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[2012] ZAFSHC 130
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Propspec Investments (Pty) Ltd v Pacific Coast Investments 97 Ltd and Another (5000/2011) [2012] ZAFSHC 130; 2013 (1) SA 542 (FB) (28 June 2012)
FREE STATE HIGH
COURT, BLOEMFONTEIN
REPUBLIC OF SOUTH
AFRICA
Case No.: 5000/2011
In the matter between:-
PROPSPEC
INVESTMENTS (PTY) LTD
…..............................
Applicant
and
PACIFIC COAST
INVESTMENTS 97 LTD
…...............
First
Respondent
ARCHIBALD ROTHMAN
….....................................
Second
Respondent
_____________________________________________________
HEARD ON:
14 JUNE 2012
_____________________________________________________
JUDGMENT BY:
VAN DER MERWE, J
_____________________________________________________
DELIVERED ON:
28 JUNE 2012
_____________________________________________________
[1]
This is an application for orders placing the first respondent, a
public company, under supervision and commencing business
rescue
proceedings and for appointment of an interim business rescue
practitioner.
[2]
The applicant is a creditor of the first respondent (the company).
The application is opposed only by the second respondent,
who is also
a creditor of the company. Both the applicant and the second
respondent are therefore affected persons as defined in
section
128(1)(a)(i) of the Companies Act 71 of 2008 (the Act), with the
right to participate in the hearing of the application,
in terms of
section 131(3) of the Act.
[3]
Section 131(4)(a) of the Act provides as follows:
“
(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;”
[4] It is common cause
that the company is financially distressed as defined in section
128(1)(f)(i) of the Act.
[5] The question
therefore is whether there is a reasonable prospect for rescuing the
company. Before turning to the facts of this
matter, it must be
considered what the meaning is of the phrase “a reasonable
prospect for rescuing the company”.
[6] In terms of section
128(1)(h) “rescuing the company” means achieving the
goals set out in the definition of “business
rescue” in
section 128(1)(b). This definition reads 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
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;”
[7] A goal in this
context means a desired end or result. It follows that the goals set
out in this definition are that the company
continues in existence on
a solvent basis or, if it is not possible for the company to so
continue in existence, a better return
for the company’s
creditors or shareholders than would result from the immediate
liquidation of the company.
[8] What then is the
meaning of a reasonable prospect of attaining these goals? In
SOUTHERN PALACE INVESTMENTS 265 (PTY) LTD v MIDNIGHT STORM
INVESTMENTS 386 LTD
2012 (2) SA 423
(WCC) Eloff AJ held,
correctly in my respectful view, that the term “reasonable
prospect” indicates something less
than a reasonable
probability, as was required for placing a company under judicial
management in terms of section 427(1) of the
repealed Companies Act
61 of 1973.
[9] Eloff AJ however
continued to say the following:
“
[24]
While every case must be considered on its own merits, it is
difficult to conceive of a rescue plan in a given case that will
have
a reasonable prospect of success of the company concerned continuing
on a solvent basis, unless it addresses the cause of
the demise or
failure of the company's business, and offers a remedy therefor that
has a reasonable prospect of being sustainable.
A business plan which
is unlikely to achieve anything more than to prolong the agony, ie by
substituting one debt for another without
there being light at the
end of a not too lengthy tunnel, is unlikely to suffice. One would
expect, at least, to be given some
concrete and objectively
ascertainable details going beyond mere speculation in the case of a
trading or prospective trading company,
of:
[24.1] The likely costs of
rendering the company able to commence with its intended business, or
to resume the conduct of
its core business;
[24.2] 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;
[24.3] the availability of any
other necessary resource, such as raw materials and human capital;
[24.4] the reasons why it is
suggested that the proposed business plan will have a reasonable
prospect of success.
[25] In relation to the alternative
aim referred to in s 128(1)
(b)
(iii) of the new Act, being to
procure a better return for the company's creditors and shareholders
than would result from the immediate
liquidation thereof, 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]
In
KOEN AND ANOTHER v WEDGEWOOD VILLAGE GOLF &
COUNTRY ESTATE (PTY) LTD AND OTHERS
2012 (2) SA 378
(WCC)
Binns-Ward J in par. [18] at 384 agreed with what was said in par.
[24] of
SOUTHERN PALACE
and in par. [19] and
[20] made remarks similar to what was said in par. [25] of
SOUTHERN
PALACE
.
[11] I agree that vague
averments and mere speculative suggestions will not suffice in this
regard. There can be no doubt that in
order to succeed in an
application for business rescue, the applicant must place before the
court a factual foundation for the
existence of a reasonable prospect
that the desired object can be achieved. But with respect to my
learned colleagues, I believe
that they place the bar too high.
[12] In my view a
prospect in this context means an expectation. An expectation may
come true or it may not. It therefore signifies
a possibility. A
possibility is reasonable if it rests on a ground that is objectively
reasonable. In my judgment a reasonable
prospect means no more than a
possibility that rests on an objectively reasonable ground or
grounds.
[13] This interpretation
is in my view also indicated by the context of Chapter 6 of the Act.
I refer especially to the underlying
philosophy thereof that in order
to prevent unnecessary negative economic and social impact, business
rescue is to be preferred
to liquidation and to the fact that
judicial management under the previous Companies Act failed mainly
because of the high threshold
of proof required. See
OAKDENE
SQUARE PROPERTIES (PTY) LTD AND OTHERS v FARM BOTHASFONTEIN (KYALAMI)
(PTY) LTD AND OTHERS
2012 (3) SA 273
(GSJ) at 277 para [7]
and 281 – 282 para [18]. It also takes account thereof that an
application for business rescue may
be brought by a person, such as
an employee or a creditor, who does not necessarily have access to or
a full picture of the company’s
financial affairs and that in
terms of section 141(1) of the Act a practitioner must investigate
the company’s affairs, business,
property and financial
situation as soon as practicable after being appointed.
[14] I therefore agree
with C J Claassen J in
OAKDENE
that the
discretion to make in order in terms of section 131(4)(a) arises
whenever the facts show subsection (i),(ii) or(iii) and
a reasonable
possibility of the company continuing to exist on a solvent basis or
of a better return for creditors or shareholders
than would result
from the immediate liquidation of the company.
[15] In my judgment it is
not appropriate to attempt to set out general minimum particulars of
what would constitute a reasonable
prospect in this regard. It also
seems to me that to require, as a minimum, concrete and objectively
ascertainable details of the
likely costs of rendering the company
able to commence or resume its business and the likely availability
of the necessary cash
resource in order to enable the company to meet
its day to day expenditure or 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, is tantamount to requiring proof of a probability
and unjustifiably limits the availability of business rescue
proceedings.
[16] By way of a
so-called “Private Placing Invitation” the company
invited investors to invest in a project for the
development of
serviced erven. The development would consist of two phases,
whereafter the erven would be sold and the investments
repaid
together with interest thereon.
[17] In respect of phase
I the purpose of the invitation was to raise funds to finance the
company’s acquisition of the immovable
property known as the
remaining extent of portion 18 of the farm no. 799, East London,
measuring 16,6 hectares (the property),
payment of professional fees
relating to the installation of infrastructure on the property and
the necessary private placing costs
and the promoter’s fee. In
respect of phase II it was for the financing of the installation of
electrical, civil and bulk
services on the property, as well as the
necessary private placing costs and the promoter’s fee. The
property is situated
near Gonubie, East London.
[18] Linked units were
offered for subscription at R1 000,00 per unit. A linked unit
consists of one ordinary par value share of
1 cent and one unsecured
fixed shareholder’s loan of R999,99 “inseparably linked
together”. Shareholders’
loans and interest thereon would
be repaid on completion of the project, that is the sale of the erven
at the projected prices.
Investors were no doubt persuaded to invest
in the project by the offer of interest on shareholders’ loans
of 30% per annum
calculated from closing date of the particular offer
to date of completion of the project. The closing date of the offer
in respect
of phase I was 31 October 2007 and in respect of phase II
it was 31 March 2008. Marketing of erven was to commence during May
2008
and completion of the project was expected to take place during
May 2009. A maximum of 30% of investors could opt for payment of
accelerated interest at the maximum rate of 1% per month from date of
investment to date of completion of the project, in terms
of a loan
agreement entered into with the company.
[19] Phase I attracted
investments in the amount of R26 152 900,00 and phase II attracted
investments in the amount R35 711 000,00.
This was in accordance with
the projections in the Private Placing Invitation. These investments
were made by a total of 228 investors.
The second respondent invested
the amount of R145 000,00 and agreed with the company for payment of
accelerated interest.
[20] It appears to be
common cause that phases I and II were completed and that the
projected 205 full title erven and 330 sectional
title erven became
available for sale at approximately the projected time. According to
the photographs that form part of the papers,
the development appears
to be of good quality and in reasonable condition. Not a single stand
has however been sold, naturally
causing the company serious
financial distress. Payment of accelerated interest ceased by May
2009 and the project grinded to a
halt.
[21] The liability of the
company for repayment of shareholders’ loans and interest
thereon amounts to approximately R85 968
831,00. The applicant was
the promoter of the project. In terms of the Private Placing
Invitation promoters’ fees would amount
to ± R8 901
197,00. The applicant however made a loan to the company in order to
enable it to pay interest to the investors
that opted for payment of
accelerated interest. The amount of R7 563 348,00 is owed by the
company to the applicant in this regard.
Other liabilities amount to
R337 046,00. The total liabilities of the company therefore amount to
approximately R93 869 225,00.
[22] Apart from the
amount of R40 033,00 in savings accounts, the property is the only
asset of the company. The company has no
employees.
[23] In terms of the
Private Placing Invitation the total projected nett profit of the
project would be distributed as investors’
return on
investments. Therefor even after successful completion of the
project, the company would be left with no funds and no
assets. The
applicant’s case is also that the property should be sold,
either as a whole or by sale of individual erven.
It follows that
there is no practical prospect of the company continuing to exist on
a solvent basis.
[24] In any event there
is no proper valuation of the property before me to show that the
property or erven may be sold for more
than the total liabilities of
the company. The valuation placed before me did not purport to value
the property as a single entity.
Its effect is to place a total sale
value on the erven of R102 560 000,00. But this is seriously open to
question. The valuation
is as at 30 June 2009, that is three years
ago. The best proof of the market value of property is the price
actually obtained in
the open market. As I said, no sales of erven
took place at all over a period of approximately three years, let
alone at these
prices.
[25] The question
therefore is whether there is a reasonable prospect that selling of
the property by a business rescue practitioner
will yield a better
return than selling thereof by a liquidator. The applicant says that
the problem with the development was the
economic downturn as well as
the chilling effect of the National Credit Act on obtaining credit
from banks. The applicant says
that there is improvement in respect
of both these impediments. It says that the economy has improved and
that “the banks
now grant 50% (fifty percent) loans for the
purchase of vacant land and much more favourable building loans”.
This may be
accepted, but is neutral. There is no reason why these
factors would not apply equally to a liquidator and a business rescue
practitioner.
[26] The applicant in
reply relies on an affidavit by a person who is an auctioneer and
valuator of some experience. This witness
suggests that sales by
liquidators generally yield less than market value. Upon close
examination however, it is clear that the
witness refers to so-called
forced sales, such as sales in execution, as opposed to sales in the
open market. Again, this may be
accepted, but there is no reason why
a sale by a liquidator should be a forced sale. In this matter all
shareholders are also creditors
and there are no employees. The
liquidator must act on the directions of the creditors of the
company. See
sections 40(3)(a)
,
81
(1),
81
(3)(a) and
82
(1) of the
Insolvency Act 24 of 1936
, read with Item 9(1) of Schedule 5 to the
Act. There is no reason why a liquidator could not on these
directions sell the property
or erven on exactly the same basis as a
business rescue practitioner would.
[27] In my judgment
therefore, the applicant did not show a reasonable prospect of a
better return than would be the case in liquidation.
[28] This application was
precipitated by an application for liquidation of the company by the
second respondent. This application
is still pending, but was not
placed before me for adjudication. In the circumstances I believe
that I should not order liquidation
of the company, but that that
should be considered in the liquidation application.
[29] The application is
dismissed with costs.
________________________
C.H.G. VAN DER MERWE,
J
On behalf of applicant:
Adv. W.A. van Aswegen
Instructed by:
Honey Attorneys
BLOEMFONTEIN
On behalf of second
respondent: Adv. P.J.J. Zietsman
Instructed by:
Webbers Attorneys
BLOEMFONTEIN
/sp