By: Patience Katiyo, Legal Intern at Gottschalk Attorneys
The recent South African High Court decisions in Misty Blue Investments (Pty) Ltd, Personify Investments (Pty) Ltd and Huntrex 302 (Pty) Ltd considered the following:
1. the requirement of reasonable prospect of rescuing the company in financial distress in terms section 131(4)(a) of the Companies Act 71 of 2008 (“the Act”);
2. winding-up in business rescue rather than in liquidation;
3. impossibility of performance in the time of COVID; and
4. commercial insolvency.
Issues Before the Court
Ploos Van Amstel J approached the matter by first considering the business rescue applications. In the event that the business rescue applications succeeded, the applications for liquidation and winding up would remain suspended. In the event that the business rescue applications failed, the
liquidation and winding-up applications would be considered on their own
Considering the business rescue applications Ploos Van Amstel J explained that the purpose of business rescue proceedings, as stated in section 128(b)(iii) of the Act, is to facilitate the rehabilitation of a company that is financially distressed. This is done by providing for 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.
Ploos Van Amstel J identified that a key issue before the Court was the requirement of section 131(4)(a) of the Act, that there must be a reasonable prospect of rescuing the company in financial distress.
The Court referred to the case of Prospec Investments (Pty) Ltd v Pacific Coast Investments 97 Ltd 2013 (1) SA 542 (FB) 11 (“the Prospec case”) wherein the test for reasonable prospect was considered. In this case, Van Der Merwe J held that, vague statements and mere speculative suggestions will not suffice and 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.
Reference was also made to the case of Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) 2013 (4) SA 539 (SCA) (“the Oakdene case”) wherein Brand JA stated that the reasonable prospect must be based on reasonable grounds.
The Companies in this matter, contended that there was indeed a reasonable prospect that they could be rescued and continue to exist on a solvent basis. In an attempt to establish this, the Companies presented a proposed business strategy (“the Proposal”), prepared by a business rescue practitioner.
The Proposal included inter alia the following:
• the sale of a number of properties;
• conversion of two hotels into old age care facilities; and
• the continued operation of a guesthouse. Investec criticised the Proposal and contended that no case for a reasonable prospect of success was made, raising a number of points, including:
• lack of ability to sell the properties previously;
• lack of experience in running old age care facilities;
• the Proposal was superficial, lacking in essential information and refers to annexures which did not appear; and
• a lack of factual basis for the claim that the dividend in the case of business rescue will exceed the dividend in liquidation.
Ploos Van Amstel J, in considering the Proposal remarked “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… 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
In light of the above, the Court held that the Companies had not shown a reasonable prospect to rescue the companies and the relevant applications for business rescue were accordingly dismissed.
Considering the liquidation applications The Companies argued that they were not commercially insolvent. They based this on the fact that the industry within which they operate was hit hard by the national lockdown and the Covid 19 pandemic (supervening impossibility, or vis major) and that potential purchasers of the properties, which had been set aside for sale in terms of the moratorium agreements, proved to be hesitant and would not commit.
Investec, on the other hand indicated that the Companies had a history of defaulting on their obligations prior to the national lockdown and had in fact been defaulting on their debts dating back to 2017. Ploos Van Amstel J referred to the case of Tweedie and Another v Parker Travel Agency (Pty) Ltd t/a Park Tours 1998 (4) SA 802 (WLD) 805F-I (the “Tweedie case”), wherein it was held that when a debtor is in mora, any subsequent supervening impossibility does not relieve the debtor from their duty to perform.
Reference was also made to the case of Unibank Savings and Loans (Formerly Community Bank) v Absa Bank 2000 (4) SA 191 (WLD) 198 (the “Unibank case”) wherein it was held that impossibility is not implicit in a change of financial strength or in commercial circumstances which cause compliance with the contractual obligations to be difficult, expensive, or uncomfortable.
The Court accordingly held that the Companies were not excused by the national lockdown nor the COVID-19 pandemic from paying their debts and that they were in fact, commercially insolvent.
When making this finding, the Court considered Murray NO v African Global Holdings (Pty) Ltd 2020 (2) SA 93 (SCA) 28 (the “Murray case”) wherein, Wallis JA referred with approval to the following passage in LAWSA: ‘A company is unable to pay its debts when it is unable to meet current demands on it, or its day-to-day liabilities in the ordinary course of business, in other words, when it is “commercially insolvent”. The test is therefore not whether the company’s liabilities exceed its assets, for a company can be at the same time commercially insolvent and factually solvent, even wealthy.
The primary question is whether the company has liquid assets or readily realisable assets available to meet its liabilities as they fall due, and to be met in the ordinary course of business and thereafter whether the company will be in a position to carry on normal trading, in other words whether the company can meet the demands on it and remain buoyant’.
In light of the above, the Court found the Companies to be commercially insolvent and unable to pay their debts and saw no basis for exercising its discretion against the granting of a provisional liquidation order.