MALABA
CJ: This
is an appeal against the decision of the High Court (“the court a
quo”)
which placed the first, the second and the third appellants under
corporate rescue proceedings in terms of section 124(1)(a) of the
Insolvency Act [Chapter
6:07]
(“the Insolvency Act”). The judgment of the High Court dealt with
two separate applications, numbers HC2619/19 and HC2696/19, which
were consolidated for the purposes of hearing them.
The
Court holds that the respondents did not comply with the mandatory
provisions of section 124 of the Insolvency Act, which required them
to notify each affected party of the application by standard notice.
The
respondents failed to notify each affected party by “standard
notice”, as is prescribed by section 2 of the Insolvency Act.
Such
non-compliance with peremptory provisions of the Insolvency Act
rendered the application for corporate rescue fatally defective.
This
Court finds that the second respondent, being the only respondent
before this Court, had no locus
standi
to make the application for corporate rescue as it does not meet the
definition of “affected person” in terms of section 120 of the
Insolvency Act.
The
second respondent is a registered trade union representing employees
in the mining industry and not a registered trade union representing
employees of the company as envisaged by section 120 as read with
section 124 of the Insolvency Act.
Further,
the second respondent fails to meet the criteria of a creditor, as
the judgment it relied
upon
is not against the first appellant but against a different party.
It
bears mentioning that the first respondent was in default at the
hearing of the appeal as it realised it could not possibly defend the
judgment of the court a
quo.
FACTUAL
BACKGROUND
The
first
respondent
(being a creditor of the appellant companies) and the second
respondent (being a registered trade union in the mining industry)
sought an order in the court a
quo
that the appellants be placed under corporate rescue in terms of
section 124(1) of the Insolvency Act.
They
alleged that the appellants were failing to pay creditors and that it
was very likely that the appellants would become insolvent within the
immediately ensuing six months, making them worthy candidates for
corporate rescue.
The
first respondent, armed with an order against the appellants for
US$6,394,232
issued
in case HC6197/18, made the application for corporate rescue as an
“affected person”, being a creditor of the appellants in terms of
section 121(1)(a)(i) of the Insolvency Act.
The
second respondent, in making its application, averred that it was an
“affected person” in that it was a registered trade union in the
industry. The second respondent further stated that it also derived
its locus
standi
from its status as a creditor of the second and the fourth
appellants.
No
judgment against the second and the fourth appellants was attached to
the founding affidavit before the court a
quo
to support the claim of locus
standi.
It attached a copy of a judgment obtained against the first appellant
but no claim was made against the first appellant in the court a
quo
on the basis of that judgment.
In
defending the matter, the appellants raised a number of points in
limine.
In
case HC2619/19 the locus
standi
of the first respondent was disputed, on the basis that its creditor
status was compromised as the parties had entered into agreements for
the settlement of the debt.
The
first appellant further raised the point that the first respondent
had failed to comply with the requirements of section 124(2)(b) of
the Insolvency Act requiring an applicant for a corporate rescue
order to notify each affected person of the application by standard
notice.
At
the hearing of the applications, the first appellant raised the
preliminary objection that the first respondent did not serve the
Master of the High Court and the Registrar of Deeds with the
applications.
The
first appellant argued that the Master of the High Court had to be
served with the applications as he was required to provide a report.
Pertaining
to case HC2696/19, the appellants raised the preliminary objection
that the application was not served on the fourth appellant.
They
further argued that the second appellant was a non-existent entity,
as it had changed its name from Gold-Fields of Shamva (Pvt) Ltd to
Shamva Mining Company (Pvt) Ltd.
The
second respondent, however, filed a notice of withdrawal in relation
to the second appellant.
The
appellants also raised the point that the second respondent did not
comply with the peremptory statutory requirement to notify all
“affected persons” as envisaged in section 124(2)(b) of the
Insolvency Act.
Subsequent
to the hearing of the consolidated applications, the appellants filed
two applications in terms of Rule 235 of the High Court Rules, 1971,
for leave to file a further affidavit.
The
appellants intended to file an affidavit conveying to the court that
they had managed to raise $39,129,459.03. The contention was that
they were now in a position to settle their debts with their
creditors and provide working capital to revive the operations of the
mines.
The
court a
quo
dismissed all the points in
limine
raised by the appellants. The court a
quo
found that section 124(2)(b) of the Insolvency Act did not provide
for the manner or form of notification of “affected persons”.
The
court a
quo
found that the respondents had effected proper notice on the
appellants by publication in a local newspaper. The court a
quo
held that such notification was sufficient compliance with the
requirements of the statute in the absence of knowledge of all
“affected persons”.
Regarding
the issue of the failure to serve the Master of the High Court with
the application, the court a
quo
relied on the principle that what is not denied is deemed to be
accepted. Therefore, since the appellants did not raise the issue of
non-service in their notice of opposition, they were deemed to have
accepted that the Master of the High Court was duly notified.
In
relation to the merits of the matter, the court a
quo
took into consideration the supporting affidavit filed by the
appellants in terms of Rule 235. The court found that the said
affidavit corroborated the case for corporate rescue, as the position
taken in the additional affidavit contradicted the positions taken in
the opposing affidavits.
The
court expressed the view that in case HC2619/19 the appellants
admitted indebtedness to the first respondent but argued that they
had entered into a settlement agreement, the consummation of which
was being stalled by the delay in retrieving a mining lease. They
further averred that they were not in financial distress so as to
warrant corporate rescue as their assets exceeded liabilities.
The
finding was that no evidence was produced to support the averments.
The
court also found that the appellants had not been open and candid
with the court as they had not disclosed their production plans,
projections, estimates and financial status. The finding was that it
would be impossible for the court to project that the appellants
positions in both matters could reasonably be expected to change for
the better within six months.
The
court further found that the appellants did not present evidence to
show that they were not financially distressed. They failed to place
information before the court from which it could determine that in
the ensuing six months the companies would be able to pay off their
debts. The court also found that no revival plans were placed before
it.
Consequently,
the court a
quo
granted the application for corporate rescue, setting out the
corporate rescue practitioners to be engaged.
Aggrieved
by the decision of the court a
quo,
the appellants noted the present appeal.
SUBMISSIONS
BEFORE THE COURT
The
appellants submissions
Mr
Girach
for the appellants submitted that there is a very specific procedure
to be followed when commencing corporate rescue proceedings. He
argued that the respondents failed to comply with section 124(2)(b)
of the Insolvency Act, which requires an applicant for corporate
rescue to notify each “affected person” of the application by
“standard notice”.
He
rightly stated that the court a
quo
erred in finding that neither the manner of notification nor the form
or content of “standard notice” was defined in the Insolvency
Act.
Mr
Girach
argued
that the court a
quo
erred in applying a purposive interpretation of the statute, when the
ordinary grammatical meaning of the words was clear and unambiguous.
He
further submitted that the respondents could not hide behind the
assertion that they did not have information of all “affected
persons” as they could have obtained such information from the
appellants had they requested for it.
Mr
Girach
contended that an assessment of whether or not a company is in
financial distress can only be effectively conducted when the
creditors of the company are known. Thus, he queried how the
respondents could determine that the appellants were in financial
distress without having obtained information of their debts and
creditors.
He
stated that the advertisement published by the respondents in a local
paper could not possibly be deemed to have notified all “affected
persons”, as it was beyond the reach of foreign creditors.
Mr
Girach
also submitted that the second respondent had no locus
standi
to institute an application for corporate rescue.
He
argued that, in terms of the Insolvency Act, only an “affected
person” could institute such proceedings.
He
argued that the second respondent was not a registered trade union
representing the employees of the appellants, as prescribed by
section 121(1)(a)(ii) of the Insolvency Act. It was a registered
trade union in the mining industry.
Mr
Girach
further argued that the second respondent could also not derive legal
standing from the provisions of section 121(1)(a)(i) of the
Insolvency Act, as it was not a creditor of the first appellant.
He
submitted that the court order from which the second respondent
claimed to derive locus
standi
was not against the first appellant but another company known as
Metallon Gold.
Mr
Girach
argued that the Legislature painstakingly laid down the procedures to
be followed in corporate rescue proceedings as the process has dire
consequences, in that the mere institution of proceedings initiates
the process of corporate rescue.
The
second respondent's submissions
Counsel
for the second respondent, Mr Magwaliba,
submitted that the appellants preliminary objection a
quo
was not raised in respect of a particular creditor who was not
notified. He said the objection was raised as a bald allegation on
the invalidity of the service of notice. He argued that the
respondents served notice on creditors and attached e-mails to that
effect. It was through an abundance of caution that the respondents
caused the further publication of the notice in the newspaper.
In
respect to the issue of locus
standi,
Mr Magwaliba
argued that the appellants failed to raise that issue before the
court a
quo
in the opposing papers. He argued that the principle that what is not
disputed is deemed to be admitted ought to be applied against the
appellants.
He
further argued that in terms of section 29 of the Labour Act [Chapter
28:01],
a trade union represents employees in an industry, whereas a workers
committee represents employees at the workplace. The contention was
that the second respondent enjoyed legal standing to institute
corporate rescue proceedings against the appellants in the court a
quo.
THE
LAW ON CORPORATE RESCUE
The
current Insolvency Act was enacted in June 2018. The Act repealed the
former Insolvency Act [Chapter
6:04]
and some provisions of the former Companies Act [Chapter
24:03].
The
purpose of the new Insolvency Act is to provide for the
administration of insolvency and assigned estates and the
consolidation of insolvency legislation. Critically, the Insolvency
Act replaced judicial management as a business rescue strategy with
corporate rescue proceedings.
In
defining “judicial management”, the Court in Feigenbaum
and Anor v Germanis NO and Ors
1998 (1) ZLR 286 (HC) at p294 held that:
“Judicial
management is an extraordinary procedure made available to a company
by the court in special circumstances and for statutorily prescribed
purposes: Silverman
v Doornhoek Mines Ltd
1935 TPD 349. The procedure is only adopted when the court is
satisfied, on the facts contained in the application, that there is a
reasonable probability that if placed under judicial management, the
company which is unable to pay its debts will be able to pay its
debts in full, meet its obligations and become a successful concern:
Preston
& Anor v Hivu Estates (Pvt) Ltd & Anor
HH183-97 at pp29-30.”
The
definition was reinforced in Cosmos
Cellular (Pvt) Ltd v Posts & Telecommunications Corporation
2004 (2) ZLR 176 (S) at p182, wherein it was stated that:
“The
object of judicial management is to obviate a company being placed in
liquidation if there is some reasonable probability that, by proper
management or by proper conservation of its resources, it may be able
to surmount its difficulties and carry on.”
The
court in Oakdene
Square Properties (Pty) Ltd and Ors v Farm Bothasfontein Kyalami
(Pty) Ltd and Ors
2012 (3) SA 273 at para 7 stated the following:
“Judicial
management has been termed a 'spectacular failure' 'an abject
failure'. The main reason for its disuse was the high threshold of
proof required ('reasonable probability' and not merely a
possibility) for an order and the requirement that creditors claims
were to be paid 'in full'.
Empirical
studies indicated a success rate of between 15 percent and 20
percent.
Judicial
managers were appointed largely from practicing liquidators, many of
whom lacked the mind-set of saving the company, invariably resulting
in its liquidation.
Judicial
management had a negative effect on the creditworthiness of the
company, thereby undermining financial assistance from financial
institutions to recapitalise the company. It does not trigger a
concursus
creditorum
as
in the case of liquidation.”
With
the passage of time, judicial management, which had been in terms of
section 300 of the former Companies Act, became outdated and failed
to cater for the needs of the modern-day business environment. It had
several unsatisfactory aspects that defeated the purposes of business
rescue.
Corporate
rescue, on the other hand, is seen as a measure which seeks to avoid
the liquidation of a company in order to preserve it in a solvent
state for the benefit of the company's security holders and
creditors including the company's workers, as well as the society
in which it exists.
This
approach is broader than the approach under judicial management, in
that it seeks to cover the interests of all stakeholders who benefit
from the existence of the entity concerned.
Restructuring
of companies in financial distress is on the increase globally.
In
line with this trend, South Africa, in its new Companies Act, No.71
of 2008, introduced business rescue to the South African business
landscape.
The
South African procedure in commencing business rescue proceedings is
very similar to the Zimbabwean procedure for corporate rescue.
Companies that are financially distressed in South Africa now have an
opportunity to reorganise and restructure. This has far-reaching
effects on creditors, financial institutions, shareholders, employees
and society at large.
This
concept is also called corporate reengineering in North American
terminology.
In
the United Kingdom, companies in financial distress are allowed to
restructure their affairs under the Insolvency Act of 1986, which
provides for two rescue procedures, namely, an 'Administration'
and a 'Company Voluntary Arrangement'.
The
Insolvency Act of 1986 was aimed at the rehabilitation and
preservation of viable businesses, as well as offering the ailing
company a better chance of survival by allowing it to undergo a
reorganisation or an arrangement plan rather than facing liquidation
or administrative receivership.
The
Zimbabwean corporate rescue model reflects the same philosophy.
This
new approach looks at the broader social justice context and does not
restrict itself to private corporate interest alone.
Corporate rescue proceedings are a paradigm shift from judicial
management. The streamlined procedures are key in having a successful
and effective business rescue regime critical to economic growth and
stability.
Judicial
management, which was the law in existence before corporate rescue,
was found to be unsatisfactory as a vehicle for business rescue for a
number of reasons.
(i)
The procedure was regarded as an extraordinary remedy, which
infringed upon the rights of creditors and was only available under
special and limited circumstances.
(ii)
The procedure was only available to companies incorporated in terms
of the Companies Act and was not available to other forms of business
entities such as partnerships, trusts and private business
corporations.
(iii)
In addition, the judicial management scheme was too formal and
over-regulated, in that the procedure was rather costly, slow and
cumbersome.
(iv)
The former Companies Act had some defects in the appointment and
qualifications of judicial managers, for instance an applicant could
nominate a person to be appointed as judicial manager.
(v)
Judicial management failed to provide a mechanism for the management
and reorganisation of companies with a view to returning them to
profitability. In some instances, it resulted in company failures and
their winding up, thus negatively impacting on the economy.
A
concern for the livelihood and well being of those dependent upon an
enterprise which may well serve an entire town or region is a
legitimate factor to which the modern law of insolvency needs to have
regard.
The
chain reaction and consequences of liquidating a company could
potentially be disastrous to creditors, employees and the community.
These
were some of the issues which influenced the new concept of corporate
rescue.
In
Powdrill
v Watson
1995 (2) AC 394 at 442(A), Lord
Brown
Wilkinson referred
to a “rescue
culture which seeks to preserve viable business”.
In
Cape
Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd and Anor
2011 (5) SA 600 (WCC) at p603 the court pointed
out that business rescue proceedings reflect
a legitimate preference for proceedings aimed at the restoration of
viable companies rather than their destruction.
The
concept of corporate rescue is in line with modern trends of
corporate rescue regimes:
(i)
Firstly, it attempts to secure and balance the competing interests of
creditors, shareholders and employees.
(ii)
Secondly, it envisages a shift away from having regard to creditors
interests only.
(iii)
Thirdly, it is predicated on the belief that to preserve a business,
the experience and skills of employees might in the end prove to be a
better option for creditors.
(iv)
Lastly, it enable creditors to secure a better recovery of their
debts from debtors.
In
Koen
and Anor v Wedgewood Village Golf & Country Estate (Pty) Ltd and
Ors
2012 (2) SA 378 (WCC) at 383 the
court stated that:
“It
is clear that the legislature has recognised that the liquidation of
companies more frequently than not occasions significant collateral
damage, both economically and socially, with attendant destruction of
wealth and livelihoods. It is obvious that it is in the public
interest that the incidence of such adverse socio-economic
consequences should be avoided where reasonably possible.
Business
rescue is intended to serve that public interest by providing a
remedy directed at avoiding the deleterious consequences of
liquidations in cases in which there is a reasonable prospect of
salvaging the business of a company in financial distress, or of
securing a better return to creditors than would probably be achieved
in an immediate liquidation.”
Corporate
rescue proceedings are much more flexible and financially distressed
company friendly than judicial management. The purpose is to
facilitate the continued existence of a company in a state of
solvency and to facilitate a better return on shareholders income.
In
South
African Airways (SOC) Ltd (In Business Rescue) and Ors v National
Union of Metalworkers of South Africa obo Members and Ors
2020 ZALAC 34 at 13 the court said:
“The
primary aim of a corporate rescue procedure is not merely to rescue a
company business or potentially successful parts of the business. The
procedure aims to rescue the whole company or corporate entity. This
will naturally include preservation of jobs. Indeed, one of the main
drivers for the introduction of the business rescue regime in place
of the system of judicial management was the rescue of an ailing
business and thus the retention of jobs. This gloss on the purpose of
the business rescue provisions is captured by Prof. Anneli Loubser
and Mr Tronel Joubert as follows:
'The
preservation of jobs is widely regarded as one of the many economic
and social benefits that could result from the successful rescue of a
company or business … the saving of jobs is a high priority for
South Africa and the introduction of an effective and successful
business rescue procedure was seen by government as an important
measure to prevent further job losses.
As
was to be expected, the protection of the rights and interests of
employees in the new business rescue proceedings were emphasised from
the early stages of the corporate law reform process. It became
evident that employees were to be regarded as stakeholders in a class
of their own.
In
the Memorandum on the Objects of the Companies Bill 2008 it was
stated that the new Chapter
6
'recognises the interests of shareholders, creditors, and employees'.
The rest of this part of the document then continued by referring
only to the protection of the interests of workers with no further
mention of either the creditors or shareholders.'”
It
is in light of these developments that the Legislature enacted the
current Insolvency Act with the new concept of corporate rescue
procedures.
Corporate
rescue is defined in section 121(1)(b) of the Insolvency Act as
follows:
“(b)
'corporate 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; and
(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… .”
The
purpose of corporate rescue is to avert the eventual failure of a
company and to achieve the above objectives. The only acceptable
outcome at the end is the survival of the financially distressed
company.
THE
PROCEDURE AND EFFECT OF CORPORATE RESCUE
The
Insolvency Act provides two ways of commencing corporate rescue
proceedings:
(i)
The first procedure is in terms of section 122(1) of the Insolvency
Act, which provides that the board of a company or its shareholders
can make a resolution to institute corporate rescue proceedings.
This
procedure is voluntary and does not require the company to approach a
court.
The
resolution placing the company under supervision can only be taken if
the company is financially distressed, in that it is unable to pay
its debts and there appears to be reasonable prospects of rescuing
the company.
For
the resolution to be effective, it must be filed with the Master of
the High Court, the Registrar of Companies and the Registrar of
Cooperative Societies, in the case of a cooperative society.
The
company must within five business days after filing the resolution
notify every “affected person” and appoint a corporate rescue
practitioner who satisfies the requirements of section 131 of the
Insolvency Act.
The
responsibility of the corporate rescue practitioner is to oversee
management of the company during the corporate rescue proceedings.
(ii)
The second procedure, which is the procedure adopted in this matter,
is made by way of an application to court for an order commencing
corporate rescue proceedings.
The
procedure to be followed in terms of section 124 of the Act is as
follows:
“(1)
Unless a company has adopted a resolution contemplated in section
122, an affected person may apply to a Court at any time for an order
placing the company under supervision and commencing corporate rescue
proceedings.
(2)
An applicant in terms of subsection (1) must —
(a)
serve a copy of the application on the company, the Master and the
Registrar of Companies; and
(b)
notify each affected person of the application by standard notice.
(3)
Each affected person has a right to participate in the hearing of an
application in terms of this section.
(4)
After considering an application in terms of subsection (1), the
Court may —
(a)
make an order placing the company under supervision and commencing
corporate rescue proceedings, if the Court is satisfied that —
(i)
the company is financially distressed; or
(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.”
The
application for corporate rescue is filed before the High Court by
any affected person. Section 121(1)(a) of the Insolvency Act defines
“affected person” as follows:
“(i)
a shareholder or creditor of the company; and
(ii)
any registered trade union representing employees of the company; and
(iii)
if any of the employees of the company are not represented by a
registered trade union, each of those employees or their respective
representatives.”
It
therefore follows that if a court is satisfied that the company is
financially distressed, or has failed to pay any amount in terms of a
public regulation, or contract, with respect to employment related
matters, or it is otherwise just and equitable to do so for financial
reasons, it may make an order placing the company under supervision
and commencing corporate rescue proceedings.
Alternatively,
the court can dismiss the application and make any further necessary
and appropriate orders, which include an order placing the company
under liquidation.
The
court will also appoint a corporate rescue practitioner to manage the
affairs of the company.
The
effect of corporate rescue is to impose a general moratorium on
commencing or continuing with legal proceedings, including
enforcement of actions, against the company or in relation to any
property owned by the company or lawfully in its possession, in any
forum, for the duration of the corporate rescue proceedings.
The
moratorium, in terms of section 126(1) of the Insolvency Act, is
automatic and comes into effect on commencement of corporate rescue.
Section 126(1) provides that:
“126
General moratorium on legal proceedings against company
(1)
During corporate rescue proceedings, no legal proceeding, including
enforcement action, against the company, or in relation to any
property belonging to the company, or lawfully in its possession, may
be commenced or proceeded with in any forum, except —
(a)
with
the written consent of the practitioner; or
(b)
with the leave of the Court and in accordance with any terms the
Court considers suitable; or
(c)
as a set-off against any claim made by the company in any legal
proceedings, irrespective of whether those proceedings commenced
before or after the corporate rescue proceedings began; or
(d)
criminal proceedings against the company or any of its directors or
officers; or
(e)
proceedings concerning any property or right over which the company
exercises the powers of a trustee; or
(f)
proceedings by a regulatory authority in the execution of its duties
after written notification to the corporate rescue practitioner.”
The
mere filing of the application with the Registrar of the High Court,
even before the merits of the application are considered, has the
effect of commencing corporate rescue proceedings.
The
temporary moratorium regarding the suspension of the rights of
creditors will therefore start at this stage.
The
law requires the protection of the troubled company's assets so
that corporate rescue practitioners do not inherit shells. This is an
important change to the old regime.
In
JVJ
Logistics (Pty) Ltd v Standard Bank of South Africa Ltd and Ors
2016 (6) SA 448 (KZD) at 448 the court dealt with the moratorium on
business rescue proceedings. The court held that:
“During
business rescue proceedings, no legal proceeding, including
enforcement action, against the company, or in relation to any
property belonging to the company, or lawfully in its possession, may
be commenced or proceeded with in any forum…”.
During
a company's corporate rescue, the company can only dispose of its
assets in circumstances prescribed in section 127(1) of the
Insolvency Act.
In
respect of contracts of employment, the general rule is that
employees who were employed by the company before commencement of
corporate rescue proceedings will remain employed with no change to
their terms and conditions of employment - however, section
129(1)(a)(i)-(ii) of the Insolvency Act provides exceptions to this
rule.
Furthermore,
the board of directors is deemed to be dissolved during corporate
rescue proceedings and directors can no longer exercise their
functions as directors.
The
management of the company is vested in the corporate rescue
practitioner.
Section
121(1)(d) of the Insolvency Act defines a corporate rescue
practitioner as a person appointed, or two or more persons appointed
jointly, to oversee a company during business rescue proceedings. As
indicated earlier, he or she is, or they are, appointed by way of
company resolution or by court order.
To
be eligible for appointment one must satisfy the requirements and
qualifications spelt out in section 131 of the Insolvency Act.
The
powers of a corporate rescue practitioner are set out in section
133(1)(a)–(d) of the Insolvency Act and include full management and
control of the company in substitution of the board. He or she can
delegate any of his or her powers to a person who was part of the
board or pre-existing management of the company, appoint any person
as part of management of a company to develop a corporate rescue
plan, and implement any corporate rescue plan.
Section
136(1) of the Insolvency Act provides for remuneration of the
corporate rescue practitioner.
The
effect of section 121(1)(c) of the Insolvency Act is to shed light on
what a corporate rescue plan is.
It
is a plan drawn up by the corporate rescue practitioner in
consultation with creditors, affected persons, and management of the
company, showing how the rescue of the company will be achieved.
The
contents of a corporate rescue plan are prescribed in section 142 of
the Insolvency Act and include background information, proposals,
assumptions and conditions.
A
corporate rescue plan must be approved by creditors and shareholders
at a meeting convened in terms of section 143(1) of the Insolvency
Act.
During
the corporate rescue proceedings, the Act recognises, in sections
137, 138 and 139 respectively, participation rights of employees,
creditors, and holders of securities.
Corporate
rescue proceedings are not permanent. They are
a
measure for the temporary supervision of the financially distressed
company to bring it back to viability so that it continues as a going
concern.
In
Koen
and Anor supra
at 382 the court expressed the view that it
is axiomatic that business rescue proceedings by their very nature
must be conducted with the maximum possible expedition.
There
is no provision for the automatic or compulsory termination of
corporate rescue proceedings in the Insolvency Act.
The
intention of the Legislature, in section 125(3)(a) of the Insolvency
Act, is that corporate rescue proceedings should not take more than
three months.
In
terms of section 125(2)(a)-(c) of the Insolvency Act, corporate
rescue proceedings are terminated in one of the following ways -
(i)
by court order;
(ii)
the filing of a notice of termination with the Master; and
(iii)
by rejection of substandard implementation of a corporate rescue
plan.
TEST
TO BE APPLIED IN CORPORATE RESCUE PROCEEDINGS
In
terms of section 121(1)(b) of the Insolvency Act, the test to be
applied when assessing if a company should be placed under corporate
rescue is whether or not the company is financially distressed.
The
exercise involves an objective test, wherein the court is called upon
to look at all the financial circumstances of the company including
its ability to meet its obligations as they fall due.
Section
121(1)(f) of the Insolvency
Act
defines the term “financially distressed” as follows:
“(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
(ii)
it appears to be reasonably likely that the company will become
insolvent within the immediately ensuing six months…”.
From
the first part of the test, it appears that a company will be
regarded as being in financial distress if there is a reasonable
likelihood that the company may reach a position within the next six
months where it will no longer be able to pay its debts as they
become due and payable.
“Reasonable
likelihood” implies that there must be a rational basis for the
conclusion that the company may not be able to pay its debts within
the next six months.
This
conclusion amounts to an informed prediction, based on the current
financial position of the company, and considering all relevant
factors that may impact on the company's liquidity in the
foreseeable future. These factors include, but are not limited to,
the purpose of the company - for example, if it is a mining company
whether it is located in an area where there are sufficient mineral
reserves and whether the company has adequate machinery and manpower
to extract the minerals. The factors to be taken into account also
include whether the management of the company is competent and takes
its fiduciary duties seriously.
The
court in Southern
Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd
2012 (2) SA 423 WCC created a checklist to be used before a court
grants a corporate rescue application. In that case, it was stated
that the court needs to consider the following:
(i)
the cause of the financial failure;
(ii)
the remedy for the failure;
(iii)
whether there is a reasonable prospect that the remedy will be
sustainable; and
(iv)
whether there are concrete and objective ascertainable details beyond
mere speculation that the remedy is sustainable.
The
second part of the financial distress investigation deals with
insolvency.
A
company is regarded as technically insolvent (and thus financially
distressed) if the liabilities of the company exceed the assets. A
court must consider the complete financial position of the company
when determining whether there is a reasonable likelihood that the
company will be insolvent within six months.
A
company will be regarded as being in financial distress where it is
insolvent after all other circumstances have been considered,
including considering alternative fair values of the assets and
liabilities, factoring in reasonably foreseeable assets and
liabilities, as well as considering any other proposed measures taken
by management such as subordination agreements, recapitalisation or
letters of support.
It
is also important to bear in mind the fact that
corporate
rescue proceedings are not for terminally financially distressed
corporations. They are for ailing corporations which, given time, can
be rescued and become solvent.
In
the case of BNY
Corporate Trustee Services Ltd v Eurosail
[2013] UKSC 28 at 42 the court found that the "balance sheet"
test for insolvency must take account of the wider commercial
context. It stated that courts must look beyond the assets and
liabilities used to prepare a company's statutory accounts when
deciding whether or not a company is “balance sheet” insolvent.
See
also Boschpoort
Ondernemings (Pty) Ltd v Absa Bank Ltd
[2014] 2 SA 518.
However,
identifying when a company is financially distressed is not a
straightforward process, with part of the difficulty resting with how
the initial assessment of the financial state of a company is
conducted. The evaluation of a company's solvency state relies on
somewhat rough benchmarks, often referred to as the cash flow and
balance sheet tests. The tests are not intended to be accurate
mechanisms employed to determine the exact financial situation of a
struggling company, but should be used as a statutory rule to
determine whether a company is insolvent for certain legal purposes.
The
court will have a basis to conclude that a company is financially
distressed, especially in a situation where a company is unable to
pay salaries to its employees, trade creditors, and regulatory
authorities such as the National Social Security Authority (“NSSA”)
and the Zimbabwe Revenue Authority (“ZIMRA”).
Also,
failure to pay statutory obligations such as pensions and the Mining
Industry Pension Fund (“MIPF”) in the case of mining companies is
also an indicator that a company is in financial distress.
Other
indicators include failure to pay electricity bills, water bills,
professional membership fees for senior employees, and insurance
policies.
Thus,
financial distress is associated with liquidity problems.
A
reasonable prospect of successful rescue proceedings as envisaged in
section 121(1) of the Insolvency Act requires more than a prima
facie
case or an arguable possibility. It was stated in the Oakdene
Square Properties
case
2013 (4) SA 539 (ZASCA) at pp551-552
that:
“Of
even greater significance, I think, is that there must be a
reasonable prospect, with 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”.
In
support of the above authority, the court in Al
Mayya International Ltd (BVI) v Valley of the Kings Thaba Motswere
(Pty) Ltd and Ors
[2017] JOL 38030 (EL), commenting on section
128(1)(b) of the South African Companies Act 2008 which is the
equivalent of section 121(1)(b) of the Insolvency Act, expressed
the view that:
“The
prospect of rescue must accordingly be considered in the light of the
objectives of business rescue proceedings contemplated by the
definition in terms of section 128(1)(b) of the Act, which are: to
facilitate rehabilitation of the company in order to -
(a)
return the company to solvency; or
(b)
provide a better return for creditors and shareholders than what they
would achieve through liquidation.
An
applicant for business rescue proceedings must thus place before
Court a factual foundation for its contention that there are
reasonable prospects that the aforementioned objectives can be
achieved.”
It
appears that the Legislature intended that business rescue be applied
in instances where there is a reasonable likelihood that a company
may be commercially insolvent (unable to pay its debt) within the
immediately ensuing six months, and as such business rescue can be
used to rescue or rehabilitate the failing company.
APPLICATION
OF THE LAW TO THE FACTS
It
appears to the Court that this matter can be disposed of by answering
one pertinent issue, which is: whether
or not the failure to comply with the mandatory provisions of the Act
rendered the application a nullity.
It
has already been established that section 124 of the Insolvency Act
provides for the procedure to be followed when approaching the court
for an order of corporate rescue. Section 124(1) provides that:
“124
Court
order to commence corporate rescue proceedings
(1)
Unless a company has adopted a resolution contemplated in section
122, an
affected person may
apply to a court at any time for an order placing the company under
supervision and commencing corporate rescue proceedings.”
The
statute is specific in relation to the appropriate applicant who is
entitled to make an application for corporate rescue.
The
statute is specific so as to curb the abuse of the process by parties
who may not have a substantial interest in the rehabilitation of a
company as well as parties who may only be interested in their
personal financial gain and not the rehabilitation of the company.
In
terms of the Insolvency Act, there is no ambiguity as to whom an
affected person is. It is either a shareholder, a creditor of the
company, a registered trade union representing the employees of the
company or the employees of the company who are not represented by a
registered trade union.
An
applicant for corporate rescue is therefore confined to such persons.
In
casu,
the second respondent cannot be held to be an affected person in
terms of the Insolvency Act. It was never alleged by the second
respondent that it was a shareholder. Therefore it cannot qualify in
terms of the first criterion set out in section 121(1)(a)(i).
Instead, the second respondent alleged that it was a creditor because
it was in possession of a judgment against the first appellant.
It
is apparent from the record that the judgment which the second
respondent relied on is a judgment, not against the first appellant,
but another company, identified as Metallon Gold, that is based in
the United Kingdom. The judgment does not establish that the second
respondent was a creditor of any of the appellants.
In
the absence of any other evidence to prove that indeed the second
respondent was a creditor of any of the appellants, the Court cannot
possibly clothe the second respondent with creditor status.
The
second respondent further alleged that it qualified as an affected
person in terms of section 121(1)(a)(ii) of the Insolvency Act, in
that it was a registered trade union in the mining industry.
The
Insolvency Act does not provide for a registered trade union in the
industry but specifically provides for a “registered trade union
representing the employees of the company”.
Lastly,
the second respondent does not qualify as an employee of the company
in terms of section 121(1)(a)(iii) of the Insolvency Act.
As
such, the second respondent does not meet the requirements of an
affected person and therefore had no locus
standi
to institute corporate rescue proceedings against the appellants.
There is no reason to deviate from the definition of “affected
person” prescribed by the Act.
The
respondents failed to comply with the provisions of section 124(2) of
the Insolvency Act, which made their application a nullity as they
failed to comply with peremptory provisions of the statute.
Section
124(2) provides that:
“(2)
An applicant in terms of subsection (1) must
—
(a)
serve a copy of the application on the company, the Master and the
Registrar of Companies; and
(b)
notify each affected
person
of the application by standard
notice.”
Section
2 of the Insolvency Act provides that:
“'standard
notice' means notice by registered mail, fax, e-mail or personal
delivery.”
This
provision shows that the court a
quo
misdirected itself when it found that neither
the manner of notification nor the form or content of “standard
notice” was defined in the Insolvency Act.
The
court a
quo
went on to express the view that there was a lacuna in the law that
needed to be addressed by the Legislature as it created confusion in
the procedure.
The
court a
quo
failed to appreciate the statutory definition of standard notice as
set out in section 2 of the Insolvency Act.
It
is clear that standard notice can only be effected through registered
mail, fax, e-mail or personal delivery. Nowhere in the Act is there a
provision for standard notice to be by way of publication in a
newspaper.
Such
notice was a nullity which vitiated the entire proceedings.
Service
by way of standard notice is a peremptory requirement as the Act uses
the word “must”. Deviation from peremptory requirements of the
Act render an application fatally defective.
It
is imperative to conduct corporate rescue proceedings with the utmost
diligence and care as they have far-reaching consequences, not only
on the creditors, shareholders and employees of a corporation but the
society at large.
Corporate
rescue is predicated on a broader social justice perspective unlike
the old law of judicial management that was based on private
corporate interest. Consequently, it is critical that the procedures
laid down for corporate rescue be complied with to the letter.
In
Top
Trailers (Pty) Ltd and Anor v Kotze
[2017] ZAGPPHC 1268 the court expressed the following sentiments in
respect of notification of affected persons:
“How
Kotze should have become aware of the business rescue proceedings is
not explained by the applicants. The applicants have the obligation
to notify all affected persons of the resolution but have not done so
and have not proffered any explanation for their breach. They are now
approbating and reprobating, demanding that Kotze should perform
miracles. The applicants themselves had not complied with the law but
are using the same legislation that they disregarded, to achieve a
perverted outcome. The Court will not allow itself to be a party to
an illegality…
The
main argument relied on by Kotze at the proceedings before Justice
Khumalo
was that the resolution placing Top Trailers under business rescue
was a nullity because of the company's non-compliance with section
129(3)
of the Companies
Act.
From
a
reading of the affidavit filed by Kotze at the hearing before Justice
Khumalo,
it is clear that Kotze was attacking the resolution adopted by the
Board of Directors. The attack was to the effect that because he, as
an affected person, was not notified of the resolution as provided
for in section
129
of the Companies
Act, the resolution
stood to be set aside.
I
cannot disagree with his reasoning on this score…
I
find that Kotze as an affected person, a creditor of the company,
should have been notified of the resolution placing Top Trailers
under business rescue but he was not notified. The fact that Kotze
was not notified clearly infringes on his rights as an affected
person and creditor of the company.”
It
is apparent that the failure to notify affected persons is not only a
breach of peremptory provisions, but it also prejudices affected
persons who have a substantial and legitimate interest in the fate of
the company as they are not afforded an opportunity to respond to the
application.
Ultimately,
the outcome of the application may prove to be adverse to them.
The
effect of non-compliance by an applicant for corporate rescue with
the provisions of the Insolvency
Act relating to
notifying affected persons by standard notice renders the application
a nullity.
DISPOSITION
In
the result it is ordered as follows -
1.
The appeal is allowed with costs.
2.
The order of the court a
quo
is set aside and substituted with the following –
“The
applications for corporate rescue under HC2619/19 and HC2696/19 be
and are hereby dismissed with costs.”
BHUNU
JA: I agree
CHIWESHE
AJA: I agree
Scanlen
& Holderness,
appellants
legal practitioners
Gumbo
& Associates,
second respondent's legal practitioners
