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[2011] ZAKZDHC 93
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First Rand Bank Ltd v Imperial Crown Trading 143 (Pty) Ltd (2012 (4) SA 266 (KZD); [2012] 2 All SA 560 (KZD)) [2011] ZAKZDHC 93; [2011] ZAKZDHC 65 (15 December 2011)
REPORTABLE
IN THE KWAZULU-NATAL
HIGH COURT, DURBAN
REPUBLIC OF SOUTH
AFRICA
CASE NO. 12910/2011
In the matter between:
FIRSTRAND BANK LIMITED
(Registration No.
1929/001225/06)
…......................................
APPLICANT
and
IMPERIAL CROWN TRADING
143 (PTY) LIMITED
(Registration No.
2006/020250/07)
….................................
RESPONDENT
JUDGMENT
Delivered
on 15 December 2011
SWAIN J
[1] Firstrand Bank
Limited (the applicant) seeks an order provisionally liquidating
Imperial Crown Trading 143 (Pty) Limited (the
respondent), on the
ground that the respondent is unable to pay its debts, as
contemplated in Section 345 (1) (c), read with Section
344 (f) of the
Companies Act 61 of 1973. In terms of Section 9 (1) of Schedule 5 of
the
Companies Act 71 of 2008
, Chapter 14 of Act 61 of 1973, dealing
with the winding up of companies, continues to apply to the winding
up and liquidation of
companies, under Act 71 of 2008.
[2] It is common cause
that the applicant granted a Commercial Property Finance Loan
Facility to the respondent in an amount or
R82,155,294.00, on 11 July
2007 which was repayable by the respondent on 28 February 2011.
[3] The loan was used by
the respondent to construct a sixteen story block of flats,
comprising commercial premises on the ground
floor, parking floors
above the commercial level and above that two hundred and sixty five
residential flats. The block is situated
in St. George’s
Street, in the residential area known as Albert Park, adjacent to the
central business district and harbour
in Durban.
[4] The plan of the
respondent was to sell the individual flats in the block and in order
to obtain the development loan from the
applicant, the respondent had
to achieve an eighty percent pre-sale of the units. The recession
then intervened, development market
conditions deteriorated and as a
consequence a large number of pre-sales were cancelled, prior to
transfer. Consequently, and in
order to generate income, the
respondent let the majority of the residential units to the
University of Kwa-Zulu Natal, as serviced
student accommodation. This
contract was concluded during 2010 and was renewed in 2011.
[5] The loan was advanced
to the respondent against receipt by the applicant of a number of
different securities, the most important
of which are three mortgage
bonds registered over the property in favour of the applicant in the
respective amounts of R3,500,000.00
(with an additional amount of
R700,000.00), an amount of R83,000,000.00 (with an additional amount
of R16,600,000.00) and an amount
of R16,200,000.00 (with an
additional amount of R2,700,000.00.
[6] A number of widely
disparate views as to the present value of the building appear on the
papers. The valuer engaged by the applicant,
Auction Alliance, was
asked to value a number of different scenarios, regard being had in
certain respects to the value of the
full maintenance lease agreement
with the University of KwaZulu-Natal. The market value of one hundred
and forty residential units,
plus one hundred and thirty parking bays
and the commercial component is estimated to be R50M, which is
reduced to R30M in the
event of a forced sale. This value is disputed
by the respondent and reference is made to a valuation conducted by
Yanush Investments
Estate Agents, who place a value upon the property
of R104M.
[7] The respondents
annual financial statements for the year ended 28 February 2011
record its total assets, as per its balance
sheet, at a value of
R68,509,815.00 and its total liabilities are recorded as
R69,589,478.00, including the applicant’s claim
in an amount of
R55,028,127.00 (as at that date) which is admitted.
[8] The case advanced by
the applicant however, is that even if
the respondent’s
assets exceed its liabilities (which is not admitted) the respondent
is nevertheless commercially insolvent,
because the respondent is
unable to pay its debts in terms of Section 345 (1) (c) of Act 61 of
1973. It is clear that the failure
of a company to pay its debts in
the sense of it being unable to meet the current demands upon it, and
its day to day liabilities
in the ordinary course of business, means
that it is in a state of commercial insolvency.
Rosenbach &
Company (Pty) Ltd. v Singhs Bazaar (Pty) Ltd.
1962 (4) SA 593
D
at 597 D
A company
“which
is not in financial difficulties ought to be able to pay its way from
current revenue or readily available resources”
Rosenbach
supra
a
t 597 H
In addition, a creditor
who cannot obtain payment of his debt is entitled as between himself
and the company
ex debito
justitiae
to an order of
liquidation, if he brings his case within the Act and is not bound to
give time to the debtor. If there is due to
the petitioner a
liquidated sum, which is not disputed and the petitioner has demanded
payment, without success, this affords cogent
prima facie
evidence of the company’s inability to pay its debts.
Rosenbach at 597 F –
G and authorities there cited
At the stage of a
provisional order where on the affidavits there is a
prima facie
case (i.e. a balance of probabilities) in favour of the applicant, a
provisional order of winding up should normally be granted
Kalil v Decotex
(Pty) Ltd. & another
1988 (1) SA 943
(A)
at 979 B
[9] It is common cause
that the respondent failed to make payment of the amount of
R55,432,294.00 to the applicant as at 28 February
2011. The
respondent states that it has never disputed the amount outstanding,
but has requested the applicant to restructure the
finance, as a
mortgage bond repaying the capital with interest, over a twelve year
period. The deponent on behalf of the respondent
adds the following:
“
It is
impossible without finding a buyer to expect the respondent to repay
the R55M outstanding. In my humble submission, twelve
years is an
eminently reasonable period”.
[10] In the context of
this admission, the main thrust of the respondent’s opposition
to the grant of a provisional order
at this stage was the following:
(a) The application had
been brought as a matter of urgency and the respondent needed time to
engage the services of a financial
expert, to examine the proposals
made by the respondent to the applicant for the repayment of the
loan, to determine whether they
were workable or not. This exercise
could only be conducted in the latter half of January 2012, once
professionals returned to
their offices, after the Christmas holiday.
(b) Building work under
way at the building, to convert portion of the retail component to
residential space was sixty five per
cent complete. This work was
being carried out with money supplied from the personal funds of the
Directors of the respondent.
Ten units would be ready in December
which would house a further one hundred and sixty students.
Development to house a further
fifty students would be ready by the
end of January 2012, which would increase the student numbers to
seven hundred and sixteen
by January 2012. With the additional units
the business would operate at a profit.
It was impossible for
the respondent in the time available and because of the University
vacation, to obtain confirmation from
the University officials,
whether the University would need accommodation for students in the
short to medium term. The lease
agreement with the University having
ended at the end of 2011.
In the time available,
it had been impossible to launch a
detailed application for
business rescue, as contemplated by
Section 128
(1) (b) of the
Companies Act 71 of 2008
. An important aspect of any such
application, would be the financial experts’ opinion on the
proposals put forward to the
applicant, by the respondent.
[11] In the light of
these contentions and at the hearing of the matter, I asked Mr.
Harcourt S C, who appeared for the applicant,
what the attitude of
the applicant was, to an adjournment of the matter to the end of
January 2012, to be heard before me. It seemed
obvious that a
provisional liquidator would not be able to sell the building by the
end of January 2012. In addition, it seemed
unlikely that a
liquidator would terminate the incomplete building alterations, the
object of which was to increase the return
of income from the
property. In addition the representatives of the respondent, would
possibly be in a better position to re-negotiate
the lease with the
University. This was on the assumption that a provisional liquidator
would wish to rent the flats to the University
for at least the year
2012, because of the difficulty of selling the building in the
present depressed market.
[12] Mr. Harcourt S C
consequently took instructions from the applicant and advised me that
the applicant’s overriding concern,
was to obtain control over
the building by way of the appointment of a provisional liquidator. A
provisional liquidator would be
able to negotiate any lease agreement
with the University and take control of the alterations to the
building, which had been undertaken
without the consent of the
applicant and in breach of the conditions of the mortgage bonds. A
provisional liquidator would also
be able to take control over the
negotiations with the Municipality, concerning unpaid rates on the
building, which were disputed
by the respondent. In addition, a
provisional liquidator would be able to investigate and take control
of the non-payment of levies
to the Body Corporate. Control could
also be exercised over the servicing of the units, if a further lease
was negotiated. In addition
the applicant undertook that no
application would be made for special powers to be afforded to the
provisional liquidator, to sell
the property in the interim.
Furthermore, the applicant tendered an extended return date in
respect of the provisional order of
liquidation, to afford the
respondents sufficient time to investigate and if necessary, launch
any application for business rescue
of the respondent.
[13] The response of Mr.
Pillay S C, who appeared for the respondent, was to submit that once
a provisional order of liquidation
was granted, an application for
business rescue was precluded in terms of Act 71 of 2008. He
submitted that before an application
for business rescue could be
entertained, the provisional order for liquidation, would have to be
set aside. He accordingly applied
for an adjournment of the matter to
10 February 2012 to enable the respondent to investigate and if
deemed advisable, to launch
an application for business rescue of the
respondent.
[14] In aid of his
submission, Mr. Pillay S C referred to Section 129 (2) (a) of Act 71
of 2008, which provides that the board of
a company may not adopt a
resolution that the company voluntarily begin business rescue
proceedings, and place the company under
supervision in terms of
sub-Section 1,
“if liquidation proceedings have been
initiated by or against the company”.
[15] The answer of Mr.
Harcourt S C to this submission, was to refer to the provisions of
Sections 131 (6) and (7) of Act 71 of
2008, which provide as follows:
“
(6) 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
–
the court has adjudicated upon the
application; or
the business rescue proceedings end,
if the court makes the order applied for .
(7) In addition to the powers of a
court on an application contemplated in this section, a court may
make an order contemplated
in subsection (4), or (5) if applicable,
at any time during the course of any liquidation proceedings or
proceedings to enforce
any security against the company”.
[16] It is clear however
that Act 71 of 2008 draws a distinction, regarding the
inter-relationship of business rescue proceedings
and liquidation
proceedings, depending upon whether the source of business rescue
proceedings, lies in the resolution of the board
of a company to
begin such proceedings in terms of Section 129 (1), or whether the
source of such proceedings, lies in an application
brought by an
“affected person”
in terms of Section
131 (1), for an order placing the company under supervision and
commencing business rescue proceedings.
[17] In the former case,
as pointed out, in terms of Section 129 (2) (a), such a resolution
may not be adopted
“if liquidation proceedings have been
initiated by or against the company”.
The
reference to liquidation proceedings
“by”
or
“against”
the company, is clearly a
reference to a voluntary winding up of a company in terms of Section
352 of Act 61 of 1973, as well as
a reference to a winding up of a
company by the Court, in terms of Section 348 of Act 61 of 1973. In
this regard, the authors of
the work
Companies and other
Business Structures in South Africa
2
nd
Edition – Davis et al pg 229, Note 6
express the view that it
is unfortunate that it is unclear whether the word
“initiated”
(which is not defined) is intended to have the same
meaning as the word
“commenced”
contained
in the aforesaid sections of Act 61 of 1973 and which is clearly
defined in Act 61 of 1973. In this regard, it should
be noted that
Section 131 (6) of Act 71 of 2008, refers to liquidation proceedings
having
“been commenced by or against the company”
at the time application is made for an order placing the
company under supervision and commencing business rescue proceedings,
in
terms of Section 131 (1) of Act 71 of 2008. It would be anomalous
if what was meant by liquidation proceedings being
“initiated”
by or against the company for the purposes of Section
129 (2) (a), differed from what was meant by liquidation proceedings
being
“commenced”
by or against the
company, for the purposes of Section 131 (6). In my view, due regard
being had to the fact that these provisions
of Act 61 of 1973,
expressly continue to be applicable to the winding up of companies
the word
“initiated”
must be intended
to have the same meaning as the word
“commenced”
in the applicable sections. To conclude otherwise would
be to introduce uncertainty, where none is justified, by virtue of
the clear
definition of the
“commencement”
of
proceedings, in Sections 348 and 352 of Act 61 of 1973.
[18] In terms of Section
129 (6) of Act 71 of 2008, once a company has taken a resolution to
voluntarily begin business rescue proceedings
and place the company
under supervision, it may not adopt a resolution to begin liquidation
proceedings, unless the resolution
has lapsed in terms of sub-Section
129 (5), or until the business rescue proceedings have ended, as
determined in accordance with
Section 132 (2).
[19] However, where a
company has not adopted a resolution contemplated in Section 129 of
Act 71 of 2008, an
“affected person”
may
apply to a court at any time, for an order placing the company under
supervision and commencing business rescue proceedings,
in terms of
Section 131 of Act 71 of 2008. If liquidation proceedings have
already been commenced, by or against the company at
the time such an
application is made, the application has the effect of suspending
those liquidation proceedings in terms of Section
131 (6) of Act 71
of 2008. This suspension endures in terms of sub-Sections 131 (6) (a)
and (b) until the court has adjudicated
upon the business rescue
application or
“the business rescue proceedings end, if
the court makes the order applied for”.
Mr. Pillay
S C and Mr. Harcourt S C differed however on what was meant by the
phrase
“if the court makes the order applied for”
.
As I understood the argument of Mr. Pillay S C, it was that
”the
order applied for”
referred to the order for the
liquidation of the company. Consequently, a court was entitled, as an
alternative to adjudicating
upon the application for business rescue
in terms of Section 31 (6) (a), to grant an order of liquidation in
terms of Section 31
(6) (b) and thereby bring to an end the business
rescue proceedings and simultaneously the suspension of the
liquidation proceedings.
Mr. Harcourt S C however contended that
“the
order applied for”
referred to the application for
business rescue. In other words, if the court grants the order for
business rescue, the suspension
of the liquidation proceedings, will
endure until the business proceedings end in terms of Section 132
(2). On this interpretation,
the provisions of Section 131 (6) (a),
which provides for adjudication upon the application for business
rescue, will only have
the effect of terminating the suspension of
the liquidation proceedings, if the application is refused.
[20] I understood the
significance of Mr. Pillay’s argument, to lie in the fact that
the benefit to the respondent of the
suspension of the liquidation
proceedings in terms of Section 131 (6), was greatly diminished, by
the power of the court, as an
alternative to adjudicating upon the
application for business rescue, to simply grant a liquidation order
in terms of Section 131
(6) (b) and thereby bring to an end the
suspension of the liquidation proceedings themselves.
[21] In my view, such a
consequence was never intended by the Legislature. Simply put,
Section 131 (6) provides that if the application
for business rescue,
after adjudication is refused, the suspension of liquidation
proceedings is ended. If however, the application
is granted, the
suspension of liquidation proceedings endures until the business
rescue proceedings end, in terms of Section 132
(2).
[22] Consequently, on the
facts of this case, if a provisional order of liquidation is granted,
the Board of the respondent will
be precluded from resolving, that
the respondent voluntarily begin business rescue proceedings and
place the company under supervision.
The grant of such an order will
however not preclude an
“affected person”
from
applying to court, to place the respondent under supervision and the
commencement of business rescue proceedings. An affected
person is
defined in terms of Section 128 (1) (a) as including
“a
shareholder or creditor of the company”.
The
shareholding of the two Directors namely Went and Jhupsee in the
respondent, are held by the instrumentality of Trusts, which
are
controlled by these persons. The Trusts would accordingly qualify as
“affected persons”
, for the purposes
of this section. In addition, in the light of the fact that it is
alleged that the building alterations to the
premises, have been
carried out with funds advanced personally by the Directors, they
would on this basis, qualify as creditors
and have the necessary
locus standi,
to
launch such an application.
[23] Due regard being had
to the aforegoing and especially the admission by the respondent that
the amount claimed by the applicant
is due and payable and the
contention advanced by the respondent that a reasonable period within
which the respondent could be
expected to make payment to the
applicant, in the absence of a sale of the building, is a period of
twelve years, no valid ground
exists for the refusal of a provisional
order of liquidation, or an adjournment of the application, as sought
by the respondent.
As tendered by the applicant, I intend granting an
extended return date, to enable an application for business rescue to
be brought
by any
“affected person”
if
so advised.
I grant the following
order:
A
rule nisi
is to
be issued calling upon all persons interested to show cause, if any,
to this Court on 29
February 2012 at 09h30 or so soon
thereafter as the matter may be heard, why the respondent should not
be finally wound-up and
why the costs of this application should not
be costs in the liquidation.
The order will operate,
with immediate effect, as a provisional order for the winding-up of
the respondent.
The service of this
order will be effected:
by one publication on
or before 31 January 2012 in both the Government Gazette and a
daily newspaper published and circulating
in KwaZulu-Natal;
by service on the South
African Revenue Service at corner of Albany Grove and Victoria
Embankment, Durban;
by service on the
registered address of the respondent at 96 Armstrong Avenue, Villa
Avant-Garde, La Lucia, Durban;
by service on the
respondent’s employees, if any; and
by service on the
registered trade unions representing the respondent’s
employees, if any.
___________
SWAIN J
Appearances: /
Appearances:
For the Applicant :
Mr. A. W. M. Harcourt S C
Instructed by
:
Edward Nathan Sonnenbergs Inc. Umhlanga, Durban
For Respondent :
Mr.
L. Pillay S C
Instructed
by :
T. Giyapersad & Associates
Durban
North
Date of Hearing
:
25 November 2011 09 December 2011
Filing of Judgment :
15 December 2011