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SAFLII Note: Certain personal/private details of parties or witnesses have been redacted from this document in compliance with the law and SAFLII Policy

IN THE HIGH COURT OF SOUTH AFRICA

NORTH WEST DIVISION, MAHIKENG

Case Number: M292/18

In the matter between:

LENNOX ANTONIE LOUW                                                      First Applicant

IDENTITY NUMBER: [6…]

JOHANNA MAGRET RAFFERTY LOUW                                 Second Applicant

IDENTITY NUMBER: [6…]

and

FORRES FARM PROPERTIES (PTY) LTD                              Respondent

REG NO: [19…]

LAND AND AGRICULTURAL DEVELOPMENT                      Intervening Applicant

BANK OF SA          

JUDGMENT

LEEUW JP

Introduction

[1]        The applicants are seeking an order placing the first respondent under supervision and commencing business rescue proceedings as contemplated in section 131 (4)(a)of the Companies Act (The Act). [1]

[2]        The respondent, Forres Farm Properties (Pty) Ltd (Forres Farm/the company) is a private company registered in terms of the provisions of the Company Laws of the Republic of South Africa with its principal place of business at the farm Wilina in the district of Vryburg. Forres Farm’s primary purpose is to invest in agricultural land suitable for the production of grain fed beef and ancillary products.  The first applicant Lennox Antonie Louw (Lennox Louw) and Johanna Margret Rafferty Louw (Johanna Louw) cumulatively referred to as applicants or Mr and Ms Louw, are co-directors of Forres Farm and each hold 50% of the issued shares of Forres Farm.

[3]        The business rescue application which was filed on the 28 July 2018, was preceded by an application for liquidation of Forres Farm launched on 18 May 2018 by the Land and Agricultural Development Bank of South Africa (The Land Bank) under case number M189/2018.  The Land Bank is a statutory body and a registered credit provider bank established in terms of the Land and Agricultural Development Bank Act.[2] On 26 August 2013, Land Bank concluded a written agreement with Suidwes Landbou (Pty) Ltd (Suidwes) in terms of which Suidwes sold and ceded its right, title and interest in and to its existing and future debtors’ book to the Land Bank. Suidwes is authorised to act as an agent of the Landbank and Rudolph Marthinus Nagel (Nagel) deposed to the affidavit on behalf of both Suidwes and the Land Bank.

[4]        The business rescue application was filed whilst the application for liquidation was still pending in this Court, which consequently suspended the liquidation proceedings.[3] Pursuant thereto, on the 11 October 2018 the Land Bank was granted leave by this Court to intervene and oppose the business rescue application. At the hearing of this application, parties agreed that the business rescue and liquidation applications should be argued together and further that the preliminary points raised by each party be abandoned.  

Background

[5]        Forres Farm had given surety in favour of the Land Bank as creditor for the liabilities of Lennart Boerdery CC (in liquidation) (Lennart Boerdery). The members of Lennart Boerdery are Lennox Louw, Stephanus Jacobus Daniel Swart (Swart) and Forres Farm. In addition to the Forres Farm surety, the Land Bank also obtained sureties from Lennox Louw and Swart in their personal capacities, in respect of the same debt which was initially a loan of R25, 313, 913.78.

[6]        On the 17 August 2017 this Court granted an order under case number M531/16, jointly and severally against Lennox Louw, Swart and Forres Farm, for a total payment of R25, 480,222-56 plus 20% interest per annum calculated daily, and capitalised monthly from the 1 July 2016 to date of payment. In addition, three immovable properties of Swart namely: Portion 4 Kleinbegin, Portion 1 of Myburgs Fontein and the remaining portion of farm Myburgs Fontein, were declared executable in favour of the Land Bank.  As sureties and co-principal debtors of Lennart Boerdery, they were all ordered to pay costs on a scale of attorney and own client, jointly and severally, the one paying the other to be absolved. Forres Farm and Lennox Louw and Swart as joint sureties a co-principal debtors of Lennart Boerdery, failed to pay and satisfy the judgment debt.

[7]        On 28 April 2018, the Sheriff of this Court served a copy of the warrant of attachment on Lennox Louw, as the director of Forres Farm, and Swart. The sheriff filed a return of service in terms of which Forres Farm failed to satisfy the writ upon the execution thereof and consequently filed a nulla bona return.

 [8]       Forres Farm was deemed to be unable to pay its debts as prescribed in section 346(1) of the Companies Act No 61 of 1973.[4] As a result, the judgement granted against Forres Farm in favour of the Land Bank, still remains unsatisfied. Pursuant thereto, the Land Bank was granted a warrant of execution against the immovable property of Swart for the realisation of the amounts owing in terms of the order of this Court granted on the 17 August 2017.  The total dividend award for the Land Bank’s secured claim of R28, 493, 734-79 was R12, 688,873-26.  The shortfall against the total claim of the Land Bank was less than R16 million.

[9]        I have alluded that on 18 May 2018, the Land Bank, applied for the liquidation of Forres Farm and that it be placed in the hands of the Master of the High Court. The application was opposed by Forres Farm per notice filed on the 4 June 2018. On 26 July 2018, Lennox Louw and Johanna Louw filed the business rescue application, in their capacities as directors of Forres Farm.

Submissions

[10]        The Land Bank submits that Forres Farm is commercially insolvent in that it lacks financial resources and trading capital, and does not have realisable assets sufficient to pay its liabilities. In consequence, Forres Farm should be finally liquidated and wound-up in terms of the provisions of chapter 14 of the 1973 Companies Act.

[11]        Lennox Louw on behalf of the directors of Forres Farm argue that the dire financial distress experienced by Forres Farm was occasioned by the judgement of the 17 August 2017, which was taken against Forres Farm and Lennox Louw personally as surety for the liabilities of Lennart Boerdery. Lennox Louw further submits that the proposed business rescue plan of Forres Farm will benefit all affected persons, which include creditors and employees of Forres Farm.

Issues

[12]        The issues to be decided are whether:

(a)   Forres Farm is financially distressed;

(b)   the company has failed to pay any amount in terms of its obligations; 

(c)   it is just and equitable to place Forres Farm under supervision and commence business rescue proceedings for financial reasons;

(d)   there are reasonable prospects of rescuing the company;

(e)   Forres Farm should be liquidated; and

(f)     Costs.

Analysis 

[13]        Business rescue is defined as follows in section 128 (1) (b) of the Companies Act:

“(b) ‘business rescue’ means proceedings 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 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.”

[14]      The factors to be considered to be granted in business rescue proceedings are prescribed in section 131(4) as follows:

“(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 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.”

Is Forres Farm (a) financially distressed and (b) consequently failed to pay any amount in terms of its obligations?

[15]      Section 128 (1) (f) defines “financially distressed” as meaning that:

“(f) “financially distressed”, in reference to a particular company at any particular time, means that- (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or (i) substituted by s. 81 of Act 3/2011] (ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.”

[16]          It is common cause that Forres Farm is in financial distress based on the following: Forres Farm, as well as Lennox Louw and Swart, as sureties and co-principal debtors to Lennart Boerdery, are jointly and severally liable for the shortfall of R27, 112, 263.61 calculated after the total award payable to the insolvent estate of Lennart Boerdery. The shortfall was initially R16 million, but escalated to R27, 112, 263-61 plus further interest calculated from 28 August 2018.

[17]          I alluded above that, on 21 April 2018, when a copy of the warrant of attachment was served on Lennox Louw, the sheriff of this Court filed a nulla bona return.  Forres Farm as surety and co-principal debtor failed to satisfy the writ of execution granted by this Court in terms of a Court order of the 17 August 2017. Forres Farm’s inability to pay the debt, even after service of the writ of execution premised on a judgment of this Court which remains unsatisfied, is prima facie evidence that the company is insolvent.

[18]          Forres Farm is a registered owner of the following agricultural properties: Portion 8 of farm Mooinfontein valued at approximately R4,2 million, Portion 11 of farm Mooifontein also valued at R4,2 million, Portion 1 of farm Middleberg valued at R7 million; Portion 1 of farm Brussels valued R7 million; and Portion 8 of farm Beginselpan valued at R7 million.

 [19]          Portions 8 and 11 of the farm Mooifontein have a mortgage bond registered in favour of Harvey Cattle Ranch (Pty) Ltd for the same amounts of its value. Portion 1 of Middelberg has 2 covering mortgage bonds in favour of ABSA Bank Limited, for the amounts of R7 million and R3 million; Farm Brussels has covering bonds registered in favour of ABSA Bank Limited, for amounts of R7 million, R1,2 million, R3 million and R1,8 million; and a covering mortgage in respect of farm Beginselpan, registered in favour of ABSA Bank for the amounts of R7 million and R1,1 million. The 3 farms Beginselpan, Brussels and Middelburg are leased out to Sion Boerdery (Pty) Ltd (Sion Boerdery) and they generate a total financial income of R784, 203-65. Sion Boerdery is represented in by the family member of the applicants, namely Johanna Louw and Elizna Louw who are the children of the applicants.  On its own, Forres Farm has no realisable property sufficient to pay its debts.  It is thus in financial distress.

Is it just and equitable for financial reasons, to place the company under business rescue?

[20]          Lennox Louw proposes a business rescue plan, with its main focus directed at settling the issue of the two surities amounting to approximately R25 million. He submits that, he and with the assistance of Swart in their personal capacities, have come up with a plan on how to settle the Land Bank judgment debt. Swart is in the process of selling a certain portion of his farm Myburgs Fontein for R21, 400,000-00 to Waldap Boerdery CC. The members of the Waldap Boerdery are Ms CBF Swart (the wife to Swart) and Mr SJD Swart (Jnr).  A signed deed of sale was concluded.  Lennox Louw obtained an arbitration award in his favour against NWK Boerdery (Edms) Bpk in which he claimed R21 million. Although the quantum of the award still needs to be finalised, he nonetheless believes that he will receive an award of R21 million. They both commit themselves to make available all excess funds emanating from the above transactions, towards the release of Forres Farm from its surety commitments.

[21]          Nagel, on behalf of the Land Bank, submits that the rental amount of R784,203-65 per year, derived from the lease agreements, is insufficient to pay the labilities of Forres Farm.  Forres Farm liabilities to its creditors, amount to approximately R40 million. The directors of Forres Farm could not provide any tangible evidence, despite being invited to do so, on how Forres Farm would be capable of paying its running expenses from its own resources in respect of electricity supply, taxes and bond liability.

 [22]         Nagel further submits, with regard to the sale of Swart’s farms, that the offer to purchase the farm Myburgs Fontein, was reduced from R21,400,00-00 to R12 million.  Nagel further submits that in terms of the judgment of 17 August 2017, granted in favour of the Land Bank against Lennart Boerdery and Swart, in his personal capacity as surety in respect of Lennart Boerdery liabilities, the Land Bank is entitled to the full amount of the proceeds of any sale of the farms, for the purpose of reducing the Land Bank’s current judgment claim in the sum of R27,112,263-61 plus interest.  Furthermore, the Land Bank, has a covering mortgage bond hypothecating the said farms.  As a result, its proceeds will not be available as post-commencement financing in the business rescue of Forres Farm.

[23]          Regarding the arbitration award in favour of Lennox Louw, Nagel states that the arbitration award was delivered on 20 March 2018, and as at the hearing of this application, nothing was done to quantify the claim.  He further submits that Lennox Louw failed to disclose that Lennart Boerdery is entitled to 50% of the proceeds, as per agreement between Lennox Louw and Lennart Boerdery.  Nagel further submits that the prospects of litigation to institute claims against the directors of NWK Boerdery (Pty) Ltd, will take years to finalise, and consequently such proceeds that may be derived from the litigation, cannot be taken into consideration to enhance Forres Farm’s prospects under business rescue. And besides, NWK Boerdery (Pty) Ltd, was liquidated in June 2018.

[24]          It is further submitted on behalf of the Land Bank, that Forres Farm has been in financial distress since 2016 and yet the directors failed to act in accordance with their statutory duties, by applying for business rescue in terms of section 129(1),[5] even when it was evident at that time, that Forres Farm was unable to pay the debt in compliance with the judgment of the 17 August 2017. The nulla bona return filed by the Sheriff in respect of Forres Farm, pursuant to the warrant of execution issued against it, is in terms of section 345(1)(b) of the Act, prima facie proof that the company is insolvent.

Has Forres Farm established grounds aimed at achieving the goals set out in section 128(1)(b)?[6]

[25]          The applicants submit that the appointment of a business rescue practitioner will ensure that a “thorough and comprehensive investigation be conducted into the business affairs of the company and if the duly appointed business rescue practitioner concludes that there are no prospects of rescuing the company, alternatively, yield a better return for creditors and shareholders as opposed to liquidation, he or she may request this Honourable Court to liquidate the company”. They go further to submit that if this Court does not grant the application “the company and its entire investors stand to loose their entire investment in the company”.

[26]          This submission seems to suggest that an application in terms of section 131 of the Act should be granted irrespective whether or not the goals prescribed in section 141 (b) have been achieved or are achievable. This Court has the authority to determine whether or not there are any prospects of rescuing or rehabilitating the company.  This is a discretion to be exercised by the Court in terms of section 131(4)(a)(iii).[7]  I wish to pause and echo the sentiments expressed by Van der Linde J in Pouroulis, Theofanis v Market Pro Investments 106 (Pty) Ltd[8] at para [29], where he states that:

“[29]    . . . It does not seem to me to matter whether in the informal winding up the body of creditors will be better off; that will always be the result if one’s postulate is that a business rescue practitioner will sell fixed property at a better price than a liquidator.  It will also be the inevitable result if one accepts that, as a matter of course, the business rescue practitioner comes cheaper than the liquidator.

[30]      But self-evidently, if that type of argument were valid, most liquidators should systematically be business rescuers, because on that basis the business rescue system will always render a better dividend than liquidation.”

[27]          Lennox Louw contends that the Land Bank decided to sequestrate the sureties and co-principal debtors as well as liquidate Forres Farm, separately instead of cumulatively.  That the outstanding debt can be settled if they were to be allowed to pay the debt collectively instead of targeting each one of them separately.  He further submits that in terms of the last financial statements of Forres Farm, the value of the assets owned by the company amounts to R26 890,000-00 and the outstanding debt (excluding the shareholder’s interest) amounts to R44 200 000-00 and that if sold by means of forced sale, in execution, the proceeds will most likely not reach 40% of its potential value.

[28]          This summation by the applicants is not substantiated by facts and figures.  A detailed financial statement ought to have been attached to its founding papers.  Lennox Louw attached an unsigned summary of the company’s balance sheet which shows that the primary liabilities of Forres Farm liability for a shareholder loan to Lennox Louw for R2,7 million, is not fully explained.  Lennox Louw does not give detailed information in that regard.  Forres Farm’s total liabilities amount to R46,9 million and its assets are worth R26, 890 million plus the lease income of R683,000 per annum.  The farm Myburgs Fontein, which is owned by Swart, and is on sale, is not unencumbered, in that the Land Bank is a bondholder on the property.  Not much is expected from the arbitration award granted in favour of Lennox Louw, especially in view of the liquidation of NWK Boerdery (Pty) Ltd.

[29]          In Oakdene Square Properties v Farm Bothasfontein[9] at para [31], the court held the view that:

“…the appellants contended that the bar should be set even lower than that.  Relying on the reference in section 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 section 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 section 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 section 128(1)(h).  According to this section “rescuing the company” indeed requires the achievement of one of the goals in section 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 Prospec (supra) 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 section 141.  But the applicant must establish grounds for the reasonable prospect of achieving one of the two goals in section 128(1)(b).”  (Emphasis added)

[30]          The applicants do not give a detailed plan as to how the company will be restructured in order to pay its other financial commitments other than the judgment debt at issue.  They do not even state how the interests of creditors will be protected.  The remarks of the Traverso DJP (retired) in Francis Edward Gomley v West City Precinct Properties (Pty) Ltd and Others[10] at para 12 on these concerns raised are apposite.

“. . . the definition of business rescue makes it clear that a restructuring of a potentially viable company is envisaged so that it can continue to function as an economic entity.  In the present case no restructuring of the company is envisaged, merely the realisation of its assets over an extended period of time.  Not a single fact is placed before the court as to why creditors can expect a larger dividend at the end of the moratorium.  Only generalisations are put forward.  There is no plan put forward at all. . . . the application boils down to nothing more than the winding down of West City in a manner which disregards the rights of creditors and in particular of the Bank are completely ignored.”

[31]          Applicants are at pains to try and avoid liquidation when it is clear from the facts presented that the company is in serious financial distress. It cannot, on its own, meet its financial obligations.  That is why the sureties and principal co-debtors are devising all kind of ways and means to sell some of their personal properties and even undertake to utilise monies expected from an arbitration award which is not yet finalised.  It is also evident that even the sureties themselves, do not have any realizable assets to defray the obligations of the company.  The company is not self-sustainable.  Business rescue proceedings should not be abused to evade the liquidation of the company

[32]          The remarks of Brand JA in Oakdene Square Properties v Farm Bothasfontein supra at para [33] and [34] are appropriate in the circumstances:

“[33] My problem with the proposal that the business rescue practitioner, rather than the liquidator, should sell the property as a whole, is that it offers no more than an alternative, informal kind of winding-up of the company, outside the liquidation provisions of the 1973 Companies Act which had, incidentally, been preserved, for the time being, by item 9 of Schedule 5 of the 2008 Act.  I do not believe, however, that this could have been the intention of creating business rescue as an institution.  For instance, the mere savings on the costs of the winding-up process in accordance with the existing liquidation provisions could hardly justify the separate institution of business rescue.  A fortiori, I do not believe that business rescue was intended to achieve a winding-up of a company to avoid the consequences of liquidation proceedings, which is what the appellants apparently seek to achieve.

[34] In any event, I believe that, even on its own terms, the appellants’ proposal consisting of not more than an alternative winding-up, cannot be sustained.  In motivating this proposal the appellants relied on two grounds.  The first was that a business practitioner would be able to obtain a better price for the property than a liquidator.  But I share the court a quo’s difficulty in understanding why this should be so (see paragraph 49(1) of the judgment).  In short, this ground appears to rest on no more than pure speculation.  Their second ground was that the remuneration of the liquidator would exceed that of the business rescue practitioner.  It departs from the premise that the fees of the liquidator are calculated as a percentage of the assets of the company, while those of the business rescue practitioner are based on a daily rate.”

[33]          Forres Farm is financially distressed and has failed to pay its obligations. The judgment debt remained unsatisfied from August 2017 and the debt is escalating through interest charges. If indeed the directors of Forres Farm were of the view that the company was in financial distress as early as 2016, which in actual fact it was, they were duty bound to voluntarily apply for business rescue of the company in terms of section 129 (1), of the Act at that time, because it was unable to pay the judgment debt.

[34]          The company is in dire financial distress to the extent of being commercially insolvent. Taking into account that all the properties of Forres Farm are encumbered in one way or the other, I am not persuaded that there are reasonable prospects of rescuing the company.  In the circumstances, I am of the view that the liquidation of Forres Farm is justified.

Costs

[35]          The liquidation application was filed on the 28 May 2018.  On 4 June 2018, the applicants opposed the application.  Instead of filing an answering affidavit, they lodged the business rescue application.  I alluded to the fact that the applicants should have approached the court earlier before the liquidation order of the 17 August 2017, for an order for business rescue of Forres Farm.

[36]          Land Bank approached this Court on an urgent basis, to be admitted as an intervening party in order to oppose the business rescue application.  The applicants opposed the application, however the court granted the order in favour of the Land Bank.

[37]          The Land Bank, as a creditor, was entitled to participate in the business rescue application as prescribed by section 131(3) of the Act.[11] Forres Farm directors should not in the circumstances, have opposed the application for intervention filed by the Land Bank.

[38]          Counsel for Forres Farm argued that the reason for opposing the application was because the Land Bank sought an order opposing the business rescue application.  There is no merit in this submission because clearly, the purpose of applying to be admitted in that regard was to oppose the business rescue application, which the Land Bank is of right entitled to do.

[39]          I am of the view that the Land Bank is in the circumstances entitled to costs, incurred for the urgent application for intervention and dismissal of the business rescue application, which were reserved on the 11 October 2018.

[40]          The parties were in agreement that if the application for business rescue application is dismissed, then I can exercise my discretion to grant the final liquidation order.

[41]          In the result, I make the following order:

                 41.1  Case No. M292/2018

The application for business rescue is dismissed with costs, such costs to include the costs occasioned by the opposition of the application for intervention on 11 October 2018;

            41.2    Case No. M189/2018

(a)      The respondent, Forres Farm Properties (Pty) Ltd, is hereby liquidated and placed in the hands of the Master of the High Court;

(b)      The costs of this application shall be costs in the liquidation.

____________________

M M LEEUW

JUDGE PRESIDENT OF THE HIGH COURT

NORTH WEST DIVISION, MAHIKENG

APPEARANCES:

Date of Hearing                                                    :          14 December 2019 

Judgment Handed Down on                                  :          22 March 2019

Counsel for the Applicants                                     :           Adv M. A. Bardenhorst SC 

 and the Intervening Applicant

Counsel for the First Respondents                      :          Adv J.A. Klopper     

Attorneys for the Applicants                                   :         Smit Stanton Inc.

and the Intervening Applicant       

(Instructed by: Leahy Attorneys Inc.)

Attorneys for the Respondent                   :          Maree & Maree Attorneys

(Instructed by: DR Hardus Van Der Westhuizen Inc.)              

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