“It is clear that the legislature has recognised that the liquidation of companies more frequently than not occasions significant collateral damage, both economically and socially, with attendant destruction of wealth and livelihoods.” – Binns-Ward J, in the judgment of Koen and Another v Wedgewood Village Golf & Country Estate (Pty) Ltd and Others 2012 (2) SA 378 (WCC)”
As many people know, the matter of Oakdene Square v Farm Bothasfontein dealt extensively with the requirements which an applicant for business rescue must meet before the court will consider granting a business rescue application.
However, the Oakdene judgment is the subject matter of a pending appeal and the appropriateness of the test which was applied by Claassen J will be debated in the Supreme Court of Appeal.
I act for the appellants in the matter and have delivered and filed my heads of argument. Now that the heads of argument have become a matter of public record, I thought it might be interesting for those who follow my blog to have some insight into the argument which will be advanced at the hearing.
I have therefore decided to provide an excerpt from my heads of argument in the matter which deals with the test which ought to be applied in an application to have a company placed under business rescue. Any comments would be appreciated.
I am indebted to Paul-Michael Keichel, Samuel Rousseau and Maurice Crespi for assisting me in the drafting of the heads of argument.
So without further ado…
INTRODUCTION
- This appeal relates to the application of the provisions of Chapter 6 of the Companies Act 71 of 2008 (“the Act”) and is with the leave of the above Honourable Court, leave to appeal having been refused by the court a quo.
- The primary issue on appeal relates to the test that is to be applied when considering an application for Business Rescue. It is submitted that too stringent a test has been applied when considering applications for business rescue and that the threshold of “a reasonable prospect of rescuing the company”, as contemplated by section 131 of the Act, has been misapplied by various lower courts. It is submitted that this misapplication, if endorsed by the above Honourable court, would render the business rescue regime no more successful than its predecessor, Judicial Management.
- The appeal, therefore, relates to an interpretation of the relevant provisions of chapter 6 of the Act and to their application to the facts of the case.
- The appellants launched a Business Rescue Application under Case No 2011/35199 in relation to the business rescue and supervision of the First Respondent (“the company”), in accordance with Sections 128 to 154 of the Companies Act 71 of 2008 (“the Act”).
- The second appellant, which represents/constitutes a 40% (Forty Percent) shareholder in the company, is an ‘Affected Person’ as defined in Section 128 of the Act (Founding Affidavit: Vol 1, p10/ln14 – p11/ln5 AND Vol 1, p9/ln8-19). The Second and Third Respondents each hold a 30% (thirty percent) shareholding in the company (Founding Affidavit: Vol 1, p12/ln2-3 AND Vol 1, p14/ln2). Further, the Second Respondent is a judgment creditor of the company in an amount of R31 578 095.11 (Founding Affidavit: Vol 1, p12/ln9-12).
- The company has assets in the form of immovable properties (hereinafter collectively referred to as the “Property”) which, on the appellants’ version is worth between R300 – R350 million (Founding Affidavit: Vol 1, p17/ln12-22) and on the Second Respondent’s version, R129 million (Answering Affidavit: Vol 1, p167/ln14-19). On either version, there is more than sufficient equity to settle all of the company’s liabilities in full (i.e. the judgment debt referred to above plus claims of a further amount of approximately R30 million) and to provide the company’s shareholders with a substantial dividend (Replying Affidavit: Vol 3, p583/ln12-14).
- It is common cause that the company has no cash resources at its disposal in order to discharge the aforementioned indebtedness (Founding Affidavit: Vol 1, p16/ln10-12). The primary reason for the aforegoing, on the appellants’ version, is that the Second and Third Respondents have made it impossible for the company to either generate sufficient income, or to raise outside finance to liquidate such indebtedness (Founding Affidavit: Vol 1, p16/ln13-19). This has occurred, from the inception of such indebtedness and the registration of the Mortgage Bond in 2008, but more specifically from November 2010, which resulted in the Second Respondent declaring the property executable under case number 23688/11.
- The company is factually solvent, but not commercially solvent, as it has been unable to meet its debts as and when they fall due (Founding Affidavit: Vol 1, p24/ln23-25). It is submitted that the company is an extremely viable candidate for Business Rescue proceedings, it being clear that the total outstanding amount, which effectively renders the company commercially insolvent, constitutes approximately 10% – 20% of the net asset value of the company.
- The full and further facts are too many to iterate by way of introduction and, for the sake of brevity, are not repeated herein. They appear from the Appellant’s papers filed in the applications.
- It is submitted that the court a quo erred in making the findings of fact and/or conclusions of law set out in the application for leave to appeal to this Court. In particular, having set out the relevant statutory provisions and legal principles in paragraphs 4 to 18 of the Judgment (Judgment: Vol 10, p1731/ln 6 – p1739/ln12) and certain facts in paragraphs 19 to 48 of the Judgment (Judgment: Vol 10, p1739/ln14 – p1747/ln20) (certain of which “facts” are disputed), it is submitted that the court a quo misdirected itself in its interpretation of the relevant statutory provisions and the legal principles applicable thereto, particularly in its application of same to the facts of the case.
THE DISCRETION OF THE COURT A QUO
- The following submissions are made in regard to the discretion of the court a quo:
11.1 Section 131(4) of the Companies Act, 71 of 2008 (“the Act”) states as follows:
“(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;”
11.2 The Court is accordingly not limited by the form of order which it may grant upon considering a business rescue application;
11.3 The discretion to be exercised by the Court is accordingly a discretion in the wide sense in that the Court is not limited in the relief which it is entitled to grant;
11.4 If however, such discretion was a discretion in the strict sense, i.e. a choice between different but equally admissible alternatives (which does not equate to the grant, or refusal of the application), then, it is respectfully submitted that the court a quo did not exercise its discretion judicially, alternatively, it exercised same based on a wrong appreciation of the facts and/or on wrong principles of law, with the result that such decision could not reasonably have been made by a Court directing itself to all the relevant facts and principles.
See: Mabaso v Law Society, Northern Provinces and Another 2005 (2) SA 117 (CC) at [par 20].
- The Court, therefore, even in the event that it is disinclined to grant the application for business rescue, is entitled, nonetheless, to exercise its discretion against the granting of an application for the winding-up of the company, making any such alternative order as it deems fit. The principle that a creditor of an ailing company has a right ex debito justitiae to liquidate a company (as well as the remedy of Judicial Management) is no longer applicable and the interests of the shareholders (in this case) need also to be accounted for.
See: Judgment of the court a quo at p1732, para 6; Koen v Wedgewood Village Golf & Country Estate (Pty) Ltd 2012 (2) SA 378 (WCC) at 382 G-H; ABSA Bank Ltd v Newcity Group (Pty) Ltd, Cohen v Newcity Group (Pty) Ltd and Another (2012) ZAGPJHC 144.
THE TEST FOR GRANTING AN APPLICATION FOR BUSINESS RESCUE
- It is respectfully submitted that the court a quo failed to take cognizance of and to apply the following:
13.1 The provisions of section 131(4), quoted above;
13.2 Section 128(h) of the Act, which defines “rescuing the company” as “… achieving the goals set out in the definition of “business rescue” in paragraph (b)”.
13.3 Section 128(1)(b), which states that “business rescue” means:
“Proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for-
(i) …
(ii) …
(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property and other liabilities, and equity in a manner that … results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.”
13.4 The effect of the aforegoing is that:
13.4.1 the Court must be satisfied (that is, on a balance of probabilities) that the company is financially distressed; and
13.4.2 there must merely be “a reasonable prospect” for rescuing the company (which, according to the definition of “rescuing the company” means achieving the goals set out in the definition of “business rescue” in section 128 (1) (b), one of which is specifically stated as being “the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company”).
13.5 It is common cause between the parties in casu that the company is financially distressed (Founding Affidavit: Vol 1, p8/ln24 AND Answering Affidavit: Vol 1, p174/ln11). What remains is a determination of whether or not there is a reasonable prospect of achieving the goal of developing and implementing a plan to rescue the company, in a manner that results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
13.6 It is accordingly submitted that it need not be shown that there is a reasonable prospect that there will be a better return for creditors and shareholders. Rather, it must be shown that there is a reasonable prospect that a plan to do so is capable of being or will be developed or implemented, regardless of whether or not it may fail.
13.7 It is further submitted that the authorities which suggest that an applicant for Business Rescue, relying on the provisions of section 128(1)(b)(iii), must show a cogent and evidential foundation to support the existence of a reasonable prospect that the company will survive, or that there will be a better return for the company’s creditors or shareholders, than would result from the immediate liquidation of the company are incorrect.
13.8 Accordingly, on a proper interpretation of the statute, it is submitted that an Applicant need not set out a plan to re-establish the company’s solvency, or establish a better return for creditors or shareholders, but rather, need merely show that a plan which seeks to achieve that purpose, has that expectation or seeks to achieve that possibility, can be developed or implemented.
See Prospec Investments (Pty) Ltd v Pacific Coast & Investments 97 Ltd [2012] ZA FSHC 130
13.9 As was held in Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd (Registrar of Banks and Another intervening) 2012 2 SA 423 (WCC) the use of different language in section 131(4) from that which applied to Judicial Management indicates that something less is required than that the recovery should be a reasonable probability. Moreover, the mindset 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. It was further held in the Southern Palace Judgment (supra) that “it would … be inappropriate for a Court faced with a business rescue application to maintain the mindset (from the earlier regime) that a creditor is entitled ex debito justitiae to be paid to have the company liquidated”.
13.10 In applying the correct interpretation of the relevant provisions of the Act and having due regard to the principle that Business Rescue is preferred to Liquidation, it is submitted that a Court, even where it is unconvinced that a proposed business rescue plan will result in the company surviving in solvency, or achieve a better return for creditors or shareholders, should grant a Business Rescue Application, once it is established that it is the intention of the applicant to develop and implement a BRP which has that as its purpose.
13.11 The Respondents, in casu, do not seriously challenge the proposition that the appellants seek to implement and develop such a business rescue plan, but rather, deny that such purpose/s will be achieved.
13.12 It is submitted that it is inappropriate for a Court, at a stage where it is faced with two factually competing versions with regard to whether such a purpose can be achieved, to decide that issue.
13.13 It is further submitted that, only once such a plan has been developed and, where applicable, implemented, is one in a position to make a finding that the purpose of achieving a better result for shareholders or creditors can or cannot be achieved.
13.14 Therefore, rather than resolve the issue of whether that purpose can be achieved, the Court ought to grant the Business Rescue Application and allow the BRP to take such steps as he may desire to develop and implement the Business Rescue Plan.
13.15 It is only once those steps have been taken that any of the parties, or the Court, for that matter, is able to assess whether the Business Rescue Plan is likely to achieve one of the desired outcomes.
13.16 The introduction of the Business Rescue regime therefore brings with it an inquisitorial approach in ultimately determining whether a company can be rescued. The BRP investigates the affairs of the company and reports to the court in order for the court to curtail any unwarranted delay. This is borne out by section 141 (1) of the Act, which expressly requires the BRP to consider whether there is any reasonable prospect of rescuing the company, only after having investigated the company’s affairs, business or property.
13.17 It is also worthy of mention that the powers required to delve into the affairs of a company, for purposes of assessing the viability of the business rescue plan, will only be bestowed onto a business rescue practitioner once he is appointed, not before.
13.18 This also begs the question as to how certain classes of affected persons (such as employees and shareholders) would be able to put suitable business rescue plans before the court, in circumstances where they do not have access to the information required to do so.
13.19 Only once such an investigation has taken place and the machinery of Chapter 6 of the Act has ben utilised, is a court in a position to consider whether there is, in fact, a prospect of rescuing the company. The Act envisages that this take place in a restricted period of time (much shorter than the usual time limits associated with resolving disputes by means of referrals to evidence or on appeal) and to report to the court, if necessary. It is submitted that it is for this reason that an applicant for business rescue is enjoined to bring the application by way of motion proceedings.
13.20 The fact that a low threshold is required, together with the fact that a court is much better placed to consider the merits of any proposed plan after an investigation by a BRP, lead to the conclusion that a court, when faced with any application involving a company which is commercially insolvent must provide the company with an opportunity to make use of the machinery of business rescue, which opportunity can always be later revoked in terms of Section 141 of the Act.
13.21 By way of a strange quirk of the legislation, the appellants, if they had enjoyed a majority on the board of the directors of the company, would simply have been able to place the company under business rescue by way of a resolution in terms of section 128. To require a much stronger threshold, simply due to the fact that the business rescue is sought by an affected person other than the majority of the board, creates, with respect, an absurdity. No liquidation proceedings had been commenced against the company at the time of the launching of the application.
13.22 It is not correct to approach the consideration of a business rescue application against the backdrop of any delay associated therewith. When compared with the delay inherent in liquidation proceedings and in proceedings before Court, any delay inherent in business rescue proceedings is comparatively nominal. The legislature specifically contemplated the delay inherent in business rescue proceedings by legislating the time limits associated with business rescue.
In this regard see, for example, sections 132(3), 147(1) and 148(1) of the Act.
13.23 Business rescue proceedings, by their very nature, must be conducted with a maximum possible expedition. Legislative recognition of this axiom is reflected in the tight timelines given in terms of the Act for the implementation of business rescue procedures if an order placing a company under supervision for that purpose is granted;
13.24 This is self-evident in the present case where, had the court a quo granted the business rescue application, such business rescue proceedings would have been finalised prior to the hearing of the present appeal and the company would either have been rescued, alternatively, would, if the respondent’s contentions are accepted, have been liquidated (at the very least, the court considering an application for liquidation would enjoy the benefit of the input of the BRP and the outcome of the business rescue proceedings and would therefore be much better placed to resolve the disputes in the papers);
13.25 It is submitted that the present scenario is the very one which the legislature has sought to avoid. By providing for such a light burden in an application for business rescue, the legislature has intended that companies be placed under business rescue so as to ensure that every remedy has been afforded to it, prior to the consideration of any liquidation application;
13.26 It is further submitted that only once all of the affairs of the company have been investigated by the BRP and once a full Business Rescue Plan has been considered in terms of Section 152 of the Act, that a Court can come to a conclusion as to whether or not the ultimate goals of rescue, or achieving a better result for creditors or shareholders can be achieved.
13.27 Thus, it is submitted that a Court, on a proper construction of the relevant provisions of the Act, is only empowered to consider the question of whether “solvency rescue”, or a better result for creditors and shareholders can actually be achieved, once the BRP has completed his legislated task, and not at a stage where it is merely faced with an Application to place the company under Business Rescue.
13.28 The fact that the respondents have stated that they will vote against any proposed plan (Answering Affidavit: Vol 1, p127/ln13 – p128/ln 20 AND p81/ln4-7) not only demonstrates their mala fides, but gives rise to a situation which is specifically catered for in the Act.
See Nedbank Ltd v Bestvest 153 (Pty) Ltd; Essa and Another v Bestvest 153 (Pty) Ltd and Others 2012 (5) SA 497 (WCC).
13.29 Section 153 of the Act entitles a Business Rescue Practitioner, in the event that a Business Rescue Plan is rejected, to apply to Court for an order that the rejection of the Business Rescue Plan was inappropriate.
13.30 Therefore, a creditor who simply votes against any plan in an effort to advance its own self-serving interests, faces the risk of sanction by the court. If the plan is a good one, the fact that a creditor may have voted against the plan, and in so doing procured the rejection of the plan as contemplated in section 152, will not prevent the plan being implanted on the authority of the court. This, it is submitted, demonstrates the lengths to which the legislature has gone, to ensure that business rescue is explored prior to liquidation, despite what the majority of creditors may require, in their own self-interest.
13.31 To give a contrary interpretation to the relevant provisions of chapter 6 of the Act would, it is submitted, run contrary to the very purpose of the Business Rescue procedure and lead to a complete failure of the concept of Business Rescue as a remedy, for the same reasons that Judicial Management has been termed “a spectacular failure” and “an abject failure”.
See paragraph 7 of the judgment (Vol 10, p1732/ln 11 – p1733/ln3) and see Anthony Smits, Corporate Administration: A Proposed Model, 1999 De Jure, pages 80-107; Stein & Everingham, “The New Companies Act Unlocked”, page 409.
13.32 The granting of an Application to place a company under Business Rescue ought, therefore, merely to serve as an interim remedy to allow a BRP to place all the relevant facts before shareholders and creditors and, if necessary, before the Court. It is only once an investigation has taken place, and assuming that a plan has been rejected by creditors, that a Court can decide whether it would be appropriate or not to continue with the Business Rescue Plan. This would alleviate all the difficulties with which a Court is faced at the Application stage to resolve factual disputes with regard to whether or not a better return for creditors and shareholders can actually be achieved.
13.33 It is submitted that, to expect an Applicant to already have a Business Rescue Plan in place, at the time the Court is approached for an order placing a company under supervision is, to use the language adopted by Eloff J at para 18 of the Southern Palace Judgement “to place the cart before the horse”.
13.34 In the context of chapter 6 of the Act, there may be many other ways of demonstrating a reasonable prospect of rescuing the company that would fall far short of presenting a full business plan to the Court. By way of a hypothetical example, the mere fact that a company would enjoy the benefit of a moratorium under section 133 may be sufficient to demonstrate that there is a reasonable prospect of rescuing the company.
See Henochsberg on the Companies Act 71 of 2008, page 466, commentary on section 131.
13.35 The breathing space allowed by the moratorium, may offer sufficient time to allow the company to negotiate a settlement or a repayment plan with its creditors, especially since provision is made for obtaining post-commencement finance in terms of Section 135.
See Henochsberg on the Companies Act 71 of 2008, page 466, commentary on section 131.
13.36 The very fact that the company is factually solvent means that a hypothetical sale of assets will realise funds to point the business in any given number of viable new directions.
13.37 Furthermore, the mere fact that the company has been placed under business rescue might assist it in procuring post-commencement finance, due to the preferential nature of such funding.
13.38 It is submitted that the Southern Palace Judgment sets an unreasonable precedent for the level of proof required in order to obtain a compulsory Business Rescue order generally. It is further submitted that if all Appellants are to be expected to meet the stringent requirements laid down in the Southern Palace case, it would sound the death-knell for Business Rescue in South Africa and lead to the procedure becoming as ineffective as its predecessor, Judicial Management.
13.39 In the premises, it is submitted that the Court a quo erred in failing to apply a correct interpretation of the relevant provisions of the Act by placing too stringent a burden on the appellant in making out a case for business rescue.
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