Business Rescue proceedings have been introduced into our law by Chapter 6 of the new Companies Act 71 of 2008, as amended from time to time (“the Companies Act”). The main focus of business rescue is to attempt to restructure the financially distressed company’s affairs in such a manner that it is able to continue doing business on a solvent basis, or that it results in more favourable returns for creditors of the company than would have resulted from the liquidation of the company.

It is thus an integral requisite of any business rescue plan that it should be more beneficial for the company’s creditors than having the company liquidated.

Principle of reasonable business recovery prospects
Any person affected, on whom an application for business rescue has been served, may oppose such application and request that the court dismiss the application for business rescue. The affected person may also ask the court for any other appropriate order, usually being an order placing the company in either provisional or final liquidation, depending on the circumstances.

The focus of this article is to indicate, by way of practical example, where the court’s assessment of whether there is a reasonable prospect for business rescue to succeed involves a ‘value judgment’ and not by exercising a narrow discretion. A ‘reasonable prospect’, therefore requires more than just a prima facie case. We will look at how the court goes beyond these prima facie facts, and takes all the relevant circumstances or possible outcomes into consideration.

The Normandie-case
In a very recent Supreme Court of Appeal (SCA) decision handed down on 25 November 2016, the court laid down the principle that the recovery of a business in difficulty or bankruptcy must be based on fair and equitable reasons and on reasonable prospects of reorganisation of such business.

In FirstRand Bank v Normandie Restaurants 189/2016 [2016] ZASCA 178 (“the Normandie-case”), the court overturned a High Court order in terms of section 131(1) and (4) of the Act, whereby the first respondent was placed under business rescue; and granted an application for the winding-up of the first respondent, who was subsequently placed under final winding-up.

Background
The background will be discussed briefly to give context herein. The Normandie-case had its origin from two related applications, namely; an application by the appellant, First Rand Bank Limited (“FRB”), for the final winding-up of the first respondent, Normandie Restaurants Investments (Pty) Ltd (“Normandie”), and an application by the second respondent, Mr DP, for an order placing Normandie under supervision and commencing business rescue proceedings as contemplated in Chapter 6 of the Companies Act. Mr DP also sought an order declaring and directing that the liquidation proceedings instituted by the Bank be suspended, until the court had adjudicated upon the business rescue proceedings. FRB opposed this application, however, the High Court granted the orders sought and dismissed the liquidation application.

It was common cause that Normandie was in financial distress, as envisaged by section 128(1)(f) of the Act, and that it had failed to pay FRB and various other creditors. Taking the total amount of debt and the amount of creditors into account, the High Court held that there was a reasonable prospect for business rescue proceedings to succeed. FRB however submitted that a ‘reasonable prospect’ requires more than a prima facie case, an arguable possibility or mere suggestive speculation. It must be a prospect based on reasonable grounds. The SCA agreed with this argument and further pointed out that the Bank’s unwillingness to grant Normandie any further indulgence, was a fundamental problem.  The viability of the business rescue plan by Normandie was solely dependent on continuity of the business relationship with a single tenant.

The SCA in the above case held that Section 128(1)(b) requires that the steps taken to rescue the company should provide for temporary supervision and for a temporary moratorium of the rights of the claimants against the company. They are not meant to provide companies with a mechanism with which to delay payments to creditors with no feasible plan of ever paying its debts, or a means of restructuring its debts over lengthy periods of time. These actions ultimately aim to create a better return for the creditors and shareholders.

In Oakdene Square Properties (Pty) Ltd & others v Farm Bothasfontein (Kyalami) (Pty) Ltd & others 2012 (3) SA 273 (the Oakdene-case), the court held that:
“The development of a plan cannot be a goal in itself. It can only be the means to an end. That end … must be either to restore the company to a solvent going concern, or at least to facilitate a better deal for creditors and shareholders than they would secure from the liquidation process.”

The law recognises that the liquidation of companies, in many case, cause significant collateral damage, both economically and socially. It is thus naturally in public interest that the incidence of such adverse socio-economic consequences should be avoided where reasonably possible. In the present matter however, the collateral damage would be minimal should Normandie have been liquidated. The court took into consideration that the company only owned one immovable property, and placing it under business rescue would not save any jobs or livelihoods. The company does not provide any services that needed to be preserved, neither does it provide any goods or products to the public. The company’s only income was derived from the rental it received for the property.

FRB, as the major creditor, voted against the adoption of a business rescue plan.  Section 153(1)(a)(ii) read with section 153(7) of the Companies Act however provides the possibility for business rescue practitioners to approach the court to set aside the creditors’ vote against business rescue. In the Oakdene-case for example, the court said that if the majority creditors declare that they will oppose any business rescue scheme, they see no reason why the proclaimed opposition should be ignored, unless the attitude of the creditors are unreasonable or mala fide. The court further mentioned that a rejection of the proposed business rescue plan by the majority of creditors, will normally halt any business rescue attempts.

The SCA in the Normandie-case further went on to say that the proposed business rescue plan by Normandie falls short of providing the required information in terms of the Companies Act, as well as information on which an assessment of reasonable prospect could be made

Conclusion
In this case the SCA found that there was no basis to conclude that there is a reasonable prospect of rescuing the company. Thereby, the business rescue application of Normandie was held to be without merits and thus an order of final winding-up was granted.

It is clear that, by looking at the courts’ comprehensive approach to business rescue, that business rescue in South Africa will continue to grow, even though the end result in the Normandie-Case was final liquidation.  It is thus of extreme importance that all creditors do research and seek the advice of an insolvency practitioner when it has become an affected party in either business rescue or liquidation proceedings.

Written by André Nortjé, Junior Associate, Schoeman Law