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It is an unlikely collection of names, but then so have been the players in the decided cases which are starting to shape the direction which Business Rescue (BR), as interpreted by the Courts, is taking.
In what follows we focus on:
The following judgements are relevant:
Judgement centred on allegations of the company's and its controllers' untoward activities. Much was made of the apparent lack of good faith on the part of the applicant in bringing the application for BR.
The intervening creditors (in opposing the granting of BR) complained of the dilatory tactics of the respondent and its controller – for example, in giving notice of intention to oppose the winding-up but never filing papers, making unfulfilled promises of payment, and seeking to prevent the sale of the major assets (certain aircraft) by applying for an interdict against the auction.
The Court also criticised the applicant for having overstated the value of the assets and for having understated the liabilities.
The Court noted it was common cause that the company was "financially distressed". The Court, in interpreting the requirement that the company would have to become a "successful concern", considered the provisions of Section 427 of the 1973 Companies Act (regarding judicial management) and held that this was intended to mean that the company "will be able effectively to carry on its operations in accordance with its main object and yield a return to its shareholders and creditors".
The Court said it had a discretion on whether to order supervision and business rescue even if it was found that the requirements therefor (Section 131(4)(a)(i) – (iii) of the Act) had been satisfied in the application.
The Court held that in exercising its discretion it would have to determine "whether a case has been made out that the respondent company will be able to carry on business on a solvent basis and/or whether any case has been made out that the granting of business rescue will result in creditors achieving a better dividend".
The Court found that where an application for BR entailed weighing up of the interests of creditors and the company (as had been the case in applications for judicial management), the interests of the creditors should carry the day.
TIt Court concluded that there was no basis for contending that the respondent would be able to carry on business on a solvent basis, or that there was any prospect thereof. The granting of BR would not place the company's creditors in a better position than they would have been were the company to be wound-up.
The application for BR was declined.
Here the Court was faced with serious allegations that the respondent company was in the process of transferring vast sums from its bank account to the accounts of related companies. The respondent was in the process of disposing of its assets, including vehicles and collectable debts.
The application to commence BR was instituted ex parte by the sole shareholder and director and by various employees (purportedly in their capacities as "affected persons").
The Court maintained that the application was "bristling with procedural irregularities", which included:
Given the nature and extent of the irregularities involved, the BR application was dismissed. The Court further considered it essential that a winding-up order be granted to enable a liquidator to take control of the affairs of the respondent companies.
It was seemingly the Court's disapproval of the substantive actions of the controllers of the respondent companies, rather than the procedural difficulties which persuaded it to allow the intervention of Engen, the major creditor, and to dismiss the BR application.
Given the serious allegations against the former controllers of the collapsed Realcor Group, the Court warned of a possible abuse of the BR procedure, holding that it was "necessary for an application for business rescue to be carefully scrutinised so as to ensure that it entails a genuine attempt to achieve the aims of the statutory remedy".
BR plans in this matter (several applications relating to companies within the same group were heard concurrently) were put before the Court but were criticised as being "extremely terse, vague and uninformative".
The Court considered the requirement that there should be a "reasonable prospect" of rescuing the company, as opposed to the requirement of "reasonable probability", which had been stipulated in the old judicial management Section 427.
The Court contrasted the prior mindset of only granting judicial management in exceptional circumstances with the new order, which, it held, provided that the BR mechanism in the new Act was to be preferred to liquidation.
The Court thus held that it would be inappropriate for a Court faced with a BR application simply to maintain the "old" approach that a creditor was entitled ex debito justitiae to be paid or to have the respondent company liquidated.
Referring to what it described as "vague and undetailed information", the Court held that there was no prospect of the respondent business being restored to a successful one. BR plans had been put before the Court but were criticised as "extremely terse, vague and uninformative".
Significantly, in setting the minimum standard with which the applicant for BR would have to comply, the Court held that it would be difficult to conceive of a BR plan with a reasonable prospect of success unless such plan:
addressed the cause of the demise or failure of the company's business; and
offered a remedy that had a reasonable prospect of sustainability.
In short, the Court held that "a business plan which is unlikely to achieve anything more than to prolong the agony, i.e. by substituting one debt for another without there being light at the end of a not too lengthy tunnel, is unlikely to suffice".
The Court maintained that, at the least, some concrete and objectively ascertainable details (going beyond mere speculation) would be expected regarding:
The Court then considered the alternative aim referred to in Section 128(b)(iii) of the 2008 Act – that BR should procure a better return for the company's creditors and shareholders than would result from its immediate liquidation.
In applying this test, the Court expected an applicant for BR to provide concrete factual details of:
The Court emphasised that "mere speculative suggestions" would be unlikely to suffice. It did, however, note that it was not sought in this matter to pursue this alternative outcome contemplated in Section 128(1)(b)(ii).
Although this matter was not decided against the background of the untoward activities which characterised the matters considered above, it is worth perusing this judgment, which deals with and dismisses various defences raised by a surety in opposition to a summary judgment application.
The defences arose from the fact that the principal debtor was under BR. The judgement disposes of one of the many concerns which were identified in the draft 2008 Companies Act – the provisions of Section 133(2) which reads:
"During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances."
The debtor argued that this section should be construed as providing that during business recue proceedings a suretyship given by A in favour of B for the debts of the company may not be enforced by B against A without leave of the Court.
This argument was given short shrift by the Court, which held that section 133(2) was a special provision dealing specifically with the enforcement of claims against the company based on guarantees and suretyships. The Court considered this paragraph tautologous.
The second defence was that because a statutory moratorium was, in terms of Section 133(1), in effect against the principal debtor, the same defence could be raised by the surety.
The Court analysed the nature of the statutory moratorium in favour of the company and held that this was a defence "in personam" – in other words, a personal privilege or benefit in favour of the company. It was not a defence the surety could properly raise.
A third defence was that because a BR plan had been proposed, the defendant as surety would be able to rely upon an intended compromise between the company (as debtor) and the plaintiff, Investec, as its creditor.
Importantly, the court held:
"If the law-maker had intended to prohibit creditors from enforcing their claims against sureties of companies undergoing business rescue proceedings, it would have said so. Such a prohibition would be a drastic interference with the rights of creditors and would require clear language. Here there is no language at all on which to rest the supposed prohibition".
The Court granted summary judgement.
Judicial management was a procedure which, although probably well-intentioned, and a fore-runner in its time, was barely used, given the onerous requirements for its implementation.
Most judicial managements seemed to unravel into liquidations in any event.
It remains to be seen how many more cases where a company should genuinely be rescued will be considered by the Courts, and whether the bar will be set at a height achievable in circumstances where there are not allegations of underhand activities.
It would indeed be regrettable if BR were to go the way of judicial management.
