The first case relating to Chapter 6 of Act 71 of 2008 (the
Act), being the business rescue chapter, was decided by the
Honourable Makgoba J in the North Gauteng High Court (case
26597/2001 – Riaan Swart as applicant and Beagles Run
Investments 25 (Pty) Ltd and others as respondents). In paragraph
16 of the judgment Makgoba J quoted the preamble to the Act as
follows: "to provide for efficient rescue of financially
distressed companies."
Correctly, Makgoba J said the purpose of Chapter 6 was to assist a
financially distressed company by means of a business rescue plan
in order to maximise the possibility of the company continuing on a
solvent basis, or to achieve a better return for the company's
creditors or shareholders in comparison to a liquidation.
The facts in the Beagles Run case were that the respondent was
financially distressed but merely needed time in order to dispose
of immovable assets in order to pay his creditors. Makgoba J posed
the question whether there exists a reasonable prospect of rescuing
the company (section 131(4)(a)). A consideration of this part of
section 131 is essential because this is the basis on which the
court will exercise its discretion.
In this matter Makgoba J made a factual finding (based on the
affidavits of the first and second intervening creditors) that the
respondent, in this matter, was insolvent and the judge agreed with
the contention of counsel acting for the intervening respondents
that the applicant was being "less than frank and lacks the
bona fides in bringing this application".
Most importantly, at paragraph 37, Makgoba J emphasised that the
court does have a discretion even though the requirements of
section 131(4)(a)(i) to (iii) have been made out. The judge
exercised his discretion against the applicant and concluded that
there was no basis for saying the business could be carried on a
solvent basis or that there is any prospect thereof and that no
case had been made out that the granting of a business rescue will
place the creditors of the respondent in a better position than
they would be in a winding up.
I think that the judgment of Makgoba J is correct and gave positive
and useful direction. It has been usefully supplemented by the
judgment of the Honourable Acting Justice Eloff decided in the
Western Cape High Court under case number 15155/2011 in the matter
between Southern Palace Investments 265 (Pty) Ltd as applicant and
Midnight Storm Investments 386 Ltd as respondent with The Registrar
of Banks and Zoneska Investments (Pty) Ltd as first and second
intervening parties.
The Honourable Eloff AJ quoted from section 7(k) of the Act which
says that the purposes of business rescue are to "provide for
the efficient rescue and recovery of financially distressed
companies, in a manner that balances the rights and interests of
all relevant stakeholders".
Eloff AJ states in paragraph 3 of the judgment that the purpose is
to achieve an essential breathing space while a business rescue
plan is implemented by the business rescue practitioner. The judge,
however, cautioned against the possible abuse of the business
rescue procedure by rendering the company temporarily immune to
actions by creditors to enable the directors or other stakeholders
to pursue their own ends.
Importantly, the judge said that "it is necessary that an
application for business rescue be carefully scrutinised so as to
ensure that it entails a genuine attempt to achieve the aims of the
statutory remedy". The judge in this case found that no
genuine attempt was discernible from the affidavits filed of record
and accordingly the judge said he was not prepared to exercise the
discretion as provided for in section 131(4). He accordingly
dismissed the application for business rescue and placed the
respondent in provisional winding up.
The learned judge then considered the meaning of the term
"reasonable prospect" used in section 131(4). The judge
decided that the term "reasonable prospect" indicates
that something less is required than in court 427(1) of the
Companies Act 61 of 1973 (judicial management) where a
"reasonable probability" was required. The judge very
correctly, in my view, said that the mindset in previous cases
dealing with judicial management was that prima facie the
creditor was entitled to a liquidation order and only in
exceptional circumstances would a judicial management order be
granted. The judge emphasised that the approach to business rescue
in the new Act is the opposite, namely that business rescue is
preferred to liquidation, but most importantly the court still has
a discretion not to grant the business rescue order.
The Honourable Eloff AJ said it would be inappropriate for a court
faced with a business rescue application to maintain the mindset
(from the earlier regime) that a creditor is entitled ex debito
justitiae to be paid or to have the company liquidated.
Eloff AJ then focused in detail on the facts of the matter and
commented that the respondent did not initiate business rescue
proceedings by way of resolution under section 129 of the Act and
found that on vague and undetailed information before the judge
there was no reason to believe that there could be any prospect of
the respondent being restored to a successful business. A comment
was made by the judge that not even a concrete business rescue plan
was made available for consideration.
In paragraph 24 of the judgment it is stated that while every case
must be considered on its merits, a business rescue plan will not
have a reasonable chance of success unless it addresses the cause
of the demise or failure of the company's business and offers a
remedy therefor that has a reasonable prospect of being
sustainable. The emphasis in the judgment was that a business
rescue plan which is unlikely to achieve anything more than to
prolong the agony by substituting one debt for another without
there being light at the end of the tunnel will certainly not be
sufficient.
I am of the view that this is a very strong and well-reasoned
judgment. What can be gained from the judgment is that when an
application is made to court there should be a detailed proposed
business rescue plan modelled on Part D of Act 71 of 2008. This
must be fully motivated and explained to the court and unless this
is done then the judges (correctly in my view) will exercise their
discretion against granting business rescue.
Shortly put, an application to court should not be a kneejerk
reaction but should only be brought after the business rescue plan
has been comprehensively planned and prepared. These comments apply
specially to an application in terms of section 131(6) where
liquidation proceedings have already been commenced by or against
the company and an application for business rescue is brought. In
this case the business rescue application will suspend the
liquidation proceedings. In my view, in these circumstances, a
well-researched and motivated business rescue plan can, if
correctly presented, end opposed liquidation proceedings.
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