SCA ROLLS BACK THE BARRIERS TO BUSINESS RESCUE
The new procedure, which is loosely equivalent to Chapter 11 bankruptcy protection in the United States, can have a “primary” or “secondary” purpose – those concepts coming from the part of the definition of “business rescue” that speaks of a plan to restructure a company’s affairs in a manner that:
- maximises the likelihood of the company continuing on a solvent basis; or
- failing that, results in a better return for the company’s creditors or shareholders than would result from immediate liquidation.
Previously, the South Gauteng High Court had held, in A G Petzetakis International Holdings Ltd v Petzetakis Africa (Pty) Ltd, that the requirement of “rescuing the company” would not be satisfied where it was clear that the only hope would be a better return than that which would result from liquidation. This alternative object could be pursued only once the primary object of recovery was under way.
This approach in Petzetakis was advanced by Nedbank Ltd when the SCA heard Oakdene / Kyalami in March this year. Here the bank – a creditor that wanted to liquidate Farm Bothasfontein (Kyalami) (Pty) Ltd, the owner of the eponymous race track – contended that the appellants’ business rescue plan had to be aimed at the primary goal of restoring the company to healthy solvency. A plan that provided for the secondary goal only, Nedbank argued, would not meet the requirements for an order.
But the SCA, though it eventually dismissed the appeal and granted the winding-up order, disagreed with Nedbank and favoured the approach adopted “by implication” by the Western Cape High Court in Koen v Wedgewood Village Golf & Country Estate (Pty) Ltd) and by the Free State High Court in Propspec Investments (Pty )Ltd v Pacific Coast Investments 97 Ltd.
The SCA held that “business rescue” means to facilitate “rehabilitation”, which in turn means the achievement of any one of the two goals. This view, notes Brand JA, is supported by the distinction between the regime of business rescue and its unsuccessful predecessor: whereas an order for judicial management required a reasonable probability of a return to solvency, it “can be accepted with confidence that the legislature did not intend to repeat the mistakes of the past”.
As for the debate about the information that needs to be included in a plan, the SCA parts ways with earlier decisions that prescribe that a substantial measure of detail is required. For example, in Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd, the court held that the applicant should set out “concrete and objectively ascertainable” factors such as the likely costs of rendering the company able to conduct its core business; the availability of the necessary cash and other resources; and the reasons for suggesting that the proposed plan would have a reasonable prospect of success.
That Southern Palace test, however, wasn’t always adopted uncritically – with the court in the unreported case of Employees Solar Spectrum Trading 83 (Pty) Ltd v AFGRI Operations Limited and Solar Spectrum Trading 83 (Pty) Ltd warning that such “stringent” requirements could consign business rescue to the fate of its predecessor.
Now any debate has been settled, with the SCA affirming the Prospec court’s statement that “general minimum particulars” cannot be prescribed and that to require “concrete and objectively ascertainable details” of factors such as costs and resources would be “tantamount to requiring proof of a probability” – as opposed to a possibility – and would unjustifiably “limit the availability of business rescue proceedings”. A detailed plan, the SCA said, can be left to the business rescue practitioner.
This lowering of the bar did not ultimately assist the appellants in Oakdene / Kyalami, which becomes another addition to the admittedly long list of unsuccessful business rescue applications. As the judge in the unreported case of Lidino Trading 580 CC v Cross Point Trading (Pty) Limited remarked, none of the applications for business rescue in the reported cases he had read had been successful. But with the requirements now being positioned in the realm of “possibility” rather than “probability”, financially distressed companies may find the hurdles a little easier to clear.