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[2009] ZAKZPHC 20
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Griffin v Edwafin Investment Holdings Ltd, Chaplin v griffin and Another; Stapleton and Others v Edwafin Investment Holdings Ltd and Others [2009] ZAKZPHC 20; 1630/2009;366/2009;3656/2009 (22 May 2009)
IN THE
HIGH COURT OF SOUTH AFRICA
KWAZULU-NATAL,
PIETERMARITZBURG
CASE
NO 1630/2009
In the
matter between:
DOROTHY JEAN GRIFFIN
Applicant
and
EDWAFIN INVESTMENT HOLDINGS
LTD
Respondent
AND
CASE NO. 3606/2009
In the
matter between:
THERESA DIANE CHAPLIN
Intervening Applicant
and
DOROTHY JEAN
GRIFFIN
First Respondent
EDWAFIN INVESTMENT HOLDINGS
LTD
Second Respondent
In re: DOROTHY JEAN
GRIFFIN
Applicant
and
EDWAFIN INVESTMENT HOLDINGS
LTD
Respondent
AND
CASE NO. 3656/2009
In
the matter between:
PATRICK ROY STAPLETON
First Applicant
MARIA JOHANNA
STAPLETON
Second Applicant
DONALD GRAHAM
HUTCHINSON
Third Applicant
LOUIS ROBERT KLYNSMITH
Fourth Applicant
and
EDWAFIN INVESTMENT HOLDINGS
LIMITED
First Respondent
TERESA DIANE CHAPLIN
Second Respondent
DOROTHY JEAN GRIFFIN
Third Respondent
JUDGMENT
Delivered
on 22 May 2009
SKINNER,
AJ:
1
An
application was brought in matter number 3656/2009 to place the first
respondent in that matter (Edwafin Investment Holdings
Limited,
hereinafter referred to for the sake of convenience as “the
company”) under judicial management in terms of
Section 428 of
the Companies Act No. 61 of 1973. This application had been
preceded by an application under case number 1630/2009
for the
liquidation of the company as well as an application under case
number 3606/2009 for leave to be granted for a party to
intervene as
a second applicant in the liquidation proceedings. This last
mentioned application was brought as a matter of
caution because
there was a challenge in the liquidation proceedings to the status of
the Applicant in such proceedings as being
shown to be a creditor of
the company entitled to bring liquidation proceedings.
2
The
principles governing an application for judicial management are set
out in Section 427 of the Companies Act, namely:
“
(a)
The relevant company must be unable to pay its debts or probably
unable to meet its
obligations; and
(b)
The
company has not become or is prevented from becoming a successful
concern;
(c)
There
is a reasonable probability that if placed under judicial management,
such company will be enabled to pay its debts or meet
its obligations
and become a successful concern;
(d)
It
must appear just and equitable to the court to grant a judicial
management order.”
3
Once the
court is satisfied that all these requirements have been met, there
is nevertheless a discretion to be exercised judicially
by the court
as to whether a judicial management order should be granted or not
(
Ben-Tovim v Ben-Tovim and Others
2000 (3) SA 325
(C) at 330 –
331)
4
It is trite that an unpaid creditor of
a company is entitled
ex debito justitiae
to a winding up
order (provided of course he can establish the requirements for such
order) (
Tenowitz v Tenny Investments (Pty) Ltd; Spur Steak Ranches
(Pty) Ltd v Tenny Investments
1979(2) SA 680 (E) at 683 A).
Accordingly, where a creditor insists that a company be wound up,
such insistence can only be
overridden if it can be shown that a
judicial management order is in the interests of all the members and
creditors. (
De Jager v Karoo Koeldranke & Roomys (Edms) Bpk
1956 3 SA 594
(C) at 602). For that reason, since it is an
encroachment on the right of the creditor to demand his money,
judicial management
cannot be used an experiment to determine whether
the company can extricate itself from its difficulties. (
Kotze v
Tulryk Bpk en Andere
1973
SA 118
(T) at 122 H)
5.
The present circumstance is an unusual one. The applicants for
the judicial management order do not contend there has been
any
maladministration that the grant of such order will serve to
eradicate. Accordingly if a judicial manager is appointed
his appointment will not assist the transforming of the company into
a successful concern by removing any existing conflict or
maladministration. Further, since the company (as appears
hereafter) is unlikely to attract any further investments, its
success is entirely dependent on receiving the interest and ultimate
repayment of its investments. Thus the success of the
company
is not reliant on the endeavours and skills of the judicial manager
but rather on the success of other entities or companies,
the day to
day running of which would not fall under his or her control.
For that reason I was urged by Mr. Potgieter SC
on behalf of the
applicants for the winding up of the company to find that judicial
management is not appropriate where the profitability
of the company
is dependent on the success (or lack thereof) of other entities.
It seems to me however that in the circumstances
of the present case
judicial management can be considered because the fate of the company
rests (as appears hereafter) on the endeavours
of two identified
entities. The situation may well be different if the company
were dependent on a multiplicity of other
entities where it would
become almost impossible to assess the prospects of all those
entities.
6.
The business of the company, as emerges
from the judicial management application, was “to procure
venture capital, to invest
and manage such venture capital and to
provide related strategic, planning, company and secretarial services
to companies/entities,
inclusive of its subsidiaries”. It
procured venture capital for investment in other companies by way of
selling debentures
to members of the public. Each debenture was
repayable after the expiration of a period of five years.
During that
period the debentures would bear interest at a specified
rate.
7.
The company seems to have been
successful for some years and as appears from the audited financial
statements for the year ending
28 February 2007, it returned a profit
after taxation in excess of R5 million. According to the
applicants for the judicial
management order however, the global
economic crisis adversely affected the company’s ability to
attract capital with the
result that the down-turn in the global
economy caused an accumulated investment opportunity loss of
approximately R25 million.
In addition the company invested R27
million in one of its wholly owned subsidiaries which was to develop
and manufacture two types
of vehicles. There was however a
lengthy delay in such subsidiary being able to obtain the necessary
approval from the South
African Bureau of Standards and the
Department of Transport. It was estimated that this delay cost
the subsidiary some R37
million rand which naturally meant that the
subsidiary was not able to sell vehicles or repay the company.
The company’s
trading accounts for the period ending February
2009 reflect a loss of some R124 000.00. While this is not in
itself substantial,
the difference in comparison to the company’s
previous financial position is marked. In the liquidation
application
it was acknowledged that the company was “going
through a cash flow crisis”.
8.
Although as I have indicated, the
company purported to invest capital in other entities, it would
appear that for present purposes
the investments were all in wholly
owned subsidiaries. Several of these were either sold or
rendered dormant once the company
found that it was no longer
attracting investments with the result that the company had only two
wholly owned subsidiaries which
were still active, namely Edwabond
(Pty) Ltd trading as Edwabond Capital Options (hereinafter referred
to as “Edwabond”)
and Dynamic Motor Company (hereinafter
referred to as “DMC”).
9.
In the judicial management application
the deponent to the following affidavit stated that:
“
Edwabond is a registered private equity and
securities venture capital company. Until recently its primary
business was to
market the debentures issued by the respondent [the
company] and manage the debenture investment portfolio of the
respondent.
Since the global economic downturn, the business
activities of Edwabond have been directed towards the development of
a new range
of products, such as debt consolidation, the sale of
equity in DMC, the marketing of DMC loan share offers and the sale of
DMC
back-end products.”
10.
DMC, as its name implies, manufactures
vehicles and in particular “an all terrain utility vehicle for
use in the agricultural,
general utility, leisure and mining markets”
known by the brand name of Damara and a sub-surface mine vehicle.
A document
was furnished indicating that there was an order for 11
Damaras, four of which were to be delivered during May 2009 to the
purchase,
the total order value being in the vicinity of R857
000.00. It was further submitted that “currently, DMC is
actively
engaging and exploiting 300 enquiries/leads for the purchase
of Damara vehicles”. Regarding the sub-surface mine
vehicle
it was submitted that:
“
DMC has been actively engaged for a period
of about one year in the development and negotiations for the
purchase of the mine vehicle
with Anglo-Platinum Mines in the
Rustenburg area. The first prototype of the mine vehicle will be
available by the end of June
2009. An arrangement has been
reached with the mines in question that they will purchase the mine
vehicle from July 2009
and that in respect of such purchases a
deposit of 50% will be payable on the placing of an order. The said
deposit will enable
DMC to purchase all the required raw materials
and substantially manufacture the mine vehicle, without utilising its
own financial
resources”.
11
I have described the activities of the
two subsidiaries in some detail because Mr Lotz SC who appeared
on behalf of the applicants
in the judicial management application
very fairly and properly conceded that the prospects of the company
itself attracting further
capital were “probably zero”.
I agree with this as it is very unlikely that large numbers of
creditors would
be prepared in the current economic downturn to
invest substantial sums in a company under judicial management with
the risk that
the funds may well be lost if the company ultimately
goes into liquidation. In the circumstances, the only prospect
for the
company is that the two subsidiaries will be successful to
such an extent that they will be able to generate sufficient funds to
make large payments to the company in such manner that it will in
turn be able to meet its debts and settle its obligations.
12
To this end, the applicants for the
judicial management order furnished a profit and loss projection for
Edwabond for the period
April 2009 to March 2010 and a profit and
loss projection in respect of DMC for the same period. These were
apparently prepared
by the third applicant in the judicial management
application, Donald Graham Hutchinson who was described as a
“research
and development specialist with the appropriate
management, engineering and project development skills”.
From the projections
it was submitted that Edwabond would be able to
pay to the company from May 2009 the nett monthly profit before tax,
increasing
over the period from May 2009 to March 2010 from R62
810.00 to R284 310.00 per month. The projection in respect of
DMC was
that it would operate at a loss of between R231 991.00 and
R156 993.00 per month until October 2009 when it would generate a
profit
of some R140 121.00 which within two months would increase to
R2 714 966.00 per month and by March 2010 an amount of R3 078 988.00
per month. The dramatic increase from October 2009 to December
2009 was attributed to the fact that “realistically
sales of
the Damara should commence during September/October 2009” and
further that by such period the sales of the mine
vehicle would also
increase from 20 vehicles a month to 30 vehicles a month.
13.
A further projection was
also furnished in respect of the company itself which indicated that
the company would have an accumulated
loss by June 2009 of R1.1
million but would then receive an amount of approximately R7.779
million during July 2009 – this
was from an off shore
investment in Paragon derivatives which although it had a current
value of some R12.965 million was only
anticipated to realise the
lower figure due to the early redemption of the derivatives. It
was submitted that such would
effectively tide the company over until
November 2009 when, with the income derived from Edwabond and DMC, it
would be able to
recommence payment to the debenture holders in the
amount of R2.3 million per month. It would also be able to
commence repayment
to creditors from August 2009 in the amount of
R548 095.00 per month.
14.
Mr Potgieter SC severely criticised
these projections. He submitted that financial statements of
the two entities relied upon
should have been furnished to show that
they have some track record sufficient to have confidence in the
projections. He
pointed out that a specific “invitation”
to furnish these documents has been extended but that the response
was that
“the disclosure of and the making available of the
financial records of all the subsidiaries will not contribute to the
determination
of the issues in this application”. (Mr
Lotz SC submitted that DMC was only commencing its trading operations
while
Edwabond was also in effect a new entity due to its change in
operations).
15.
Mr Potgieter SC further submitted that
there would be an accumulated arrears debenture interest (since such
had not been paid since
October 2008) in excess of R30 million by
November 2009 and emphasised that the projections were merely that
the company would
pay R2.3 million per month to service the current
debenture interest repayments. He submitted that the
projections took no
account of the fact that R30 million would have
to be found from somewhere to repay the arrears. He
further pointed
out that the debentures enduring for a period of five
years from March 2005 would mature from March 2010 and that on the
projections
before the court no provision had been made for this with
the result that the debenture holders could not possibly receive
their
capital within a reasonable time. He pointed out that the
applicants for the judicial management order had themselves indicated
that “the respondent’s road to recovery is not a miracle
road. It is a slow process and will depend on sound
management
and financial principles being applied in view of the current
economic recession”.
16.
In my view, there is a great deal of
weight to be attached to his criticisms. While it is correct as
Mr Lotz SC pointed out,
that the opposition to the judicial
management was not based on furnishing any figures or projections to
dispute those furnished
in support of the application for judicial
management, in the nature of things, that would hardly have been
possible since only
the company and its two subsidiaries would have
knowledge of the anticipated financial figures and returns.
While I must
accept (in the absence of any challenge) the expertise
of Mr Hutchinson and his
bona fides
in furnishing the
projections, in my view they are entirely too optimistic. As I
have indicated, it is common cause between
the parties that there is
a general global economic downturn. I cannot accept (without
any supporting facts or basis for
such proposition) that there will
be sufficient purchases for the vehicles manufactured by DMC to bring
to fruition the projected
results. Since DMC will only be commencing
sales of the Damara during September/October 2009, there is no “track
record”
to justify why this particular motor vehicle
manufacturing company will be successful against the current
worldwide trend.
As was pointed out in
Weinberg and Another
v Modern Motors (Cape Town)(Pty) Limited
1954(3) SA 998 (C) at
1001 A-B “A mere confident hope expressed in affidavits and not
sufficiently supported by concrete
evidence is not enough.”
17.
In my view without any supporting
evidence I cannot accept that the projections are realistic and not
over-optimistic. The
onus rests on the applicants in the
judicial management application to satisfy the court that there is a
reasonable probability
that the grant of such order will enable the
company to pay its debts, meet its obligations and become a
successful concern.
Where reliance is based on projections of
anticipated future trade coupled with proof of an order for 11
vehicles only, I cannot
be so satisfied. It may well be that
because both subsidiaries are only commencing trade, there is no
adequate supporting
evidence that could be furnished but such
detracts from the applicants for the judicial management order being
able to discharge
the onus. “An applicant basing his case
for a judicial management order, which after all is a special
concession and
only granted in exceptional circumstances …. on
scanty information and generalisations does so at his own peril.”
Ladybrand Hotel (Pty) Ltd v Segal and Another
1975(2) SA 357
(O) at 359 A – B).
18.
The
funds to be derived from DMC are fundamental to the submission that
the company will become successful in due course. The income
from
Edwabond would not on its own be sufficient. I agree with the
submission by Mr Potgieter SC that it should have been
possible for
the applicants for the judicial management order to have furnished at
the least schedules of the creditors of such
company in order to
justify the projections of the income which Edwabond will allegedly
be receiving but for the reasons I have
indicated this in itself
would not suffice.
19.
Mr Lotz
SC submitted that applicants for the winding up of the company
constitute a minute proportion of the debenture holders.
There
were contradictory averments from each side as to whether the
majority of the debenture holders support or oppose the winding
up
application but since that has not been satisfactorily established, I
do not take it into account.
20.
It is
undoubtedly so that the liquidating creditors are only a small
fraction of the total debenture holders. There has however
been
a relatively lengthy delay of several months before the papers in all
the applications were ripe for hearing and it is common
cause that
various meetings of the debenture holders have been held
Accordingly if indeed the “silent majority”
opposed the
liquidation of the company, they have had ample opportunity to breach
their silence and place their views before the
court in an acceptable
form.
21.
Mr
Lotz SC pointed out, and it was not disputed, that on a liquidation
of the company the creditors would only receive an amount
of
approximately six cents in the Rand and he submitted that in the
circumstances, it was not just and equitable for a small proportion
of the creditors to force the company into a liquidation which will
have the result that the creditors would receive a minimal
return for
their investments. He further submitted that it was in the
interests of the general body of creditors that a judicial
management
order be granted because that would afford the opportunity for the
financial position of the company (and the two relevant
subsidiaries)
to be assessed by an independent expert and that further, the body of
creditors would have an opportunity at the
statutory meeting to have
their attitude to the winding up clearly established – if the
independent assessment by the judicial
manager was that the company
could not become successful within a reasonable time or if the
general body of creditors was overwhelmingly
against the judicial
management order being confirmed, then there would merely have been a
delay of a short period which would
not have prejudiced the creditors
in any way.
22.
That may
well be, although of course it is equally possible that the delay may
merely have served to cause a further deterioration
in the financial
position of the company with the expenses of the judicial manager
adding to the company’s predicament.
In my view however
and having due regard to the fact that this a public company with
some R200 million worth of investor’s
funds, the judicial
management order cannot be in the nature of an experiment to see
whether the company may well become successful.
(
Tenowitz
and Another v Tenny Investments supra
1979(2) SA 680 (E) at
685F). My determination of the prospects must be based on the
facts presented in the papers before
me and on those I cannot be
satisfied that there is a reasonable probability that the company
will in a reasonable time become
successful. The fact that any
judicial management order would on the face of it have to last at
least a number of years before
the company could hope to repay all
the debenture holder their capital and interest also suggests that
the company is not capable
of becoming a successful concern within a
reasonable time (
Tenowitz and Another v Tenny Investments supra
at
685G). Accordingly, exercising my discretion, I must refuse the
judicial management order.
23.
Mr de
Wet, on behalf of the company, had a very limited role to play in the
proceedings in the light of the fact that it had to
be accepted, for
the judicial management application to be brought in the first place,
that the company was unable to pay its debts.
He accordingly aligned
himself with the submissions of Mr Lotz SC. He conceded very
properly that if the judicial management
order was not granted then
it followed that the company should be wound up. He pointed out
that since the applicants in the
winding up had launched the
proceedings in February 2009 and more than three months had elapsed
since then, a further delay of
60 days for the return day (if the
judicial management order were granted) would not make any
difference. While section 432(1)
of the Companies Act 61 of
1973 stipulates that the return day of a judicial management order is
to be 60 days after the grant
of the order, this can however be
extended on good cause. On the present facts little will have
changed in 60 days as such
period would still be too soon to assess
whether the motor vehicle sales are actually materialising or at
least the probability
of the projections being correct is being
demonstrated.
24.
He also
submitted that there had been no sudden change of stance (as
contended by Mr Potgieter SC) with regard to the position of
the
company – the winding up proceedings had been opposed on the
basis that the company was not insolvent but merely in a
cash flow
crisis of a temporary nature and that it was accordingly consistent
with this position for the applicants in the judicial
management
application to contend that, as matters presently stood, the company
could not pay its debts because of the cash flow
problems. I
have some difficulty with this if the accepted “dividend”
on liquidation is likely to be only six
cents in the rand - this
shows the company is insolvent. In the light however of the
conclusion I have reached, it is not
necessary to consider this
aspect further.
25.
For
the reasons already set out I am not persuaded that the judicial
management order should be granted. As far as the application
to intervene was concerned, that was not opposed and accordingly the
intervening applicant should be given leave to intervene.
26.
I am
satisfied that a case has been made out for a provisional winding up
order and in the light of the concessions by Mr Lotz SC
and Mr de Wet
as to the course of conduct if the judicial management application is
dismissed, I do not propose to analyse the
papers in the winding up
application in any detail. Suffice it to say that all the
relevant requirements have been met in
such application.
27.
I
accordingly grant the following order:
(a)
The intervening applicant in matter number 3606/2009
is granted
leave to intervene as a second applicant in the application between
Dorothy Jean Griffin and Edwafin Investment Holding
(Pty) Ltd under
case number 1630/2009;
(b)
The application under case number 3656/2009 for Edwafin
Investment
Holdings Limited to be placed under judicial management is dismissed
and the applicants in such application are directed
to pay the costs
of the second and third respondents in opposing the application.
(c)
In case number 1630/2009 a provisional winding
up order is granted in
terms of paragraphs 1 to 3 inclusive of the notice of motion with the
return date of such application to
be 2 July 2009 and with the date
in paragraph 3 of such order to be 26 June 2009.
_______________________
SKINNER,
AJ
Acting
Judge of the High Court
KwaZulu-Natal,
Pietermaritzburg
Date of
hearing
:
18 May 2009
Date of
Judgment
:
22 May 2009
Counsel
for the Applicants in
Case
No. 3656-09 (the
judicial
management
application)
::
Mr. E. Lotz S.C.
Counsel
for
Teresa
Diane Chaplin
and
Dorothy
Jean Griffin
:
Mr. A. Potgieter S.C.
Counsel
for
Edwafin
Investment
Holdings
Limited
:
Mr. A. de Wet