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

• Jurisdiction: South Africa

Ex parte Millman and Others NNO: In re Multi-Bou (Pty) Ltd and Others
1987 (4) SA 405 (C)

1987 (4) SA p405

Citation	1987 (4) SA 405 (C)
Court	Cape Provincial Division
Judge	Friedman J, Tebbutt J and Berman J
Heard	June 8, 1987; June 10, 1987
Judgment	July 3, 1987

Flynote : Sleutelwoorde

Company — Compromise — Scheme of arrangement in terms of s 311 of Companies Act 61 of 1973 — 'Standard' scheme F whereby all creditors' claims against company ceded, as against payment, to third party nothing more than arrangement between creditors and third party — Consent or participation by company not required — Agreement by creditors to reduce claims by one cent in rand not involving company in transaction G either — 'Standard' scheme of arrangement, being one between creditors and third party, not complying with s 311 of Act.

Company — Compromise — Scheme of arrangement in terms of s 311 of Companies Act 61 of 1973 — Scheme of arrangement offered during winding up of company — Essence of scheme was cession of 99% of creditors' claims to offerer against payment H of R1,6m — Company borrowing R100 000 from offerer to pay for 1% balance of creditors' claims — Amounts of R1,6m and R100 000 to be paid to receiver for distribution among creditors after scheme sanctioned — Scheme consisting of series of interdependent transactions which would be concluded I simultaneously — Partial cession illusory in that creditors contractually bound to look to receivers, not company, for payment of 'retained' 1% of claims — Creditors thus having no claim against company for payment — Furthermore, where part of claim paid, balance can be ceded without consent of debtor — Consent of company thus not required to render 'partial' cession of creditors' claims legally effective — J Scheme in effect no

1987 (4) SA p406

A more than one between offerer and creditors and thus not meeting requirements of s 311 — Application for leave to convene meetings of creditors to consider scheme refused.

Headnote : Kopnota

The word 'arrangement' in s 311 of the Companies Act 61 of 1973 B is not to be held to bear a meaning in any way restricted by its association in the section with the word 'compromise'; it is something conceptually of the widest character, limited only by what is contrary to general law or ultra vires the company. On the other hand, the scope and purpose of the section is strictly limited to considering an arrangement between the company and its creditors, and not an arrangement between its creditors or between its creditors and a third party. What had become the 'standard' scheme of arrangement in C the Cape Provincial Division in its simplest form (without the provision for the reduction of all creditors' claims by one cent in the rand, or some similarly insignificant fraction), viz whereby a third party acquired, by cession as against payment, all creditors' claims, was nothing more than an D arrangement between a third party and the creditors. The consent or participation of the company was not required. The agreement by creditors to reduce their claims by one cent in the rand did not in any way involve the company in the transaction between the third party and the creditors, for an instruction to the company to reflect reductions in creditors' claims in its books of account did not constitute a compromise between the company and its creditors. Nor did a reduction constitute a compromise between the company and its creditors, since a compromise presupposed a dispute, and there would be nothing in dispute between them - the creditors would receive the same dividend, whether their claims were reduced or not. The 'standard' scheme, being no more than an arrangement E between a third party and the creditors, is thus not acceptable and resort may no longer be had to s 311 as a means of acquiring all creditors' claims against a company.

The provisional liquidators of four closely related companies applied to Court for leave to convene meetings of creditors in terms of s 311 of the Act to consider a proposal whereby a third party, the offeror, would acquire all creditors' claims against the company. The proposal had been designed to overcome the criticisms levelled at the 'standard' scheme. The matter F was referred to a Full Bench for decision. The main feature of the proposed scheme was that the offeror would acquire by way of cession 99% of each creditor's claim against payment by the offeror of R1,6m. The companies would then borrow on loan account from the offeror the sum of R100 000, which sum would be paid to the creditors for the balance, being 1%, of their claims. The amounts of R1,6m and R100 000 would be paid to a receiver for distribution among the creditors after the registration of the orders sanctioning the scheme. It was argued for the applicants that the scheme was distinguishable G from the 'standard' one in that the companies would play an essential role and would thus be party to a tripartite transaction between themselves, their creditors and the offeror. The companies, being the debtors, would have to agree to the partial cession (99%) of each creditor's claim to afford the cession legal validity. A further distinguishing feature was said to be that, while certain of the assets would be transferred to the receiver for the benefit of creditors, other H assets would remain the property of the companies; this was said to require the consent of the companies and the creditors and would thus create an arrangement between them.

The Court pointed out that, since the coming into operation of the scheme was dependent upon its being sanctioned, it should be regarded, if not as a single transaction, then as a number of interdependent transactions which would be concluded simultaneously. On a proper analysis of the scheme, what appeared to be a partial cession was nothing of the kind. When I 99% of the claims was ceded to the offeror against payment or guarantee of payment, the remaining 1% was extinguished by payment out of the sum of R100 000 provided by the offeror. The creditor, having contractually bound himself, upon sanction, to look to the receiver for payment of whatever was due to him in respect of the 1% of his claim 'retained', would have no right of action against the company in respect of that 1%; there was thus no possibility of anything other than a single action being maintained in respect of any creditor's claim. J Furthermore, what was effectively the entire balance of each creditor's claim would be ceded to the offeror, and the consent of the companies

1987 (4) SA p407

would not therefore be required to render the cession legally A effective and enforceable because where part of a claim has been paid or satisfied, the balance can be ceded without reference to the debtor and without his consent. As to the question of the assets, the Court held that it was nothing other than an arrangement between the offeror and the companies; the creditors would be paid out by the receiver and would have no claims against the companies and thus no interest in their assets.

The Court concluded that, since the consent of the companies to B the cession of the unpaid portion of the creditors' claims was not required, the scheme was no more than one between the offeror and the creditors and was thus one which could not competently be laid before creditors at meetings summoned pursuant to the terms of s 311.

The Court held that there was yet a further ground upon which the scheme was found wanting: the scheme was a disguised or C simulated one in that, although the offeror had packaged the scheme in such a way as to call for the essential participation of the companies, in substance the scheme required the companies to play no more active a role than that called for under the now unacceptable 'standard' scheme. The application was accordingly refused.

Case Information

Application for leave to convene meetings of creditors to D consider a scheme of arrangement in terms of s 311 of the Companies Act. The facts appear from the reasons for judgment.

L S Kuschke for the applicants.

F D J Brand as amicus curiae.

E Cur adv vult.

Postea (July 3).

Judgment

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...