circumstances
may a court permit litigation against a business rescue plan’.
11
He found that the applicant failed to present ‘sufficient
motivation’ for the breach of the ‘statutorily set
moratorium against legal proceedings during the period a business
rescue plan is in operation’,
12
and ‘to convince this court to indulge the applicant’.
13
Citing himself in
Merchant
he
found that the circumstances in
Redpath
did
not 'cumulatively constitute sufficient motivation’.
14
[10]
Respectfully, I too disagree with the reasoning in
Redpath
that
there must be ‘exceptional circumstances' for granting an
application in terms of
s 133.
Apart from being vague, the wording
‘exceptional circumstances’ is not one of the grounds
stipulated or foreshadowed
in
s 133.
Nor does the learned Judge give
any direction as to what would constitute ‘exceptional
circumstances’. There may have
been ‘a lot of things and
circumstances ... alluded to by ... the applicant’ that failed
to convince that court that
exceptional circumstances existed
justifying the granting of the application.
However,
the findings of fact in
Redpath
do
not go far enough to elevate ‘exceptional circumstances' to a
legal principle and ground for granting
s 133
applications.
Eventually granting the application in terms of
s 133
for the limited
purpose of bringing that very application was circular and
unnecessary, with respect.
Does the
applicant require leave in terms of section 133(1)(b) of the Act
[11]
This application in terms of s 133 does not suffer from being made
‘ex
post
facto'
or
from the bar as happened in
Merchant
and
Msunduzi above.
I
align myself with
Moodley
in
holding that s 133 does not apply to legal proceedings that are
against the company in general or property belonging to the company
or lawfully in its possession.
[12]
In addition, barring the court from scrutinising procedural and
substantive compliance with the requirements of the Act is
inimical
to the Constitution of the Republic of South Africa, 1996. Section
1(c) entrenches the supremacy of the Constitution and
the rule of
law. The principle of legality requires that anything done in
conflict with the rule of law shall not enjoy the force
of law.
15
Eliminating illegalities that occur in business rescue proceedings
should be automatic. Consequently, to interpret s 133 as
indiscriminately
barring all legal proceedings unless they meet the
requirements of subsections (a) to (f) undermines the principle of
legality.
[13] This
application challenges the business rescue proceedings on the
substantive ground that such proceedings have come to an
end.
Furthermore s 130(5) and by way of another example, s 132(2)(a)(i)
permit applications to court to set aside a company’s
resolution to begin business rescue proceedings without rendering
these sections subject to the leave of the court being granted
in
terms of s 133. Nor is there any rider in s 133 qualifying
applications brought under those sections.
[14] The respondents
failed to support with any authorities their contention that the
application should be disjunctive of the substantive
legal
proceedings. Moreover, the allegations in support of the substantive
relief claimed in terms of s 130{5)(a) of the Act also
support the
application in terms of s 133(1 )(b) of the Act. Without sufficient
precise information as to how the business rescue
proceedings are
being conducted the court would be hamstrung in intervening to give
any directions that counsel for the respondents
anticipate. With the
information the court has in this application their suggestion that
the court appoint another independent
person to assess the business
rescue proceedings and the application for provisional liquidation
will serve no purpose other than
to bulk up the bureaucracy and delay
the resolution of the claims of all stakeholders.
[15] Accordingly, I
find that the applicant did not need to apply in terms of s 133(1
)(b) to institute proceedings to set aside
the resolution.
Issues in dispute
[16] Having
abandoned its challenge in terms of s 129(5) of the Act that the
resolution to commence business rescue and placing
the ZCR under
supervision had lapsed and was a nullity, the applicant persisted
with its alternative grounds for setting aside
the resolution in
terms of s 130(1 )(a)(ii) and 130(5)(a) and to declare the business
rescue proceedings to be terminated. The
applicant contends that
there is no reasonable prospect for rescuing the company and, having
regard to all the evidence, it is
just and equitable to set aside the
resolution.
[17] Broadly, the
applicant relies on 2 interconnected factors:
(a) There has been a
delay of 11 months since the BRP was appointed on 5 September 2013
until this application was launched.
(b) Notwithstanding
the passage of time the BRP has failed to develop and propose a
business rescue plan that makes sense.
In
support of these submissions the applicant referred to
DH
Brothers Industries (Pty) Ltd v Gribnitz NO and Others
2014
(1) SA 103
(KZP) para 17 and 18 and
Welman
v Marcelle Props
193
CC (33958/2011) [2012] ZAGPJHC 32 (24 February 2012).
[18]
The respondents resisted the termination of the business rescue
proceedings on the basis that none of the options on termination
provided in s 130(5)(c) were ‘apposite’. Furthermore, the
fact that the plan did not comply with s 150 was not a reason
for
setting aside the business rescue proceedings. Mainly, the
respondents sought to persuade the court to give effect to the letter
and spirit of the Act in introducing business rescue proceedings as
stated in s 7 and several judgments.
16
The Delay
[19]
As regards the delay s 132(3) of the act provides that if a company’s
business rescue proceedings have not ended within
three months the
BRP must apply to court for an extension of time. Supporting such an
application must be a report on the progress
of the business rescue
proceedings and an update at the end of each subsequent month until
the end of the proceedings. The BRP
must aiso deliver the report and
regular updates to the court. Section 132 does not spell out what the
consequences would be if
the BRP fails or refuses to apply to court
for an extension. Besides, the passage of time is not the only
consideration in deciding
whether business rescue should continue or
come to an end. Nevertheless, the sense of urgency in finalising
business rescue proceedings
is manifest from these provisions. I am
unaware of any application for extension being made by the BRP in
this case.
17
[20]
DH
Brothers Industries (Pty) Ltd
v
Gribnitz
above
para 26-27 acknowledges that ‘time is of the essence’ in
a business rescue because it is an intrusion on the rights
of
creditors.
18
A countervailing consideration that underpins the rationale for
business rescue is the purpose of the Act of allowing companies
to
contribute to enhancing the economic welfare of South Africa as a
partner within the global economy.
19
[21]
In refusing an application for postponement by a company in business
rescue in
Koen and
Another v Wedgewood Village Golf and Country Estate (Pty) Ltd and
Others
2012
(2) SA 378
(WCC) para 10 the Western Cape Court remarked :
‘
It
is axiomatic that business rescue proceedings, by their very nature,
must be conducted with the maximum possible expedition.
In most cases
a failure to expeditiously implement rescue measures when a company
is in financial distress will lessen ... the
prospect of effective
rescue. Legislative recognition of this axiom is reflected in the
tight time lines given in terms of the
Act for the impiementation of
business rescue procedures if an order placing a company under
supervision for that purpose is granted.'
20
[22]
Unlike the facts in
DH
Brothers
in
this case the meetings of stakeholders and the adoption of a business
rescue plan has been postponed on several occasions sometimes
at the
instance of the applicant. The various drafts of the plan were not
acceptable to all the stakeholders in particular the
applicant. No
matter who sought the postponement for whatever reason, protracted
business rescue proceedings would be permissible
if the plan works,
is capable of working or enjoys the support of significant
stakeholders.
[23] In this case a
plan has yet to be adopted. Almost triple the expected time of three
months has passed since the process began.
Alarming as the delay is
it must be assessed in the context of what has been achieved.
The Content of
the Business Rescue Plan
[24] The scheme of
business rescue is manifestly to enable stakeholders to participate
meaningfully in the business rescue process.
The BRP must make full
disclosure of all relevant information to enable stakeholders to make
informed decisions. Such disclosure
must also seek to clarify and
convince stakeholders of the factual basis for seeking business
rescue, that it is a genuine attempt
at rescuing the business and not
a subversive exercise to enable the company to avoid its creditors. A
BRP cannot hope to secure
buy-in or endorsement of stakeholders
without full and meaningful disclosure of relevant information.
[25] The Act
prescribes the content of the proposed business rescue plan in
general terms for the obvious reason that it applies
to all
industries and sectors of commercial enterprise, big and small.
However, the Act does stipulate basic minimum requirements
in s
150(2)(a) in three parts as to what a business rescue plan must
contain. Part A: Background, Part B: Proposals and Part C:
Assumptions and Conditions ‘must include at least’ the
list of requirements set out in those parts. Nothing precludes
the
BRP from providing more information if such information would be
relevant to enabling stakeholders to accept, reject or modify
the
business rescue plan. But he cannot provide less.
[26] Turning to each
of the requirements in s 150(2)(a) Part A subsection (i) requires:
‘
(i)
a complete list of all the material assets of the company, as well as
an indication as to which assets were held as security
by creditors
when the business rescue proceedings began;’
The plan states:
‘
Material
Assets
Immovable
Property- The Boomlaer Dump
Valuation
thereof: R14 500 000.00 (market related) calculated at R12 rand per
ton with a reserve of 1 200 000 tons of material R9
600 000.00
(forced sale) at R8 per ton.
The assets are
free unencumbered save for a limited covering bond in favour of
Resource Washing.
No appraisal was
obtained and the practitioner reserves his rights to do so should it
be deemed necessary by direction of affected
parties.’
[27] Although the
plan reflects the immovable property it does so without any
description as to its location, title deed, size or
value. The
valuation appearing below it is misleading. It refers to the
valuation of the property. However, what is provided is
the valuation
of the coal deposits on the property. The applicant has a notarial
covering bond over ZCR’s stock in trade
on the immovable
property and is therefore aware of the property description. The same
cannot be said of other creditors participating
in the business
rescue process. Furthermore ‘covering bond’ could refer
to both a mortgage bond over immovable property
and a notarial bond
over movables. The business plan does not disclose over which assets
the covering bond is held. In this regard
too it is misleading and
imprecise. The only known covering bond is the notarial bond in
favour of the applicant. Presumably the
immovable property is
freehold.
[28] Despite the
passage of eleven months before this application was launched the BRP
failed to obtain an appraisal of the assets,
a material piece of
information to enable stakeholders and the court to decide whether
the business is genuinely in need of rescue,
whether there is or is
not sufficient assets to meet the claims of creditors, whether the
business’s cash flow problems could
be resolved by raising
capital using unencumbered assets as collateral and ultimately
whether it is better to remain in business
rescue than to liquidate
the business.
[29] Section
150(2)(a) Part A subsection (ii) requires:
‘
(ii)
a complete list of the creditors of the company when the business
rescue proceedings began, as well as an indication as to
which
creditors would qualify as secured, statutory preferent and
concurrent in terms of the laws of insolvency, and an indication
of
which of the creditors have proved their claims’.
The business plan
provides:
'List of known
creditors as at commencement of business rescue
M.
Yacoob
...........................................................
R7
035 796.00
Schoerie and
Sewgoolam
.....................................
R
159 000.00
R.
Verster
...........................................................
R1
209 869.00
Resource Washing
Services
.............................
R2
380 211.10
Deloitte
& Touche
..............................................
R
193 800 00
South African
Revenue Services
...........................
Unknown
Total:
................................................................
R10
978 676.10’
[30]
Henochsberg
observes
21
that although the term ‘creditor’ is not defined in the
Act it should bear its normal meaning. It would therefore include
an
employee to whom outstanding amounts relating to employment are due.
The business plan does not disclose what, if any, amounts
are owing
to its employees. Nor does it reflect whether any amounts are due and
payable to the local authority in respect of rates
and taxes.
[31] It is a poor
reflection on the BRP to record 'unknown’ against the claim of
the South African Revenue Services (SARS)
who is a creditor and a
participant in the business rescue process. The BRP offers no
explanation as to why after 11 months he
is still unaware of SARS’
claim. His duty is to ascertain the claimants and the amounts of
their claims. If SARS has no claim
then it would not be reflected as
a creditor; it would certainly not be participating in the business
rescue process. Deloitte
and Touches’ claim is for services
rendered in compiling the 2012 financial statements of ZCR. That
presupposes there were
financial statements for 2011, a fact relevant
to the requirement of disclosure of financial information below.
[32] Although the
business rescue plan does not indicate whether the creditors are
secured, preferent or concurrent and whether
any have proved their
claims this information appears in other parts of the business rescue
plan. The applicant disputes the claim
of M. Yacoob on the basis that
it is not apparent as to whether he is an independent and bona fide
creditor. Section 145 (5)(a)
requires a BRP to determine whether a
creditor is independent. It emerged in this application that M.
Yacoob ceded his claim to
Bayete Mining Resources (Pty) Ltd (Van
Rooyen), the company competing with the applicant to buy the ZCR’s
dump material,
allegedly for monies lent and advanced. Coinciding the
interests of creditor Bayete as trading partner with its interests as
shareholder
would have been less suspicious if the cession was
revealed in the plan and discussed with other stakeholders before
such a significant
disposal of shareholder interests had occurred.
The cession may or may not be a positive development depending on how
Bayete intends
to influence the settlement of claims of all other
creditors. The court has no information to make this assessment. In
any event
it was not invited to do so.
[33] Section
150(2)(a) Part A subsection (iii) requires:
'(iii) the probable
dividend that would be received by creditors, in their specific
classes, if the company were to be placed in
liquidation;’
The business plan
provides:
'The probable
dividend if liquidated
Secured creditor:
100 cents in the Rand (limited to the extent of the bond, subject to
same been perfected)
Preferent Creditors:
None exist
Concurrent Creditors
as per the above creditors schedule. Estimated to be 100 cents in the
rand with the effluxion of time alternatively
approximately 80 cents
in the rand on a forced sale.’
[34] Having failed
to indicate which of the creditors are secured, statutory preferent
and concurrent as required in the preceding
subsection (ii) the
response to the requirements in subsection (iii) is meaningless
without any calculation, source documents,
explanation or motivation.
Without some estimation of how long it would take to settle claims
stakeholders and the court cannot
make informed decisions on the
viability of the plan. Why creditors would stand to receive 80 cents
in the rand when the current
assets alone of R14m, excluding the
value of the freehold immovable property, exceeds the liabilities of
R11m tabled above is puzzling.
The BRP’s projections are
unconvincing, irrational and unreliable.
[35] Section
150(2)(a) Part A subsection (iv) requires:
‘
(iv)
a complete list of the holders of the company issued securities, and
the effect that the proposal would have on them, if any’.
The BRP ignored this
requirement altogether.
[36] Section
150(2)(a) Part A subsection (vi) enquires:
‘
(vi)...
whether the proposal includes a proposal made informally by a
creditor of the company’.
Presumably the BRP
is responding to subsection (v) when he states:
‘
Offers
have been received from various parties namely: Osho Coal and Keaton
and KwaZulu-Natal Crushing (Pty) Ltd. These appear to
have been
withdrawn alternatively have lapsed by fluxion of time.’
What the attitudes
of all the participants in the business rescue process were to these
offers and why they were not accepted, are
not known to the court.
[37]
Part
B: Proposals
[38] Section
15Q(2)(a) Part B subsection (i) requires:
‘
(i)
the nature and duration of any proposed debt moratorium’.
Part
B is also not a model of clarity and certainty. The BRP produced the
offers from the applicant and Bayete. He bases his proposals
on these
two offers. The moratorium referred to subsection (i) depends on
which of the two proposals is ‘deemed appropriate
by
creditors’. ZCR does not seek to be released from paying its
debts.
22
In anticipating paying creditors fully but over an extended period
depending on which proposal, if any, is adopted, the approximate
duration is not forecasted.
[39] As for ZCR’s
on-going role and treatment of any existing agreement the BRP
discloses in terms of subsection (iii) the
following:
'
3.
It is anticipated (on the Resource Washing and Bayete proposals) that
the entity will retain its asset base, both movable (to
the small
extent that it does have) and immovable, and earn an income in the
form of payment generated on a rate per ton per month,
for the
benefit of the general body of creditors.
4. It is proposed
that the governing asset (the dump material inclusive of slurry) of
the entity be utilised for the direct generation
of income in terms
of the plan in order to make funds available to pay creditors.'
[40] How it intends
to retain its asset base of movables and simultaneously ‘utilise’
the ‘governing asset’
that is the dump material inclusive
of slurry to generate income to pay off creditors is
incomprehensible. It transpires that by
‘utilise’ the BRP
means ‘sell’. But if he sells he will be depleting the
applicant’s security held
via its notarial bond. Section
134(3)(a) prohibits the BRP from disposing of any property over which
another person has any security
without the prior consent of that
person unless the proceeds will be sufficient to fully discharge that
persons claim and pay or
secure that person’s claim promptly.
The BRP’s plan to dispose of dump material is with not with the
applicant’s
consent. Nor is the proceeds of the disposal
intended to 'promptly ‘settle or secure with ZCR’s
indebtedness to the
applicant. For this reason alone the plan is a
non-starter.
[41] Later the BRP
adds:
‘
9.
The plans for consideration is that ring fenced debt shall be reduced
by payment of the minimum sum of R150 000 per month, commencing
on a
date thirty days from the receipt of the first payment as proposed.
10. In addition, the
adoption of the business rescue plan will mean that the business will
be ongoing and also be generating a meaningful
monthly income which
can be used to reduce the ring fenced creditors claims as stipulated
at commencement of business rescue and
meet its current obligations.'
[42]
How the BRP arrives at R150 000 he does not explain. What the ‘ring
fenced debt’ is remains uncertain. As stated
above the full
list of creditors and the amounts owing to them are unknown to all
the stakeholders and, at this stage of the proceedings,
even to the
court. Reducing the debt is a retreat from the earlier undertaking to
pay the ZCR’s debts fully over time and
to satisfy the claims
of creditors at 100 per cent in the rand. In the BRP's response as to
why the plan should be preferred instead
of liquidation this
undertaking is further whittled down to the ZCR paying its debt
‘either in full alternatively a major
portion’.
23
Such inconsistencies in a plan may be overlooked as being in the
nature of the uncertainty of plans if the foundation of information
on which the plan rests is credible and reliable.
[43] Unhelpfully the
BRP assumes that:
‘
the
plan will end with the fluxion of time and compliance alternatively
against failure to substantively comply with the business
rescue plan
as adopted.’
With no projection
as to when the plan would end and with failure being a possibility
independent creditors have little reason to
vote in favour of it.
[44] The first
assumption the BRP makes in response to Part C of s 150(2) of the Act
is that the ZCR should remain intact to trade
‘as a going
concern alternatively the outright buy be facilitated’.
'[0]utright buy’ is ambiguous if not misleading,
it could refer
to the sale of ZCR or only its business as a going concern. Whether
either includes or excludes the immovable property
is also not clear.
The only ‘trade’ contemplated is the sale of the movable
dump material over which the applicant
has a notarial covering bond.
[45] Although the
plan does not state how many employees ZCR engages it transpires that
there were two employees: Mrs van der Merwe,
a shareholder and the
son of Mr Verster, the deponent to the affidavits for ZCR. The son is
no longer an employee. What Mrs van
der Merwe does and what her
remuneration is are not disclosed in the plan.
[46] Although not
evident from the plan it emerges in the answering affidavit that the
respondents intend to sell the dump material
as is to buyers who
would undertake the washing and processing of the raw materials
themselves. This would avoid the ZCR having
to obtain washing and
other licences. This could be a viable option. Whether it is
necessary for the ZCR to remain in business
rescue to execute this
option is discussed further.
[47] Section
150(2)(c) Part C (iv) calls for a ‘a projected -:
(aa) balance sheet
for the company; and
(bb) statement of
income and expenses for the ensuing three years, prepared on the
assumption that the proposed business plan is
adopted.
'
The BRP dismissed
this requirement as ‘not applicable at this stage'. His
explanation is that the estimated income from the
two offers is
‘determinable at the suggested minimum tonnages and rate per
ton.’ He reserves the right to determine
the projections on
either option being adopted.
[48] This is not
what the section prescribes. ‘At least’ he ‘must’
project a balance sheet and income statement
for three ensuing years
on the ‘assumption’ that the proposed business plan is
adopted. Furthermore s 150(3) anticipates
and therefore permits
‘alternative projections based on varying assumptions and
contingencies' in the projected balance sheet
and statement of income
and expenses.
[49] The obvious
starting point of any assessment of an entity’s commercial
viability is its financial statements. For this
there must be full
financial disclosure of the company in an authentic and credible way
to the stakeholders and to the court. Usually
production of the
financial records for the company would serve this purpose. Without
such records in this instance the BRP was
statutorily bound to
project a balance sheet and income and expense statement. He has
failed to do so.
[50]
In
Commissioner,
South African Revenue Service
v
Beginsel NO and
Others
2013
(1) SA307 (WCC) at para 38 the court remarked that:
‘
upon
a proper construction of s 150(2) substantial compliance with the
requirements of the section will suffice. This would, in
my view,
mean that where sufficient information, along the lines envisaged by
s 150(2), has been provided to enable interested
parties to take an
informed decision in considering whether a proposed business rescue
plan should be adopted or rejected, there
would have been substantial
compliance.’
[51]
In
Welmen
the
South Gauteng High Court dismissed an application to place a company
under supervision and business rescue ‘[b]ecause
of the dearth
of facts upon which’ that application was based.
24
In
Koen
25
the
Western Cape Court found that the applicant had 'fallen woefully
short of furnishing the court with the material required to
make the
assessment of whether a reasonable prospect of business rescue
succeeding exists.’
[52]
Success of a plan must be evident or at least the expectation of it
should rest on objectively reasonable grounds.
26
My analysis above shores up the deficiencies in the plan that arise
from a serious failure to disclose relevant and reliable information
to the stakeholders. The failure is not merely an inadvertent
oversight. For instance, the applicant had asked repeatedly for a
list of the shareholders. It became aware of who they were only in
the respondents’ affidavits filed in this application.
Furthermore, management and assessment of any business starts with an
understanding of its financial statements. If the 2012 financial
statements are not available because ZCR has not paid Deloitte's for
them then the BRP should have obtained and disclosed the 2011
financials or used it as a basis on which to authenticate the
information he receives from the ZCR and to estimate its subsequent
financials. He could have asked SARS for its records of ZCR’s
financials with the assistance of ZCR, if necessary.
[53] Disconcertingly
the language of the plan is opaque, ambiguous and in parts
contradictory. If the court has misunderstood it
the poor quality of
the draft must account for such misunderstanding. Bearing in mind
that the BRP is a practicing attorney who
is writing possibly for
non-lawyers he must appreciate the special need to express his
thoughts precisely and clearly. The absence
of these qualities in the
plan plus the nondisclosure of relevant and reliable information
inspires no trust and confidence in
the BRP and his plan but doubt
and suspicion.
[54]
Although the ZCR appoints the BRP the latter is an officer of the
court reporting to the court.
27
The business rescue plan proposed by the BRP requires him to
facilitate the claims and interests of the various stakeholders in
deciding whether to accept or reject the proposals made in the plan.
28
Most importantly, a BRP has the same responsibilities, duties and
liabilities as a director of a company as set out in ss 75 -
77 of
the Act. Section 75-77 partially codifies the duties of directors and
by extension the BRP’s. However, their duties
are largely
regulated by the common law and codes of best practice such as the
King Report on Corporate Governance.
29
[55]
Essentiafly BRPs, like directors of a company, have non-negotiable
fiduciary duties towards the company. Directors are duty
bound to
exercise an independent discretion.
30
The BRP may not be a dummy or puppet blindly following instructions
of a shareholder or anyone else who appointed him. If he does
so he
commits a breach of his statutory duty.
31
He also has a statutory duty to act bona fide in the best interest of
the company irrespective of any contractual obligation he
agrees to.
32
Under s 77 the BRP assumes the same liability as directors and
prescribed officers of a company. This includes the liabilities
arising from his fiduciary duty, loss, damages or costs.
[56] The BRP is a
facilitator of conflicting and competing claims. To succeed he has to
earn the trust of all the stakeholders.
Crucial to earning trust he
must be demonstrably and impeccably open, independent, impartial,
competent and capable. In short a
BRP must be a person of the highest
integrity. A BRP who fails to meet these standards may be removed by
application to court in
terms of s 139.
[57]
The conditional counter-application invites the court to order that
ZCR be placed under business rescue under the stewardship
of another
BPR. Turning to Australian law, which is the backdrop to the Act, the
court in
Jeffrey
Raymond Dailinger
v
Halcha
Holdings Pty Ltd (Administrator Appointed) and Christopher Mel
Chamberlain
[1995]
FCA 1727
(8 December 1995) para 17-18 considered the power under
section 449(b) of the Corporations Law which authorises the court to
remove
an administrator and appoint a replacement if to do so would
conduce to the better conduct of the administration. On the facts in
that case the court found the administrator to be suitable, competent
and impartial. Therefore there was no evidence that the
administration would be better conducted by someone else.
33
[58]
Contrastingly in this case the evidence suggests otherwise. The BRP
in this case does not demonstrate these qualities clearly
and
convincingly. Respondent counsels’ suggestion that the court
appoint another independent person to assess whether business
rescue
or liquidation should be followed substantiates the court's finding
that the BRP is unsuitable. As an officer of the court
the the BRP
cannot be seen to be making common cause with the ZCR by being
represented by the same counsel. Conflicts of interest
can arise as
they do when the BRP’s compentence, impartiality and
independence are challenged. Commentators calling for up-skilling
BPR’s and orientating them to their statutory obligation find
justification in cases such as this.
34
[59] Against this
analysis the BRP’s concluding certificate prescribed in
subsection 4 is untrustworthy and unreliable. Over
11 months the BRP
has achieved little. He has not fulfilled his basic statutory
responsibilities. His plan does not have sufficient
reliable
information to persuade me that the twofold jurisdictional
requirements in s 128(1)(b)(iii) of the Act for business rescue
persist. These requirements are that there is a likelihood of the
company continuing in existence on a solvent basis and failing
that,
business rescue proceedings will result in a better return for
creditors and shareholders than liquidation of the company
would.
Such information that has been disclosed points to be ZCR and its
creditors being better off without business rescue.
[60] Having regard
to the macroeconomic policy considerations in s 7 underpinning
business rescue terminating business rescue in
this case will not
defeat those developmental objectives on the contrary it might
facilitate development. ZCR is a business in
the mining industry.
Currently it is dysfunctional. Disposing of it or its business as a
growing concern in the ordinary course
so that it becomes functional
would be consistent with the developmental objectives of s 7.
[61] On the
available information the BRP has listed creditors to the value of
about R11m. He projects the value of the dump material
to be
conservatively R9,6m on the applicant’s offer and R14,5m on the
Bayete offer. These figures exclude the value of the
immovable
property that inexplicably remains undisclosed in this application.
In the absence of any indication that the property
is anything but
freehold, the prospect of using the property to raise capital to
refinance the business to stave off its immediate
cash flow
constraints is an obvious option that surprisingly is not considered
in the plan. Faced with what is projected as being
essentially a cash
flow constraint arising from conflict with the applicant as a service
provider, reflexively recourse should
have been to explore ways to
recapitalise the business. If the BRP considered this option there is
no explanation as to why it
was not acted upon. Whether a loan from
shareholders or an issue of shares was tabled as options is also not
evident.
[62] Given the
passage of 11 months the BRP has little progress to show. If any
assessment can be made at all it is that the plan
is skewed to
protect shareholders at the expense of independent and minority
creditors. The BRP has little hope of convincing minority
independent
creditors to vote in favour of the plan. For these reasons the
business rescue should be terminated
The remedy
[63] Turning to the
remedy on the available information I am unable to find that any of
the requirements of s 130{1)(a) for setting
aside the resolution to
declare ZCR to be under business rescue had been met. I cannot find
that a reasonable basis exists for
believing that ZCR remains
financially distressed or that there is no reasonable prospect for
rescuing the company. I have found
that the ZCR can continue in
business on a solvent basis without being in business rescue. If it
was commercially insolvent when
it was placed in business rescue
without opposition it has had sufficient time to put itself on a firm
financial footing if the
shareholders and the BRP genuinely intended
to settle the claims of the independent creditors. Section 130(1)(a)
cannot be the
basis for setting aside the resolution.
[64] Helpfully, s
130(5)(a)(ii) exists. It provides :
‘
When
considering an application in terms of subsection (1)
(a)
to
set aside the company's resolution, the court may-
(a)
set
aside the resolution-
(ii) if, having
regard to all of the evidence, the court considers that it is
otherwise just and equitable to do so;’
DH
Brothers
highlights
difficulties in interpreting and applying the ‘just and
equitable' discretion of the court in s 130(5)(a)(ii).
Challengingly
at this nascent stage of the development of the Act the ‘just
and equitable’ power that s 130(5)(a)(ii)
confers on courts
injects a degree of flexibility necessary to cater for the numerous
circumstances that can arise to justify or
not justify setting aside
the resolution. A just and equitable power can work in favour of or
against the company in business rescue.
As the court is so empowered
anyone seeking to invoke such power must lay the factual and legal
basis for invoking it. I doubt
that any litigant who sets out a
compelling basis for invoking the court’s just and equitable
powers can justifiably suffer
the striking off of its pleadings. I do
not have to decide this issue as the court in
DH
Brothers
did
because in this case the applicant seeks to invoke the just and
equitable power of the court to set aside the resolution declaring
ZCR to be under business rescue without the respondents resisting
with a striking off of its pleadings.
[65] In view of the
deficiencies in the plan I find that the respondents have failed to
make the case for business rescue of the
ZCR. The twofold
jurisdictional requirements in s 128(1 )(b)(iii) of the Act do not
exist. Accordingly, the main application should
succeed
[66] Mr Verster as
director and shareholder of ZCR has delivered a conditional
counter-application seeking to reinstate ZCR under
business rescue
under the stewardship of the same BRP if the respondents fail in
opposing the main application. Following my findings
above the
conditional counter-application should be dismissed.
[67]As for the
application for provisional liquidation, I have found that the ZCR is
not insolvent. Recapitalisation, the sale of
ZCR or its business in
the ordinary course, hold better prospects of satisfying the claims
of creditors than liquidation. However,
if theses options do not
materialise the applicant would still have an opportunity to apply to
liquidate the ZCR. The application
for provisional liquidation should
be adjourned with the applicant having leave to reapply on the same
papers supplemented if necessary.
Costs
[68] A substantial
portion of the application related to the applicant’s s 129
challenge. It became aware that the BRP’s
registration
certificate had been properly issued before his appointment when the
respondents delivered their replying affidavit
in the
counter-application. It should have abandoned its challenge at that
point. Instead it ran up unnecessary costs that took
up 50% of the
heads of argument and wasted the court’s time in preparing for
hearing it. Consequently the applicant should
bear the respondents’
costs related to the s 129 challenge from the 18 October 2014 to the
date of the hearing. For the rest
costs follow the results with the
further qualification that the BRP and Mr Verster should bear costs
jointly and severally with
the ZCR.
Order
i. The application
setting aside the resolution to commence business rescue proceedings
and placing the first respondent under supervision
annexed as ‘FA116’
to the founding affidavit is set aside in terms of
s 130{5)(a)
of the
Companies Act, 2008
with costs.
ii. The costs
referred to in (i) above shall be born by the first, second and third
respondents jointly and severally the one paying
the others to be
absolved.
iii. The business
rescue proceedings pertaining to the first respondent are declared to
have come to an end.
iv. The application
for provisional liquidation is adjourned sine die with costs
reserved.
v. The applicant has
leave to reapply for provisional liquidation on the same papers
supplemented if necessary.
vi. The conditional
counter-application is dismissed with costs such costs to be born by
the first, second and third respondents
and Mr Verster, jointly and
severally the one paying the others to be absolved.
D. Pillay J
APPEARANCES
Counsel for the
plaintiff: B.M Gilbert
Instructed by :
Cuzen Randeree c/o
Venns Attorneys
Ref: Mr R A Stuart -
Hill/ Michael/26145043
Tel: (033) 355 3100
Fax: (033) 394 1947
Counsel for the
first to third respondents : Y.N Moodley SC, H.S Gani
Instructed by :
Vather Attorneys
Ref: U Vather
Tel: (033) 342 4099
Fax:
(033) 342 4075
1
Merchant
para
60.
2
Merchant
para
61.
3
Merchant
para
31.
4
Msunduzi
para
7.
5
Msunduzi
para
8
6
Moodley
para
1.
7
Moodley
para
10-11.
8
(18486/2013)
[2013] ZAGPJHC 148 (14 June 2014)
9
Moodley
para
5; PA Delport (ed)
Henochsberg
on the
Companies Act 71 of 2008
Vol
1 (October 2014 -Service Issue 9).
10
Redpath
para
70.
11
Redpath
para
71.
12
Redpath
para
72.
13
Redpath
para
71.
14
Redpath
para
72.
15
C
Hoexter
Administrative
Law in South Africa
(2ed)
12-3,116 fn 36 and cases cited there; E Mureinik
Discretion
and Comment: The Sock Exchange Case
102
SALJ
434
16
Nedbank
Ltd v Bestvest 153 (Pty) Ltd; Essa and Another v Bestvest 153 (Pty)
Ltd and Others
2012
(5) SA 497
(WCC) para 34-39;
Madodza
(Pty) Ltd
i/
Absa
Bank Ltd and Others
[2012]
ZAGPPHC 165 para 12-15.
17
Welmen
v Marcelle Props 193 CC and Another
(33958/11)
[2012] ZAGPJHC 32 (24 February 2012) para 26.
18
See
also
Koen
and
Another
v Wedgewood Village Golf and Country Estate (Pty) Ltd and Others
2012
(2) SA 378
(WCC) para 10.
19
Section
7(e) of the Act
20
Koen
at
para 10.
21
PA
Delport (ed)
Henochsberg
on the
Companies Act 71 of 2008
Vol
1 (October 2014 - Service Issue 9) 445.
22
Section
150(2)(b)(Part
B)(ii)
23
Para
7(b) of the plan.
24
Welmen
para 29.
AG
Petzetakis International Holdings Ltd v Petzetakis Africa (Pty) Ltd
and Others (Mariey Pipe Systems (Pty) Ltd and Another Intervening)
2012 (5) SA 515
(GSJ);
_Newcity
Group (Pty) Ltd
v
Pellow
NO and Others, China Construction Bank Corporation Johannesburg
Branch v Crystal Lagoon Investments 53 (Pty) Ltd and Others
(GSJ) (unreported case no
12/45437,16566/12, 28-32013)
25
Para
25.
26
Propspec
Investments (Pty) Ltd v Pacific Coast Investments 97 Ltd and Another
2013
(1) SA 542
(FB); Blair Wassman
Business
rescue - getting it right
De
Rebus
:
28 January 2014; 28 KB
27
Section
140(3).
28
">
28
PA Delport (ed)
Henochsberg
on the
Companies Act 71 of 2008
Vol
1 (October 2014 - Service Issue 9) 517.
29
King
III Practice notes:
Guidance
on Business Rescue
30
PA
Delport (ed) Henochsberg on the
Companies Act 71 of 2008
Vol 1
(October 2014 - Service Issue 9) 298(5).
31
Section
139
(2)(e)
32
">
32
Henochsberg
above.
33
Jeffrey
Raymond Dailinger
v
Halcha
Holdings Pty Ltd
(Administrator
Appointed) and Christopher Mel Chamberlain
[1995] FCA 1727
(8
December 1995) para 22
34
Rezen
Papaya ‘Are business rescue practitioners adequately
regulated’ [2014] De Rebus 241.