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[2012] ZAGPPHC 359
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Employees of Solar Spectrum Trading 83 (Pty) Limited v Afgri Operation Limited and Another (6418/2011, 18624/2011, 66226/2011, 66226/2011, 66226A/11) [2012] ZAGPPHC 359 (16 May 2012)
IN
THE NORTH GAUTENG HIGH COURT, PRETORIA
(REPUBLIC
OF SOUTH AFRICA)
CASENO:6418/2011
18624/2011
66226/2011
66226/2011
66226A/11
DATE:
16 MAY 2012
REPORTABLE
OF
INTEREST TO OTHER JUDGES
-
In
the matter between:
THE
EMPLOYEES OF SOLAR SPECTRUM
TRADING
83 (PTY)
LIMITED
...........................................................................
APPLICANT
And
AFGRI
OPERATIONS
LIMITED
...........................................................
1ST
RESPONDENT
SOLAR
SPECTRUM TRADING 83 (PTY)
LTD
.......................................
2ND
RESPONDENT
In
Re:
AFGRI
OPERATIONS
LIMITED
.....................................................................
APPLICANT
.
And
SOLAR
SPECTRUM TRADING 83 (PTY)
LTD
.............................................
RESPONDENT
JUDGMENT
KOLLAPEN,
J
[1]
In this application the applicants, who are employees of the second
respondent seek an order for the commencement of business
rescue
proceedings and for the appointment of a business rescue practitioner
in respect of the business of the second respondent
as provided for
in terms of the Companies Act No 71 of 2008 (the Act).
[2]
Ms Thobile Cynthia Maseko who is a packing house supervisor in the
employ of the second respondent deposed to the founding affidavit
on
her own behalf as well as on behalf of some 76 employees of the
second respondent, both permanent and temporary, all of whom
work and
live on the farm of the second respondent located at portions 34 and
73 of the farm Maleiane 1389JU.
[3]
The first respondent is Afgri Operations (Pty) Limited a secured
creditor of the second respondent. It has brought a conditional
application for the liquidation of the first respondent which
application was subject to the discharge of the provisional judicial
management order issued by this court on 8 February 2011.
[4]
On 8 February 2011 this court issued an order placing the first
respondent under provisional judicial management in terms of
section
428(1) of the Companies Act 61 of 1973 (the old Act). Juanito Damons
was appointed as provisional judicial manager with
the return date
being 7 March 2011.
[5]
During March 2011 the first respondent brought an application to
intervene in the judicial management proceedings. It sought
to have
the provisional judicial management order discharged and sought an
order for the liquidation of the second respondent.
[6]
The rule in the provisional management proceedings was extended on
various occasions and the matter came before court on the
opposed
roll on 21 November 2011.
[7]
On 18 November 2011 the applicants lodged the current application and
on 23 November 2011 it was agreed between the parties
and ordered by
the court that all three applications (the judicial management,
liquidation and business rescue) be heard together
on the opposed
roll of 26 March 2011.
7.1
There was no appearance for the second respondent in the judicial
management application and apart from a provisional report
of the
provisional judicial manager dated 23 May 2011 no other reports from
the provisional judicial manager were filed. After
the hearing of the
matter, the second respondent filed a notice withdrawing it’s
opposition to the discharge of the provisional
judicial management
order and tendered the first respondent’s costs.
In
the circumstances the discharge of the provisional judicial
management order with costs would be the appropriate order to make.
7.2
With regard to the conditional liquidation application, section
131(6) of the Act provides that “if liquidation proceedings
have already been commenced by or against the company at the time an
application is made in terms of subsection (1), the application
will
suspend those liquidation proceedings until -
(a)
The court has adjudicated upon the application; or
(b)
The business rescue proceedings end, if the court makes the order
applied for.
The
reference to subsection (1) is a reference to business rescue
proceedings and the effect of section 131(6) was to suspend the
liquidation proceedings until the court adjudicated on the business
rescue application.
The
business rescue proceedings
[8]
The new Companies Act (the Act) in introducing the provisions
relevant to business rescue proceedings has demonstrated a shift
from
creditors’ interest to an attempt to balance a wider range of
often competing interests. See the judgment of CLAASSEN
J in the
matter between Oakdene Square Properties (Pty) Ltd and Others v Farm
Botha’s Fontein (Kyalami) (Pty) Ltd and Others
an unreported
judgment of the South Gauteng High Court of 17 February 2012. Section
7(k) of the Act captures the essence of business
rescue provisions as
follows:
“
To
provide for the efficient rescue and recovery of financially
distressed companies, in a manner that balances the rights and
interest of all relevant stakeholders;” Section 128 of the Act
defines business rescue as follows:
“
(b)
‘business rescue’ means proceedings to facilitate the
rehabilitation of a company that is financially distressed
by
providing for -
(I)
the temporary supervision of the company, and of the management of
its affairs, business and property;
(ii)
a temporary moratorium on the rights of claimants against the company
or in respect of property in its possession; and
(iii)
the development and implementation, if approved, of a plan to rescue
the company by restructuring its affairs, business, property,
debt
and other liabilities, and equity in a manner that maximises the
likelihood of the company continuing in existence on a solvent
basis
or, if it is not possible for the company to so continue in
existence, results in a better return for the company’s
creditors or shareholders than would result from the immediate
liquidation of the company;”
The
stakeholders whose interest require a careful balancing would include
creditors, shareholders and employees and while the scheme
of the Act
still contemplates the bringing of liquidation proceedings where this
is warranted, business rescue would be preferred
to liquidation where
a proper case for business rescue has been made out.
Business
rescue is a relatively new concept and was described by MAKGOBA J in
Swart v Beagles Run Investments 25
2011 5 SA 422
(GNP) as a novelty
brought about by the new Companies Act. There are various judgments
that have dealt with its application and
in some of those there
appear to be an attempt to compare it to the regime of judicial
management. There are in my view both philosophical
and substantive
differences between the regime of judicial management and the concept
of business rescue. CLAASSEN J in Oakdene
supra remarks that South
Africa has had a traditional liquidation system with a liquidation
culture, it is this culture that the
Act seeks to reverse,
recognising the broadly accepted failure of the concept of the
judicial management.
[9]
ELOFF AJ in Southern Palace Investments 265 (Pty) Ltd v Midnight
Storm Investments 386 Ltd case number 15155/2011 (WCC) makes
the
observation in comparing the recovery requirement in relation to
judicial management and business rescue that the requirement
in
respect of judicial management is a “reasonable probability”
while in respect of business rescue it is a “reasonable
prospect” indicating in his view that “the use of
different language in this later provision indicates that something
less is required and that the recovery should be a reasonable
possibility”.
He
also alluded to the different mindset that should distinguish the
approach to judicial management as opposed to the approach
to
business rescue. In judicial management the creditor was entitled to
a liquidation order and a judicial management order would
only be
granted in exceptional circumstances. With business rescue it was the
preferred option to liquidation.
[10]
The broader range of interests that the Act recognises and seeks to
balance as well as the eminently reasonable proposition
that it is
infinitely better to rescue a business than to liquidate it must mean
that in applying the provisions of the business
rescue provisions of
the Act courts are enjoined to give substantive effect to the object
of the Act in this regard.
[11]
Of course one must be careful in the balancing exercise to give
proper weight and consideration to the various competing interests
and to guard against the use of business rescue proceedings in
situations where it is clearly not warranted. In Anthonie Welman
v
Marcelle Props 193 CC and Others case number 33958/2011 (GSP) TSOKA J
cautioned in this regard as follows:
“
in
my view business rescue proceedings are not for the terminally ill
close corporations. Nor are they for the chronically ill.
They are
for ailing corporations which, given time, will be rescued and become
solvent. To grant the present application, in these
circumstances,
would be to subvert the purposes of the Act and disregard the
interest of other stakeholders.”
[12]
Section 131(4) of the Act which deals with the powers of the court in
business rescue proceedings provide that:
"(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.”
[13]
With regard to these requirements the parties appear to be in
agreement that the second respondent is financially distressed
as
contemplated in section 128 of the Act. What is in dispute is whether
there is a reasonable prospect for rescuing the company.
[14]
The words “reasonable prospect” in the context of section
131(4) were considered by the court in Southern Palace
supra. The
court beyond indicating that the cause of the demise or failure of
the company’s business as well as the proposed
remedy would
have to be adequately addressed, also provided some indicators which
in its view would constitute concrete and objectively
ascertainable
details going beyond mere speculation and these would include:
(a)
The likely cost of rendering the company able to commence with its
intended business, or to resume the conduct of its core business;
(b)
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 resumed. If a 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;
(c)
The availability of any other necessary resource, such as raw
materials and human capital;
(d)
The reasons why it is suggested that the proposed business plan will
have reasonable prospect of success.
[15]
In Henochsberg on the Companies Act (service issue 1 December 2011)
the learned authors described these as stringent requirements
and
caution that if the level of proof was set as high as this in order
to obtain a compulsory business rescue order “this
will
probably sound the death knell for business rescue in South Africa
and lead to the procedure becoming as ineffective as its
predecessor,
judicial management".
[16]
I do not necessarily understand the factors listed in Southern Palace
supra with regard to satisfying the requirement of reasonable
prospects to be applicable in each case, given the caveat expressed
by ELOFF AJ that every case must be considered on its own merits.
In
this regard while a court must be ultimately satisfied that
reasonable prospects do exist in the balancing exercise it must
have
regard to what information the affected party who brings the
application is able to present given its own position vis-a-vis
the
company.
[17]
Clearly a shareholder is likely to possess greater details of a
company’s financial position and its financial performance
then
an employee. On the other hand employees, in particular long standing
employees, would have peculiar information of a company’s
performance being as it were at the centre and at the heart and soul
of its operations. Their knowledge of the company’s
history,
the highs and lows of its performance, the problems and the solutions
identified and their own role in any possible business
rescue would
be just as relevant. Without suggesting that different tests should
be applied in establishing whether the threshold
of reasonable
prospects has been met, if the Act is to be implemented in a manner
that does not disadvantage an employee as an
affected party, then
regard must be had both in assessing whether there are reasonable
prospects and in exercising of the balance
of competing rights to the
different positions of the parties in relation to the company.
[18]
In addition it should not in every case be expected of an applicant
in business rescue proceedings to produce a business rescue
plan. The
responsibility for developing a business rescue plan is that of the
business rescue practitioner if one is so appointed
and the Act
clearly contempiates this happening only after an application for
business rescue proceedings has been granted. To
suggest as the first
respondent has done, that such a plan should be a prerequisite in
meeting the requirements of reasonable prospects,
would not only be
unduly onerous to an affected person who is an applicant in business
rescue proceedings but would have the effect
of importing a
requirement that the legislature did not envisage regard being had to
the architecture of the Act as a whole.
Has
the applicant established the existence of reasonable prospects for
the rescuing of the company?
[19]
The first respondent in opposing the relief sought has suggested that
the history of the first respondent’s business
going back to
September 2009, has been a demonstration of the ongoing inability of
the first respondent to turn the business around
successfully and
there is no reasonable prospect in its view of the business being
rescued.
[20]
It points out that despite the first respondent being placed under
provisional judicial management in February 2011, the position
of the
first respondent did not improve as was contemplated when the first
respondent applied to have itself placed under judicial
management
and that if the regime of judicial management did not yield the
desired result then it was unlikely that any business
rescue
intervention would yield a different result. In pointing to the
failure of judicial management it points out that it has
received no
payment on its debt since the first respondent was placed under
provisional judicial management, that there was no
meeting of
creditors convened since the provisional judicial management order
was granted and that the provisional judicial manager
failed to
provide any information regarding the business of the first
respondent and its financial affairs after 14 July 2011.
[21]
The applicants on the other hand sketch out the various stages of the
business operations of the first respondent from September
2009 and
concede that from September 2009 until June 2011 there were various
problems in the farming methodology used as well as
in the management
of operations that resulted in the business functioning below optimal
levels.
[22]
The applicants identify the individual problems experienced and
indicate the corrective measures that have since been taken.
These
relate inter alia to adequate irrigation, proper crop choice, proper
fertilisation and importantly effective management of
production.
[23]
With regard to the latter aspect they contend that the replacement of
the former manager of the farm Mr Kritzinger with the
present manager
Mr Henry Makunya in about June 2011 has already begun to yield
positive results and in particular for the period
1 July 2011 to 14
November 2011 demonstrates the farm’s and the first
respondent’s growing profitability as it was
able to show a
positive income of approximately R50 000.00 for that period. It was
also able in this period of its operations to
be in a position to pay
approximately R150 000.00 worth of debt incurred during the preceding
period of 1 March 2011 to 1 July
2011.
[24]
The first respondent in its opposing affidavit and relying on a
report of the provisional judicial manager dated 20 July 2011
as well
as a profit and loss account for the period of 1 July 2011 to 14
November 2011 provide an analysis of the business activities
for the
period 1 March 2011 to June 2011 and thereafter for the period 1 July
2011 to 14 November 2011 from which the following
emerges.
1
March 2011 to June 2011 1 July 2011 to 14 November 2011
Income
R944 780.00 R1 484 001.00
Expenditure
R1 247 597.00 R1 434 961.00
Loss/profit
(R302 817.00) R49 039.00
[25]
From the above it would appear that for the period 1 July 2011 to 14
July 2011 the income of the farm increased by more than
half a
million rands while expenditure increased by some R190 000.00 and if
one considers that R150 000.00 of the expenditure for
the period July
to November 2011 was in respect of the earlier period of March to
June 2011, then it would appear that the period
July 2011 onward that
coincided with the appointment of Mr Makanya provides concrete
evidence of an improvement in the operations
of the first respondent.
[26]
In addition the applicants rely on an affidavit by Phillip Van Rooyen
an agricultural programme manager who has visited the
farm on several
occasions at the request of the second respondent. He states that:
26.1
The farm is effectively managed and improved under the supervision
and care of Mr Makanya.
26.2
The farm can be profitably operated subject to -
26.2.1 certain
yields being met as well as the farm purchasing from other growers.
26.2.2 that
there is satisfactory financial and production management as well as
effective cost management.
26.3
That the farm has undergone a successful Global GAP audit and that
such a certification has placed the second respondent in
a position
where it can penetrate retail markets at the higher end and achieve
better prices for its crops.
[27]
The applicant also relies on an affidavit by Francois Boshoff, a
farmer and supplier of fertilizer to the first respondent
and a
creditor of the first respondent who visits the farm regularly. He
also expresses a positive outlook for the farm and confirms
that the
appointment of Mr Makunya has resulted in a significant improvement
in the production at the farm.
[28]
During March 2011 the first respondent’s attorneys instructed
an expert to investigate the business operations on the
farm and
while the expert Mr AA Malan identified certain problems with the
crop and projected production figures many of which
are dealt with in
the applicant’s founding affidavit in this application as being
problems identified and interventions effected,
Maian in the same
report concludes as follows:
"My
berekeninge toon dat die produksie eenheid wei sy verpligtinge vir
die volgende twee jaar sal nakom mits die tonnemaat
soos begroot
realiseer... die algemene gehalte van die gelewerde produkte is goed.
My oorwee mening is dat bestuur die grootste
bepalende faktor in die
sukses van hierdie besigheid gaan wees.”
[29] Certainly
Malan’s prognosis is hardly as negative as the first respondent
makes it out to be. He identifies the most
important challenge as
management and hardly draws the conclusion that the farm is destined
to fail. In addition Malan’s
visit and inspection occurred
during the tenure of Mr Kritzinger. The position with regard to
production and income has improved
since July 2011 which may serve to
prove that Malan’s reasonably positive prognosis was not
misplaced.
[30]
From the aforegoing it does appear that the past year has been
characterised by mixed fortunes as it were with the farm doing
considerably better since July 2011 under the management of Mr
Makunya. While he may have been responsible for improved production
there may well be a need for other aspects of the overall operation
to be examined in particular those referred to by Van Rooyen.
[31]
The failure of judicial management in my view cannot stand as an
insurmountable obstacle to the relief the applicant seeks.
The regime
of judicial management and in fact the role of the judicial manager
has not been dearly canvassed in the judicial management
proceedings
and one gets the distinct impression that certainly the first
respondent experienced considerable difficulty in obtaining
regular
and accurate reports from the judicial manager. The role of a
business rescue practitioner is considerably different; certainly
much more “hands on” as it were and he/she is required to
interact in a substantial manner with creditors, employees
and other
parties.
[32]
In my view, one is not dealing with a business that is terminally ill
or chronically ill but one that is ailing considerably
and where the
appointment of a business rescue practitioner may well build on the
success of the past few months in developing
a holistic plan that
would cover the operational, financial, management and strategic
aspects of the business towards its rescue.
[33]
In the nature of applications such as these it should be noted that
the concept of a “prospect” is hardly something
that is
certain. By its very nature a prospect is future looking and
dependent upon a number of variables and includes a level
of risk to
the extent that the future is hardly capable of accurate prediction.
What is required is not certainty but a determination
on the facts
and on the evidence presented that the future prospects of rescuing
the business appear to be reasonable.
[34]
In addition in the exercise of balancing competing interests the
following warrant consideration:
(a)
The applicants have been working and living on the farm for periods
of long duration; the permanent employees from two years
to eleven
years. The large majority of them have dependents. They appear
committed to using their skills to contribute to the rescue
of
business.
(b)
Liquidation will likely result in the employees losing their
employment and their accommodation on the farm which in turn will
impact negatively on their dependants.
(c)
The then provisional judicial manager valued the farm and
improvements at R4.6 million and concluded that there was sufficient
security to meet the claim of the first respondent.
(d)
The proposed business rescue practitioner, Dr G Holtzhausen is
described as a turnaround practitioner. He has a PhD from the
University of Pretoria, his dissertation being “modelling
turnarounds strategies using verifier determinants from early warning
sign theory". He has experience in the banking and agricultural
sector having been Nedbank's agricultural expert at Bank Seta.
The
Companies and Intellectual Property Commission has confirmed he is
licensed by the commission as a business rescue practitioner
and is
classified as “a senior business rescue practitioner”.
(e)
The Act provides a narrow timeframe with full participation by
creditors and employees in the business rescue proceedings ensuring
that their rights and interests are properly considered.
[35]
In this regard it was contended on behalf of the first respondent
that given the history of the affairs of the second respondent
there
is no probability that the first respondent will accept any business
rescue plan and given its dominant position as creditor
it was
unlikely that the requirements for the preliminary approval of a
business rescue plan as set out in section 152(2) (approval
of 75% of
creditors voting interest and 50% of independent creditors’
voting interest) would be met rendering the relief
being sought
somewhat academic and of limited duration.
[36]
Whatever the position of the first respondent may be and while its
cynicism may be justified at some level I would imagine
that at the
very least there would be an obligation on it to participate in good
faith and to consider on its own merits or demerits
any business plan
proposed.
I
cannot imagine that it can be contended that it is a foregone
conclusion that it will vote against the business plan even before
one has been developed.
[37]
In the circumstances and for the reasons given I am of the view that
there are reasonable prospects for the successful rescue
of the
business of the second respondent and that the applicant has made out
a case for the relief it seeks.
Costs
[38]
The ordinary rule is that costs should follow the result and such a
rule would have the result that I should direct the first
respondent
to pay the applicant’s costs. There may be a basis for a
departure from the ordinary rule in this case. The applicant
while it
was justified in launching the application and has on the papers
before me made out a proper case for the relief it seeks
was not met
by opposition that was unreasonable or unjustified. Given the first
respondent’s experience of what can only
be determined as a
difficult relationship with the second respondent going back some
years now the first respondent may have felt
justified in opposing
the application given in particular the unsatisfactory results of the
process of judicial management. That
being the case it would in my
view be inequitable to direct the first respondent to pay the cost of
the applicant in this matter
and in my view a just and equitable
award with regard to costs would be to direct that each party bear
its own costs. I intend
to make such an order.
[39]
1 accordingly make the following order: -
39.1
The Provisional Judicial Management Order is discharged and the
second respondent is ordered to pay the costs of the first
respondent
in respect of that application.
39.2
The application for the liquidation of the second respondent is
suspended in terms of
section 131(6)
of the
Companies Act 71 of 2008
.
39.3
The second respondent is placed under supervision and that business
rescue proceedings should commence as envisaged in terms
of the
Companies Act 71 of 2008
.
39.4
Dr Gerhard Hoitzhausen be appointed as business rescue practitioner
to conduct the business of the second respondent with all
powers and
duties entrusted to him in terms of the Act.
39.5
The applicant gives notice of this order in the following manner:
39.5.1 by
notifying creditors of the second respondent of this order within
five days of this order having been granted by way of
electronic
mail;
39.5.2 by
notifying shareholders of the second respondent within five days of
this order having been granted by way of electronic
mail to such
shareholders whose electronic mail addresses are known to the
applicant;
39.5.3
by serving a copy of the order on the second respondent at its
registered address within five days of this order having been
granted;
39.5.4 by
notifying employees of the second respondent by way of attaching this
order to the second respondents notice board alternatively
at a
visible place at the second respondent’s place of business
situated on the farm being portions 34 and 73 of the farm
Malelane;
39.5.5 by
publication of this order in one publication of the Star newspaper
within five days of this order having been granted.
39.6
It is ordered that the applicant and the first respondent bear their
own costs in relation to this application.
N
KOLLAPEN
JUDGE
OF THE NORTH GAUTENG HIGH COURT
6418/2011-18624/2011
-66226/2011 /sg
Heard
on: Tuesday, 27 March 2012
For
the Applicant: Adv Z Schoeman
Instructed
by: Messrs John Joseph Finaly Cameron
For
the Respondents: Adv J G Bergenthuin S.C.
Instructed
by: Messrs Van Zyl Le Roux Inc
Date
of Judgment: