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[2013] ZAGPPHC 467
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FirstRand Bank Ltd v Arbour Village (Pty) Ltd And Eii Holdings (Pty) Ltd v Arbour Village (Pty) Ltd (2011/6253) [2013] ZAGPPHC 467 (8 August 2013)
SAFLII
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Certain
personal/private details of parties or witnesses have been
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REPUBLIC
OF SOUTH AFRICA
NORTH
GAUTENG HIGH COURT, PRETORIA
In
the matter between:
Case
No. 2011/6253
FIRSTRAND
BANK
LTD
Applicant
versus
ARBOUR
VILLAGE (PTY) LTD
Respondent
And,
in the matter between:
Case
No. 2011/42528
EII
HOLDINGS (PTY) LTD
Applicant
versus
ARBOUR
VILLAGE (PTY) LTD
Respondent
JUDGMENT
MEYER,
J
[1]
The applicant in
Firstrand Bank Ltd v Arbour Village (Pty) Ltd
(case no 2011/6253) sought the provisional winding-up of the
respondent company (‘Arbour’) on the ground that it is
unable to pay its debts as envisaged in s 344(f), read with secs
345(1)(a) and 345(1)(c), of the Companies Act 61 of 1973 (‘the
1973 Act’), and the applicant in
Eii Holdings (Pty) Ltd v
Arbour Village (Pty) Ltd
(case no 2011/42528) sought instead for
business rescue proceedings in respect of Arbour to be commenced with
in terms of the business
rescue mechanism provided for in terms of
the provisions of the new Companies Act, 71 of 2008 (‘the 2008
Act’).
Firstrand Bank Ltd (‘Firstrand’),
being an affected person, opposed the business rescue application.
These are
my reasons for having dismissed the business rescue
application with a costs order in favour of Firstrand and for having
placed
Arbour under provisional winding-up immediately upon the
conclusion of the hearing of the applications.
[2]
Portion 4 of Erf 243 U[…..] Registration Division ET Province
of K[……]
in extent 8,4643 hectares (‘the
property’) was transferred and registered into the name of
Arbour on 26 August 2008.
The purchase consideration for the
property was the sum of R40 million plus R5,6 million VAT.
Arbour acquired the property
in order to develop it into a sectional
title residential development, called ‘Arbour Village’,
in A [….], K[….].
The plan was for the property
development to be undertaken in three distinct phases. The
first phase, which is now completed,
comprises 22 sectional title
residential units, ten of which had already been erected on the
property at the time when Arbour acquired
it. The plan was to
erect a further 169 sectional title units as part of the second and
third phases of the property development.
Arbour has not
proceeded with phases two and three of the development.
[3]
Firstrand granted a Commercial Property Finance Loan Facility to
Arbour on 14 March
2008 (‘the loan agreement’).
Firstrand maintains that it advanced the total capital sum of R47,
713, 551.60 to
Arbour pursuant to the conclusion of the loan
agreement and a further sum of R7, 410, 000.00, which is a
non-refundable administration
fee. The present entitlement of
Firstrand to the administration fee is in issue. Arbour
maintains that Firstrand would
only have been entitled to such fee
had the development of phases two and three been proceeded with,
which is not happening.
Arbour also avers that Firstrand only
advanced the total capital sum of R39, 771, 019.21 to it.
Arbour’s calculation
inter alia
fails to take account of
a debit in the sum of R1, 710, 000.00 that is included in Firstrand’s
calculation of the capital
sum of R47, 713, 551.60, which is an
initiation fee that was agreed upon in terms of the loan agreement.
I accordingly consider
it fair to accept that capital amounts
totalling at least about R41 million were advanced to Arbour in terms
of the loan agreement.
[4]
It is not seriously disputed that Arbour’s indebtedness to
Firstrand became
due and payable on 26 October 2010. FNB
refuses to afford any further funding to Arbour. An amount of
just over R19
m had thus far been repaid to Firstrand. Some of
the units in Phase I have been sold and transferred into the names of
the
buyers thereof. Offers to purchase all the remaining units
in Phase I have now been received, but are subject to Firstrand’s
approval, which is required since the offers are for lesser prices
than those agreed upon between Arbour and Firstrand in terms
of the
loan agreement. Such sales would yield a net amount of
approximately R11 m that would be repaid to Firstrand, if it
approves
of the sales. Even if this amount is taken into account and it
is accepted that Firstrand will soon have been repaid
the total
capital amount of about R30 mil, then presently owing and payable to
Firstrand, apart from interest amounting to millions
of rand, remains
an outstanding capital amount of no less than about R11 m in respect
of the capital sums that have been advanced
to Arbour. The
value of that portion of the property that was earmarked for the
development of the second and third phases
is the only remaining
asset of Arbour, and it is worth about R10 million. It is not
suggested that Arbour has any other assets
or financial resources.
Its only other debts are said to be its shareholders’ loan
accounts although no particulars
in respect thereof have been
disclosed.
[5]
Arbour is on the facts presented profoundly insolvent, commercially
and factually,
and its winding-up was inevitable if it was not placed
under business rescue.
[6]
Eii applies, in terms of s 131(1) of the 2008 Act, for an order
placing Arbour under
supervision and for the commencement of business
rescue proceedings in respect of it on the grounds that Arbour is
‘financially
distressed’ or that ‘it is otherwise
just and equitable to do so for financial reasons’ and that
there is a ‘reasonable
prospect’ for rescuing it as
contemplated in secs 131(4)(a)(i) and 131(4)(a)(iii) of the 2008 Act.
[7]
A company is ‘financially distressed’ within the meaning
of s 131(4)(a)(i),
read with s 128(1)(f), of the 2008 Act if ‘it
appears to be reasonably unlikely that the company will be able to
pay all
of its debts as they become due and payable within the
immediately ensuing six months’ or ‘it appears to be
reasonably
likely that the company will become insolvent within the
immediately ensuing six months’. S 128(1)(b) of the 2008
Act
defines the expression ‘business rescue’, which, in
terms thereof
‘
means
proceedings to facilitate the rehabilitation of a company that is
financially distressed by providing for-
(i)
the
temporary supervision of the company, and of the management of its
affairs, business and property;
(ii)
a
temporary moriatorium on the rights of claimants against the company
or in respect of property in its possession;
(iii)
the
development and implementation, if approved, of a plan to rescue the
company by restructuring its affairs, business, property,
debt and
other liabilities, and equity in a manner that maximizes the
likelihood of the company continuing in existence on a solvent
basis
or, if it is not possible for the company to so continue in
existence, results in a better return for the company’s
creditors or shareholders than would result from the immediate
liquidation of the company’.
In terms of s128(1)(h),
‘”rescuing the company” means achieving the goals
set out in the definition of “business
rescue” in
paragraph (b)’.
[8]
I agree with the following passages in the judgment of Binns-Ward, J
in
Koen & Anor. v Wedgewood Village Golf & Country Estate
(Pty) Ltd & Ors
(WCC) (unreported case no 24850/11,
9-12-2011), paras [17] – [18], and with the remarks of Eloff,
AJ in
Southern Palace Investments 265 (Pty) Ltd v Midnight Storm
Investments 386 Ltd (Registrar of Banks and another intervening)
(WCC) (unreported case no 15155/2011, 25-11-2011), para [24],
which were referred to and accepted in
Koen
:
‘
[17]
It is evident in the provisions of s 131(4) that a person making an
application for
business rescue in terms of s 131(1) of the 2008
Companies Act must
satisfy the court that there is a
reasonable
prospect
that
the subject company can be rescued in the relevant sense by being
placed under supervision. The information or evidence
that will
suffice to meet the requirement will depend on the object of the
proposed business rescue; viz. whether it is to
achieve the
continued existence of the company on a solvent basis, alternatively,
to allow the company’s business to be managed
for an interim
period to allow for a better return for the company’s creditors
or shareholders than would result from the
immediate liquidation of
the company. Whatever the object of the proposed business
rescue, however, in order to succeed in
the application the applicant
must be able to place before the court a cogent evidential foundation
to support the existence of
a reasonable prospect that the desired
object can be achieved. While it is the function of the
business rescue practitioner,
if appointed, to draw up a business
rescue plan to be considered by the ‘affected persons’,
the founding papers in
a business rescue application must
nevertheless contain sufficient factual detail to enable the court to
determine whether the
business rescue practitioner will probably have
a viable basis to undertake the task, or, at the very least, make out
a case for
the court to hold that an investigation by a business
rescue practitioner to that end, in terms of s 141(1) of the Act,
appears
to be justified.
[18]
In respect of what will, in general, be required of an applicant
seeking a
supervision order to put a company into business rescue to
return it to solvent operation, I agree with the remarks made by
Eloff
AJ in
Southern Palace
supra, at para 24. The
learned judge considered that at least ‘
some concrete and
objectively ascertainable details
[should be given]
going
beyond mere speculation in the case of a trading or prospective
trading company, of:
(i)
the likely costs of rendering the company able to commence with its
intended business, or
to resume the conduct of its core business;
(ii)
the likely availability of the necessary cash resource in order to
enable the ailing company
to meet its day-to-day expenditure, once
its trading operations commence or are resumed. If the company
will be reliant on
loan capital or other facilities, one would expect
to be given some concrete indication of the extent thereof and the
basis or
terms upon which it will be available;
(iii)
the
availability of any other necessary resource, such as raw materials
and human capital;
(iv)
the
reasons why it is suggested that the proposed business
[rescue]
will
have a reasonable prospect of success.
[17]
In an application in which the object of the proposed business rescue
is to
secure a better return than would be obtained under immediate
liquidation the applicant would be required to set out in the
founding
papers a reasoned factual basis for the alternative
scenarios that the court will have to consider and lay a cogent
foundation
to enable the court to determine that there is a
reasonable prospect that a better return evident on one of those
scenarios can
be achieved.
[18]
Vague and speculative averments in the founding papers will not
suffice to
provide a proper basis for a court to make the required
determination that there is a reasonable prospect, if the company
were
to be placed under supervision, that the contemplated business
rescue objective could be achieved.’
[9]
It is instructive to also refer to the remarks of Eloff, AJ in
Southern Palace
, para [25], with which I also agree, in
respect of what will, in general, be required of an applicant seeking
a supervision order
to procure a better return for the company’s
creditors and shareholders than would result from the liquidation
thereof, which
are that
‘
one would
expect an applicant for business rescue to provide concrete
factual details of the source, nature and extent of
the resources
that are likely to be available to the company, as well as the basis
and terms on which such resources will be available.
It is
difficult to see how, without such details, a Court will be able to
compare the scenario sketched in the application with
that which
would obtain in an immediate liquidation of the company. Mere
speculative suggestions are unlikely to suffice.’
[10]
It is undisputed that Arbour is in financial distress and I
accordingly need not consider the
provisions of s 131(4)(a)(i), read
with s 128(1)(f), of the 2008 Act. The deponent to the founding and
replying affidavits of Eii,
Mr JD Els, who is a director of Arbour
and of Eii, which latter company holds 20% of the shareholding of
Arbour, attributes the
financial demise of Arbour in the founding
papers essentially to Firstrand’s conduct since it, so it is
inter alia
alleged, at the time of entering into the loan
agreement granted 100% loan finance to prospective buyers and it
subsequently imposed
more stringent lending criteria. Firstrand
disputes that it is responsible for the financial demise of Eii and
states that
Eii has failed to demonstrate that Arbour’s
precarious financial position has not been caused by ‘…
the world-wide
economic melt-down’ and that the changed
economic situation caused a change in its lending criteria.
There is merit
in this contention since Mr Els also states in the
founding affidavit that ‘[m]any sales were concluded but
none of
the purchasers, because of the new stringent lending criteria
applied by the banks, could qualify for finance to purchase the
properties
which they were endeavouring to purchase.’ Mr
Els, in the replying affidavit, also attributes blame to Mr HJ Kay,
who,
from June 2010 until January 2012, was a director of Arbour and
who is the beneficial holder of 80% of its shareholding.
[11]
The case of Eii in support of the proposed business rescue is that
the development has become
more popular as a result of the completion
of a big shopping complex adjacent to it during late 2009 and because
of plans ‘to
develop other adjacent land into office parks and
residential apartment blocks.’ Sales of the phase I
residential units
have picked up from November 2010. Seventeen
of the residential units had been successful sold by the time the
business rescue
proceedings were launched. It is alleged that
Mr Kay permitted members of his family, friends and business
associates to
occupy completed units in the development free of
charge, which resulted in such units not being marketed and sold even
though
there was at the time alleged to have been a waiting list for
prospective purchasers interested in purchasing units in the
development.
The remaining units have either been sold since
the launching of the business rescue proceedings or offers to
purchase them have
been received, which offers are subject to
Firstrand’s approval, a requirement because the offers are for
less than the selling
prices agreed to between Firstrand and Arbour
in terms of the loan agreement. The contention is that ‘…
the
recent surge in sales indicate that there is a reasonable
prospect of rescuing the company …’ and that an
investigation
by a business rescue practitioner is justified.
It is said that the business rescue practitioner will be best
positioned
to evaluate Arbour’s ‘… affairs,
business, property, and financial situation, and after having done
so, consider
whether there is any reasonable prospect of the company
being rescued’.
[12]
The encouraging sales history portrayed by Eii in respect of the
residential units comprising
phase I of the development does not, in
my view, establish a cogent evidential foundation to support the
existence of a reasonable
prospect of salvaging the business of
Arbour or of securing a better return to Firstrand and to the
shareholders of Arbour than
would probably be achieved in its
immediate liquidation nor does it establish a sufficient basis for
holding that an investigation
by a rescue practitioner in terms of s
141(1) of the 2008 Act is justified. Arbour, irrespective of
the ‘surge in sales’,
still remains unable to repay its
indebtedness to Firstrand to the extent of many millions of rands,
which indebtedness is now
long overdue. No information is given
in the founding papers of the likely costs of rendering Arbour able
to commence with
the development of phases II and III or of the
likely availability to it of loan capital to undertake such future
development.
A substantial capital injection is required and
the likelihood of that happening has not been addressed. There
is no reasoned
factual basis laying a cogent foundation for
considering whether or not another plan or scenario has a reasonable
prospect of yielding
any better result than Arbour’s immediate
liquidation.
[13]
The liquidation proceedings against Arbour, which had already
commenced on 2 February 2011, was
met by Eii’s application for
Arbour to be placed under business rescue. It was issued on 25
July 2011, which was the
day on which the winding-up application was
enrolled for hearing after it had previously been postponed upon the
application of
Arbour to be permitted to file an answering affidavit
out of time. Firstrand, being a creditor of Arbour and
therefore an
‘affected person’ in terms of s 128(1) of
the 2008 Act with a right, in terms of s 131(3) thereof, to
participate in
the hearing of an application for business rescue,
gave notice of its intention to oppose the application on 30 August
2011, and
its answering affidavit was filed on 20 September 2011.
Eii’s replying affidavit was filed on 12 March 2012, which was
the day on which the winding-up application was again enrolled for
hearing.
[14]
Application was made for condonation of the late filing of the
replying affidavit at the commencement
of the hearing before me.
I refused the application and ruled that the replying affidavit is to
be disregarded, except for
the averments relating to the alleged
conduct of Mr Kay, to which I have referred to earlier on in this
judgment, as well as averments
relating to the further sales of
residential units, because such matters only came to the knowledge of
the deponent, Mr Els, after
the date before which Arbour’s
replying affidavit should have been filed. The replying
affidavit was filed about six
months after the time for the filing
thereof had elapsed in terms of the Uniform Rules. No
reasonable explanation covering
the full period of the delay was
given. See:
Van Wyk v Unitas Hospital & Another
(Open Democratic Advice Centre as amicus curiae)
[2007] ZACC 24
;
2008 (2) SA 472
(CC), para [22].
[15]
The replying affidavit in any event essentially contains
speculative suggestions by Mr
Els relating to alternative forms of
development that could be undertaken on the remainder of the
property, a vague allegation
that ‘various developers have
shown interest and commitment to proceed with the development’,
and an allegation that
‘Riverside Park Trading 9 (Pty) Ltd has
shown keen interest to proceed with the development of a retirement
home facility
on the remaining developable land’. By
letter dated 23 February 2012, Arbour has given Riverside Park
Trading 9 (Pty)
Ltd a period of 60 days to undertake a viability
investigation and to present a development proposal. That
period had long
transpired by the time of the hearing of these
applications on 12 June 2012.
[16]
A case for business rescue had not been made out with or without
regard to the allegations contained
in the replying affidavit.
Arbour’s winding-up was accordingly inevitable. I issued
a provisional winding-up
order and not a final one at the request of
both parties.
P.A.
MEYER
JUDGE
OF THE HIGH COURT
Date
of hearing:
.............................................
12
June 2012
Date
of Judgment:
..........................................
8
August 2012
Counsel
for Firstrand Bank Ltd:
......................
Adv.
JE Smit
Counsel
for Arbour Village (Pty) Ltd
and
for
EII
Holdings (Pty) Ltd:
........................
Adv. PJ Vermeulen
Attorneys
for Firstrand Bank Ltd:
....................
Edward
Nathan Sonnenberg Attorneys
........................................................................
C/o
Jacobson & Levy Inc., Arcadia, Pretoria
........................................................................
Ref:
J Levy
Attorneys
for the respondents:
........................
Veneziano
Inc., Silverlakes, Pretoria
.........................................................................
Ref:
Mr Veneziano