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IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NO: 38140/20

In the application between:

THE EMPLOYEES OF SPHYNX TRADING CC                                                   Applicant

and

SPHYNX TRADING CC                                                                              First Respondent

NTSENGEDZENI ANTHONY MICHAEL TSHIVHASE N.O                   Second Respondent

THEODORE WILHELM VAN DER HEEVER N.O                                      Third Respondent

ROSELYN CHANTEL NOEL N.O                                                            Fourth Respondent

SAPPI SOUTHERN AFRICA LIMITED                                                        Fifth Respondent

COMPANIES AND INTELLECTUAL PROPERTY COMMISSION             Sixth Respondent

EL SAYED HAFNI                                                                                 Seventh Respondent

TISSUE WORLD CC                                                                               Eighth Respondent

J U D G M E N T

 

MAIER-FRAWLEY AJ:

Introduction

1. The application is brought in terms of s 131 of the Companies Act 71 of 2008 (the Act)[1] for an order commencing business rescue proceedings for the rehabilitation of the first respondent, Sphynx Trading CC (Sphynx). A final liquidation order was granted against the CC on 18 March 2019.[2] The present application was launched merely 9 days[3] later on 27 March 2019.

2. In terms of section 131(6) of the Act,[4] the liquidation proceedings are stayed pending the outcome of a determination by the court of the application for business rescue.

3. The application was initially set down for hearing in the urgent court during the week of 16 April 2019, but was removed from the roll for purposes of obtaining a special allocation of the matter, given the volume of papers and the time required by the parties to present oral argument. The matter thereafter served before me for hearing on a semi-urgent basis, by special allocation, on 23 April 2019.

4. The seventh and eighth respondents, being judgment creditors of Sphynx, brought an application for leave to intervene in the application, which was not opposed, pursuant to which they were duly joined as respondents in the application.[5] A composite affidavit (deposed to by Mr. ES Hafni on behalf of the seventh and eighth respondents) was delivered in support of the request to intervene in the proceedings, which also served as an answering affidavit in the business rescue application. For convenience, the seventh and eighth respondents will be referred to as ‘the intervening creditor’ in the judgment.

5. The second, third and fourth respondents (the appointed liquidators[6] in the liquidation of Sphynx) and the sixth respondent (CIPC) did not oppose the application, presumably because of a punitive cost order sought in the Notice of Motion against any respondent who opposed the application.[7]

6. The fifth respondent, Sappi Southern Africa Limited (Sappi) is a creditor of Sphynx in the amount of R11 million, whilst the intervening creditor is a judgment creditor in the amount of R28.5 million.

7. It is not in dispute on the papers that the aggregate total debts owing by Sphynx to its various creditors amounts to approximately R170 million, of which the Industrial Development Corporation (IDC) is the largest judgment creditor in the amount of R117 million.

8. Both the intervening creditor and Sappi oppose the grant of an order for placing Sphynx under supervision and in business rescue, inter alia, on the basis that the application amounts to an abuse of the provisions of Chapter 6 of the Act and because the applicant has in any event failed to establish reasonable prospects of restoring the business so that it may continue in existence on a solvent basis.  They also dispute the applicant’s locus standi on the basis that it has not been demonstrated that one ‘Merchant’ (who deposed to the founding affidavit on the basis that he represents all the employees of Sphynx) (i) had the necessary mandate to do so and (ii) was entitled to represent any non-unionised employees of Sphynx.

9. It bears mentioning at the outset that the application was not served upon all known creditors, including, amongst others, the intervening creditor and IDC, as is required in terms of section 131(2)(b) of the Act, read together with the Companies Regulations, 2011.[8] In this regard, see: Engen Petroleum Ltd v Multi Waste (Pty) Ltd and Others 2012 (5) SA 596 (GSJ) at para 24.[9]  I deal with the impact of this omission further below.

10. Sphynx Trading CC (first respondent) will be referred to intermittently in the judgment as ‘Sphynx’ or ‘the CC’ as the context requires.

 

Relevant Background

11. Prior to its liquidation, Sphynx conducted business as a manufacturer and supplier of paper rolls and paper related products. It did so since 1999. The business was previously owned by Mr El Sayed Hafni (Hafni) (deponent to the execution creditor’s answering affidavit) but it was sold in 2015 to Mr Pavlos Kyriacou (Kyriacou) (who is referred to in the papers as the sole ‘director’ of Sphynx) as a going concern, together with its movable assets consisting of all the manufacturing and paper mill machines.[10]

12. The court hearing the liquidation application granted a provisional liquidation order on 14 February 2019.[11]

13. The liquidation application was opposed by Kyriacou, acting on behalf of the CC on the basis, inter alia, that the CC was not commercially insolvent or unable to pay its debts as they fell due. A reading of the judgment of Fourie AJ[12] reveals that such notion was rejected by the court when granting the provisional liquidation order. The final liquidation order was granted a month later, despite Kyriacou’s opposition.

14. Less than two weeks later, the present application was brought on the basis that the business of Sphynx is ‘financially distressed’ (as defined in s 128(1)(f) of the Act)[13] and that there exists a reasonable prospect of saving the business for the benefit of all relevant stakeholders (employees, creditors and shareholders).[14]  But, as was demonstrated in the answering affidavits of Sappi and the execution creditor, the CC had already descended beyond the point of ‘financial distress’ and into the proverbial quagmire of hopeless insolvency by the time the final liquidation order was granted some nine days earlier, rendering the prospect of effective rescue impalpable and not reasonably possibly attainable.

15. The present application is said to be directed at the goal of rehabilitating and restoring the business to a position of liquidity and solvency (on the basis that reasonable prospects are alleged to exist for continuing in existence on a solvent basis by means of restructuring its affairs, business, property, debt and other liabilities and equity).[15] As alluded to earlier, both Sappi and the execution creditor submit that the applicant has failed to show that any reasonable prospect exists for restoring Sphynx’s business to a successful one.

16. Until 15 March 2019, the deponent to the applicant’s affidavits, Mr. KJC Merchant (Merchant) was in the employ of Sphynx as General Manager (production). According to Merchant, ‘it was business as usual’ and ‘operations were continuing’[16] whilst the application for the final liquidation of Sphynx was pending, that is, until 15 March 2019, on which date the liquidators attended at the place of business of Sphynx and ‘indicated that all business, manufacturing, and operations on the premises…should cease and all the employees were instructed to leave the business premises and go home.’ By the same token, Merchant states that the employees (including Merchant) ‘have limited information with regards to the financial and management statements of the First Respondent and the financial performance and position of the First Respondent.’[17] In the replying affidavit, he states that he has never had ‘access to the bank statements, or financial statements or bank accounts of the First Respondent’ nor does he possess any knowledge thereof, including knowledge of what was alleged by Kyriacou in his affidavit in the liquidation proceedings or knowledge of ‘the doings of Kyriacou’ (in reference to the manner in which Kyriacou had conducted the affairs of Sphynx in the build-up to its final liquidation).

17. In the answering affidavits filed by Sappi and the execution creditor, the following facts emerged:[18]

17.1. Preliminary investigations conducted by the liquidators revealed that Kyriacou operates a network of companies.[19] He is the sole member of Sphynx and the sole director and shareholder of Jurgens CI (Pty) Limited (Jurgens), under provisional liquidation. He is also the sole shareholder and director of three ‘Nat Tissue’ companies, one of which commenced trading on 1 March 2019 (Nat Tissue (Pty) Ltd) (after Sphynx had been placed under provisional liquidation and shortly before the final winding-up order was granted);

17.2. In the case of Jurgens (as in the present case), a business rescue application had been launched by employees (there, organised in trade unions), which proceedings are still pending;

17.3. Merchant, Jurgens and Sphynx are represented by the same attorneys, Bert Smith Inc;[20]

17.4. After the launch of the liquidation application against Sphynx, funds in an amount in excess of R7 million were transferred from the bank account of Sphynx to that of Jurgens, all in one month, and at a time when Jurgens was already in provisional liquidation;[21]

17.5. The aforesaid transfer ostensibly occurred without any quid pro quo;

17.6. amounts that were deducted from the salaries of Sphynx employees’ (such as UIF, PAYE and the like) have been appropriated and not paid over to the intended recipients (inter alia, SARS); and

17.7. the liquidators compiled a list of Sphynx’s trade creditors,[22] which reflects that the debts owed by Sphynx are substantial and the creditors numerous and, as is submitted by Sappi, ‘If anything, it reveals what amounts to a clear habit (and even a policy) of non-payment on the part of the first respondent’.

18. In addition, it has been shown by execution creditor in its answering papers that:

18.1. The bank accounts of Sphynx have been closed;

18.2. Sphynx has been dissipating its assets by intimating to its customers that payments due to it should be made into the banking account of Nat Tissue (Pty) Ltd as from 1 March 2019, of which Kyriacou is a director;[23] and

18.3. In so doing, the execution creditor submits that Kyriacou has failed to show a genuine concern for the prosperity of Sphynx;[24] and

18.4. Kyriacou refused to co-operate with the liquidators by refusing to hand over the book of account pertaining to Sphynx.

19. It is common cause that IDC has obtained judgment against Sphynx in respect of a debt in the amount of R117 million; that IDC is the largest creditor amongst the multitude of Sphynx’s other creditors; and that IDC has also perfected its security over all the moveable assets of Sphynx. The moveable assets of Sphynx are presently under the control of IDC who have placed security guards at the premises to secure such assets.[25]

 

Locus standi of Applicant

20. Merchant alleges in the founding affidavit that the applicant ‘…are the employees of the First Respondent,’ who are said to number 210. He thus purports to bring the application on behalf of ‘all the employees’.

21. It was pointed out in the answering affidavit filed by Sappi that: (i) Merchant does not suggest or allege that he acts or speaks on behalf of a trade union; and (ii) the ‘employees’ are not identified; no confirmatory affidavits have been supplied by the individual employees Merchant claims to represent; and (iii) Merchant has not even provided a list of those employees (if not all the employees) alleged to participate as co-applicants in the application. A challenge was thus brought against the mandate of Bert Smith Inc (applicant’s attorneys of record in these proceedings) to represent all of the alleged applicants and Merchant’s right to litigate in a representative capacity.[26]

22. Sappi thereafter delivered a notice in terms of rule 7 of the Uniform Rules of Court, calling on the applicant’s attorneys to provide proof that they hold instructions from and a mandate to act on behalf of all the CC’s employees (210).

23. In response:

(i) Bert Smith Inc produced a power of attorney, signed by Merchant, and provided a list containing the signatures of 124 employees. As appears from the power of attorney, it provides for a mandate by Merchant only, conferred on Bert Smith Inc. It makes no mention of the other employees, nor does it confer a similar mandate; and

(i) Merchant provided a list (annexed to the replying affidavit), containing the signatures of only 94 employees.

24. It was pointed out in the answering affidavit filed by the intervening creditor that: (i) The employees of Sphynx in fact number 600;[27] (ii) the application was served on the employees of Sphynx, which would have been ‘completely unnecessary’ if Merchant had indeed held a mandate to represent the employees; (iii) all the employees of Sphynx (save for management employees) were members of a trade union named SAICWU; and (iv) in section 128(1)(ii) of the Act, the Legislature has determined that unionised employees must be represented by the union.[28]

25. Section 131(1) affords an affected person the standing to apply to a court for business rescue and section 131(3) affords each affected person the right to participate in the hearing. Section 128(1)(a) recognises three separate categories of affected persons, one such being employees. In section 128(1)(a)of the Act,[29] the Legislature has determined that unionised employees are to be represented by the Union, whereas non-unionised employees may represent themselves.[30] It is clear from the provisions of section 128(1)(a)(iii) that non-unionised employees do not need to be cited or joined on an individual basis in the proceedings – one or more such employee may authorise a representative to represent him/her/them in the application.

26. The applicant’s papers do not state whether the employees Merchant professes to represent are unionised or non-unionised. As the applicant chose not to reply to the answering affidavit of the intervening creditor, the factual allegations contained therein stand wholly undisputed and unrefuted and may therefore be taken as established facts.[31] Accordingly, since the Union has not been cited as an applicant in the application, the unionised employees who are said to support the application, cannot be said to be doing so as individual co-applicants,[32] as they do not enjoy the relevant standing under the provisions of s128(1)(a)(ii) of the Act. The Union remains the ‘affected party’ who enjoys the necessary standing.[33]

27. At the hearing of the matter, I was informed by counsel appearing for Sappi and the intervening creditor that the locus standi of Merchant, qua non-unionised employee, is not in dispute. Accordingly, I propose treating the application as one which was brought by Merchant alone, in his capacity as a non-unionised employee of Sphynx. As the relevant Trade Union has not been cited as a party in the application, being the statutorily mandated representative of non-management unionised employees, and has not proffered any view on the business rescue, I intend to treat the views expressed by Merchant, qua employee in the application, as his alone.

 

Relevant Legal Principles

28. The relevant legal principles in terms of which the present application is to be adjudicated are set out below.

29. The papers are voluminous and the disputes many.[34] I have to decide the matter in line with principles that govern the grant of final relief in motion proceedings. The principle was pertinently articulated by Claasen J in Oakdene Square Properties (Pty) Ltd and Others v Farm Bathasfontein (Kyalami) (Pty) Ltd and others,[35] as follows:

“Unfortunately, the legislature has deemed it fit to prescribe motion proceedings in matters where an order is sought for the business rescue of a company. Despite that being the case, litigants and their legal representatives must count the costs of bringing matters to court on motion where disputes are to be expected. Litigants should be reminded of what Harms DP stated in regard to motion proceedings... :[36]

'Motion proceedings, unless concerned with interim relief, are all about the resolution of legal issues based on common cause facts. Unless the circumstances are special they cannot be used to resolve factual issues because they are not designed to determine probabilities. It is well established under the Plascon-Evans rule that where in motion proceedings disputes of fact arise on the affidavits, a final order can be granted only if the facts averred in the applicant's…affidavits, which have been admitted by the respondent…together with the facts alleged by the latter, justify such order. It may be different if the respondent's version consists of bald or uncreditworthy denials, raises fictitious disputes of facts, is palpably implausible, far-fetched or so clearly untenable that the court is justified in rejecting them merely on the papers.'

Harms DP went on to say that in motion proceedings the question of onus does not arise and the approach set out above governs irrespective of where the legal or evidential onus lies.[37]  ”

30. Sappi indicated in its heads of argument that it makes common cause with the allegations made by the intervening creditor in its answering affidavit. It has not been suggested by Merchant that the facts set out in the answering affidavits are inaccurate, untrue, unreliable or untenable. In my view, they are neither untenable nor far-fetched. Accordingly, the facts alleged by Sappi, read together with additional facts put up by the intervening creditor in their affidavits will ultimately govern the outcome of the application.

31. In terms of s 131(1), an affected person ‘may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings’. The court may grant the relief sought if it is satisfied that the company is financially distressed,[38] or it 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’,[39] or it is ‘otherwise just and equitable to do so for financial reasons,[40] and there are reasonable prospects for rescuing the company’.[41] The court ultimately retains a discretion to dismiss the application in terms of s 131(4)(b) of the Act.

32. The requirement of ‘reasonable prospects’ was considered by Brand JA in Oakdene Square Properties (Pty) Ltd & Others v Farm Bothasfontein (Kyalami) (Pty) Ltd & Others 2013 (4) SA 539 (SCA) (hereinafter ‘Oakdene’). Brand JA held, inter alia, as follows:

“[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 probability’ which was the yardstick for placing a company under judicial management in terms of s 427(1) of the 1973 Companies Act (see eg Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd 2012 (2) SA 423 (WCC) para 21). On the other hand, I believe it requires more than a mere 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.

[30] Self-evidently it will be neither practical nor prudent to be prescriptive about the way in which the appellant must show a reasonable prospect in every case. Some reported decisions laid down, however, that the applicant must provide a substantial measure of detail about the proposed plan to satisfy this requirement (see eg Southern Palace Investments 265 (Pty) Ltd) paras 24-25; Koen v Wedgewood Village Golf & Country Estate (Pty) Ltd 2012 (2) SA 378 (WCC) paras 18-20). But in considering these decisions Van der Merwe J commented as follows in Propspec Investments v Pacific Coasts Investments 97 Ltd 2013 (1) SA 542 (FB) para 11:

‘I agree that vague averments and mere speculative suggestions will not suffice in this regard. There can be no doubt that, in order to succeed in an application for business rescue, the applicant must place before the court a factual foundation for the existence of a reasonable prospect that the desired object can be achieved. But with respect to my learned colleagues, I believe that they place the bar too high.

And at para 15:

‘In my judgment it is not appropriate to attempt to set out general minimum particulars of what would constitute a reasonable prospect in this regard. It also seems to me that to require, as a minimum, concrete and objectively ascertainable details of the likely costs of rendering the company able to commence or resume its business, and the likely availability of the necessary cash resource in order to enable the company to meet its day-to-day expenditure, or concrete factual details of the source, nature and extent of the resources that are likely to be available to the company, as well as the basis and terms on which such resources will be available, is tantamount to requiring proof of a probability, and unjustifiably limits the availability of business rescue proceedings.’

[31] I agree with these comments in every respect. Yet, the appellants contended that the bar should be set even lower than that. Relying on the reference in s 128(1)(b) to ‘the development and implementation, if approved, of a plan to rescue the company’ their argument was that the reasonable prospect for rescuing the company in s 131(4) demands no more than the reasonable prospect of a rescue plan. According to this argument, the applicant for business rescue is therefore not required to show a reasonable prospect of achieving one of the goals contemplated in s 128 (1)(b). All the applicant has to show is that a plan to do so is capable of being developed and implemented, regardless of whether or not it may fail. Once it is established that it is the intention of the applicant to develop and implement a rescue plan which has that as its purpose, so the argument went, the court should grant the business rescue application even if it is unconvinced that this will result in the company surviving insolvency or even achieve a better return for creditors and shareholders. I do not agree with this line of argument. As I see it, it is in direct conflict with the express wording of s 128(1)(h). According to this section ‘rescuing the company’ indeed requires the achievement of one of the goals in s 128(1)(b). Self-evidently the development of a plan cannot be a goal in itself. It can only be the means to an end. That end, as I see it, must be either to restore the company to a solvent going concern, or at least to facilitate a better deal for creditors and shareholders than they would secure from a liquidation process. I have indicated my agreement with the statement in Propspec that the applicant is not required to set out a detailed plan. That can be left to the business rescue practitioner after proper investigation in terms of s 141. But the applicant must establish grounds for the reasonable prospect of achieving one of the two goals in s 128(1)(b). ”  (own emphasis)

33. The goals of business rescue as envisaged in s 128(1)(b) of the Act, are: (i) 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, (ii) to achieve a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company – by means of the development and implementation, if approved, of a plan. 

34. Counsel for Sappi submits that a reasonable prospect of being rescued is an essential substantive element that must be established, irrespective of which of the jurisdictional requirements in ss (i), (ii) or (iii) of s 131(4)(a) are applicable. The submission appears to be correct.[42] The court’s discretion to grant the order in terms of s 131(4)(a) arises when either one of the jurisdictional requirements listed in ss 131(4)(a) are met and it is satisfied that a reasonable prospect exists for rescuing the company (as interpreted in Oakdene supra).

35. Successful liquidation proceedings constitute a complete process by which a company is brought to an end and the liquidation process culminates in the dissolution of the company up to its deregistration (See Richter v ABSA Bank supra, at 60D), whereas the primary objective of business rescue under s 128(1)(b) is to prevent a viable company from closing down by allowing it an opportunity to regain solvency through the mechanism of business rescue, provided it can be achieved within a reasonable time. In particular, the preamble to the definition speaks of rehabilitating the company. (See Griessel and Another v Lizemore and Others 2016 (6) SA 236 (GJ)). The purpose is to ‘provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.[43]

36. In Van Staden and Others NNO v Pro-Wiz (Pty) Ltd (412/2018) [2019] ZASCA 7 (8 March 2019) at para [22], Wallis JA cautioned as follows: ‘It has repeatedly been stressed that business rescue exists for the sake of rehabilitating companies that have fallen on hard times but are capable of being restored to profitability or, if that is impossible, to be employed where it will lead to creditors receiving an enhanced dividend. Its use to delay a winding up, or to afford an opportunity to those who were behind its business operations not to account for their stewardship, should not be permitted. When a court is confronted with a case where it is satisfied that the purpose behind a business rescue application was not to achieve either of these goals a punitive costs order is appropriate. ’ (own emphasis)

37. In GCC Engineering & others v Lawrence Maroos & Others 2019 (2) SA 379 (SCA), the Supreme Court of Appeal held that whilst section 131(6) of the Act suspends the liquidation proceedings, it does not suspend the winding-up order that was granted by court. As the liquidation order has not been set aside, the finding by the court which precipitated the order, namely, that Sphynx is factually and commercially insolvent - at the latest 18 March 2019 - remains extant.

 

Evaluation

Reasonable prospects

38. As indicated earlier in the judgment, Kyriacou’s contention (in the liquidation proceedings), namely, that the CC was solvent and in a position to pay its debts was rejected by the court in granting the provisional liquidation order. Kyriacou had failed to provide the financial records of the CC in those proceedings. What is clear is that the CC was in dire financial straits at the time, so much so that it was considered commercially insolvent in the judgment of Fourie AJ at the stage of provisional liquidation. Nothing had been put up by Kyriacou to dispel that finding, and a final liquidation order ensued, which remains extant.

39. Kyriacou had managed the CC, which had been under his control and directorship, and was the one person who held intimate knowledge of the financial affairs and workings of the company.  Yet he had failed to provide the financial records of the CC in the liquidation application. As appears from the answering affidavits filed in the present proceedings, Kyriacou also failed to co-operate with the provisional liquidators in their investigation into the affairs of the CC, pending the final liquidation order. Kyriacou is the self-same person who supplied information concerning the CC’s financial affairs to Holtzhausen,[44] for purposes of enabling him to compile the provisional report upon which Merchant relies for the relief sought in this application.

40. None of the CC’s financial statements were provided in these proceedings, including the most recent financial statements for the year ending February 2019. When considering the evidence put up by Sappi and the intervening creditor, the suggestive (if not compelling) inference is that highly selective information pertaining to the financial affairs of the CC was supplied to Holtzhausen for purposes of creating a picture of expectant profitability, far removed from the true state of affairs, not least of all in so far as it pertains to the CC’s state of liquidity.

41. Merchant has conceded that he has no independent knowledge of the CC’s financial affairs, whether prior to or since its liquidation[45] and he appears therefore to rely to some extent on the say-so of Kyriacou (for the facts set out in the founding affidavit) and exclusively the opinion and recommendation of Holtzhausen as to the prospects of rehabilitating the CC. Holtzhausen in turn prepared a preliminary report for purposes of these proceedings, in which he constrains or qualifies his conclusions by means of various disclaimers,[46] indicating therein that he relied, inter alia, on information that was provided to him by Kyriacou.

42. In so far as Holtzhausen states that he discussed the possibility of business rescue with a representative of IDC (who advised him that IDC is not ‘in principle’ opposed to business rescue), it is apparent that Holtzhausen did not approach representatives of IDC for their comments in the light of the opposition presented by Sappi or the intervening creditor in application (assuming IDC was aware of the liquidation order that was made at the instance of Sappi), particularly, as regards the alleged cause of the CC’s ‘financial distress’ and the existing state of factual and commercial insolvency which Sphynx found itself in at the time that the final liquidation order was granted, a state which, as it implies, depicts an existing inability to raise sufficient cash resources to meet obligations, or to pay debts as they become due for payment, and which state has surpassed the threshold requirement of ‘financial distress’ as defined in s 128(f) of the Act.[47] The failure on the part of the applicant to serve the papers on the principal creditor (IDC) or to engage with it on the subject speaks volumes in that regard. The unsubstantiated statement by Holtshausen in his report that IDC has indicated that it ‘reserves its vote’ (at the first meeting of creditors) or has, ‘in principle’, not objected to business rescue, ostensibly proffered in support of the notion that IDC, who is owed R117 million, would ‘possibly’ be willing to agree a restructure of the CC’s liabilities, amounts in my view to no more than a speculative suggestion, which, as was pertinently warned by Brand JA in Oakdene supra, is insufficient for purposes of establishing a reasonable prospect for rescuing the company.[48]

43. Hotzhausen states in his report that the ‘financial distress’ of the CC was caused as a result of certain ‘operational difficulties and challenges experienced in a relatively short period’.[49] Similar allegations appear in the founding affidavit deposed to by Merchant. However, apart from the fact that the allegations lack details or factual support,[50] it was demonstrated in the answering affidavit of the intervening creditor - in reference to the figures tabulated by Holtzhausen in his report - that the alleged operational difficulties could not have caused any appreciable loss of income to the CC[51] and, by process of deduction, could not therefore have caused the CC’s alleged present financial crisis. It bears mentioning that both Sappi and the intervening creditor contend that the true reason for the financial demise of Sphynx was the financial impropriety of Kyriacou in the conduct of its affairs. But more about this later.

44. The intervening creditor has in any event produced evidence[52] that belies the accuracy and reliability of the figures depicted by Holtzhausen in his report (in relation to Sphynx’s purported financial position from 2015 to 2018[53] as well as in relation to the calculation of a postulated dividend that concurrent creditors would receive in liquidation.[54] As indicated earlier, the factual allegations in the answering affidavit of the intervening creditor have not been disputed or refuted by the applicant, and are thus accepted as correct. It follows therefrom that the financial statement tabulated in Holtzhausen’s report is of insignificant value in determining whether or not the business of Sphynx can be rescued.

45. As appears from the applicant’s papers, the prospect of rescuing the business primarily hinges on the existence and possible execution (if at all) of an alleged new ‘contract’ that Sphynx received ‘in or during March 2019’ for an indefinite period and which ‘will add R106,545 600.00 per annum to the turnover of the company’.[55] No particularity is provided in the applicant’s papers as to how the amount of R106,535 600.00 per annum is calculated or who the contracting parties were. Significantly, in the replying affidavit, the ‘contract’ is said to be no more than a ‘purchase order’, which is expected to yield a gross profit of approximately R50 million per annum.[56]

46. Mr. De Villiers appearing for the applicant indicated during oral argument tendered in court that the purchase order was received after the liquidation of Sphynx. Certain important questions arise in this context but, however, remain unanswered, namely: (i) which of the entities under the control of Kyriacou would be executing the order, given the undisputed facts set out in para 18.2 above, including the fact that Sphynx management had informed all Sphynx employees as early as March 2018 that Sphynx ‘will start operating as NAT Tissue for the ‘BIG’ customers and all those accounts will run through NAT Tissue’ and not Sphynx Trading CC’;[57] (ii) who represented Sphynx in securing the order after its liquidation;[58] and (iii) why the purchase order was not disclosed to the liquidators of Sphynx.

47. Sappi and the execution creditor both question the existence of the alleged contract or purchase order, given the lack of particularity and the unanswered questions that surround its appearance, including the justifiably suspicious emergence of a new trading entity on 1 March 2019 (Nat Tissue (Pty) Ltd) with the purchase order apparently received ‘in or about March 2019’.

48. The identity of the alleged retailer from whom the ‘purchase order’ was allegedly received has not been disclosed by Holtzhausen or Merchant, allegedly out of ‘fear of competition and possible sabotage’.[59] As pointed out by Sappi, it appears unlikely that the unnamed retailer was (or is) even aware of the fact that Sphynx has been finally liquidated. I agree that it is inherently unlikely that a large retailer would be willing to place an order to a value in excess of R100 million with a close corporation in liquidation.

49. I agree with Sappi’s submission the proposal contained in Holtzhausen’s report is unduly vague and general and creates more questions than answers. The proposal is, at best, a loose prediction of what might be possible, what could possibly be done and what might transpire. As such, the proposal offers no more than ‘speculative suggestion’ or ‘an arguable possibility’, which, as held in Oakdene supra, is insufficient for purposes of mounting a successful business rescue application. In so far as Holtzhausen states that Sphynx has a ‘suitable and functional infrastructure in place to meet current demand’ and that the liquidation order has slowed down the fulfilling of most of the ‘current contracts in place’,[60] he fails to address the following: (i) the fact that the movable assets of Sphynx have been attached by IDC and are presently under guard (ii) the fact that Kyriacou has been shown to be dissipating the assets of Sphynx; (iii) how the intended BRP intends to resolve the problems and issues that Merchant contends led to Sphynx’s current financial position;[61] and (iv) the time and capital that will be required (that is, further debt being incurred in order to commence production) in order to start trading and then to trade profitably enough to pay creditors, that is, assuming that the new purchase order is capable of being executed by Sphynx or that it will in fact be executed by Sphynx for the benefit of Sphynx (which appears to be questionable).

50. In my view, there is, on the vague and undetailed information before me, no reason to believe that there is any prospect of the business of the respondent being restored to a successful one.

 

Ulterior purpose and abuse of Ch 6

51. Both Sappi and the intervening creditor submit that the application is an abuse and that it has been launched for an ulterior purpose, namely, (i) to afford Kyriacou a further opportunity to dissipate the funds and asset of Sphynx to the newly formed entity, Nat Tissue (Pty) Ltd, of whom Kyriacou is a director; and (ii) to provide aegis against an independent investigation to be conducted by the liquidators into the payments made by Sphynx (approximately R7 million) to Jurgens, of whom Kyriacou is also a director.  The aforesaid submission is principally a function of the role played by Kyriacou and the risk that his future involvement in the business of Sphynx poses to creditors. Both parties submit that the manner in which the business of Sphynx has been carried on (outlined above) under the stewardship of Kyriacou, must be investigated (and if necessary, interrogated at a s 417 enquiry) as a matter of priority.

52. In my view, the evidence presented by Sappi and the intervening creditor strongly suggests malfeasance and deliberate mismanagement of Sphynx and a modus operandi of business being carried on to the prejudice of creditors of Sphynx. The liquidators - and not a BRP - are ideally positioned, inter alia, to: (i) hold enquiries and to interrogate witnesses; (ii) set aside voidable and unlawful transactions and in this manner, to recover funds; (iii) to preserve and recover assets and where necessary, to liquidate assets in an orderly, structured fashion, whereas the BRP has limited, if any powers, to act on what his investigations might reveal; and (iv) to investigate beyond the books and records of Sphynx – this includes a proper investigation into the relationship between Sphynx and the other entities under the control and direction of Kyriacou. More importantly, the liquidators will carry out their functions and duties independently of Kyriacou and in fact, to the exclusion of Kyriacou, as opposed to the BRP who will have to work with and rely on Kyriacou.[62] Having regard to the evidence put up by Sappi and the intervening creditor, it is quite obvious that Kyriacou is conflicted and compromised.[63]

53. I am not persuaded in the peculiar circumstances of the matter that business rescue poses a better or more feasible alternative to liquidation. There is no good reason to take Sphynx out of liquidation for purposes of allowing a BRP to investigate what led to Sphynx’s current financial position. Sphynx is not ‘financially distressed’. It is, in fact, more than financially distressed – it is insolvent and unable to pay its debts. That is the effect of the court order placing it in final winding-up. [64] In my view, the liquidators are better placed than any BRP to properly investigate the affairs of Sphynx and are also better equipped to act on what their investigations will reveal. I agree with Sappi’s submission that there is, at this stage, no reason to afford Sphynx the ‘breathing space’ allowed by Ch 6 of the Act as the CC has for a considerable time afforded itself ‘breathing space’ by not paying its numerous creditors and in the process, it has incurred debt which, in realistic terms, cannot (or will not[65]) be repaid by it. As demonstrated in the affidavit of the intervening creditor, the total capitalised judgment debt of Sphynx alone amounts to R145 million.[66]

54. Merchant mentions in his affidavits that Kyriacou supports the application for business rescue.[67]  It is apparent that Kyriacou could never have thought that a viable business rescue could be instituted in relation to the CC, given the enormity of the debts of Sphynx and its lack of disposable income and cash reserves. The timing of the application suggests that its true purpose was probably to stultify the likely impending interrogation of Kyriacou.[68]  The failure by Hotzhausen or Merchant to deal with any of the issues raised by Sappi or the intervening creditor in this regard indicates that no response was possible.[69] I conclude that the application was brought to provide a reason for avoiding Kyriakou’s likely interrogation and with a view to delaying the liquidators in their enquiries as to the squirreling away of assets. All of that constituted an abuse of the process of the court and an abuse of the business rescue procedure.

55. For all the reasons given above, the application falls to be dismissed.

 

Costs

56. Sappi gave notice to the applicant in para 8.3.4 (at p.146 of the papers) and para 38 (at p. 164 of the papers) that a punitive costs order would be sought in the event that the applicant (Merchant) elects nonetheless to persist with the application, despite the indefensible opposition brought against it. Significantly, Merchant himself sought costs on an attorney and client scale in the event that the application was opposed. The opposition was reasonable and proved successful.

57. Both Sappi and the intervening creditor allege that Kyriacou is the likely driving force behind the application and that he should therefore be ordered to shoulder the costs of the application, together with Merchant. Whilst the submission is not without measure of force, Kyriacou is not a party before court and as such, an order for costs against him personally, cannot ensue.

58. In the light of my conclusion that the application was brought for an ulterior purpose, and having regard to what was stated in Van Staden supra (quoted in para 36 above), a punitive costs order is justified.

59. Accordingly, the following order is granted:

1. The application is dismissed with costs on the scale as between attorney and client, which costs are to be paid by the applicant (Mr. John Merchant) and are to include the costs of two counsel for the fifth respondent (Sappi southern Africa Limited) and the costs of one counsel for the seventh and eighth respondents respectively (Mr. El Sayed Hafni and Tissue World CC).  

 

 

_______________________

MAIER-FRAWLEY AJ

 

 

Date of hearing:                                              23 April 2019

Judgment delivered:                                       9 May 2019

 

 

APPEARANCES:

Counsel for Applicant: Adv. RF De Villiers

together with Adv. WS Jungbluth

Attorneys for the Applicant: Bert Smith Incorporated

c/o Raymond Joffee & Associates

Ref: S. Greef

Counsel for fifth Respondent: Adv. AJ Daniels SC

together with Adv. Vetter

Attorneys for fifth Respondent: Shepstone & Wylie

Ref: N. Besesar

Counsel for 7^th & 8th Respondents: Adv. M. Desai

Attorneys for 7^th & 8^th Respondents: Vally Attorneys

Ref: I. Valley

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