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1992
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[1992] ZASCA 220
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Ex Parte: De Villiers and Another NNO: In Re Carbon Developments (Pty) Ltd (In Liquidation) (720/91) [1992] ZASCA 220; [1993] 1 All SA 441 (A) (27 November 1992)
IN THE SUPREME COURT OF SOUTH AFRICA
(
APPELLATE
DIVISION
)
720/91 In the matter of:
MICHAEL LEO DE VILLIERS
N.O.
PETRUS JACOBUS MARYN VAN STADEN N.O.
Appellants
CORAM
: CORBETT CJ, VAN HEERDEN, GOLDSTONE JJA,
NICHOLAS et HARMS AJJA.
DATE HEARD
: 2 NOVEMBER 1992
DATE DELIVERED
: 27 NOVEMBER 1992
2
JUDGMENT
GOLDSTONE JA:
The appellants are the joint liquidators of
Carbon
Developments (Pty) Limited ("the Company"). They
applied unsuccessfully to
the Witwatersrand Local
Division (Stegmann J) for leave to convene meetings
of
the creditors and members of the Company to consider an
offer of
compromise between the Company and its creditors
and members proposed by Mr
K. M. MacDonald pursuant to
the provisions of s 311 of the Companies Act 61
of 1973
("the Act"). Its terms are contained in a written
contract between
MacDonald and the appellants which is
dated 17 July 1991. The judgment of
Stegmann J has been
reported at 1992(2) SA 95 (W).
3
Clause 3.2 of the contract provided that the offer
would remain irrevocable until 30 September 1991. In terms of a deed of
amendment
dated 28 September 1992, MacDonald has undertaken that the offer will
now remain irrevocable until 31 January 1993 or until sanction
or rejection
thereof, whichever is the earliest. This Court has also been informed by the
joint liquidators that some of the assets
whose value was only estimated at the
time of the application have now been realised and their value has been
established. The result
is that the projected dividend to concurrent creditors
under the offer of compromise will now be 1,78 cents in the rand and not 1,48
cents as earlier estimated. All the financial and other information furnished to
the Court a
quo
is, we are told, still correct. It follows that if the
appeal succeeds, the offer of compromise remains capable of implementation.
The
appellants accordingly
4
seek an order substantially in the terms sought in
the Court a
quo
.
The Company was incorporated in 1986. It had an
authorized share capital of R10 000 comprising 2500 ordinary shares of Rl each
and
750 000 12% redeemable cumulative preference shares of 1 cent each.
Initially it issued 132 ordinary shares of Rl each and during
1989 it issued a
further 300 000 redeemable cumulative preference shares of 1 cent each.
The company was formed in order to carry on business as a manufacturer of
activated carbon. The technology which it was to employ
was experimental and
complex. If the technical difficulties were surmountable then it was expected by
the founders that the business
would become very profitable and of considerable
strategic importance for South Africa in the light of the economic sanctions
which
were then applied to this country. In the result, however, the
technical
5
difficulties proved insoluble, the Company failed,
and it was placed under a provisional winding-up order which was made final on
15 January 1991.
At its inception the Company incurred considerable expenses on fixed and
movable assets. The earliest balance sheet of the company
which is contained in
the record is that for the year ending 30 September 1989. It is there reflected
that the value of fixed assets
as at the end of the preceding (1988) financial
year was R2 217 890. The Company's stock was then valued at R495 675. It had not
yet begun to trade.
The small issued share capital of the Company was obviously insufficient to
provide it with the funds which it required, especially
as it must have been
contemplated that trading, and hence income, would only follow a substantial
time after the preliminary expenses
had been incurred. Accordingly, the major
shareholders lent considerable sums of money to the Company. At the
6
time of its provisional liquidation on 20
September 1990, Camms Services and Finance Corporation (Pty) Limited ("Camms")
had lent
to the Company the amount of approximately Rl,8 million. UAL Merchant
Bank Limited, (acting through Strategic Capital Investment
Trust) ("UAL"), had
advanced to the Company approximately R3,5 million.
In their founding affidavit, the appellants referred to the loans as
"capital" contributed by the shareholders. They did so on the
basis that:
"All of the aforesaid loans were subordinated by the grantors thereof in
favour of the other creditors of the Company until such time
as the assets of
the Company, fairly valued, exceeded its liabilities and notes to that effect
were contained in the annual financial
statements of the Company."
7
The notes in question record that the loans had
been:
"... subordinated in favour of the other creditors until such time as the
assets of the company, fairly valued, exceed its liabilities."
It is clear that for some years prior to its liquidation the Company's
liabilities (including the subordinated loans) substantially
exceeded its
assets. On liquidation the financial position was aggravated by reason of the
difference between the valuation of the
assets of the Company on a going concern
basis and the amount they would realise on a forced sale. The directors had
valued the assets
in an amount in excess of R3 million. After liquidation they
realised only R369 000.
In the result, on liquidation, the Company's financial position was such that
the assets were insufficient to yield any dividend for
the concurrent
8
creditors. The claims of trade creditors amounted
to R213 357. The remaining concurrent creditors were the Industrial Development
Corporation in an amount Rl 485 944 and Nedbank Limited in an amount R342 687.
As already mentioned, if the offer of compromise is
accepted and implemented,
there will be a small dividend of 1,78 cents in the rand available for
concurrent creditors.
Stegmann J refused to grant the order sought by the appellants because he was
of the view that they had failed to gather and furnish
to the creditors of the
Company sufficient information to enable them -
"to assess the relative merits of the proposal and of the alternatives to the
proposal" (at 103 F - G).
The concern of the learned judge, and the only question in respect of which
he concluded there was insufficient information, related
to the possible
9
personal liability of the directors of the Company
under s 424(1) of the Act, ie for knowingly being parties, inter alia, to
carrying
on the business of the Company recklessly or with intent to defraud
creditors or for any fraudulent purpose. In such a case, the
court is empowered
by the sub-section, on the application
inter alia
of a liquidator or a
creditor, to declare -
"that any person who was knowingly a party to the carrying on of the business
in the manner aforesaid, shall be personally responsible,
without any limitation
of liability, for all or any of the debts or other liabilities of the company as
the Court may direct."
More particularly, the Judge a
quo
held that -
1. The effect of the offer of compromise, if duly sanctioned, would be to
preclude proceedings against directors under s 424(1) of
the Act. He came to
that conclusion because, in his view, s 424 may
10
not be invoked at all unless, at the time
of the
application, the company has
creditors. And, in the case of an
application
brought by a creditor, he
would be required to establish a debt
owing to
him at the time of the
application. Consequently, a judicial
exercise of
the court's discretion to
grant an order convening meetings under s
311
requires it to be satisfied that the
creditors' prospects of recovery
unders
424(1) have been appropriately
investigated by the liquidators.
2. In the present case there was a reasonable prospect of establishing that the
directors of the Company, at material times, were
conducting the business of the
Company in a manner which rendered them liable to an order under s 424(1).
3. The question of such personal liability of the directors had not been
sufficiently investigated and therefore the appellants had
failed to gather the
information required to inform the creditors of a relevant alternative to the
offer of
11
compromise and, in particular, information which would enable them to assess
their prospects in proceedings against the
directors.
There was no other reason
given by Stegmann J for refusing the order to convene meetings. Indeed, on
substantially the same papers
such an order had been granted some weeks earlier
in the same court by Flemming DJP. That order fell away because the appellants
did not summon a meeting of secured creditors. Furthermore, additional
information had come to the attention of the appellants which
required a fresh
application to be made. It is this application which came before Stegmann J.
The application before the Court a
quo
was brought ex
parte
. It
followed that in the appeal to this Court there was no respondent. Because of
the importance of the issues raised, Mr M Tselentis
SC and Mr P Boruchowitz were
appointed to act as
amici curiae
and
12
Nathan Friedland Inc were appointed as attorneys
to assist them. This Court is indebted to them for the considerable assistance
which
they rendered by way of full and helpful heads of argument and counsel's
submissions during the hearing of the appeal.
It was the submission of counsel for the
appellants, and the
amici curiae
agreed, that a duly
sanctioned offer of compromise, which
has the effect of
extinguishing the company's debts, does not preclude
a
declaration being made by the court under s 424(1) of the
Act. It was
argued that the reference to "debts" in the
subsection is to debts which were
incurred by the company
at the time of the alleged wrongful conduct, and
not
necessarily to debts which were still owing by the
company at the time
of the application under the
subsection: cf.
Pressma Services (Pty) Ltd v
Schuttler
and Another
1990(2) SA 411(C). In the view I take
in
this matter, it is not necessary to decide this
13
interesting and difficult question. I shall
assume that the effect of the offer of compromise, on sanction by the court,
would be
to preclude relief under s 424(1) at the instance of a creditor.
The refusal by Stegmann J to grant an order convening meetings of creditors
and members of the Company to enable them to consider
the offer of compromise
was based upon his conclusions (150 B - F) that:
(a)
As a probability the
directors of the Company were knowingly dealing dishonestly with trade creditors
when they purchased goods on
credit without disclosing the "disastrously
insolvent condition" of the Company as known to them.
(b)
They were also aware that the subordination agreements did not serve
to protect the directors from the consequences of their awareness
that
they
14
were not dealing honestly with the trade creditors of the Company.
(c) There were substantial grounds for believing that a "purposeful search for
the relevant facts" would reveal that the trade creditors
would have good
prospects of recovering their losses in full from the directors of the
Company.
It is necessary to examine
each of those conclusions.
Trading under insolvent circumstances
.
Stegmann J referred to two
forms of insolvency which have been recognised by our law for many years, viz.
factual insolvency where
a company's
liabilities exceed its assets, and commercial insolvency, viz. a state of
illiquidity where a company is unable to pay it debts even
though its assets may
exceed its liabilities.
15
Commercial insolvency is expressly recognised in
the Act as a circumstance which would entitle a court to make a winding-up
order:
s 344(f) read with s 345. However factual insolvency is not expressly
referred to as a circumstance justifying the grant of a winding-up
order.
Whether the words of s 345, and especially having regard to ss (2) thereof, are
sufficiently wide to include factual insolvency
is a question of interpretation
which, as far as my researches reveal, has not been judicially determined. It is
not necessary to
decide it in the present case. Even if factual insolvency is
not,
per se
, a circumstance entitling a court to make a winding up order,
it would clearly be a relevant and material factor in deciding whether
it should
exercise a discretion to grant an order under s 344 of the Act.
With regard to this question, the provisions of ss 222 and 223 of the English
1948 Companies Act were
16
indistinguishable from their South African
counterparts. However, the matter was dealt with explicitly by the provisions of
the 1986
English Insolvency Act. It is there provided that:
"A company is deemed unable to pay its debts if it is proved to the
satisfaction of the court that the value of the company's assets
is less than
the amount of its liabilities, taking into account its contingent and
prospective liabilities."
For the purpose of this judgment I shall assume that Stegmann J was correct
in deciding that factual insolvency is
per se
a circumstance which would
entitle a court to make a winding-up order.
The learned Judge a
quo
criticised and held to be erroneous the
statement in
Ex parte Strydom NO: In re Central Plumbing Works (Natal) (Pty)
Ltd
1988(1) SA 616(D) at 623 D - E to the effect that:
17
"From a commercial point of view, however (and this is recognised in many ways
in the Companies Act), the true test of a company's
solvency is not whether the
company's liabilities exceed its assets but whether it is able to pay its debts.
(See
Rosenbach & Co (Pty) Ltd v Singh's Bazaars (Pty) Ltd
1962(4) SA
593 (D) at 596 F - 597 H) .
A more detailed
criticism of that passage by the same learned Judge is to be found in
Ex
parte Lebowa Development Corporation Ltd
1989(3) SA 71 (T) at 95 B - 97
J.
In my opinion, the learned Judges (Friedman and Wilson JJ) who delivered the
judgment in
Ex parte Strydom
did not purport to suggest that actual
insolvency was not a ground for a winding-up order. Indeed, in the passage
immediately preceding
that quoted by Stegmann J they
18
said.
"It is true that the company which the Court sends back into business' is
insolvent in the sense that its liabilities (all of which
are owing to its new
controller) exceed its assets. Any company which has accumulated losses in
excess of its share capital is insolvent
in this sense. And there are
undoubtedly very many companies operating exceedingly successfully in the real
business world in this
position."
In context, the statements in
Ex parte Strydom
are
unexceptionable.
The real question, which arises for decision in this case, however, is not
whether the Company was liable, during the relevant period,
to be wound up. It
is whether, on the assumption that it was liable to be wound up, its directors
were acting unlawfully in allowing
it to do business and incur credit. The
19
conclusion reached by the Court a
quo
was
the following (at 127 A - C):
"It therefore appears that, apart from a judicial management order, there is
no source of lawful authority for anyone, whether a member,
or a director, or a
creditor of a company, to cause the company to trade when its liabilities exceed
its assets. Since there can
be no source of lawful authority to do so, it must
always be an 'irregularity' for the directors of a company to cause it to trade
when its liabilities exceed its assets. I find it difficult to envisage
circumstances in which it could convincingly be argued that
such an irregularity
was not 'material'. Usually, it would be a
material
irregularity."
The learned Judge went on to hold (at 127 E -G) that such a material
irregularity would by its nature be likely to cause financial
loss to the
company's creditors and that therefore a company's auditor would be obliged to
act in accordance with the provisions
of
20
s 20(5) of the Public Accountants' and Auditors'
Act 80 of 1991, i.e. to report the irregularity to the company and, if not
remedied,
to the Public Accountants' and Auditors' Board.
If the view taken by Stegmann J in this regard
is correct,
it would follow that for decades in South
Africa the officers of a vast
number of private companies
(unbeknown to them and notwithstanding the
generally
accepted practice in the commercial world), have
acted
unlawfully and dishonestly. It is a common occurrence
for a private
company to embark on trading with a nominal
paid-up share capital and to
finance its business
operations by way of members' loans. Frequently,
those
loans are treated as if they were part of the capital of
the
company. This reality was recognised in
Ex parte
Strydom NO
(
supra
) at 623 E - F.
21
In
R v Latib
1973(3) SA 982 (A) at 984 G -
H, Steyn JA said:
"In a transaction on credit, the representation
as to
ability to pay is a representation by the
purchaser of a present belief that
he will be
able to pay when payment falls due, rather than
a
representation as to what his financial
condition will in fact be at a future
date. If
his belief is genuine, even though somewhat
optimistic, the
representation is not false,
whatever his financial position may turn out
to
be at the due date. His ability to pay at the
time of purchase and his
prospects in relation
to the date of payment, would, of course,
be
relevant to show whether or not he did in fact
entertain such a belief,
but what is placed in
issue is a state of mind rather than a
financial
condition."
That statement of our law with regard to the fraudulent incurring of credit
is consistent with the following statement by Buckley
J in an unreported
judgment quoted in
Palmer's Company Law
24 ed at 1463:
22
"In my judgment, there is nothing wrong in the fact that
directors incur credit at a time when, to their knowledge, the company is
not
able to meet all its liabilities as they fall due. What is manifestly wrong is
if directors allow a company to incur credit at
a time when the business is
being carried on in such circumstances that it is clear that the company will
never be able to satisfy
its creditors. However, there is nothing to say that
directors who genuinely believe that the clouds will roll away and the sunshine
of prosperity will shine upon them again and disperse the fog of their
depression are not entitled to incur credit to help them to
get over the bad
time."
See, too
Ozinsky NO v Lloyd and Others
1992(3) SA 396 (C) at 415 I -
418 D.
There is nothing in the Act or in the
Insolvency Act 24 of 1936
which is
inconsistent with those statements of the law and, in my view, they reflect what
our courts have stated over the years.
They
23
reflect, furthermore, the
commercial reality and practice
of honest men of business in this country
and, I dare
say, in other Western trading nations. To the extent
that the
judgments of Stegmann J in
Ex parte Lebowa
Development Corporation
Ltd
(
supra
),
Ex parte De Villiers
NO: In re MSL
Publications (Pty) Ltd (In Liquidation)
1990(4) SA 59(W) and in the
present matter are
inconsistent with what is stated above, they are
not
correct.
In short, the mere carrying on of business by directors does not constitute
an implied representation to those with whom they do business
that the assets of
their company exceed its liabilities. The implied representation is no more than
that the company will be able
to pay its debts when they fall due.
24
The Subordination Agreements
The
essence of a subordination agreement, generally speaking, is that the
enforceability of a debt, by agreement with the creditor
to whom it is owed, is
made dependent upon the solvency of the creditor and the prior payment of its
debts to other creditors.
Subordination agreements may take many forms. They may be bilateral i.e.
between the debtor and the creditor. They may be multilateral
and include other
creditors as parties. They may be in the form of a
stipulatio alteri
,
i.e. for the benefit of other and future creditors and open to acceptance by
them. The subordination agreement may be a term of
the loan or it may be a
collateral agreement entered into some time after the making of the loan.
Save possibly in exceptional cases, the terms of a subordination agreement
will have the following legal effect: the debt comes into
existence or
continues
25
to exist (as the case may be), but its
enforceability is made subject to the fulfilment of a condition. Usually the
condition is that
the debt may be enforced by the creditor only if and when the
value of the debtor' s assets exceeds his liabilities, excluding the
subordinated debt. The practical effect of such a condition, particularly where,
for example, the excess is less than the full amount
of the subordinated debt,
would depend upon the terms of the specific agreement under consideration and
need not now be considered.
In the event of the insolvency of the debtor, sequestration would normally
mean that the condition upon which the enforceability of
the debt depends will
have become incapable of fulfilment. The legal result of this would be that the
debt dies a natural death (see
De Wet and Yeats,
Kontraktereg en
Handelsreg
, 5 ed, vol 1, at 153; Christie
The Law of Contract in South
Africa
2 ed, at 169; Kerr,
The Principles of the Law of Contract
,
4
26
ed, at 341). The result would be that the
erstwhile creditor would have no claim which could be proved in insolvency. To
the extent
that it may have been suggested in
Cooper v A & G Fashions
(Pty) Ltd: Ex parte Millman NO
1991(4) SA 204, at 207 G - 208 D that on
insolvency a value should be placed upon such a debt, this is not correct. The
debt would
not normally survive sequestration. A contingent liability can only
be valued and proved in insolvency where at the time the condition
upon which
the liability depends is still capable of fulfilment.
As indicated earlier in this judgment, the fact that the liabilities of a
company exceed its assets does not necessarily mean that
the incurring of
further debts would constitute fraudulent or reckless conduct. In that context,
the existence and terms of a subordination
agreement would be material and
relevant in deciding whether the persons conducting such business incurred
27
the debts with the reasonable expectation of their being paid
in the ordinary course. The fact that a major creditor has subordinated
its
claim, and to that extent created a
moratorium
for the benefit of other
creditors, is obviously relevant in determining the subjective state of mind of
the debtor or those conducting
its business.
Stegmann J held that the liquidator of a
"company would not
be entitled to have any regard to the
terms of a subordination agreement
because to do so would
entail a rearrangement of the statutory ranking
of
claims. For that conclusion, the learned Judge relied on
the judgment
of Feetham J in
Lind v Lefdal's Pianos Ltd
(In Liquidation) and
Others
1929 TPD 241.
In that case
the company in question had entered
into an agreement
with certain of its creditors in terms whereof,
on
liquidation, the claim of one creditor would be preferent
to the claims
of certain other creditors. To give effect
28
to that agreement was held to be contrary to the
statutory requirement that creditors be paid
pari passu
.
In my
judgment, the
Lind
case is distinguishable. There certain creditors
attempted to rearrange the order in which they would be paid by the liquidator.
In the case of debt subordination, the creditor has no claim unless other
creditors receive payment in full. There is no question
of a rearrangement of
the claims of the creditors who are to be paid out of the unencumbered assets of
the company. The position
would be no different in principle from the case of a
debtor who, for whatever reason, decided not to prove a claim with the
liquidator.
Indeed, where there is a probability of a contribution being levied
upon creditors, it is a common occurrence for creditors to refrain
from proving
a claim. That can hardly be categorised as interfering with the
pari
passu
payment of creditors by the liquidator. The opinion of the House
of
29
Lords in
British Eagle International Airlines
Ltd v Compagnie Rationale Air France
[1975] 2 All ER 390
(HL) referred to by
Stegmann J, is similarly distinguishable.
In my opinion, the liquidator of a company would be obliged to have regard to
a subordination agreement which was valid and in force
as at the date of
winding-up.
Stegmann J raised other difficulties with regard to the efficacy of a
subordination agreement. He suggested that, if bilateral, it
could at any time
be cancelled by the parties thereto i.e. the company and the creditor. This
problem, I would suggest, would be
a rare occurrence. In any event it only
arises when such a cancellation has occurred.
Yet a further difficulty raised by the learned Judge was the effect upon a
subordination agreement of the insolvency of the creditor.
Would the
subordination agreement, for example, constitute a disposition without
30
value? This, again, as was recognised by Stegmann
J (at 122 C - D) is not a matter of principle. The financial position of the
creditor
is a matter which might have to be taken into consideration by the
debtor in a relevant case.
In the present matter the appellants placed very little before the Court a
quo concerning the details of the subordination agreements:
there is no
indication of the dates on which they were concluded; their precise terms are
not furnished; and it does not appear whether
they were recorded.
It must be accepted, nonetheless, that Camms and UAL subordinated their
claims in favour of the other creditors until such time as
the assets of the
Company, fairly valued, exceeded its assets. That appears from the balance
sheets of the Company which were duly
certified, without qualification, by the
auditors. Furthermore, those subordination agreements were still
31
operative when the Company was placed under a
winding-up order and, in terms of the offer of compromise, the claims will not
be recognised.
There is nothing to suggest that the subordination agreements
were not what they were stated to be or that they were not fully effective
and
in force at all relevant times. There was certainly no basis upon which the
appellants were entitled, let alone obliged, to ignore
them.
Valuation of the Assets
.
Stegmann J sharply criticised the directors of
the Company for having overvalued the company's assets by
more than R3 million. In his affidavit filed in anwer to
queries raised by Stegmann J, one of the appellants
stated:
"The reason for the loss to the trade creditors is that the assets in the
liquidation did not realise the values which had been placed
on them in the
balance sheet and which values, in
32
my opinion, reflected a 'going concern' basis. I humbly submit that in a
liquidation a situation often arises where assets which
have a clear value on a
'going concern' basis cannot be sold for that value and accordingly a lesser
value is realised by liquidators."
The learned Judge
referred to that statement as an "excuse" and suggested that if put forward by
the directors themselves -
"may very well be exposed as an instance of apparently wilful self-deception
on their part." (at 143 B - C).
I do not agree. It would appear that until the shareholders decided to cease
lending further monies to the Company it was trading.
Indeed, in its last year
of trading UAL lent to it a further amount in excess of Rl million. In 1988,
1989 and 1990 it owned stock
of considerable value and it had substantial
amounts owing
33
to it by its debtors. It was, on the face of it,
a going concern. There is no indication that the directors continued to trade at
a time when they knew the Company was to be wound up and that the valuation of
assets in the balance sheet was grossly inflated.
On the assumption that the
Company would prosper and continue to trade there is nothing to suggest that the
assets had been overvalued.
It would appear that the Company was the only
manufacturer in South Africa of activated carbon and that might well explain the
substantial
difference between the value of the assets on the basis of a going
concern and the amount realised at a forced sale. Stegmann J said
(at 143 F - G)
that:
"
Prima facie
, the only honest way to value the company's assets was on
a basis which took account of the fact that the company was liable to be
wound
up at any time at a moment's notice."
34
Again, I do not agree. The shareholders were investing
millions of rands in the Company. They would hardly have done so if they and
the
directors did not believe that the Company would ultimately succeed. Any
inferences drawn must take into account all the relevant
facts.
In their draft statement under s 312(1) of the Act (to which I shall refer
again later) the appellants stated:
"The Company from the outset was financed by way of loan capital which was
utilised for the regeneration and manufacture of carbon
products. This
development took 15 months to complete and the Company was only in a position to
produce in October 1989. No further
loans were available from September 1990 and
the business was immediately closed.
From the audited financial accounts of the Company for 1988 and 1989 as well
as the draft accounts for 1990, it is apparent the directors
made an effort to
ensure the success of the Company and a large percentage of the money
35
raised was in an effort to commission the activation unit for the manufacture of
activated carbon."
In this case I am of the view
that it is not a reasonable inference that the directors acted dishonestly or
recklessly when they valued
the assets on the basis that the Company was a going
concern.
Having regard to what is stated above, I am of the opinion that there is no
evidence indicating even
prima facie
that the directors of the Company
carried on its business recklessly or with intent to defraud its creditors or
for any fraudulent
purpose. There is nothing to support a conclusion that the
directors are likely to be declared personally responsible for all or
any of the
debts of the Company.
36
The Application for Leave to Convene
Meetings
.
At the stage of an application for leave to convene meetings the court is
primarily concerned with the probable response to the offer
of the
creditors.
"If the Court, cm a consideration of all the information at its disposal,
comes to the conclusion that there is a reasonable probability
that the
requisite majority of the creditors of the company may accept the offer, it will
generally speaking order a meeting of creditor
to be convened; on the other
hand, if it is not so satisfied, it will refuse to make such an order."
Per Trengove J in
Ex parte Bruyns NO: In re Mammoth Construction &
Drilling Co (Pty) Ltd (Under Provisional Liquidation
) 1973(3) SA 721 (T) at
722 B - C.
While that is the primary question, the court is also concerned that the
offer, on the face of it,
37
appears to be made in good faith and honestly,
and that its terms are unambiguous and understandable.
Over a century ago, Fry LJ posed the question as to the circumstances in
which a court should sanction a resolution approving a compromise
or arrangement
under the relevant provisions of the 1870 Joint Stock Companies Arrangement Act.
He said the following in
In re Alabama, New Orleans, Texas and Pacific
Junction Railway Company
[1891] 1 Ch 213
at 247:
"I shall not attempt to define what elements may enter into the consideration
of the Court beyond this, that I do not doubt for a
moment that the Court is
bound to ascertain that all the conditions required by the statute have been
complied with; it is bound
to be satisfied that the proposition was made in good
faith; and, further, it must be satisfied that the proposal was at least fair
and reasonable, as that an intelligent and honest man, who is a member of that
class, and acting alone in respect of his interest
as such a member, might
38
approve of it. What other circumstances the Court may take into consideration I
will not attempt to forecast."
I would respectfully
adopt that formulation. It is clearly the proper approach at the sanction stage.
Although compliance with the
statutory conditions will not be relevant at the
stage of convening meetings, the other considerations referred to by Fry LJ are
no less appropriate. They strike a balance between the duty of the court to be
satisfied that the offer appears to be fair and honest
and the recognition that
it should not dictate to men of business what is in their own
interests.
It would be inappropriate to attempt to
formulate a more precise rule in a matter of discretion
and in a context where the variety of facts and
circumstances is endless.
39
The court considering such an application should
also be satisfied that sufficient information has been gathered and can be
furnished
to the creditors to enable them to assess the relative merits of the
proposal and of the alternatives thereto. Indeed, section 312(1)
of the Act
requires that where meetings are summoned under s 311, every creditor or member
must be sent a statement containing the
information set out in subparagraph (a)
thereof. A draft of that statement need not be placed before the court at the
stage of an
application for leave to convene meetings. At the sanction stage it
must clearly be before the court in order that it may satisfy
itself that the
provisions of s 312(1) have been observed.
In the present case Stegmann J requested the appellants to place the s 312(1)
statement before him. That was done. In my opinion,
it would be a salutary
practice, in all such applications, for a draft of the
40
statement to be placed before the court at the
convening stage. This would not cause duplication as much of the information
usually
contained in the founding affidavit would have to set out in the s
312(1) statement. That information could be incorporated into
the founding
affidavit by an appropriate reference to the draft statement.
I am satisfied in the present case that the offer of compromise is,
prima
facie
, fair and reasonable and that it should be placed before the creditors
and members of the Company for their consideration. However,
having regard to
the particular facts and circumstances of this case, apart from any other
relevant information, they should be informed
-
(a) of all the relevant facts relating to the subordination agreements. If
relevant and material detail in that regard is not obtainable
by the appellants,
the reason
41
for such unavailability should be set out in the
statement;
(b)
that the Company was
trading in a state of factual insolvency virtually from its
inception;
(c)
that the assets of the Company
were valued on the basis of a going concern at an amount in excess of R3 million
and that on winding-up
they realised only R369 499;
(d)
that the effect of the sanction of the offer of compromise may be to
extinguish proceedings under s 424(1) of the
Act;
(e) the date, if it can be established, when
it became clear that no further
loans
would be forthcoming.
In my
judgment, the appellants are not required to furnish information other than that
which is in their possession or readily available
to them. If, on the basis of
such information, the creditors require further
42
investigations to be conducted, that is their
affair, and the costs thereof should be payable out of their pockets.
With regard to the draft s 312(1) statement furnished by the appellants, I
have the following comments:
1. In the first sentence of para. 13 it is stated that:
"The Company, on the fact of it, appears to have been trading in insolvent
circumstances since May 1990."
That is not necessarily correct. As already mentioned, depending on the terms
and effect of the subordination agreement, the Company
was factually insolvent
virtually from its inception. In any event, the significance of
43
the above mentioned date (May 1990) should be explained.
2. The concluding sentence of para 13 reads as
follows:
"As a result of the subordination of the
loan claim it is felt that the Company did not trade in insolvent circumstances
and that
any claims against the directors in terms of Section 424 of the
Companies Act to declare them personally responsible for the liabilities
of the
Company."
The sentence, as presently worded, is incomplete and meaningless. However,
apart from that, for the reasons indicated in this judgment,
the effect thereof
would not have been to make the Company solvent.
44
It would also be appropriate to inform creditors that in the light of the
subordination agreements, the directors,
prima facie
, were able
reasonably to trade in the belief that trade creditors would be paid in the
ordinary course.
At this stage of seeking leave to
convene meetings under s 311(1), the absence of all the relevant circumstances
and terms of the
subordination agreements is not a bar to the success of the
application. It would be an unnecessary waste of costs to compel the
appellants
to launch a fresh application incorporating that information. The information
should be obtained to the extent that is
possible. It should be placed before
the creditors and members and they should decide for themselves whether they
require further
investigations to be made prior to voting on the offer of
compromise.
45
In no way should this Court be understood as
having approved of the draft s 312(1) statement which is part of the record.
Whether
it so complies and whether it furnishes all the relevant information to
the creditors and members of the Company is something to
be considered by the
court at the sanction stage in the event of the requisite majority of creditors
and members voting in favour
of the offer of compromise.
Camms and UAL have no interest in the offer of compromise. They have no
claims and are not entitled to vote at the meetings of concurrent
creditors.
In the result the appeal succeeds. The following order is made:
1. The order made by the Court a
quo
is set aside and the following order
is substituted therefor:
46
"It is ordered that:
1.1 Meetings in terms of section 311 of the Companies Act, No 61 of 1973, as
amended, ("the Act"),
of:
1.1.1
the secured creditors;
1.1.2
the
preferent creditors;
1.1.3
the concurrent
creditors, including contingent creditors;
1.1.4
the members,
Of CARBON DEVELOPMENTS
(PROPRIETARY) LIMITED (under winding-up order) ("the Company"), be summoned by
the chairman, who shall fix
the time and place thereof for the purpose of
considering the scheme of arrangement as set forth in annexure "D" to the
founding
affidavit dated 21 August 1991, as amended, and, if deemed fit,
accepting the said scheme of arrangement with or without modification.
1.2 Michael Leo de villiers and failing him, Charles Garth Foot, be and he is
hereby appointed chairman of the meetings with authority
to adjourn the same
from time to time should such adjournment prove necessary.
47
1.3 A notice convening the said meetings be published by the chairman at least
two weeks before the date of the said meeting in two
weekly newspapers, namely
The Sunday Times and Rapport. The said notice shall
state:
1.3.1
the time and place of the said meetings;
1.3.2
that the said meetings have been summoned for the purpose of
considering and, if deemed fit, of accepting the scheme of arrangement,
with or
without modification;
1.3.3 that a copy of this
order, the terms
of the scheme of arrangement, a list
of creditors of the
Company and a
statement of the assets of the
Company with their estimated
values
may be inspected during business
hours at any time prior to the
said
meetings at the offices of:
48
Mr Michael Leo de Villiers c/o Deloitte Pirn Goldby Trust
(Proprietary) Limited 10th Floor, Diamond Corner, 68 Eloff Street, Johannesburg,
2001;
1.3.4 that the said meetings have been summoned in terms of this Order;
and
1.3.5. that a copy of the statement required by section 312 (1) of the Act
may be obtained by any creditor entitled to attend the
said meetings at the time
and place mentioned in 1.3.3. free of charge on written application to the
chairman. 1.4
1.4.1 A notice
showing:
1.4.1.1
the time and place of the meeting;
1.4.1.2
the amount owing to preferent and secured
creditors;
1.4.1.3
the amount owing to
concurrent creditors;
1.4.1.4
the amount
claimed by the directors and shareholders
of
49
the Company as owing to them and the validity of such
claims;
1.4.2
a copy of the statement
required by section 312(1) and (2) of the Act;
1.4.3
a statement of the assets of the Company with their estimated
values;
1.4.4
a copy of the scheme of
arrangement;
1.4.5
a copy of this Order;
and
1.4.6
a copy of the form of proxy being
Annexure 'E' to the founding affidavit dated 21 August
1991,
be sent by the chairman by registered post at least two weeks before the date of
the said meetings to every creditor and member of
the Company to whom the scheme
of arrangement is submitted, at the usual address of such creditor or member of
the Company.
1.5 The chairman is to report the results of the said meetings to this
Honourable Court on TUESDAY, 19 January 1993.
1.6 With respect to. the report required by the Court from the chairman, details
should be given of:
50
1.6.1
the number
of creditors present in person;
1.6.2
the
number of creditors represented by proxy with information as to the number
represented by him in terms of the proxies which were
annexed to the scheme
documents;
1.6.3
the values of each of their
claims;
1.6.4
any proxies which have been
disallowed;
1.6.5
all resolutions passed at
the meeting, with particulars of the number of votes cast in favour and against
each such resolution and
of any abstentions, indicating how many votes were cast
by him in terms of proxies which were annexed to the scheme
documents;
1.6.6
all rulings made and
directions given by the chairman at the
meetings;
1.6.7 the main points of any other
schemes
of arrangement which were submitted
at the meeting.
1.7 The notices of the meetings which are published and sent to creditors shall
include a statement that a copy of the chairman'
s report to the
51
Court will be available to any creditor on request for at least 1 week before
the date fixed by the Court for the chairman to report
back to it.
1.8 Any creditor wishing to vote by proxy should tender as his proxy the form of
proxy referred to in paragraph 1.4.6 of this
Order.
1.9
1.9.1
All creditors who
received the papers referred to in paragraph 1.4 above, shall cause their claims
to be filed with the chairman in
accordance with the provisions of section
366(1)(a) of the Act not later than 24 hours prior to the
meetings.
1.9.2
A creditor who did not receive
the aforementioned papers, may before the meeting commences, hand to the
chairman an affidavit in which
he confirms that he did not receive these papers
and that he is a creditor, stating the amount and the nature of his
claim."
52
2. The statement required by section 312(1) of the Act is to include all
relevant information concerning the subordination agreements
of Camms Services
and Finance Corporation (Pty) Ltd and UAL Merchant Bank Ltd and is not to
contain the incorrect or incomplete statements
referred to in this
judgment.
R J GOLDSTONE
JUDGE OF
APPEAL
CORBETT CJ)
VAN HEERDEN JA)
NICHOLAS AJA)
CONCUR
HARMS AJA)