Ex parte Millman and Others NNO: In re Multi-Bou (Pty) Ltd and Others

• Jurisdiction: South Africa
• Judge: Friedman J, Tebbutt J and Berman J
• Judgment Date: 03 July 1987
• Citation: 1987 (4) SA 405 (C)
• Court: Cape Provincial Division

Berman J:

Applicants are the provisional liquidators, between them, of four interrelated companies, two of them being F wholly-owned subsidiaries of the third, which is also a substantial shareholder in the fourth. Applicants seek the leave of the Court by way of notice of motion for an order summoning meetings of the various classes of creditors of these four companies to consider a proposal whereby a company, WJM Construction (Pty) Ltd ('WJM') will acquire all the claims of G all the creditors of all four companies, the affairs of which are inextricably interwoven with each other, so that although the future of four companies is involved, there is a single comprehensive proposal which the Court is asked to have submitted for the consideration of these creditors.

To this end applicants have called in aid the provisions of s 311 of the Companies Act 61 of 1973, as amended ('the Act'), a H section designed to facilitate compromises and arrangements between companies, their members and their creditors. It is a procedure frequently resorted to by persons who wish to squire control of companies more often than not in the course of being wound up, and applications under this section have become almost a daily feature on the Court roll. This particular I application was, as is the practice in this Division, set down for hearing in the Third Division, from which - at the direction of the Judge President - it was referred to this Court for consideration by a Full Bench. The reason for this referral was to have a Full Court consider this application, and indeed, generally, applications of this nature which are almost invariably based upon a standard 'scheme' (using that J word in a non-pejorative sense), in

Berman J

A the light of a recent judgment of a Full Bench sitting in the Witwatersrand Local Division, viz Ex parte Kaplan and Others NNO: In re Robin Consolidated Industries Ltd (Coetzee DJP, Goldstone J and Leveson J concurring) handed down on 5 May 1987 and as yet unreported. [*]

In that judgment, hereinafter referred to as 'the Robin B judgment', applications of this kind were critically analysed and the standard scheme, as I will henceforth refer to it, was found wanting. It therefore became necessary to consider or, more correctly, to re-consider the long-standing practice followed in this Division (as was the case in the Transvaal until the Robin judgment set the cat among the pigeons in that province) and to decide whether or not that C practice can in the future be justifiably pursued in the Cape - hence this Full Bench hearing.

As will later appear, the scheme contemplated in the instant application has been structured with a view to meeting the criticisms levelled in the Robin judgment against the standard scheme. Whether or not it has succeeded in attaining that D object is a question to which I shall in due course turn. Regard being had, however, to the purposes for which this Full Bench was convened, considerations of convenience dictate that the standard scheme be looked to first, and thereafter the scheme as formulated in the instant application.

Before doing so, however, a brief account of how the standard E scheme came into existence and why it has continually been resorted to, with minor additions and embellishments grafted on to it in appropriate circumstances over the years, will not be out of place. I may say that I am at odds with Coetzee DJP as to how this standard scheme originated - the dubious distinction of being responsible therefor belonging, as I recollect it, to the Cape Provincial Division, and not, as he F would have it, to the Transvaal.

It was the practice in the early 1960s in this Division for applications to be brought under s 103 of the Companies Act of 1926 (the precursor of s 311 of the Act) in respect of a simple unsophisticated scheme whereby a third party, who might have G been (and who not infrequently was) a director of a company in provisional liquidation or under judicial management, offered to acquire by purchase, viz by cession, the claims of creditors for a consideration which would entitle secured and preferent creditors to receive no less than they would on a winding-up of the company, and concurrent creditors a dividend in excess of what they would on a winding-up achieve. Resort to the H provisions of s 103 had a number of advantages - it was a simple way of ensuring that the third party acquired all claims of creditors against the company and that this exercise was not frustrated by an uncooperative minority of creditors, for the section provided for a judicial coercion of unwilling creditors (if they constituted less than three-fourths in value of I creditors sufficiently concerned to attend and vote at a meeting called to consider the scheme) to cede their claims to the prospective cessionary. It was also a quicker and easier procedure for the acquisition of all such claims, rendering it unnecessary for the third party to seek out individually all the company's creditors and to make a separate approach to each of them and, by J

Berman J

employing the provisional liquidator as agent to receive the A third party's total lump-sum single payment, to have him satisfy the creditors' claims out of such outlay.

A halt was, however, called to this practice when it was pointed - out at the hearing of one such application some 25 years ago - that the scheme did not constitute a compromise B between the company and its creditors, for it did not entail any adjustment of rights as between them as creditors and debtor, which is the distinctive feature of a compromise. C Although it was generally accepted that the word 'arrangement' as used in s 103 of the Companies Act of 1926 (which corresponds with s 311 of the Act) had a wider import than the word 'compromise', it was nevertheless also generally accepted that there had to be an element of compromise in any arrangement contemplated by the scheme. This was lacking in the scheme before the Court and, in fact, in the majority, if not all, of the schemes which were then being proposed. The lack of this element of compromise in the scheme was cured, or so it D was believed, and for a quarter of a century or more accepted as cured, by inserting therein a provision whereby a reduction of the claim of each creditor by 1 cent in the rand (or some similarly insignificant fraction) was deemed to have taken place. This concept had, it was thought, the effect of adjusting the rights of the company and its creditors as between themselves, and thus served to introduce the element of E compromise into the scheme.

As time went by the scheme became more sophisticated and - as Coetzee DJP observed in the Robin judgment - ancillary provisions were grafted on so that the scheme became ever more complex and complicated. The process whereby the claims were to be reduced by 1 cent in the rand, however, remained a feature F of every scheme, although with the passing of time its intended purpose and significance became lost, and schemes were made the subject of applications which - again as noted in the Robin judgment - provided for the reduction of all claims against the company by 1 cent in the rand to be deemed to have taken place, not before, but after the cession of all G claims to the third party had taken place.

The standard scheme, incorporating the deeming provision whereunder claims against the company were reduced by 1 cent in the rand and varied, amended and amplified as time went by as a result of the accretions of ancillary provisions, was placed over the years in ever increasing numbers before meetings of H all classes of creditors of companies being wound up, following the grant of orders of Court summoning such meetings to consider, accepting or (as happened in rare cases) rejecting the standard scheme couched in the form of offers to creditors. And indeed, far more often than not, nothing but good came of this practice, for creditors invariably received a greater I dividend upon the implementation of the scheme than they would otherwise have been paid, the third party obtained control over the company with its assessed loss and frequently some of or even all its stock and equipment, and the company was discharged from liquidation. And this apparently advantageous and seemingly unobjectionable practice might well have continued to the satisfaction and for the benefit of all J concerned had not the Transvaal

Berman J

A Court been alerted to what it ultimately held to be a fatal defect in that practice and to which, in the Robin judgment, it summarily put an end in that province.

Whether an end to this practice should also be put in the area of jurisdiction of this Court is the first purpose of this B exercise. Accordingly and notwithstanding that the scheme proposed in the instant application has - as I earlier observed - been structured with the Robin judgment in mind, I propose considering, firstly, the legality of the hitherto acceptable standard scheme in the light of what that judgment laid down and, secondly, the scheme as conceived and as now C proposed by WJM. Before turning to do so, however, I wish to place on record the Court's appreciation for the very considerable assistance it has received from Mr Brand who undertook the duties of amicus curiae at our request, and indeed for the assistance of Mr Kuschke, who appeared for applicants, and whose argument presented on their behalf was also most helpful.

Now s 311(1) of the Act provides as follows:

D ...