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IN THE HIGH COURT OF SOUTH AFRICA

(EASTERN CAPE, GRAHAMSTOWN)

Case no: CA192/2014

NOT REPORTABLE

DATE: 7 April 2015

In the matter between

BENJAMIN MZUVUKILE MFAZWE..................................................................................Appellant

And

AN GADI PROPERTY INVESTMENTS (PTY) LTD.......................................................Respondent

ABSA BANK LIMITED..........................................................................................ntervening Creditor

Date heard: 30 March 2015

JUDGMENT

PICKERING J:

[1] This is an appeal to the Full Bench of this Division, with the leave of the Court a quo, against the judgment and order of Sandi J, dismissing an application to place the respondent company under supervision for the purpose of commencing business rescue proceedings as contemplated by s 131 of the Companies Act 71 of 2008 (“The Act”), and placing respondent under provisional winding up in the hands of the Master of the High court.

[2] Respondent is the owner of erf 131, Lusikisiki. The building thereon is leased to a number of tenants, including Mnandi Fast Foods trading as KFC, and Metropolitan Life. Respondent has no source of income other than the rentals recovered from its various tenants.

[3] During or about 2005 Absa Bank lent or advanced to respondent the sum of R3 million against the security of a mortgage bond over respondent’s aforesaid property, erf 131, Lusikisiki. Respondent fell into arrears with payment of its instalments and Absa Bank accordingly obtained judgment during September 2010 against respondent for payment of the sum of R3 051 196,33 together with interest thereon as well as costs on the attorney/client scale. In addition Absa Bank was granted an order declaring erf 131 specially executable. This judgment has remained unsatisfied.

[4] Thereafter applicant launched the business rescue application during May 2011. The initial application was, so applicant avers, drafted by himself without the benefit of legal advice and lacked certain essential averments.

[5] The application was enrolled for hearing before Revelas J on 30 June 2011, on which date it was postponed sine die to enable the applicant to consider certain issues which were raised by the learned Judge. The application was thereafter re-enrolled during February 2012, together with an amended Notice of Motion and a Supplementary Founding Affidavit. In the meantime Absa Bank, as an intervening creditor, launched a counter-application seeking the dismissal of applicant’s application and an order provisionally winding up the respondent. At the time of the filing of the counter application the outstanding amount owed to Absa bank amounted to R4 545 236,53.

[6] The matter came before Sandi J who, as stated above, dismissed the application to place respondent under business rescue proceedings and granted the application placing respondent under provisional winding up in the hands of the Master of the High Court.

[7] In his original founding affidavit applicant avers that he has been employed as a manager by respondent since 1997 and that he is also a creditor of respondent, being owed the sum of R843 000,00. He avers that on this basis he has the necessary locus standi to bring the application as an affected person in terms of the Act.

[8] He avers that the shareholders and directors of the respondent are the four daughters of the late Mr. A.N. Gadi and include one Zanele Gunguluza (“Gunguluza”).

[9] He alleges that Gunguluza, having fallen out with two of the co-directors, instructed respondent’s tenants not to deposit their rentals into respondent’s bank account but instead to pay them into the trust account of certain attorneys. According to applicant the total amount due to respondent in terms of rentals but not paid into respondent’s bank account amounted to approximately R3 996 906,00.

[10] He proceeds further to allege that during March 2010 respondent “sued two major defaulting tenants for an amount of R1 454 000,00.”

[11] As at 10 May 2011 these actions, involving Mnandi Fast Foods trading as KFC, and Metropolitan Life, which had been instituted in the High Court, Mthatha, had not yet been set down for trial, nor, at the time of the hearing before Sandi J, was there any indication as to when they might be heard.

[12] Having categorised Mnandi KFC and Metropolitan Life as “defaulting tenants” applicant then proceeds, in reply to certain averments contained in the affidavits filed on behalf of Absa Bank, to “deny that they defaulted in payment of rental in the sense usually understood in this regard. All that has happened is that the tenants were wrongfully advised by Zanele Gunguluza to pay their rentals into the trust account of different attorneys. The tenants remain good tenants.”

[13] Applicant avers that the financial distress in which respondent finds itself was occasioned by the actions of Gunguluza in diverting the rentals. He avers that “the three directors took a decision to expel Zanele Gunguluza as a director for taking company money” but that “family members intervened and stopped all legal proceedings” against her. He avers in this regard that a business rescue practitioner “being an officer of the court, would have more powers to enforce compliance by tenants and directors, thus correcting the maladies that respondent is beset with.”

[14] In amplification hereof he states that “the business rescue practitioner is not subject to family constraints and emotions and will take appropriate steps to remove delinquent directors, if necessary.”

[15] He states further that “tenants have ignored my requests that they regularise their rental payments, whereas Mr. van der Walt (the business rescue practitioner), being appointed by the court, will have greater authority than I have and will not be trammelled by emotional concerns.”

[16] He alleges further that the assets of the respondent exceed respondent’s indebtedness to the intervening creditor by far; that the respondent’s financial distress is merely temporary; and that the business rescue practitioner will be able in due course to collect the debts owing to respondent and to pay its creditors. He states further that “respondent can earn sufficient income to meet its monthly obligations, if its business is conducted properly, without the interference of Z. Gunguluza. Expenses are, generally, fixed and limited to interest to Absa, salaries and wages and minor general expenses.” (My emphasis). It is noteworthy that no mention is made of respondent being in a position to pay the judgment debt in full should the application succeed.

[17] The submission that a business rescue practitioner would be able to collect respondent’s debts found little favour with Sandi J. The learned Judge pointed out that legal actions already instituted by respondent against Mnandi Fast Foods and Metropolitan Life were still pending at the time of hearing of the application, with no indication as to when they might be finalised. Were a business rescue practitioner to be appointed, his task, as stated by Sandi J, would “merely be to pursue the legal actions that are pending” and possibly instituting fresh legal proceedings with regard to other issues.

[18] Sandi J stated further that “the business practitioner will not be required to perform any functions other than those that the respondent is employing at present. The problem has been identified in the papers and the solution does not seem to be complex in nature. It is the collection of debts by legal means and in the ordinary way.”

[19] After consideration of the relevant authorities Sandi J concluded that there was no reasonable prospect that business rescue proceedings would bring about the desired results. He found further that the respondent was clearly unable to pay the amount owing by it to Absa Bank and was insolvent.

[20] Section 131 of the Act empowers an affected person to apply for an order placing the company under supervision and commencing business rescue proceedings.

[21] “Business rescue” is defined in s 128(b) as follows:

“’business rescue’ means proceeding to facilitate the rehabilitation of a company that is financially distressed by providing for –

(i) the temporary supervision of the company, and of the management of its affairs, business and property;

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

(iii) 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 the existence of a solvent basis or, if it is not possible for the company to so continuing existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.”

[22] S 131 (4) of the Act provides:

“(4) After considering an application in terms of subsection (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 of rescuing the company; or

(b) dismissing the application, together with any further necessary and appropriate order, including an order placing the company under liquidation.”

[23] In Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA) Brand JA stated as follows at para 29:

“[29] This leads me to the next debate which revolved around the meaning of ‘a reasonable prospect’. As a starting point, it is generally accepted that it is a lesser requirement than the ‘reasonable possibility’ which was the yardstick for placing a company under judicial management in terms of section 427(1) of the 1973 Companies Act. [O]n the other hand, I believe it requires more than a prima facie case or an arguable possibility. Of even greater significance, I think, is that it must be a reasonable prospect – with the emphasis on ‘reasonable’ – which means that it must be a prospect based on reasonable grounds. A mere speculative suggestion is not enough. Moreover, because it is the applicant who seeks to satisfy the court of the prospect, it must establish these reasonable grounds in accordance with the rules of motion proceedings which, generally speaking, require that it must do so in its founding papers.”

[24] At para 31 Brand JA stated that in an application for business rescue, an applicant was required to satisfy the court that the business rescue proceedings would either “restore the company to a solvent going concern, or at least facilitate a better deal for creditors and shareholders than they would secure from the liquidation process.”

[25] In dealing with the discretion conferred upon a court by section 131(4) of the Act Brand JA stated, at para 21, that such discretion is not a discretion in the strict sense. He concluded that “if the court of appeal should disagree with the conclusion it is bound to interfere. Hence the question is whether we agree with the conclusion reached by the court a quo that the appellants had failed to establish a reasonable prospect of rescuing the company.”

[26] It will be convenient to deal firstly with a submission by Mr. Cole, who appeared for appellant, to the effect that Sandi J had erred in failing to have due regard to a cession of rentals held by Absa in terms of clause 3 of the bond document. Clause 3 provides:

“That, for further securing the payment ... he ... hereby cedes and assigns and transfers to the said bank all the mortgagor’s right, title and interest in and to the rents which do now, or may hereafter arise in respect of the property, giving to the said bank full power to sue for and recover the same, also authorising the said bank irrevocably ... to institute action and to use and employ all lawful ways and means for the recovery of the rents ...”

[27] Mr. Cole pointed out that, as is indeed, common cause, Absa failed to exercise its rights in terms of the cession. He submitted therefore that it was grossly inequitable for Absa to now seek the winding up of first respondent and to resist the application for business rescue proceedings, in circumstances where it had failed to take advantage of the protection afforded to it in the form of the rent cession. Had it exercised its rights in terms thereof, so he submitted, “all other causes of first respondent’s problems” would have been eliminated. Because it did not do so it’s “alleged certificate of balance” was “entirely incorrect” inasmuch as it did not account for what “should have been collected” by it in terms of the cession. Absa was therefore in effect the author of its own misfortune.

[28] Mr. Cole submitted that in the light of these factors a business rescue practitioner would be able to frame a business rescue plan including, in terms of s 150(2)(b)(ii), “the extent to which the company is to be released from the payment of its debts”, for the consideration of first respondent’s creditors, having regard in particular to the fact that Absa had not exercised its rights under the rent cession.

[29] The Immediate problem with this submission is that, as was submitted by Mr. de la Harpe, who appeared for Absa, there was quite simply no evidence before the Court a quo to the effect that any attempt at exercising its rights as cessionary would have resulted in Absa effectively recovering the monies due to them. There is no evidence as to when, if ever, before Absa obtained judgment, it was advised of the first respondent’s problems relating to the diversion of the rentals.

[30] Furthermore, as submitted by Mr. de la Harpe, s150(2)(b)(ii) does not vest any business rescue practitioner with any equitable authority or jurisdiction to investigate the extent to which first respondent was to be released from payment of its debts because of Absa’s failure to act upon its cession. I agree fully with the submission by Mr. de la Harpe that other than in circumstances where the majority of creditors supported the plan, Absa, which is not only a secured creditor, but which appears also to be the major, if not the only creditor, cannot be compelled to participate in a business rescue plan of which it does not approve and which has the effect of compromising its judgment against first respondent. In my view Absa’s alleged moral blameworthiness in failing to exercise whatever rights it may have had in terms of the cession is irrelevant to the issue of whether it is “just and equitable” for an order to be granted in terms of s131(4)(a)(iii) “for financial reasons.”

[31] It was submitted on behalf of appellant that respondent was in fact solvent and was merely experiencing cash flow difficulties. This, so it was submitted, was evidenced by the fact that the diverted rental allegedly held in the trust accounts of various attorneys amounted to R4 200 935,00; that respondent owned immovable property valued in excess of R13 million; and that Absa Bank was respondent’s only creditor and was owed an amount of R4 545 326,53. It was submitted accordingly that respondent’s assets exceeded its liabilities and that respondent would continue to receive rental income from which it could meet its monthly obligations. As a consequence, so appellant argued, the respondent should be placed under business rescue so as to ensure the resolution of respondent’s temporary cash flow problem without resorting to the winding up of a solvent company.

[32] However, as was submitted by Mr. De la Harpe, who appeared for respondent, the appellant conveniently ignores the fact that the debt owing to Absa Bank is a judgment debt and that Absa Bank requires that it be paid in full together with the very considerable sum of interest which has accumulated on it. As stressed by Mr. de la Harpe, nowhere does appellant suggest that the debt would be paid in full. It appears from appellant’s averments, as set out above, that respondent’s monthly expenses were “fixed and limited to interest to Absa, salaries and wages and minor general expenses.”

[33] What is abundantly clear, in my view, is that respondent is unable to pay its debts from its own resources. Furthermore, I agree with the submission by Mr. de la Harpe that the application for business rescue was not brought at a time when the company became financially distressed but was only launched in circumstances of prolonged distress as a stratagem to avoid execution or liquidation by Absa Bank.

[34] I agree, with respect, with what was stated by Sandi J, namely that the only course of action open to a business rescue practitioner would be to pursue litigation against the defaulting tenants and those responsible for diverting rentals from respondent. The practitioner would therefore be reliant upon the pursuit of existing litigation which has made no apparent progress in years. Furthermore, as appears from the papers, Mnandi Fast Foods has raised a special plea of prescription in respect of the claim against it for non-payment of rentals and appellant’s expectations of the rentals being recovered may well be unduly optimistic.

[35] In any event, respondent is no less capable of collecting the debts owed to it than any business rescue practitioner would be. The averment that respondent cannot do so because of being trammelled by family ties and emotions is, in my view, an indication that respondent’s board of directors is utterly dysfunctional.

[36] In my view Mr. de la Harpe is correct in his submission that the respondent is in a state of chaos and that no business rescue practitioner could possibly recoup respondent’s debts and pay Absa Bank in the foreseeable future, whereas liquidation would bring with it the benefit of all debts becoming immediately due and payable, all leases being capable of termination at the election of the liquidator.

[36] In Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013(3) SA 273 (GSJ) the following was stated:

“[49] I have come to the conclusion that in this case an order for business rescue is not appropriate. There are a number of reasons which have driven me to this conclusion:

1. I have difficulty in understanding why a liquidator will be less successful in realising 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 creditor. No factual evidence was placed before me by the applicants which justifies a different conclusion.

2. The fact that the applicants have become embroiled in a litany of pending court cases, in my view, militates against the granting of a business rescue order. Any business rescue plan devised by the practitioner will have to take into account the uncertainties of the various pending applications and actions. These uncertainties would necessarily make any plan proposed by the practitioner, subject to a variety of contingencies and outcomes which he/she would not be able to define in advance in precise terms to the creditors, in order for them to make a properly informed decision as to whether they should vote for or against the plan. Nor was any factual evidence placed before me by the applicants which would render a reasonable calculation of the financial implications of the cost and/or the proceeds of the actions and applications, as compared to the financial implications of a business rescue proceeding. The imponderables related to the length of these court proceedings, taking into account possible appeal proceedings, have also been impossible to fathom, let alone calculate in numbers.

3. It is common cause that the Company is financially distressed, in that, it has failed to make due payments on the bond resulting in a judgment being taken against it by Nedbank. It is common cause that the total indebtedness of the Company towards all of its various creditors amounts to approximately R67 million. The Company’s only source of revenue was the rental received in respect of the immovable property. This revenue stream has allegedly been pledged and ceded to Oakdene. Since March 2011, the Company has received no rental. In order for this revenue to continue and/or to be properly discounted for purposes of a rescue order, the court case in regard to the disputed lease will either have to be successfully completed or settled or the loss occasioned to the Company in having to forfeit the rentals, will have to be calculated. All of these various options will be neatly obviated if the Company is placed into liquidation.

4. ....

5. ...

6. Having regard to the provisions of ss 128 and 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 cooperation of the directors, management and creditors extremely difficult.

7. In my view, the interests of the creditors as opposed 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.

8. Liquidation would be more appropriate in a case of a deadlock, as is the position in the present case. The Company is a private company. Where deadlocks occur in private or domestic companies, liquidation has often been regarded as the most appropriate remedy to unravel the deadlock in existence between the directors and/or the shareholders. If a business rescue order were to be granted in this case, it is highly likely that it will be terminated and converted to liquidation proceedings in terms of section 132(2)(a)(ii) as a result of the deadlock and unwillingness of the antagonists to cooperate.”

[38] In my view, what was stated herein applies with equal force to the present matter. In all the circumstances I fully agree with the conclusion reached by Sandi J that appellant has failed to establish a reasonable prospect of rescuing the company. There is, accordingly, no basis upon which this court can interfere with the exercise of Sandi J’s discretion.

[39] The appeal is dismissed with costs.

J.D. PICKERING

JUDGE OF THE HIGH COURT

I agree,

B. HARTLE

JUDGE OF THE HIGH COURT

I. STRETCH

JUDGE OF THE HIGH COURT

Appearing on behalf of Appellant: Adv. Cole

Instructed by: Netteltons Attorneys, Mr. Marabini

Appearing on behalf of the Intervening Creditor: Adv. De la Harpe

Instructed by: Wheeldon Rushmere and Cole: Mr. van der Veen

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