19 May 2020 by , and

Wolf in sheep’s clothing – An analysis of whether applying for business rescue when liquidation proceedings have already commenced amounts to an abuse of process

This judgment is the culmination of two separate applications before the Limpopo High Court (court), one being an application for the winding up of Madikor Sestien (Pty) Ltd (Madikor) by Vleissentraal Bloemfontein (Pty) Ltd and Vleissentraal Bosveld (Pty) Ltd (Vleissentraal creditors), and the other by Kremetart Trust, the sole shareholder of Madikor, for the commencement of business rescue proceedings of Madikor. The business rescue proceedings were opposed by the Vleissentraal creditors, as well as Vencor Holdings (Pty) Ltd (Vencor) as an intervening creditor.

At the centre of this judgment is Madikor’s financial woes, which appears to have started as far back as 2013, although steps for its restructuring only commenced in 2015. Between 2015 and 2018, Madikor had signed various deeds of settlement and loan agreements in an attempt to avoid further court action and consequent liquidation. During 2016, Madikor entered, amongst other things, into a loan agreement with Vencor in terms of which a mortgage bond was registered over one of its immovable properties. Through this, Vencor became a secured creditor of Madikor. In December 2017, Madikor signed a settlement agreement with the Vleissentraal creditors whereby it undertook to have a mortgage bond registered over certain immovable properties belonging to Madikor which would lead to the Vleissentraal creditors becoming secured creditors of Madikor. In March 2018, Madikor signed a settlement agreement with another creditor, Kuyanda, in terms of which Madikor agreed to pay Kuyanda from the proceeds of the sale of certain of its [Madikor’s] immovable property. Madikor was unable to fulfil some of the aforesaid undertakings.

It is thus not surprising that an application for the winding up of Madikor was brought by the Vleissentraal creditors, with Vencor as intervening creditor, and that a provisional winding up order was granted against Madikor in December 2018. A day before the return date for the provisional order was to be made final i.e. 19 March 2019, and on 18 March 2019, the Kremetart Trust launched an application to place Madikor in business rescue.

It did not take long for both the Vleissentraal creditors and Vencor to oppose the business rescue application, citing various reasons for their opposition. The main point of opposition was that the application to place Madikor under business rescue constituted an abuse of process. Not only is the Kremetart Trust the sole shareholder of Madikor, but the deponent to the affidavit by Madikor opposing the winding up application and the deponent to the founding affidavit by the Kremetart Trust for a business rescue order to be granted, are one and the same person. 

Yet in the founding affidavit, Madikor’s true financial position was not disclosed to the court, the Kremetart Trust failed to prove, by providing the court with copies of title deeds, that the immovable assets it claimed were owned by Madikor, were in fact so owned or to provide the court with valuations in regard to the immovable assets, alleged to have been owned by Madikor.

Furthermore, the Kremetart Trust failed to disclose to the court the fact that all the proceeds of the sale of such immovable assets are due to the Vleissentraal creditors as secured creditors of Madikor and, therefore that such immovable property cannot be used to pay any of Madikor’s other creditors under business rescue proceedings.

The court first dealt with the matter of the secured assets, whereafter it proceeded to consider the purpose of business rescue proceedings. The court confirmed that it is trite law that secured claims by creditors are protected in a business rescue, citing section 134(3) of the Companies Act 71 of 2008, along with two Supreme Court judgments.

The Kremetart Trust, as part of its application to place Madikor in business rescue, presented the court with a proposed business rescue plan which made provision for the gradual sale of certain immovable property owned by Madikor, which proceeds, so it was proposed, would then be used to pay its creditors, without any regard being had to the secured claims of the Vleissentraal creditors and Vencor. One would easily forgive the Vleissentraal creditors and Vencor for contending that this is essentially an informal liquidation, disguised as a business rescue.

In this regard the court held, with support from the BP Southern Africa (Pty) Ltd v lntertrans Oil SA (Pty) Ltd 2017 (4) SA 592 (GJ) case, that such security cannot be suspended by business rescue proceedings and the assets over which the security is held, can also not be disposed of without the consent of the Vleissentraal creditors and Vencor, as holders of the security over these assets. It confirmed that a company in business rescue wishing to dispose of secured property can only do so with the prior consent of the secured creditor, unless the proceeds of the sale will discharge the debt owed to the secured creditor in full. The court held that Madikor could not utilise the proceeds of the proposed property sales to pay other creditors in business rescue.

Turning its attention to the purpose of business rescue proceedings, the court reminded us that it “will not sanction a business rescue which is in effect nothing but an informal liquidation process”. The purpose of a business rescue is, at its core, the rescuing of a company and the court held that the threshold test is whether there is a reasonable prospect of achieving a rescue and that “the point of departure is that it is preferable to rescue a company than let it drift or plummet into extinction”. However, this does not mean that companies can use business rescue as a mechanism for avoiding its debts and the court echoed the warning in ABSA Bank Limited v Newcity Group (Pty) Ltd [2013] 2 All SA 146 (GSJ) that an attempt at business rescue must be genuine. The application brought by the Kremetart Trust was anything but genuine, so the court found.

The court found that the business rescue application amounted to an abuse of process on three grounds, namely the frustration of the final order of winding up, the lack of valuation of the properties to be sold and the failure to disclose further creditors Madikor was indebted to. As such, the business rescue application was refused, the court having spotted the wolf in sheep’s clothing, attempting to slip into the pen.

After a delay of more than a year, the court was able to make a final judgment on the liquidation application. The court confirmed the proper approach to deciding whether a company should be wound up, namely whether a company can pay its debts as and when they become due in the ordinary course of business. It is of no consequence that a debtor’s assets far outweigh its debts, if debts owed today cannot be paid today, the company is commercially insolvent. Therefore, the court is entitled to hold that the debtor is unable to pay its debts for the purposes of liquidation and grant an order for winding-up.

The court concluded by listing various reasons why it surmised that Madikor was commercially insolvent, ranging from its failure to make payments in terms of various agreements, to its own admissions regarding its financial predicament, with the inclusion of the application for its business rescue. The final liquidation order was accordingly granted, and the gates of the case could finally be closed.

This case is a prime example that the court will not allow for any abuse of process in order to avoid a company’s monetary obligations to its creditors, specifically secured creditors. The court will not be clouded by any disingenuous and colluded means of avoiding contractual duties and any action to this effect will be swiftly set aside.

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