Part
of counsel for the applicant's argument, and as I
understood it, was that the applicant's loans to SMM Holdings (Private) Limited
should be treated preferentially.
Whilst
the pre-reconstruction loans had been incurred by the failed management of the
company the applicant's loans had been incurred by the Administrator himself.
They were ordinary commercial loans. They ...
Part
of counsel for the applicant's argument, and as I
understood it, was that the applicant's loans to SMM Holdings (Private) Limited
should be treated preferentially.
Whilst
the pre-reconstruction loans had been incurred by the failed management of the
company the applicant's loans had been incurred by the Administrator himself.
They were ordinary commercial loans. They had been meant to ensure that the
company would trade out of its difficulties and be able to re-pay its
pre-reconstruction obligations. As such, the applicant should not suffer the
restrictions of section 6(b) of the Reconstruction of State Indebted Insolvent
Companies Act [Chapter 24:27]. Counsel
for the applicant also submitted that it had not been part of the terms of the
borrowing that repayment would be dependent upon new shareholders injecting new
capital into the company.
Counsel
for the respondent submitted that the applicant's loans did not deserve
preferential treatment. On the contrary, they should rank lower. The applicant
had advanced them well knowing the precarious financial position of the company
and had therefore taken a well-calculated risk….,.
Aside
from the constitutional point, in my view, the substantive issue before me was
the extent to which the respondent could exercise the discretion bestowed on
him by section 6(b) of the Reconstruction of State-Indebted Insolvent Companies
Act [Chapter 24:27]. What factors ought he to take into account? What factors
ought he not to take into account?
According
to counsel for the applicant,
an Administrator of a company under reconstruction to whom leave to sue is
sought should only have regard to the following factors:
1.
Whether the proposed claim is bona fide or is
simply intended to harass the Administrator or to improperly interfere with his
administration of the company.
2.
Whether the cause of action arose prior to the reconstruction order or after.
3.
Whether the Administrator himself was responsible for incurring the liability
that is sought to be enforced in the legal proceedings.
4.
Whether the claim made is admitted.
5.
Whether any culpable person was involved in the facts giving rise to the cause
of action.
6.
Whether an applicant, given the known history of the company under
reconstruction, should, as a matter of policy be deprived of the right to sue.
Other
than the first criterion postulated by counsel, I find the rest of them
somewhat narrow. They seem tailor-made to suit the particular circumstances of
the applicant in this case. One is mindful of the dangers of being too
prescriptive and of trying to lay down a one-size-fit-all criterion.
I
am content to accept that in deciding whether or not to grant leave under section
6(b) of the Reconstruction of State Indebted Insolvent Companies Act [Chapter
24:27], an Administrator of a State-indebted company must consider whether the
proposed claim is bona fide or is simply intended
to harass him or to improperly interfere with his administration of the
company. A court reviewing the decision of the Administrator will, in my view,
scrutinise it on such broad terms as such decisions are generally scrutinised
in the field of Administrative Law.
An
Administrator of a company under reconstruction, in terms of the of the
Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27], whose
leave is sought to institute legal proceedings against the company in terms of
section 6(b) of the Reconstruction of State Indebted Insolvent Companies Act
[Chapter 24:27], must act in accordance with section 3 of the Administrative
Justice Act, particularly subsection (1)(a) thereof. He must act reasonably and
in a fair manner. His decision must not be whimsical or capricious. He must not
advance self-interests otherwise his decision will be unfair. Whilst his
paramount consideration is to turn around the fortunes of the company and bring
it out of the financial doldrums so as to free the State from any obligation to
pay, that cannot be his singular consideration. He must not be blind to the
interests of the other stakeholders in the company otherwise his efforts may
produce unintended results. He must strive to strike a balance.
When
a person is appointed an Administrator of a State-indebted company and clothed
with the powers of paragraphs (b) and (d) of section 6 of the Reconstruction of
State-Indebted Insolvent Companies Act [Chapter 24:27], he is, in a sense,
being empowered and authorised to be judge over his own cause. All control and
management of the company is vested in him. He decides for and on behalf of the
company. He is the face of the company. He is the brains and soul of the
company. He must know what is good for the company. But, in spite of all that,
he must remain objective.
Section
6(b) of the Reconstruction of State Indebted Insolvent Companies Act [Chapter
24:27] gives no suggestion as to how an Administrator should treat the pre- and
post-reconstruction obligations. However, it seems to me that, in general, both
the pre- and post-reconstruction obligations should be accorded equal
treatment. But circumstances might arise when they may be treated differently.
Every case will have to be considered on its own set of circumstances. In my
view, it should not be the date when a particular debt was incurred that must
decide preferential treatment or otherwise. Rather it should be the
circumstances surrounding the particular debt.
In
the present matter, SMM Holdings (Private) Limited had been under a
reconstruction order because it was indebted to the State. The Minister of
Justice must have been satisfied that the company's management had been
fraudulent, negligent or guilty of some such serious infraction. The respondent
had been appointed Administrator. His duty was to turn it around so that it
would be able to repay its debt and free the State from the obligation to
utilise public funds. He had to return the company to profitability. From the
respondent's lawyer's letter of 28 August 2012, it was not only the debt to the
State that the company had been saddled with. It was said there were
other debts much bigger in size than the applicant's loans. That was the state
of affairs when the respondent had taken over.
In
his wisdom, the respondent had borrowed from the applicant. As his general
powers of administration, in relation to a company under reconstruction, he had
had such power to raise money in any way in terms section 18(d) of the
Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27]. When
he borrowed from the applicant, the purpose had been to ensure that the company
continued to produce and to trade. From the loan terms, not only would the
company be able to repay the applicant's loans, but also it would remain with
60% of the proceeds from its products to utilise for other purposes. But from
the papers, and from the submissions during the hearing, it appeared that the
company, under the control and management of the same respondent, who himself
had incurred the debt, albeit on behalf of the company, had neither kept the
arrangement of supplying the company's products to the applicant nor repaid the
loans by due date. The applicant became entitled to sue the company. But the
law said it must first get permission from the respondent. The respondent
refused that permission despite acknowledging the debt, and, tacitly, the
breach. His fear had been that the applicant's suit would open up the
floodgates, a Pandora's Box, as his lawyers had put it.
There
is something in the respondent's conduct that offends against notions of
justice and fair play in the minds of reasonable men. There is something
callous in the submission that the applicant was not entitled to cry foul when
it had got, as it were, its fingers burnt allegedly because it had entered into
the loan arrangements with its eyes wide open. Yet, it had been the respondent
himself, not the failed management of the past, who had brought about the state
of affairs giving rise to the debt due to the applicant. In my view, his
decision to refuse the leave had classicallybeen concerned with
self-preservation. It had evidently been designed to shield himself from the
consequences of his own infractions. That was wrong. That was unreasonable.
That was unfair. That was in breach of section 3 of the Administrative Justice
Act.
For
that reason I set aside the respondent's decision.
