MAKONI J: This is an application for the confirmation of a
provisional order granted on 1 December 2010 for the placement of the
respondent companies under judicial management. Between that date and the 17th
of July 2013 a lot happened which culminated in an order by consent of all the
parties involved, extending the return date for confirmation or discharge of
the provisional order to 17 July 2013. A notice to that effect was
advertised in The Government Gazette and The Herald, the relevant part of which
read as follows:
“Any interested
person who wishes to oppose the confirmation of the provisional judicial
management order of the companies shall file a notice of opposition with the
Registrar of the High Court within ten days from the date of this advert……..
and shall serve a copy of the notice on the applicant. He shall then appear before
the High Court at Harare at the hearing of the matter on the 17th
day of July 2013 to show cause why the companies should not be placed under
judicial management”
On the return date the matter was postponed to 24 July 2013
on which date it was referred to the opposed roll to be set down for hearing in
terms of the rules of this Honourable Court. The parties are not agreed as to
exactly what happened on the return date.
The matter was set down for hearing on 23 January 2014 on
the opposed roll. On that date Mr Ruzengwe appeared for applicant
whilst Messrs C. Nhemwa and Associates and Messrs C.N. Mlotswa and Company
appeared both purporting to represent the companies. The legal practitioners
appeared before me in chambers and two issues arose;
a) Whether C. Nhemwa and
associates have any authority to represent the companies on the return date.
b) Whether this Honourable
Court can exercise its jurisdiction in the absence of a return date.
I directed that the parties file heads of argument
addressing the above two issues.
Issue number 1
Mr Nhemwa submitted that the directors of the
companies have the locus standi instead of the Provisional Judicial
Manager (PGM) to represent the companies on the return date. He further
submitted that on the granting of a provisional judicial management order,
directors of a company are stripped of their power and the PGM assumes all the
powers of a company. However the directors retain some residual powers to
prosecute the matter placing their company under final provisional judicial
management. He referred to a number of South African and English cases one of
which is ABSA Bank limited vRhebokskloof (Pvt) limited and Ors 1993
(4) SA 436 (C).In that matter it was held that the South Africanlaw
position was stated in the matter of Wolhurter Steel (Welkom)Pvt v
Jatu Construction (Private) limited ( in provisional liquidation)1983
(3) SA 815 (O)were the court held that ,
“ To hold that after the
granting of a provisional liquidation order the directors of a company which has
been provisionally liquidated by virtue of such order have lost their locus
standi in judicio to oppose the granting of a final order would fly in the
face of the very object and purpose of the rule nisi and it
would therefore be quite wrong to emasculate such object and purpose by a
finding that the directors have lost their residual power to show cause why the
company should not be wound up or for that matter to anticipate the return date
of the rule nisi. It would be quite ludicrous to hold that a director
of a company or a company acting through its directors, is not an interested
party, when it comes to deciding whether it or they have the right to be heard
on the return day of the rule nisi.”
Mr Nhemwa also referred to some cases in our
jurisdiction that of Mzwimbi and Ors v Reserve Bank of Zimbabwe
and Ors 2005 (1) ZLR 132 p 139 and Ex parte Lion Transport Company
(Private) Limited 1954 SRLR 135. He submitted that the position
of our law is exactly the same with the English and South African law. He
concluded by saying that the directors of a company under provisional judicial
management have an interest in the affairs of the company. The placement of a
company under final judicial management may affect their personal status
especially their personal liabilities in terms of company law. To deny them an
opportunity to be heard is contrary to the tenets of the principal of natural
justice especially the audi alterum paten rule.
On the other hand Mr Mlotshwa submitted that the
authorities cited by Mr Nhemwa relate only to those instances were the
directors of a company wish to oppose the confirmation of a provisional
liquidation order. No single authority was cited relating to the position in
relation to provisional judicial management. He referred to the case of Alpha
Bank BPK & Anor vRegistrar of banks & Anor 1996 (1) SA
330(A); which is authority for the contrary proposition to the effect that the
directors of a company under provisional judicial management have no residual
powers whatsoever.
He further submitted that there are separate provisions in
the Companies Act (The Act) dealing with provisional liquidation, provisional
judicial management and final judicial management. Provisional liquidation and
provisional judicial management are two distinct processes. In terms of s
303 (a) of the Act a PGM assumes the management of the company. There is
no such corresponding provision in relation to provisional liquidation. Further
the matters and reports to which a Court shall have consideration to on the
return date in terms of s 305 (1) of the Act do not include anything required
from the directors of the company. He conclude by submitting that there is no
legal or logical basis upon which Messrs C. Nhemwa and Company can claim any
right or insist to represent the respondent companies.
In reply Mr Nhemwa conceded that the cases he cited related
to provisional liquidation but argued that the same principles apply to
judicial management. He further submitted that the question of residual powers
is not provided for statutorily but is a common law position.
In Boka Investments Pvt Ltd v Third Line
Trading (Pvt) Ltd and Ors HH 104/13 PATEL J (as he then was) made a
very pertinent observation when he stated
“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.”
This is borne out by the Companies Act where there are
separate provisions relating to judicial management and liquidation. The
provisions relating to liquidation do not provide for a return date as is the
position with provisional judicial management in terms of s 305 (1). The PGM,
in terms of s 303 (a) assumes the management of the company upon the granting
of the judicial management order. There is no such corresponding
provision in relation to liquidation.
I would agree with the submissions by Mr Mlothwa that
it would be misleading to cite cases relating to liquidation in relating to the
process of judicial management. There is no authority that has been cited
by Mr Nhemwa to support the contention that directors of a company
under provisional judicial management have residual powers which enable them to
oppose or consent to the placement of a company under judicial management or
otherwise.
There is clear authority to the contrary in Alpha bank
BPK and Anor v Registrar of Banks and Anor 1996 (1) SA 330 A
where it was held that
“the question whether the board of directors had retained
residual powers of control after the placement under curatorship could best be
answered by asking whether the board of directors had such powers before
placement under curatorship. This question had to be answered in the
negative; shareholders control a company; the board manages, it. What the
placement under curatorship brought about was to transfer the management of the
bank to the curator, so that no residual powers of control could thereafter
have vested in the board ----.”
Analogous to this position are the provisions of s 303 of
the Act which provide that upon a company being placed under provisional
judicial management, the provisional judicial management assumes management of
the company.
In my view s 305 (1) is the determining provision. It
clearly spells out matters and reports to which the court shall give
consideration to on the return date of the provisional judicial management
order. It does not include anything required from the directors of the
company.
From the above, it is, clear that the directors as
represented by Mr Nhemwa have no locus standi to appear in
court at this stage of the process of provisional judicial management.
In terms of s 30 5 (1), (b) of the Act the court shall
inter alia, consider the report of the provisional judicial management made in
term s of s 303. Therefore the provisional judicial management, as
represented by Mr Mlotshwa has locus standi to appear on the
return date.
Issue No. 2
Mr Mlotshwa submitted that it was not competent for this court to deal
with any of the matters set out in s 305 of the Act, in particular the
confirmation of a provisional order, in the absence of a valid and existing
return date. The return date lapsed on 14 July2013 and was not
extended. Such an extension can be effected in terms of s 305 (2) of the
Act. Such proceedings would be irregular particularly in those instances
where those creditors who have not proved their claims are not afforded the
opportunity to do so in terms of s 305 (1) (c) of the Act on the return date.
Mr Ruzengwe and MrNhemwa's common position is that the
setting down of sequestration or winding up of companies is done in terms of
Companies Act and Order 32 r 247 (3). They submitted that the return date
was advertised and all interested parties given an opportunity to present their
positions. No party can file papers after the return date other than
those already before the court.
As I have already stated, the parties, are not agreed on exactly what
transpired on the return date, which resulted in the matter being returned to
the opposed roll. The return date was not specifically extended.
I believe the starting point is the Companies Act itself.
Section 305 provides:
“Return day of provisional judicial management order
(1) On the return day fixed in the provisional
judicial management order, or on the day which the court or a judge may have
extended it, the court, after considering-
(a) the
opinion and wishes of the creditors and members of the company; and
(b) the report of
the provisional judicial manager prepared in terms of section three hundred and
three; and
(c) the number
of creditors who did not prove claims at the first meeting of creditors and the
amounts and the nature of their claims; and
(d) the report of
the Master; and
(e) the report
of the Registrar;
May grant a final judicial management order if it appears
to the court that there is a reasonable possibility that the company concerned,
if placed under judicial; management, will be enabled to become a successful
concern and that it is just and equitable to grant such an order, or it may
discharge the provisional judicial management order or make any other that
it thinks just.” (my own underlining)
In terms of the underlined part, the court, on the return date, may make any
other order it thinks just. In casu the court, seeing that the
matter was now opposed, referred the matter to the opposed roll where it would
be properly ventilated and determined. Thereafter, order 32 r 247 (3) (4)
comes into operation. Subrule 4 provides
“Rules 238 and 240 shall apply, mutantis mutandis,
to the hearing of a matter consequence upon the issue of a provisional order
referred to in subrule (3).”
MrMlotshwa's concerns are addressed by the
provisions of order 247 (3). The provisional order issued by the court
must specify the date and place at which the court will hear argument on
confirmation of the order. It must also specify the manner in which it will be
published and the persons on whom the copies of the order are to be served.
In casu, the provisional order was advertised and it had a clause
which invited persons who wished to oppose the confirmation of the provisional
judicial management order to file notices of opposition with the Registrar and
to appear before the court on the return date.Those who filed their papers by
or appeared in court on 17 September 2013 will be notified of the set down
dates. As a result, there will be no prejudice to any of the interested
parties.
The other approach to the issue is that adopted by PATEL J
(as he then was) in the Boka'ssupra. He considered the
circumstances of the matter before him and concluded;
“to take the view that the failure to extend the return
date of the provisional order should not be regarded as being fatal to its
continuing validity. Accordingly, to deem it appropriate to exercise my
discretion under rule 4 C 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.”
In casu I have considered that the companies have
remained under provisional judicial management for 36 months now. The
provisional judicial manager has issued his reports, and the members and
creditors have held their meetings and expressed their wishes. The Master
has also compiled his report. As was stated in the Boka casesupra
this court should be less inclined to interfere, at a late stage, in the
judicial management of the respondent companies and hold that the general
balance of convenience is overwhelmingly in favour of treating the provisional
order as having remained operational up to the time of hearing. It is in
the interests of all parties concerned to know where they stand. I will
therefore deem that the provisional order remain in full force.
Whether the provisional order should be confirmed or
discharged.
The requirements for confirmation or discharge of a
provisional judicial order are set out in s 305 of the Act. For a court
to arrive at a decision it must consider.
(i)
The opinion and wishes of the creditors and members of the company
(ii)
The report of the provisional judicial manager
(iii)
the number of creditors who did not prove claims at the first meeting of
creditors and the amounts and the nature of their claims;
(iv)
the report of the Master;
(v)
the report of the Registrar of Companies
After considering the above, the court may confirm the
order
“if it appears to the court that there is a reasonable
probability that the company concerned, if placed under judicial management,
will be enabled to become a successful concern and that it is just equitable to
grant such an order----.”
The purpose of judicial management was clearly spelt out in
International Capital Corporation (Pvt) Ltd v Clarison (Pvt) Ltd 2000
(1) ZLR 585 H at 570 B-F.
“Generally, a company should not be permitted to be
dissipated by winding up and dissolution because it has suffered a set back
with regard to the repayment of its debts or the performance of its
obligations, which if it were to be given time, it would be able to surmount
and become successful.
“The procedure of judicial management is intended to be a
means for affording it such time. Judicial management should not be
instituted or continued merely on the basis that while it subsists the
company's assets maybe sold more advantageously than they would be in
winding-up: judicial management is not intended to be an alternative method of
liquidation: see Millman NO v Swartland Huis Meubileerders
(Edms) Bpk 1972 (1) SA 741 (C0 at 744-45 and Tenowitz v Tenny
Investments (Pty) Ltd 1979 (2) SA 680 (E) at 684 and Henochsberg on
the Companies Act vol. 1,5 ed by PM Meskin, p 923.
Judicial management is a special dispensation which can be
granted to a company only in exceptional cases – see Silverman v Doorhoek
Mines Ltd 1935 TPD 349 at 353;Bahnenn v Fritzmore Exploration
(Pvt) Ltd 1963 (2) SA 249 (T) at 250 – 251;Ladybrand Hotel (Pty) Ltd
1963 (2) SA 249 (T) at 250-251; Ladybrand Hotel (Pty) Ltd v Seal
& Nor 1975 (2) SA 357 (O) at 359. Judicial management implies
that there be a temporary reconciliation of conflicting interests – those of
the company in being unable despite its difficulties to continue its operations
in the ordinary course and those of its creditors in not being prevented from
enforcing their rights, including the way of winding-up. It is because of these
conflicting interests that the Act requires the court to be satisfied both that
there is a reasonable probability were that there to be judicial management the
company would be able to achieve the goals envisaged by s 300 (a) and that it
is just and equitable to afford it the opportunity to attempt to do so.
As such, judicial management cannot be instituted merely on the ground that it
would improve the efficiency of the company's management or increase the
profitability of its operation – see Henochsberg on the Company Act supra
at p 924 and Makuvha & Ors v Lukoto Bus Service (PTY) Ltd and
Ors 1987 SA 376 (VSC) at 397.”
The issue therefore is whether if the company is placed
under final judicial management it will be enabled to become a successful
concern and whether it will be just and equitable to do so. The arrive at
the appropriate decision I considered the reports by PMJ, the Master and the
submissions made by the applicant who is one of the creditors.
The P.J.M report
The companies have been in difficulties since 2001. In 2006
they were placed under provisional judicial management and later final judicial
management until June 2008, when an investor Elgate (Pvt) Ltd offered to invest
US 5.4 million. 18 months later, the companies were placed under provisional
judicial management again.
The PJM's opinion is that the respondent companies are
hopelessly insolvent. His basis for saying so is that the Master had
provisionally accepted claims worth US13 871 678.56. To this amount is to
be added a recent claim by Agribank, secured by a mortgage bond, in the amount
of US5.8 million. The total liabilities of the company will amount to $19
671 678.56. The debt might rise to US20 million when costs of judicial
management are factored in including those of the Master.
The huge debt figure always the combined assets valued at
$5 979 219. 00
The biggest creditor to the companies is Parrogate Zimbabwe
Pvt Ltd whose claim is for $3 000 000.00. Although the amount is subject
of pending liquidation, the amount is secured by a bond of US3 million over the
assets of the companies i.e. their immovable property.
The companies do not therefore have free immovable assets.
There is no single shareholder who is prepared to support
the judicial management by proposing injection of capital into the
companies. There is no indication, in the turn around proposed by
Aurifin, of an investor or financial institution ready or willing to provide
the working capital. In any event such capital will not be forthcoming because
the companies assets are encumbered and in some the instances to financial
institutions.
He also commented on the unfavourable conditions in
the textile industries due to competition from cheaper imports ageing equipment
which requires replacement and. He concluded by saying that the only
prospect for creditors getting paid is for the companies to be placed under
provisional liquidation, where outside of the secured creditors, a potential
investor might be willing to make a palatable offer to the unsecured creditors.
Master's report
Various creditors and members meetings were held where the
PJM would present reports. The final meeting was held on 17 April 2013
where the PJM's reports were discussed to conclusion. The PJM presented his
position per his report above. The issue was put to vote. A total
of 13 creditors whose total claims amount to US6 million voted for final
judicial management. Their reasons for doing so were
i)
Workers wanted to save their jobs and the communities they lived in.
ii)
Unsecured creditors felt that they might not get anything upon liquidation due
to
ranking of creditors.
iii)
They had hope in the turn around strategy presented by Aufin Pvt ltd.
Creditors whose total claims were $5 536 758.00 voted for
liquidation their reasons were
i)
There was no hope that an investor will be found.
ii)
The ageing equipment which needed replacement
iii)
They had waited for too long for payment and they could accept whatever
comes from liquidation.
The members who were present voted for final judicial
management.
Their reasons were that
i)
There were prospects of a turn around contained in the Aurifin report.
ii)
There will be proper management.
iii)
There would be a conjusive environment for investors after the 2013 harmonised
elections.
According to the PJM's report, a total of 135 creditors
claims amounting to $13 871 078 were provisionally accepted.
The Applicant's Position.
After the meeting of the 17 March 2013 where the PJM had
recommended liquidation the members and the creditors sought an independent
opinion from Aurifin.
The members and some of the creditors also believed that the PJM had grossly
undervalued the companies immovable properties to paint a picture of insolvency
and cause liquidation of the companies. They filed an evaluation report
of the Chegutu property which was done before the placement of the companies
under the provisional Judicial Management. The value was placed at $13. 2
million.
It was the applicant's opinion that the companies can be
turned around as illustrated by the following.
(i)
The PJM was able to enter into a toll manufacturing contract with Kithra
Enterprises (Pvt) Ltd which was producing army wear.
(ii)
The respondent companies supplied uniforms to the police and prison services.
(iii)
The respondent were major producers of hosiery material especially school socks
which were imported.
The applicant commended that the companies were the major
producers of yarn both for the local an export market. Their demise
affects not only the shareholders and creditors but the collapse of all down
stream and upstream industries such as cotton production, ginning, textile and
clothing industries.
The towns of Kadoma and Chegutu have borne the burnt of the
closure of the companies. All aspects of development have been
affected since revenues from the companies, their workforce and downstream
industries have dried up.
The Aurifin report was of the view that it is possible to
revive the fortunes of companies. It puts forward the following
measures
(i)
Shareholding restructuring
(ii)
Implementation of scheme of arrangements.
(iii)
Capital raising
(iv)
Production.
Long term, the companies can then consider identifying
institutional investors and re listing on the Zimbabwe Stock Exchange.
It concluded by saying that on a balance of probabilities,
the continuation of judicial management could result in the restoration of
normalcy as opposed to liquidation
Analysis
The PJM report paints a dim picture about the respondent companies situation.
According to his report the companies have debts of just under $20 million
against assets valued at US $979 219.00 the immovable properties are
encumbered. The biggest creditor is Parrogate (Pvt) Ltd with a claim for $3
million.
The Masters report reflects that creditors who are owed the
larger amount voted for final judicial management. Amongst these creditors are
the workers of the companies who are owed about 42% of the total creditors
claim, in respect of salary arrears and proposed retrenchment packages. These
workers are members of the applicant. They are prepared to enter into payment
arrangements with the companies if the companies are placed under Judicial
Management.
Of those creditors who voted for liquidation, the bulk of the amount is claimed
by Parrogate Pvt Ltd. This amount is the subject of court proceedings as
it is disputed. If this amount is subtracted from the total of those who voted
for liquidation, only an amount of $2 536 755 will remain as claims of those
who voted against judicial management compared to total claiming of about US 6
500.00 who voted in favour of final judicial management.
There is an amount of 5.4 million which is owned to Agribank. The claim had not
been accepted at the time the Master's report was filed. From the papers filed
on record, it appears an amicable solution is likely to be revealed in respect
of this amount.
There is also the issue of Elgate Investments (Pvt) Ltd. This entity was meant
to inject an amount of $5,4 million as investment in the companies. The PJM was
still investigating whether this amount was injected, It affects only 1 million
was injected. There is litigation to compel Elgate to produce proof that it
paid the amount in full.
The PJM in his report date 2 February 2011 he put the value of the respondent's
companies immovable properties in Harare, Kadoma, Chegutu and Gweru at
$.2million dollars. The applicant puts this value in issue. They
described it as undervaluation. In support of their contention, they
produced a valuation report on the Chegutu property which put the value 13,2
million dollars. What comes out from all the above is that the
Provisional judicial manager's report contains some discrepancies which are not
explained. I will deal with them here under
1. If a property was valued
at 13.2 million dollars just before the placement of the companies under
judicial management how can all the immovable properties, with one located in
Harare be valued at 4.2million dollars
2. If one were to subtract
the amount being claimed by Parrogate and that is owed to the workers in sum of
$4 816187, 25 it would leave an amount of $3 787 259. The total remaining
amount includes amount owed to such institutions as ZESA, NSSA and ZIMRA. Could
the companies not be able to be turned around and pay this amount?
3. The issue of Agribank's
claim was not properly ventilated. It appears from the papers that the
debt to Agribank is owed by FSI and the respondent's companies guaranteed the
date. There are indications from FSI that it is in some discussions with
the bank which might result in the security being released.
On the other hand there are some sound turn around
strategies put forward by Aurifin. These will prevent the company from
being dissipated by winding up and dissolution. My view is that the
respondent's companies should be given time to pursue the proposals put forward
by Aurifin and the applicants. They will be able to surmount the current
difficulties and become a successful concern again.
The creditors who voted for the placement of the companies
under judicial management, proposed that Knowledge Hofisi of Aurifin Capital
(Pvt) Ltd be appointed the judicial manager. I would agree with their
proposal since he is the one who came up with the turn around strategy.
The provisional judicial manager does not believe in final judicial management
but in liquidation. It is therefore in the best interest of all concerned that
Knowledge Hofisi be appointed the final judicial manager.
In the result I make the following order;
1)
1st, 2nd, 3rd, 4th, 5th
and 6th respondents are herby placed under Final Judicial
Management.
2)
Subject to the provisions of s 305 of the
Companies Act[Cap 24:03]the master shall appoint Knowledge Hofisi of
Aurifin Capital Private Limited as final judicial manager with the powers and
duties set out in s 306 and s 307of the court and subject to the supervision of
this court.
3)
From the date of that appointment and upon completion of the Bond of Security
in accordance with s 274 of the Companies Act [Cap 24:03], the Final
Judicial Manager shall forthwith take over the management of the 1st,
2nd, 3rd, 4th, 5th and 6th
respondent companies and shall prepare and submit reports in accordance with s
306 (i) of the Act.
4)
The Final Judicial Manager shall have the powers set out in sub paragraph (a)
to (m) of s 306 of the Companies Act [Cap 24:03] and, without the
consent of the creditors or the shareholders, may raise money on the security
of the 1st,2nd,3rd, 4th, 5th
and 6th respondent companies assets, or with the consent of the
creditors and shareholders dispose off part of the assets of the respondent
companies to raise working capital or to enter into a scheme of arrangement of
resuscitate the respondent companies.
5)
All actions and applications and the execution of all Writs, Summon and
other process against the 1st, 2nd, 3rd,4th,5th
and 6th respondent companies shall be stayed and not proceed without
the leave of this court.
6)
The Final Judicial Manager shall, in terms of s 308 of the Companies Act [Cap
24:03], be entitled, from the assets of the respondent companies, to the
payment of remuneration at a rate to be determined by the Master of the High
court and to reimbursements for all out of pocket expenses incurred in the
course of his duties.
7)
The Provisional Judicial Manager, Winsley Militala of Petwin Executor and Trust
Company (Private) Limited, shall handover all matters and shall account to the
Final Judicial Manager and is hereby discharged in terms of s 305 (2) (a) of
the Companies act [Cap 24:03].
8)
The Final Judicial Manager shall pay both applicants and respondents costs of
these proceedings out of the assets of the companies.
Mapombere, Musakana and Ruzengwe, applicants' legal practitioners
G.N.
Mlotshwa and Associates, respondents' legal practitioners
