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[2012] ZAWCHC 139
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Nedbank Ltd v Bestvest 153 (Pty) Ltd, Essa and Another v Bestvest and Another (21857/2011, 2106/2012) [2012] ZAWCHC 139; 2012 (5) SA 497 (WCC); [2012] 4 All SA 103 (WCC) (12 June 2012)
IN THE HIGH COURT OF SOUTH AFRICA
(CAPE OF GOOD HOPE PROVINCIAL DIVISION)
Case no: 21857/2011
In the matter between:
NEDBANK
LIMITED
...................................................................................................................................
.
Applicant
and
BESTVEST
153(PTY)LTD
.
.....................................................................................................................
Respondent
(Registration No: 2006/006029/07
AND
Case no: 2106/2012
ADAM
ESSA
.......................................................................................................................................
First
Applicant
(Identity No: )
SHAIEK
COE
…...................................................................................
Second
Applicant
and
BESTVEST 153
(PTY) LTD
…....................................................................
First
Respondent
(Registration No: 2006/006029/07
THE
COMPANIES AND INTELLECTUAL
PROPERTY COMMISSION
.
.....................................................................................................
Second
Respondent
NEDBANK
LIMITED
….......................................................................
First
Intervening Party
STRUCTURED MEZZANINE
INVESTMENTS
(PTY)
LIMITED
….........................................................................
Second
Intervening Party
JUDGE
P.A.L.
GAMBLE
FOR
APPLICANT
Adv.
Jeremy Muller SC Case no: 21857/11
INSTRUCTED
BY
Edward
Nathan Sonnenbergs
FOR
RESPONDENT
Adv.
A.P. Moller
INSTRUCTED
BY
M.L.
Littleford and Associates
FOR
APPLICANT Adv. A.P. Moller Case no: 2106/12
INSTRUCTED
BY M.L. Littleford and Associates
FOR
INTERVENING PARTIES : Adv. J.F. Pretorius
INSTRUCTED
BY: Sim Botsi Attorneys
DATES
OF HEARINGS 10 April 2012; 23 April 2012 and 14 May 2012
DATE
OF JUDGMENT 12 June 2012?
REPORTABLE
IN THE HIGH COURT OF SOUTH AFRICA
WESTERN CAPE HIGH COURT, CAPE TOWN
CASE NO: 21857/2011
In the matter between:
NEDBANK
LIMITED
...............................................................................................
.
Applicant
and
BESTVEST
153(PTY) LTD
.................................................................................
Respondent
(Registration
Number: 2006/006029/07)
AND
Case no: 2106/2012
ADAM
ESSA
........................................................................................................................................
First
Applicant
(Identity No: )
SHAIEK
COE
…...................................................................................
Second
Applicant
and
BESTVEST 153
(PTY) LTD
….....................................................................
First
Respondent
(Registration No: 2006/006029/07
THE COMPANIES
AND INTELLECTUAL
PROPERTY COMMISSION
.
.....................................................................................................
Second
Respondent
NEDBANK
LIMITED
….......................................................................
First
Intervening Party
STRUCTURED MEZZANINE
INVESTMENTS
(PTY) LIMITED
….........................................................................
Second
Intervening Party
JUDGMENT: 12 JUNE 2012
GAMBLE, J:
INTRODUCTION
[1]
Bestvest
153 (Pty) Ltd ("the Company") owns a valuable piece of
commercial property in the Cape Town inner-city suburb
of Woodstock.
It has sought
to
develop that property
and erect thereon a building known as "360
Degrees
The building was
financed by the company with borrowed money.
[2]
The
company initially borrowed the sum of R26,1 million from Imperial
Bank Limited ("Imperial") in
February 2008 and passed a first mortgage bond in its favour to
secure that loan. In July
2008 the company borrowed a further amount
of R65 million in terms of a so-called
"mezzanine
finance loan"
from
a company called Structured Mezzanine Investments (Pty) Ltd ("SMI").
This was intended to be a short-term bridging
loan for a year at a
very high rate of interest. The SMI loan, secured by a second
mortgage bond, was to have been repaid in full
by July 2009.
[3]
The
company was clearly under-capitalized for the project and by mid
2010 ran into cash flow problems. It
renegotiated the terms of its arrangement with Imperial in September
2010 and a re-structured
loan of some R36 million was secured by a
third mortgage bond in favour of Imperial Bank, which was intended to
augment the first
mortgage bond. With effect from 1 October 2010 all
the assets and liabilities of Imperial were transferred to Nedbank
Limited.
[4]
The
financial woes of Bestvest continued and it was further allegedly
plagued by the liquidation of the main
contractor on the development. It is common
cause
that there were regular defaults in its obligations to both Imperial
(and later Nedbank), as well as SMI.
[5]
During
November 2010 construction on the site ground to a halt and there
has been no further work since then. It
seems to be common cause that the work is about 90% complete although
the amount of money
required to finish the project is in dispute. I
shall revert to this aspect later.
[6]
The
developers of the building originally intended selling units therein
(both
residential and commercial) by way of a
sectional title scheme but the delay in completion of the project
also led to the cancellation
of the limited number of sales that had
thus materialized.
[7]
Nedbank
appears to have held out for a protracted period of time in the
hope that the project could be saved
but eventually in November 2011 it launched urgent proceedings in
this Court for the winding-up
of the company. In that application
(case No. 21857/11) Nedbank claims that the company was indebted to
it in the sum of R36 743
860, 87 as at 25 October 2011.
[8]
The
winding-up application which is to be decided in terms of Section 344
of the Companies Act, 61 of 1973 ("the
old Companies Act") is based primarily on the commercial
insolvency of the company
under Section 345 of the old Companies Act
It is also suggested in that application that it is quite probable
that the company
is factually insolvent given that the current value
of the property exceeds the extent of the company's liabilities. The
company's
only asset is the building in question.
[9]
It
is not in issue that the company is unable to pay its debts and that
a
winding-up order falls to be granted.
However, the directors of the company (Messrs Essa and Coe) are of
the view that the company
can be saved from insolvency by the
appointment of a business rescue practitioner and on 7 February 2012
they launched business
rescue proceedings ("BRP") in this
Court under case no. 2106/2012. The BRP application is brought under
Chapter 6 (and
in particular Section 131) of the Companies Act 71 of
2008 ("the Act").
[10]
Nedbank
and SMI were subsequently granted leave to intervene in the
BRP application and actively participated therein by
way of opposition.
THE SMI PAYMENT APPLICATION
[11]
On
28 October 2009 SMI initiated motion proceedings in this Court under
case no. 22698/09 against Messrs. Essa
and Coe and another company controlled by them known as Coessa (Pty)
Ltd, for the payment
of the sum of R8 317 827.04. The amount is
alleged to be due by these parties jointly and severally with the
company in terms
of a deed of suretyship executed in favour of SMI
on 1 July 2008. The suretyship was additional collateral security
sought by
SMI under the mezzanine loan.
[12]
It
will immediately be observed that SMI's
"payment
application
(as the
parties
called it) followed only a few months after the mezzanine loan was
due for repayment, and preceded Nedbank's winding-up
application by
more than two years That application was dealt with as an ordinary
application on the opposed motion roll and
followed a litigation
route of its own - a route which was plagued by a number of
postponements not of SMI's making.
[13]
For
the sake of convenience, the payment application was heard together
with the winding up and BRP
applications by this Court in one consolidated hearing which
stretched over four days. Judgment in
the payment application will
be delivered separately in due course. This judgment concerns only
the winding-up and BRP applications.
[14]
At
the hearing of the various applications
Mr.
A.P. Moller
appeared
for the
company, Messrs. Essa and Coe and
Coessa (Pty) Ltd.
Mr.
I.J. Muller S.C
appeared
for Nedbank and
Mr.
J.F. Pretorius
appeared
for SMI. The Court is indebted to counsel for the immense amount of
work they put in to these matters and for the very
thorough heads of
argument which have greatly facilitated the preparation of this
judgment
THE WINDING-UP APPLICATON
[15]
As
I have said, the company accepts that it is currently unable to meet
its
financial obligations and that a
provisional winding-up order should follow. However it asks that any
such order be held in abeyance
pending the determination of the BRP
application. It is common cause that if the BRP application fails a
winding-up order should
follow.
1
I turn then to consider the BRP
application.
INTERPRETING THE
COMPANIES ACT OF 2008
[16]
The
Companies Act came
into operation on 1 May 2011. It is new order
legislation which brings with it a
number of innovative concepts not previously part of South African
corporate Law. Importantly,
and unlike its predecessor, the Act
hasdetailed provisions
2
which are designed to enhance an
understanding of its purpose These purposes track the policy paper
issued by the Department of
Trade and Industry in 2004
3
and must be applied in the
adjudication of any matter under the Act or brought before a court
of law.
4
[17]
It
is therefore as well to set out the provisions of this section in
full
"7.
Purposes
of Act-
The
purposes of this Act are to -
(a) Promote compliance with the
Bill of Rights as provided in the Constitution in the application of
company law;
(b) Promote the development of the
South African economy by -
(i)
encouraging
entrepreneurship and enterprise
efficiency;
(ii)
creating
flexibility and simplicity in the formation
and maintenance of
companies; and
(iii) encouraging transparency and
high standards of corporate governance as appropriate, given the
significant role of enterprises
within the social and economic life
of the nation:
(c) promote innovation and
investment in the South African markets;
(d) re-affirm the concept of the
company as a means of achieving economic and social benefits;
(e) continue to provide for the
creation and use of companies, in a manner that enhances the
economic welfare of South Africa
as a partner within the global
economy;
(f) promote the development of
companies within all sectors of the economy, and encourage active
participation in economic organization,
management and productivity;
(g) create optimum conditions for
the aggregation of capital for productive purposes, and for the
investment of that capital in
enterprises and the spreading of
economic risk;
(h)
provide
for the formation, operation and accountability of non-profit
companies in a manner
designed to promote, support and enhance
the capacity of such companies to perform their functions;
(i)
balance
the rights and obligations of shareholders and directors within
companies;
(j) encourage the efficient and
responsible management of companies;
(k) provide for the efficient
rescue and recovery of financially distressed companies, in a manner
that balances the rights and
interests of all relevant stakeholders;
and
(I) provide a predictable and
effective environment for the efficient regulation of companies."
[18]
It
will be noted therefore that the Legislature has directed that
corporate
law too must now be considered in a
constitutional setting and that the Act must be interpreted so as to
promote the development
of the economy as a whole while encouraging
entrepreneurship and efficiency, flexibility and relative simplicity
in the maintenance
of companies and, importantly, promoting
transparency and hign standards of corporate governance.
[19]
It
is to be noted in particular that specific mention is made in
Section
7
(k)
of the necessity for the Act to
provide for the efficient rescue and recovery of financially
distressed companies while ensuring
that the rights and interests of
the parties affected thereby are preserved.
[20]
It
seems to me then that a fresh approach must be adopted when
assessing the affairs of "Corporate
South Africa". The Legislature has pertinently charged the
Courts with the duty
to interpret the Act in such a way that,
firstly, the founding values of the Constitution are respected and
advanced, and, secondly
so that the spirit and purpose of the Act
are given effect to. Fundamental to the Act is the promotion and
stimulation of the
country's economy through,
inter
alia,
the use of the
company as a vehicle to achieve economic and social well-being. This
must be done efficiently and in accordance
with acceptable levels of
corporate stewardship, all the while, balancing the rights and
obligations of shareholders and directors
in the company, its
employees and any outside parties with which a company ordinarily
interacts in the course of its business.
[21]
The
general purposes of the Act circumscribed in Section
7
must be
interpreted in accordance with the
interpretative provisions set out in Section
5
Firstly, Section 5
requires a purposive interpretation of the Act as a whole. Further
it is said that a Court interpreting or
applying the Act is entitled
to have regard to foreign company law. Neither provision is in and
of itself particularly innovative.
[22]
In
the constitutional era a purposive approach to legislative
interpretation is
the method mandated by Section 39(2)
of the Constitution
5
.
As Langa DP observed in the
Hyundai
case:
"This means that all statutes
must be interpreted through the prism of the Bill of Rights. All
law-making authority must
be exercised in accordance with the
Constitution...The Constitution requires that judicial officers read
legislation, where possible,
in ways which give effect to its
fundamental values."
[23]
Later,
in
Department of Land
Affairs and Others v Goedgelegen Trop
ical
Fruits (Pty) Ltd
,
6
Moseneke DCJ clarified the approach as
follows:
"In searching for the purpose,
it is legitimate to seek to identify the mischief sought to be
remedied. In part, that is
why it is helpful where appropriate, to
pay due attention to the social and historical background of the
legislation. We must
understand the provision within the context of
the grid, if any, of related provisions and of the statute as a
whole, including
its underlying values. Although the text is often
the starting point of any statutory construction the meaning it
bears must
pay due regard to context. This is so even when the
ordinary meaning of the provision to be construed is clear and
unambiguous."
[24]
Further,
Section 39(1 )(c) of the Constitution entitles a Court interpreting
the Bill of Rights incorporated in
Chapter 2 of the Constitution to have regard to foreign law.
[25]
In
the circumstances it appears that Sections 5 and 7 of the Act serve
to
stress the importance of these modes
of interpretation and, particularly in referring to foreign law, to
encourage our Courts
to take a leaf out of the books of
foreignjurisdictions when interpreting the Act generally, and not
just issues encompassed
by Chapter 2 of the Constitution.
[26]
Our
company law has for many decades closely tracked the English
system and has often taken its lead
from the relevant English Companies Acts and the judicial
pronouncements thereon. The Act
now encourages our Courts to look
further afield and to have regard, in appropriate circumstances, to
other corporate law jurisdictions,
be they American, European, Asian
or African, in interpreting the Act
INTERPRETING THE BUSINESS RESCUE
PROVISIONS OF THE ACT
[27]
The business rescue provisions
incorporated in Chapter 6 of the Act are
innovative and, while they resemble in
certain respects the judicial management provisions of Chapter XV of
the old
Companies Act
7
,
there are distinct differences.
8
In this regard I find myself more in
agreement with the approach suggested by Eloff AJ in
Southern
Palace
than that
postulated by Makgoba J in
Swart
v Beagles Ru
n
Investments 25 (Pty)
Ltd
,
9
namely, that the test for the
successful granting of an order of business rescue is not as onerous
as in an application for judicial
management This is apparent from a
comparison of the phrase
"reasonable
prospect'
in Section
131(4)(a) of the Act with the term
"reasonable
likelihood"
used
in Section 427(1) of the old
Companies Act. One
notes, too, that
while the extensive provisions of Chapter XIV of the old
Companies
Act relating
to winding-up have been retained in the interim
10
the provisions of Chapter XV relating
to judicial management have not. In this respect the Legislature has
obviously signalled
a deliberate intention to break from the past
and abandon that earlier limited form of corporate rescue.
[28]
At
the core of successful business rescue lie two critical
jurisdictional facts
which a Court must consider when
exercising its wide discretion as to whether business rescue should
be granted or not.
11
Firstly, in terms of
Section
131(4)(a)(i)
, the company sought to be rescued must be
"financially
distressed"
within
the ambit of the definition of this phrase in
Section 128(1
)(f) of
the Act. That definition reads as follows:
"(f) Financially
distressed",
in
reference to a particulai company at any particular time, means that
-
(i)
It
appears to be reasonably unlikely that the company will be able to
pay all of its debts as they become due and payable within
the
immediately ensuing six months; or
(ii)
It
appears to be reasonably likely that the company will become
insolvent within the immediately ensuing six months."
[29]
Secondly,
the Court considering a business rescue order must be satisfied
that
"there
is a reasonable prospect for the rescuing of the company".
For
the sake of convenience I quote Section 131(4) of the Act in full:
"(4) After considering an
application in terms of sub-section (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: or
(b)
Dismissing
the application, together with any further-
necessary and
appropriate order, including an order- placing the company under
liquidation."
[30]
Mr.
Pretorius
submitted
that the definition of
"financial
distress"
in
section
128(1 )(f) is intended to refer only
to a company that is commercially insolvent n e one that is unable
to pay its debts in the
ordinary course of business as contemplated
by section 345 of the old
Companies Act), rather
than a company
which is actuallyinsolvent (i.e. one in which the liabilities exceed
the assets), and that accordingly, business
rescue is only available
to companies which are commercially insolvent
[31]
Counsel
further submitted that because Bestvest was actually insolvent
the application should fail on this
basis alone. While I consider that there is much to be said for this
approach, I need not
decide the point since, in my view, it has not
been conclusively established that the company is actually
insolvent.
[32]
I
am satisfied (and it was not in issue) that on the facts placed
before the
Court, Bestvest is indeed a company
which is financially distressed. The real issue in this case is
whether it has been shown
that there is a reasonable prospect of
rescuing the company by placing it under the supervision of a
business rescue practitioner
A
"REASONABLE
PROSPECT
FOR
RESCUE
?
[33]
The
interpretation of this phrase in section 131(4)(a) of the Act was
the
main area of debate in the business
rescue application before me. Adjunct to the interpretation was the
question of the sufficiency
of evidence which an applicant was
required to put up to persuade a Court to consider granting business
rescue.
[34]
I
am in agreement with the
dictum
of Rogers AJ in
Cape
Point Vineyar
ds
(Pty) Ltd v Pinnacle Point Group
Limited and Another
12
,
basing his opinion on section 7(k) of the Act, that -
"The business rescue
provisions in the 2008 Act reflect a legislative preference for
proceedings aimed at the restoration
of viable companies rather than
their destruction."
[35]
In
Southern Palace
13
Eloff AJ suggested the following
approach
"[2] Like its Australian
equivalent, one of the aims of the remedy is to render it possible
for companies in financial difficulty
to avoid winding-up and to be
restored to commercial viability Both jurisdictions recognize the
desirability of a company in
distress lo continue in existence.
Business rescue does, however not necessarily entail a complete
recovery of the company in
the sense that, after the procedure, the
company will have regained its solvency, its business will have been
restored and its
creditors paid. There is also the further
recognition that even though the company may not continue in
existence, better returns
may be gained by adopting the rescue
procedure.
[3] The scheme created by the
business rescue provisions in Chapter 6 of the new Act envisages
that the company in financial distress
will be afforded an essential
breathing space while a business rescue plan is implemented by a
business rescue practitioner.
It is, however, necessary to caution
against the possible abuse of the business rescue procedure, for
instance by rendering the
company temporarily immune to actions by
creditors so as to enable the directors or other stakeholders to
pursue their own ends.
The courts in Australia have been careful not
to allow their equivalent procedure to be used where there appears
to be an ulterior
purpose behind the appointment of an administrator
by the directors. It is necessary that an application for business
rescue
becarefully scrutinized so as to ensure that it entails a
genuine attempt to achieve the aims of the statutory remedy."
[36]
In
a more recent decision in this Division in
Gormley
and
3
Other
s
v
Anglo Irish Bank
Corporation Limited; Anglo Irish Bank Corporation Limited
v
West
City Precinct Properties (Pty) Ltd
14
,
Traverso DJP commented as follows
"6.2 Business rescue has as
its aim proceedings to facilitate the rehabilitation of a
financially distressed company by providing
for the temporary
management of the affairs of the company a tempory moratorium on the
rights of claimants, the implementation
of a plan to rescue the
company by restructuring its affairs in a manner that maximises the
likelihood of a company continuing
to function on a solvent basis or
if that is not possible, a plan that would achieve a better return
for the company's creditors
than the payment they would receive if
the company were to be immediately liquidated."
[37]
In
the
Oakdene Square
case,
supra,
C.J. Claasen J
observed that the
focus of the section was on
business
rather than
company
recue:
"This is in line with the
modern trend in rescue regimes. It attempts to secure and balance
the opposing interests of creditors
shareholders and employees. It
encapsulates a shift from creditors interests to a broader range of
interests. The thinking is
that to preserve the business coupled
with the experience and skill of its employees, may, in the end
prove to be a better option
for creditors in securing full recovery
from the debtor"
15
[38]
In
an endeavour to achieve these aims, and to give effect to the
purpose
of section 131 of the Act, in my view
a Court should not set the bar at such a height that the applicant
for business rescue has
little chance of clearing it and persuading
the Court to exercise its discretion to grant supervision. As I have
said, the test
under section 427(1) of the old
Companies Act for
the
granting of judicial management was more onerous since an applicant
was required to persuade a Court that there was a
"reasonable
probability"
that
if placed under judicial management, the company would be able to
pay its debts, meet its obligations and ultimately become
a
successful business.
[39]
In
Southern Palace
16
Eloff AJ usefully summarized the
difference in
approach as follows:
"[21] In contrast,
s131(4)
of
the new Act uses the phrase 'reasonable prospect' in respect of the
recovery requirement. The use of different language in
this latter
provision indicates that something less is required than that the
recovery should be a reasonable probability. Moreover,
the mind-set
reflected in various cases dealing with judicial management
applications in respect of the recovery requirement
was that,
prima
facie
, the
creditor was entitled to a liquidation order, and that only in
exceptional circumstances would a judicial management order
be
granted The approach to business rescue in the new Act is the
opposite -business rescue is preferred to liquidation.
[22] However, even if the
substantive test with its lower threshold is satisfied, the Court
still has a discretion not to grant
the order in exercising this
discretion the Court should give due weight to the legislative
preference for rescuing ailing companies
if such a course is
reasonably possible. It would therefore be inappropriate for a Court
faced with a business rescue application
to maintain the mind-set
(from the earlier regime) that a creditor is entitled
ex
de
bito
justitiae
to be paid or to have the company
liquidated."
[40]
Mr.
Muller SC
argued
that an application for business rescue should to all
intents and purposes, contain a
summary of the proposed business rescue plan He contended that only
once this had been done could
a Court decide whether there was a
reasonable prospect of the company being saved from insolvency. I do
not agree witn that submission.
In my view it should be left up to
the business rescue practitioner to formulate the rescue package
once he/she has had an opportunity
to properly assess the company,
its prospects going forward and, most importantly, the reasons for
its commercial distress.
[41]
That
is not to say, however, that a party can approach the Court for the
appointment of a business rescue
practitioner with flimsy grounds in the hope that the practitioner
will provide the panacea to
its problems. The application must set
out sufficient facts, if necessary augmented by documentary
evidence, from which a Court
would be able to assess the prospects
of success before exercising its discretion
[42]
In
Southern Palace
17
Eloff AJ suggested some of the
objectively
ascertainable details that may be put up in relation to
a trading company That approach is not warranted in the present case
because
the company's only asset is the incomplete building which
has been financed by Nedbank and SMI.
[43]
Ideally,
in a matter such as the present, one would expect an applicant for
business rescue to set out:
43.1. Brief reasons for the company finding itself
commercially insolvent;
43.2. What the reasonable cost will be
of bringing the building to completion in order that it can be
commercially viable;
43.3. What the prospects are of raising the finances
required to so complete the building;
43.4. How best the building, when
completed, can attain commercial viability eg. whether it can be
developed as a sectional title
block, or given to a letting agent
for the procurement of commercial and/or residential tenants or sold
to a prospective purchaser.
THE COMMERCIAL CONSIDERATIONS
ADVANCED BY THE APPLICANTS FO
R
BUSINESS RESCUE
[44]
In
the founding affidavit deposed to on 7 February 2012 Essa describes
the company's problems as
"short-term
cash flow and liquidity issues as a result of the
economic recession currently
experienced."
He
goes on to claim that the company s balance sheet is strong and that
it has
"the
clear ability to trade out of its difficulties alternatively to
achieve a much better return and result for [its] creditors
than
would result from ...immediate liquidation."
Essa
confidently predicts in the founding affidavit that
"the
co-operation of Nedbank will in all likelihood be obtained as
Nedbank would benefit from the successful outcome of the
[the]
proceedings for business rescue
[45]
Essa
says too that the building (situated in a part of Cape Town that is
evidently experiencing some urban
renewal) is almost complete and
"requires
less than R1,5 m to facilitate the completion of finishes and
fittings, whereafter the property will be fully suitable
for
occupation."
He
claims that
"the
purpose and ultimate goal of the 360 degree development [has always
been] to achieve an out and out sale of the property
or
alternatively to conclude a long term lease with a Government
entity".
He
points out that during 2010 and 2011 there were extensive
negotiations with the Cape Peninsula University of Technology with
a
view to concluding a long-term lease of the building for student
accommodation.
[46]
These
negotiations have floundered and it appears, instead, that the
directors of the company have diverted
their attention away from a lease situation to an out and out sale
of the building. To
this end the company has received various offers
to purchase the building "as
is",
some of which have
been reduced to writing. It is said that these offers include the
following:
46.1 An an offer in October 2010 for
R45 m which was turned down because, although it would have settled
most of the liabilities
of Nedbank and SMI, it "d/d
not
constitute a complete resolution of the [company's] financial woes
46.2. On 8 December 2011 a local trust
made a cash offer of R15,75 m to the company and undertook to attend
to the
"resolution
of the outstanding liabilities".
This
offer also fell through.
46.3. In January 2012 a similar offer
was made by a businessman from Johannesburg for some R21 m. This
offer did not adequately
address the settlement of the company's
creditors and was rejected.
46.4. Also, in January 2012 two
further offers were received from other parties, both of which were
said to be still under consideration
at the time the founding
affidavit was deposed to.
[47]
Copies
of all the written offers received by the company were annexed to
the founding affidavit. During
argument
Mr. Moller
indicated that the two offers referred
to in para 46.4 above, were still under consideration. It is
difficult to understand why
these offers, if they were substantial
and commercially viable, had still not been taken up some three
months later.
[48]
Mr.
Muller SC
indicated
that Nedbank had not yet even had sight of these
offers and suggested that settlement
of the company's debts to it and SMI were far from resolved. Surely,
he argued, if his client
was to receive a 100 cents in the Rand in
terms of either of these offers, it would not have been too
difficult to put a deal
together In the absence of such agreement,
Mr. Muller SC
invited the Court to conclude that
Nedbank s debt would not be settled in full. Similar submissions
were made by
Mr.
Preforms
.
[49]
Nedbank
does not dispute that about R1,5 m is required to complete the
building but, it says emphatically, it
will not provide the company with any further finance. SMI, however,
disputes the figure
on the basis that a quantity surveyor s report
has not yet been placed before the Court to verify the sum required
to complete
the work. SMI too has made it clear that it will not be
advancing the company any more money.
[50]
In
the replying affidavit of 23 March 2012 Coe confidently predicts
that
"the
relatively small amount to complete
the building will be easily raised by the business rescue
practitioner."
However,
no substance is given to this bald assertion and it is difficult to
see where any further financing will come from. Three
mortgage bonds
have already been registered against the property to secure debt of
some R46 m. Any further mortgages will no
doubt require the consent
of these mortgagees which is hardly likely to be forthcoming in the
current circumstances, given the
hard-nosed approach adopted by
them. Furthermore, the company has no income and it will not be in a
position to service the interest
payments on any further loans.
Neither of the directors has indicated a willingness to put any
further money into the project
either.
[51]
At
best for the company it could be hoped that the business rescue
practitioner would try and raise some
sort of bridging finance to enable the project to be completed and
then on-sold immediately
so that the major creditors can be settled
This prospect however does not seem realistic given that the company
has already made
use of very expensive short-term finance and has
still been unable to bring the project to completion.
[52]
The
situation may have been different, too, if there was certainty
regarding
a potential purchaser of the completed
project. At present it must be assumed that the prospects of further
capital being raised
are not good. Certainly, no evidence of any
substance has been placed before the Court to demonstrate that there
are reasonable
prospects of raising any further loans.
[53]
The
only other option open to a business rescue practitioner would
appear
to be an attempt to market and sell
the property in its present condition. In argument
Mr.
Mbller
accepted that
this would be the most likely scenario. As I have said the property
is the sole asset of the company. Should the
company be wound up the
property will undoubtedly have to be sold by the liquidator. In that
event, the issue which falls to
be determined is whether a business
rescue practitioner is likely to sell the property for more than a
liquidator.
[54]
In
the founding affidavit Essa deals with this issue in only the
broadest of
terms:
"55. Upon consultation with
Applicant's legal representatives it is clear that the process of
business rescue is less expensive
overall and more advantageous to
both the First Respondent as a
company
in financial distress, and its creditors in order to resolve the
recovery of the business and the settlement of outstanding
debts
and/or the restructuring of outstanding debts....
62.4...(l)f, it is not possible for
the First Respondent so to continue in existence, a better return
will result to
(sic)
its creditors and shareholders than
would otherwise result from the immediate liquidation of the First
Respondent;
62.5 It is respectfully submitted
that it is a well-known fact that the costs of business rescue
proceedings represent much less
expensive mechanism
(sic)
to achieve the responsible
settlement of debt, as opposed to liquidation proceedings that are
expensive and destructive. Business
rescue proceedings instituted in
terms of this application will result in the efficient rescue and
recovery of the First Respondent
as a financially distressed company
and in a manner that will balance the rights and interests of all
relevant stake holders."
[55]
In
the answering affidavit both Nedbank and SMI make it clear that they
are not in favour of any BRP plan and
that they will vote against it at any meeting to be convened by the
business rescue practitioner
in terms of sections 132(2)(c) and 152
of the Act. They accordingly urged the Court not to sanction an
exercise in futility and
to, rather, make an order of winding up.
Such an approach appears, at first blush to be a stratagem to
advance the argument for
winding up: one would have expected a
responsible creditor to be open to any proposal that may ultimately
redound to its benefit.
Such an approach certainly does not accord
with the overall purpose of BRP which, as I have demonstrated above,
are aimed at
saving rather than destroying a business, and in which
consultation and consensus-seeking would be the point of
departure.
[56]
Mr.
Moller
pointed out
that, in the event that a BRP plan was not approved
by the requisite majority of
creditors, the practitioner could approach the Court under section
153(1)(a) of the Act to set aside
the result of a vote on the
grounds that it was
"inappropriate"
(whatever that
phrase may mean). Such a state of affairs would of course attract
additional costs and could lead to the practitioner
becoming
embroiled in on-going litigation rather than the primary goal of
rescuing the company. It certainly does not appear
to me to be a
desirable route in the present circumstances, particularly where
there is no available cash to fund such litigation.
[57]
In
the replying affidavit deposed to by Coe, the following are said to
be
factors which indicate the preference for BRP over
winding up:
"126. It is common knowledge
that the Court may take judicial knowledge thereof that forced sales
under liquidation proceedings
often result in a return that is not
advantageous to the debtor. There is every reason to believe that
the business rescue proceedings
will achieve a better return than
the immediate
liquidation of Bestvest. This is certainly one of
the factors that a Court may or may not in due course after voting
had failed
consider in order to decide whether or not to set aside
the voting and/or make other directions as to the furtherance of the
business rescue application..............
144...It is incorrect that business
rescue proceedings will inevitably result in any additional costs to
be paid out of Bestvest
The liquidation proceedings as a fact have
been shown and illustrated to be more costly than business rescue
proceedings. However
as
(sic)
this is a factor that will be
considered in due course by the business rescue practitioner upon
its reports alternatively upon
its
(sic)
approach to Court upon a failed
voting...............
146. It may be true that Nedbank
will not benefit from the proposed business rescue proceedings in
any manner as its full claim
will be settled during business rescue
proceedings and/or during a liquidation process. Both processes will
entail that Nedbank
will have to wait until its secured claims and
further costs are paid In consequence nothing turns on this
statement, save to
illustrate Nedbank's cynical disregard for the
policies and purposes underlying business rescue.
146.1. Nedbank exposes itself as a
hostile creditor, aimed at a one-sided promotion of their
(sic)
own interests at the expense of the
other interested parties.
146.2. It is also true that much
more turns on a successful business rescue application for first
applicant and myself as we have
invested a considerable part of our
life into the project. Such investment will be destroyed on
liquidation
146.3. Business rescue is not a
remedy that this Honourable Court ought to disregard likely (
sic)
merely because a substantial
creditor has a prejudicial predisposition against the process, it is
submitted with respect
153.2
Interest
will be accruing to Nedbank whether or not Bestvest is liquidated or
placed under business rescue. Nedbank is adequately
covered and will
be paid in full. It is not being suggested anywhere in any
meaningful fashion that the immovable property constitutes
insufficient security for Nedbank's claims
157. These allegations are denied.
It is not stated why a liquidator will be 'well placed' to sell the
movable
(sic)
property when it
is
clear that the
liquidators have no interest in achieving the highest possible price
but instead in processing assets in order
to achieve the prompt
payment of their commission. This state of affairs is common
knowledge within the liquidation industry
and it is respectfully
submitted that the Court may take judicial notice of the position.
This state of affairs clearly gave
rise to the creation of the
business rescue provisions of the new
Companies Act. it
is
respectfully submitted."
[58]
These
generalised claims and allegations made by Coe in the reply are not
substantiated in any way at all but
appear to be based upon
"well
known"
perceptions
of winding-up procedures in general. In my view the Applicants have
failed to demonstrate in this case why BRP is
the preferred option
over liquidation. Indeed, some of the passages referred to above,
show that the interests of the two secured
creditors will be
adequately addressed either way. This seems to suggest that there is
likely to be little difference between
the proceeds of a sale of the
property in liquidation or under business rescue.
[59]
In
the
Oakdene Square
case
supra
the Court was faced
with a similar
conundrum. The company in that case
owned a large tract of land to the north of Johannesburg on which
was situated the iconic
Kyalami Grand Prix race track complex and
which was the object of an on-going commercial development.
[60]
The
learned Judge decided in favour of winding-up the company for a
number of reasons which in my view find reasonance in
this case. I therefore cite them in detail:
60.1. "/
have
difficulty in understanding why a liquidator will be less successful
in realizing a proper market value for the immovable
property than a
business rescue practitioner. Provided a sale of the properties is
effected at market-related prices, whether
by private treaty or at
an execution sale, I can see no reason why a liquidator would not be
equally successful in obtaining
the best price for the immovable
property. Despite the negative connotations surrounding
liquidations, they are not
per
se
negative,
since they may, in certain cases, yield a better financial return
for creditors. No factual evidence was placed before
me by the
applicants which justifies a different conclusion."
(See
p287 B-D)....
60.2. 6. Having regard to the
provisions of ss128-154 of the Act. once a company is placed under
supervision and business rescue
proceedings have commenced, such
proceedings are open-ended and could probably include further
applications to court, and carry
on for a considerable period of
time. This would be even more so if there are parties involved who
are seeking to obstruct the
creditors of the relevant company, as
the applicants have been accused of doing. These conditions will
make the task of a business
practitioner who has to seek the
co-operation of the directors, management and creditors extremely
difficult.
(See p288
F-G, footnotes excluded)
62.3
7.
In my view, the interests of the creditors, as supposed to that of
the company, should carry more weight in the circumstances
of this
case. There is no
"business
"
of the company to be rescued
The benefit of placing the business
of the company on its feet again does not arise in this case. The
applicants' counsel, however,
relied on the provision of the
definition of
'business
rescue"
to the
effect that-
"or, if it is not possible for the company so
to continue in existence, results in a better return for the
company's creditors
or shareholders than would result from the
immediate liquidation of the company"...
The application of this provision
to the facts of the present case begs the question, "well, will
business rescue render
a better return for the creditors?"...No
facts were placed before me by the applicants in support of the
contrary view.
I have to decide this dispute on the allegations made
by the respondents. Applying this rule, the applicants failed to
show that
business rescue will yield a better return for the
company's creditors."
(See
p288H-289E, footnotes omitted)....
60.4. 10. There is no provision for
the taxation of the fees, costs and expenses of a business rescue
practitioner, whereas a
liquidator's costs are subject to taxation.
There is, therefore independent control over the costs of a
liquidation, whereas
there is currently none in the case of a
business rescue procedure This aspect may be for the legislature to
consider when further
amendments to the Act are proposed."
60.5. It was also common cause in that
case that the company was in distress and that its income stream had
dried up.
[61]
In
this matter almost the entire liabilities of the company are secured
by
the three mortgage bonds referred to
earlier. The ordinary creditors are Messrs Essa
and
Coe who allege that they each have unsecured claims against the
company Essa says that his claims amount to R1.6 m for unpaid
salary
and certain running expenses disbursed on behalf of the company
while Coe says that he is owed some R840 000 00 by way
of unpaid
salary. The unsecured claims therefore amount to about five per cent
of the company's' alleged liabilities and are
still subject to
proof. There is no evidence before me to suggest that the unsecured
creditors will be better off under BRP than
winding-up. In fact, the
reverse is more likely to be the case since a liquidator will be in
a position to invoke the relevant
provisions of the old
Companies
Act to
deal with any disputed claims - on the papers before me these
claims are certainly placed in issue
[62]
Finally,
on this score, Section 133 of the Act places a general moratorium
on legal proceedings against the
company while it is under business rescue Coe and Essa would
therefore be precluded from asserting
any claims against the company
without either the written consent of the business rescue
practitioner, or the Court Their disputed
claims will therefore
remain unresolved under business rescue In such circumstances,
winding-up is undoubtedly the preferred
option.
CONCLUSION
[63]
Having
regard to all of the aforementioned facts and circumstances I am
not persuaded that there is any
reasonable prospect of the company being rescued by the appointment
of a business rescue practitioner,
nor that it is just and equitable
to do so for financial reasons. In the circumstances the application
for business rescue must
fail and a provisional winding-up order
must follow.
ORDER
[64]
Accordingly
I make the following orders:
Case no. 2106/2012 (the business rescue
application)
The application is dismissed with costs.
Case no. 21857/2011 (the winding-up application)
1. The Respondent, Bestvest 153 (Pty) Ltd, is placed
under a provisional winding-up order.
2. A
rule
nisi
is issued
calling upon the Respondent and all interested parties to show
cause, if any, to this Court on 24 July 2012 as to why
2.1. A final winding-up order should not be granted;
2.2. The costs of this application
including the costs occasioned by the postponement on 4 November
2011 should not be costs in
the winding-up of the Respondent
3. Service of this order shall be effected.
3.1 By the Sheriff upon:
3.1.1. The Respondent at its
registered address at 1 Hood Road, Belgravia, Cape Town:
3.1.2. The Respondent's employees at
its principle place of business at 20 Argyle Road, Rondebosch, Cape
Town;
3.1.3. Any trade union which the
Sheriff may establish represents any employees of the Respondent, in
terms of Section 346(A)(a)
of the Companies Act no. 61 of 1973, read
with the transitional provisions of the
Companies Act 71 of 2008
3.1.4 The South African Revenue Services at 22 Hans Strijdom Street,
Cape Town;
3.2 By publication in one edition of
each of the Cape Times and Die Burger newspapers.
GAMBLE,
J
1
See
Section 131(4)(b) of the Act.
2
Section
7 of the Act.
3
South
African Company Law for the 21
st
Century -
"
Guidelines
for Corporate Law Reform
"
publishes m Government Gazette 26493 of 23 June 2004.
4
Henochsberg
on the
Companies Act 71 of 2008
Volume 1 p45.
5
Investigating
Directorate: Serious Economic Offences and Others v Hyundai Motor
Distributo
rs
(Pty) Ltd
and
Others
[2000] ZACC 12
;
2001
(1) SA 545
(CC) at 558 para 21
et
seq.
6
[2007] ZACC 12
;
2007
(6) SA 199
(CC) at 218 F para 53
7
See
sections 427
-
440
thereof.
8
Southern
Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386
Limited
2012
(2) SA 42
3 (WCC) at 431 paras 20-22. See also
Koen
and Another v Wedgwood Villiage Golf and Country
Estate
(Ptv)
Ltd and Others
2012
(2) SA 378
(WCC) at 382 paras 13-14;
Oakdene
Sguare Properties (Pty
)
Ltd
and
Others v Farm Bothasfontein (Kvalami) (Pty) Ltd and Others
2012 (3) SA 273
(GSJ) at 281G para 18.
9
2011
(5) SA 422
(GNP) at 428 para 24-5.
10
Section
224 of the Act read with Schedule 5 thereto.
11
"It
is otherwise just and equitable to do so for financial reasons".
12
2011
(5) SA 600
(WCC) 603 E para 6.
13
p425
H para 2-426 D para 3
14
[2012]
ZAWCHC
33
(18
April 2012)
15
p278F
para 12
16
p431
E-H
17
At
p432 C-E para 24