PATEL J: This an application for
the confirmation of a provisional order, granted on 23 February 2011, for the
winding up of the 1st and 2nd respondents (the
respondents). The latter companies were the tenants of the applicant and
jointly operate a tobacco auction floor under the trade name of Zimbabwe
Industry Tobacco Auction Centre (ZITAC) together with their sub-tenants.
The
applicant avers that the respondents have failed to satisfy an arbitral award
for moneys owed that was granted in its favour on 16 April 2010 and registered
by this Court on 19 May 2010. Together with sales commission and arrear rentals
due, the total amount that the respondents owe the applicant stands at
US$460,800. The applicant further contends that the respondents' confirmed
liabilities of US$1,630,800 exceed their assets of less than US$100,000 and
that they have no prospect of recovery in the future as they were not granted
an auction licence for the 2011 season.
The
respondents' preliminary objection is that the provisional order in this case
was granted unprocedurally for a number of reasons. On the merits, they contend
that the applicant has ignored their goodwill and volume of business,
approximating US$6 million annually, which must be included in the valuation of
their tobacco auction business. Therefore, their assets far exceed their
liabilities. Their auction licence for 2011 was not granted because of an
interdict by this Court preventing the Tobacco Industry Marketing Board from
issuing the licence. The respondents have applied for the interdict order to be
set aside and the matter is still pending. Moreover, soon after the provisional
order was granted, the provisional liquidator voluntarily vacated the leased
premises. Both the interdict and provisional liquidation were manipulated by
the applicant to wrongly evict the respondents under the guise of liquidation.
Before their provisional liquidation, the respondents had loan facilities with
ZABG Bank and did not owe any arrear salaries to their employees. Again, their
trading debts due were normal and the income that would have been generated in
2011 would have sufficed to satisfy those debts. The provisional liquidator's
interim report is grossly inaccurate in understating their assets and income
and in inflating or falsifying their liabilities. In short, the respondents
argue that they are not insolvent and that the provisional order should be
discharged with costs de bonis propriis or on an attorney and client
scale.
Procedural Irregularities
The
principal argument for the respondents is that the provisional order in
casu was obtained unprocedurally in breach of Rules 223, 231 and 232 of
the High Court Rules 1971. Firstly, the notice of set-down for hearing on the
Unopposed Roll was filed on the Friday instead of the Thursday preceding the
next Wednesday of set-down. Secondly, the application and supporting papers
were not served on either of the Respondents. Thirdly, the application was
filed on 18 February and granted on 23 February 2011, before the period of 10
days for the filing of any notice of opposition had elapsed. Mr. Nhemwa
concedes these irregularities but submits that they should be condoned in the
interests of justice.
Section
4C of the High Court Rules provides for departures from the Rules and
directions as to procedure:
“The court or a judge may, in relation to any
particular case before it or him, as the case may be –
(a) direct, authorise or condone a
departure from any provision of these rules, including an extension of any
period specified therein, where it or he, as the case may be, is satisfied that
the departure is required in the interests of justice;
(b) give such directions as to procedure
in respect of any matter not expressly provided for in these rules as appear to
it or him, as the case may be, to be just and expedient.”
In the instant case, the respondents' procedural objections were first
raised in an urgent chamber application, filed in March 2011 in Case No. HC
2854/11, wherein the final relief sought was the invalidation of the
provisional order for breach of the Rules. This application was dismissed for
want of urgency and the respondents lodged an appeal in Case No. SC 69/11. The
respondents then failed to file their heads of argument or to pursue the appeal
further and must be deemed to have abandoned it. Again in March 2011, the
respondents also filed an application in Case No. HC 2942/11 for the rescission
of the provisional order premised on the same grounds, i.e. breach of
the Rules. The applicant duly filed its notice of opposition, but the
respondents have to date neither filed their answering affidavit or heads of
argument nor done anything else to pursue that application, and the matter is
still pending.
Turning
to the interests of the creditors and other parties concerned with this matter,
I note that the respondents were placed under provisional liquidation over 24
months ago. In the intervening period, the provisional liquidator has completed
the whole process of investigation and issued his interim report confirming
that the liabilities of the respondents far exceed their assets. Having regard
to this scenario, coupled with the flagrant abuse of court process exhibited by
the respondents as described above, it seems to me that this matter must be
brought to finality. Moreover, I do not perceive that the respondents will suffer
any prejudice in having this matter finally determined as they have had ample
opportunity to oppose the confirmation of the provisional order. In the
premises, I am inclined to condone the procedural irregularities preceding the
issuance of the provisional order so that that the interests of justice are
duly served.
Whether Provisional Order has Lapsed
At the hearing of this matter, Mr. Muchada raised the new point
that the original return date for confirmation of the provisional order was 17
May 2011 and, because the date was not extended, the order lapsed on that date.
Consequently, there is no provisional order to be confirmed. Reliance for this
submission is placed upon Ex parte S & U TV Services (Pty) Ltd
1990 (4) SA 88 (WLD) and Crundall Brothers (Pvt) Ltd v Lazarus
N.O. & Another 1991 (3) SA 812 (ZHC) at 823G-I. As against this, Mr. Nhemwa
explains that the respondents filed their notice of opposition on 16 May 2011,
the day before the return date. Because the matter could no longer proceed on the
Unopposed Roll, he argues that there was no need to extend the provisional
order once it was opposed. He relies for this proposition on the decision of
the Supreme Court in Militala N.O. & Others V Zimbabwe Textile
Workers Union & Others SC 67/11. According to Mr. Nhemwa, it
was held that a provisional order for liquidation or judicial management,
whether it is opposed or unopposed, does not lapse until it is confirmed or
discharged.
My
reading of the cases relied upon by both counsel is that they do not
meaningfully support their respective arguments. In the S & U TV
Services case, the applicant applied for and obtained an order for its own
provisional winding up. On the extended return day, there was no appearance on
behalf of the applicant and the rule nisi was therefore expressly
discharged by order of the court. An application for its revival 3 weeks later
was refused because matters would no longer have been res integra at
that stage. The Crundall Brothers case involved a dispute over a right
of pre-emption incorporated in an order of court. The return day of the
relevant rule nisi was postponed but the rule itself was not extended
accordingly. It was held that the postponement of the return day ipso facto
extended the rule nisi to the new return day. In my view, both of
these cases are distinguishable on their facts and findings from the present
matter and do not really advance the position of the respondents. In the same
vein, I do not think that the decision in the Militala case can be construed
to support the applicant's position. In that case, an appeal against the
decision of this Court in Case No. HC 2540/11 was allowed and it was ordered
that the provisional order for judicial management of the applicants “remains
of full force and effect until discharged in terms of the law”. Although
applications for winding up and judicial management are similar in nature, they
are not necessarily identical in terms of the processes involved and their
objectives. In any event, I am advised that there are no written reasons for
the order of the Supreme Court and I am therefore unable to glean anything from
the case to substantiate Mr. Nhemwa's submissions in that regard.
Rule
247(3) of the High Court Rules stipulates the procedural requisites of a
provisional order for sequestration or winding up as follows:
“Where a provisional order relates to the
sequestration of an estate, the winding up of a company or any other matter in
which interested parties generally are to be given an opportunity to oppose the
granting of a final order, the provisional order shall –
(a) be in Form 29D; and
(b) specify the date and place at which
the court will hear argument on the confirmation of the provisional order; and
(c) specify the manner in which the provisional
order is to be published and, where appropriate, the persons on whom copies of
the provisional order, together with all supporting documents, are to be
served.”
The
relevant paragraphs of the provisional order in casu are in the following
terms:
“1. The 1st
and 2nd Respondents' companies … are provisionally wound up, pending
the granting of an Order referred to in paragraph 3 or the discharge of this
Order.
2.
…………………………………………………………………….
3.
Any interested party may appear before this Court sitting at Harare on the 17th
May 2011 at 10.00 am, to show cause why a Final order should not be made
placing the Respondent Company (sic) in liquidation and ordering that
the costs of these proceedings shall be the costs of liquidation.
4.
Pending the return day, this Order shall operate as a Provisional Order of
winding up.
5.
……………………………………………………………………….
6.
……………………………………………………………………….
7.
Any person intending to oppose or support the application on the return day of
this Order shall ... give due notice … and … serve … a copy of an affidavit
which it (sic) files … .”
It is
abundantly clear from the Rules as read with the terms of the provisional order
that the return day is critical to its confirmation or discharge. What appears
from the papers and from submissions by counsel is that the respondents filed
their notice of opposition the day before and that the applicant attempted to
extend the provisional order. It is not clear how this attempt was made or why
it was unsuccessful. What is clear is that provisional order was not confirmed,
discharged or extended on the stipulated return day. Ordinarily, this would
entail the conclusion that it has lapsed and is no longer extant for the purposes
of these proceedings. While this conclusion seems inescapable, I am loath to
endorse it in the circumstances of this case for the following reasons.
Firstly,
just before the return day, the applicants filed voluminous documentation, 85 pages
in total, by way of opposition to the confirmation of the provisional order.
After the return day had passed, they did not challenge the order or its
continued operation on the ground that it had lapsed. Instead, they awaited the
filing of the applicant's heads of argument and responded by filing their own
heads of argument on 7 August 2012. Even at that late stage, they did not take
the point that the provisional order had lapsed. This objection was only raised
at the hearing of this matter, almost 22 months after the return day. In my
view, their conduct in this regard is again tantamount to gross abuse of court
process.
Secondly, as I have already stated, the respondents were placed under
provisional liquidation over 24 months ago. Thereafter, other creditors have
lodged their claims and the provisional liquidator has issued his interim
report. At this juncture, it is of cardinal importance to have regard to the
general advantage and benefit of all the persons concerned or interested in the
matter. The Court should be less inclined to interfere at a late stage in the
winding up process than it would be at an early stage in that process. See Ma-Afrika
Groepbelange (Pty) Ltd & Another v Millman and Powell N.N.O. &
Another 1997 (1) SA 547 at 566A-E, in the context of an application for
the removal of a liquidator. In the instant case, the general balance of
convenience is overwhelmingly in favour of treating the provisional order as
having remained operational up to the present time. Moreover, the interests of
justice dictate that the matter be finally determined to enable all the parties
concerned, including the respondents, to know where they stand. Having regard
to all of these factors, I take the view that the failure to extend the return
day of the provisional order should not be regarded as being fatal to its
continuing validity. Accordingly, I deem it appropriate to exercise my
discretion under Rule 4C to condone that failure and to proceed with this
matter on the basis that the provisional order remains in full force until it
is confirmed or discharged.
Grounds for Winding Up
Section 206 of the Companies Act [Chapter 24:03] specifies the
circumstances in which a company may be wound
up:
“A company may be wound up by the court –
(a) if the company has by special
resolution resolved that the company be wound up by the court;
(
b) if default is made in lodging the statutory report or in holding
the statutory meeting;
(c) if the company does not commence its
business within a year from its incorporation or suspends its business for a
whole year;
(d) if the company ceases to have any
members;
(e) if seventy-five per centum of
the paid-up share capital of the company has been lost or has become useless
for the business of the company;
(f) if the company is unable to pay its
debts;
(g) if the court is of opinion that it is
just and equitable that the company should be wound
up.”
It is clear that the circumstances enumerated in this section are to be read
disjunctively and not conjunctively. With particular reference to paragraph (f)
of section 206, section 205 provides that:
“A company shall be deemed to be unable to pay its
debts –
(a) if a creditor, by cession or
otherwise, to whom the company is indebted in a sum exceeding one hundred
United States dollars then due, has served on the company a demand requiring it
to pay the sum so due by leaving the demand at its registered office and if the
company has for three weeks thereafter neglected to pay the sum or to secure or
compound for it to the reasonable satisfaction of the creditor; or
(b) if the execution or other process
issued, on a judgment, decree or order of any competent court in favour of a
creditor, against the company is returned by the Sheriff or messenger with the
endorsement that no assets could be found to satisfy the debt or that the
assets found were insufficient to do so; or
(c) if it is proved to the satisfaction of
the court that the company is unable to pay its debts and, in determining
whether a company is unable to pay its debts, the court shall take into account
the contingent and prospective liabilities of the company.”
For the
purposes of section 205(c) as read with section 206(f), the test that is
generally applied is that of commercial insolvency. See RAG (Pvt) Ltd
v Huizenga N.O. 1986 (2) ZLR 203 (S) at 206A-B. With reference to the
equivalent provisions of the South African Companies Act 61 of 1973, the test
was expounded in ABSA Bank Ltd v Rhebokskloof (Pty) Ltd &
Others 1993 (4) SA 436 (C) at 440F-H as follows:
“The concept of commercial insolvency as a ground
for winding up a company is eminently practical and commercially sensible. The
primary question which a Court is called upon to answer in deciding whether or
not a company carrying on business should be wound up as commercially insolvent
is whether or not it has liquid assets or readily realisable assets available
to meet its liabilities as they fall due to be met in the ordinary course of
business and thereafter to be in a position to carry on normal trading – in
other words, can the company meet current demands on it and remain buoyant? It
matters not that the company's assets, fairly valued, far exceed its
liabilities: once the Court finds that it cannot do this, it follows that it is
entitled to, and should, hold that the company is unable to pay its debts … and
is accordingly liable to be wound up.”
As
regards the just and equitable criterion set out in paragraph (g) of section
206, which postulates not facts but only a broad conclusion of law, it is
necessary to take into account all the relevant circumstances, including the
competing interests of all the parties concerned. See Moosa N.O. v Mavjee
Bhavan (Pty) Ltd & Another 1967 (3) SA 131 (T) at 136H. There are five
broad categories that that have been identified for winding up on just and
equitable grounds: the disappearance of the company's substratum; the
illegality of its objects and fraud committed in connection therewith; a
deadlock in the management of the company's affairs; grounds analogous to those
for the dissolution of a partnership; and where there is oppression. See Hughes
v John Dory Trucking (Pty) Ltd & Others 2008 (5) SA 300 (N) at
paras. 16-17. These circumstances are not exhaustive and it is open to the
courts to identify other circumstances or devise other categories in the
future. The first step is to determine the facts relevant to the formation of
an opinion as to justice and equity. The second step is for the court to decide
whether or not to exercise the discretion to wind up. See Asla Devco (Pty)
Ltd v Bubesi Investments 74 (Pty) Ltd [2011] ZAWCHC 24 (WC) at
paras. 29-32.
Whether Respondents should be Wound Up
Dealing
with the commercial solvency of the respondents prior to the granting of the
provisional order, it is fairly clear, despite their attempt at denial, that
they had several outstanding liabilities. These included the following: lease
fees and good tenancy deposit owing to the applicant, sums due to several
financial institutions, and levies due to the Ministry of Agriculture and
Tobacco Industry Marketing Board. After they were placed under provisional
liquidation, they have incurred further liabilities in the form of overdue
wages and salaries and related statutory levies. According to the provisional
liquidator's interim report, submitted on 11 May 2011, the respondent's
liabilities stand at US$6,937,633 while their assets are estimated at
US$300,000, leaving a negative solvency of US$6,663,633.
The
respondents dispute most of their liabilities before their provisional
liquidation. They also dispute the extent of liabilities tabulated by the
provisional liquidator as being inflated and inaccurate. In my assessment,
their assertions in this regard are not borne out by the documentary evidence
adduced by them. For instance, in their letter dated 4 June 2010, addressed to
the applicant, the respondents admit the accrual of deposit rent, monthly
rentals and commissions, and openly plead for time to pay off the arrears due.
Moreover, their liability for these amounts is confirmed in the arbitrator's
interim award in April 2010 and the final award in September 2010.
In light
of all of the documentation before the Court, it is clear that, before the
provisional order was granted in February 2011, the respondents did not meet
their liabilities as they arose. It is equally clear that, after February 2011,
their inability to satisfy their indebtedness has been exacerbated by the
accumulation of further liabilities. In this regard, I am not persuaded by the
argument that their predicament has been deliberately orchestrated through the
machinations of the applicant in collusion with the provisional liquidator.
Critical to this argument is the interdict of this Court restraining the
Tobacco Industry Marketing Board from issuing an auction licence to the
respondents. This interdict was granted many months ago in November 2010 and
remains in force to this day. The respondents claim to have challenged it but
have not demonstrated what further steps they have taken to have the matter
finalised in their favour.
Related to the auction licence is the argument that, but for the interdict,
the respondents would have generated approximately US$6 million in the 2011
season and would have been more than able to meet their normal trading debts.
They further contend that their goodwill and volume of business must be
included in the valuation of their tobacco auction business. By their
calculation, that business is worth US$18 million and, therefore, their assets
far exceed their liabilities. In my view, this contention is entirely spurious
and fallacious in the present context. From a commercial perspective, goodwill
based on prospective revenues may be treated as an asset in valuating a
company's business when it is sold or transferred as a going concern. However,
goodwill is utterly valueless and cannot assist in discharging the company's
debts and liabilities as and when they arise. I am fortified in this view by The
Shorter Oxford English Dictionary definition of “goodwill” as:
“the privilege, granted by the seller of a business
to the purchaser, of trading as his recognised successor; the possession of a
ready-formed connection of customers, considered as a separate element in the
saleable value of a business.”
In the
final analysis, it is abundantly clear that the respondents did not and
presently do not have liquid or readily realisable assets available to meet
their liabilities as they fall due in the ordinary course of business. I am
adequately satisfied that they are not in a position to carry on normal trading
and are therefore commercially insolvent. It follows that they are unable to
pay their debts within the meaning of section 205(c) as read with section
206(f) of the Act. This is sufficient to warrant a final order for their
liquidation.
In view
of this conclusion, it seems unnecessary to consider the additional or
alternative ground for winding up envisaged by section 206(f) of the Act.
However, for the sake of completeness, it may be as well to do so. As I have
already indicated, the interdict against the issuance of an auction licence
still stands and effectively operates to hamstring the respondents from
carrying out their operations. The further practical impediment to their
business is the requirement of the Tobacco Industry Marketing Board that they
rehabilitate the auction floor infrastructure. Thus, even if they were duly
licensed, they do not have the requisite capital base in order to rectify the
necessary infrastructure. What all of this means is that the substratum of the
respondent companies has effectively disappeared. Moreover, whilst they remain
in legal existence, they will continue to incur further liabilities in the form
of bank interest and charges, unpaid wages and salaries and attendant statutory
levies. To avoid further financial prejudice to the applicant and other
creditors, it is imperative that the respondents be liquidated so as to enable
the proportional sharing of their remaining assets amongst all of their
confirmed creditors. All in all, it seems eminently just and equitable that the
respondents be finally wound up.
In the result, it is ordered that the provisional order
for the winding up of the 1st and 2nd respondents granted
by this Court on the 23rd of February 2011 be and is hereby
confirmed and made a final order.
C. Nhemwa & Associates, applicant's legal practitioners
Dube, Manikai & Hwacha, 1st
and 2nd respondents' legal practitioners
