Ex parte De Villiers No: In re M S L Publications (Pty) Ltd (In Liquidation)

• Jurisdiction: South Africa
• Judge: Stegmann J
• Judgment Date: 07 December 1987
• Citation: 1990 (4) SA 59 (W)
• Hearing Date: 20 October 1987
• Court: Witwatersrand Local Division

Stegmann J:

This is an application made under s 311 of the Companies Act 61 of 1973 by a liquidator for leave to convene meetings of classes of the creditors of an insolvent company in liquidation. The purpose is to enable the creditors to decide whether or not to agree to a proposed I compromise or arrangement between the insolvent company and its creditors. The proposed compromise or arrangement with creditors is part of a wider scheme put forward by the proposer, without using s 311, in terms of which the proposer is to acquire all the issued shares of the insolvent company from its members. The insolvent company is also to J issue additional shares to the proposer.

Stegmann J

A After reading the application, I put a number of queries to counsel. They were dealt with very promptly in a supplementary affidavit by the applicant. I express my appreciation for that ready assistance. The applicant has also filed an additional supplementary affidavit containing a proposal for an amendment to the scheme, which I shall mention in due course. B

The applicant is one M L de Villiers in his official capacity as the liquidator of M S L Publications (Pty) Ltd (in liquidation). He qualified as a chartered accountant in 1966 and has since then practised as an auditor and as a liquidator of companies for over 20 years. He is a partner in Deloitte Haskins and Sells, a firm of auditors.

C The proposer of the compromise or arrangement between the insolvent company and its creditors under s 311, and also of the wider scheme of which it is a part, is Baker Street Consultants (Pty) Ltd, a company about which I have no information.

For information about the insolvent company I have been referred to D case No 19230/86, being the proceedings in which the insolvent company applied for and was granted an order for its own winding-up.

Section 311 invests the Court with a discretionary power to order the summoning of meetings of creditors or classes of creditors such as are envisaged in the present application. The first matter I propose to deal with is the approach to be adopted in order to ensure the judicial E exercise of that discretionary power. It may well be that the subject-matter of the discretion is so wide-ranging and diffuse that it is not possible to formulate a method of approach that is to be regarded as correct in all cases: cf Mahomed v Kazi's Agencies (Pty) Ltd and Others 1949 (1) SA 1162 (N) at 1172. Nevertheless, much helpful guidance is to be found in precedents, and I consider that I shall best avoid straying beyond the proper limits of the discretion, and best discipline F myself to exercise it judicially, if I organise my approach to the present matter along lines that have commended themselves to other Courts, and keep to the paths suggested thereby.

Inevitably, the approach is initially to be determined by the G objective of the applicant and by the fact that the applicant can only achieve that objective in three procedural steps.

The first step is to obtain the authority of the Court for the summoning of meetings of creditors. If the Court authorises such meetings, the second step is to hold the meetings and to try to obtain H the assent of a majority of the creditors in number, representing three-fourths in value, of the creditors or classes of creditors present and voting in person or by proxy. Finally, if such majorities are obtained, the third step is to seek the sanction of the Court for the proposal as so assented to in order to make it binding on all the creditors, or all the members of each class of creditors, and on the company itself or its liquidator.

I That being so, it is self-evident that in a case in which it appears at the outset, when the first step of seeking leave to summon meetings is taken, that, if the proposals is one that no Court could possibly sanction when the last step is to be taken, the Court should not authorise the calling of meetings at the initial stage. Cf Liquidator Dainty Foods Ltd v Glenton and Mitchell 1942 EDL 26. Indeed, the logic J of the situation and authority

Stegmann J

A both appear to establish that at the initial stage, when application is made to authorise the summoning of meetings, the applicant should place before the Court everything that is necessary to satisfy each of at least six broad categories of requirements.

Firstly, the proposal must be placed before the Court and it must have B been formulated in writing in terms which are clear and comprehensible and which are not vague or ambiguous or otherwise liable to be misunderstood or misconstrued: In re Gipsy King GM Coy (In Liquidation) 1923 WLD 155; Ex parte De Villiers and Another 1970 (2) SA 536 (C); Ex parte Union Whaling Co 1973 (3) SA 550 (W).

Secondly, the proposal must be shown to be for a compromise or C arrangement contemplated by s 311: Ex parte NBSA Centre Ltd 1987 (2) SA 783 (T). In particular, it must genuinely satisfy the requirement of being a compromise or arrangement between the company and its creditors or members. A compromise or arrangement between the company's creditors and a third party, in which the company features only as a matter of form and not as a matter of substance, is not within the contemplation D of s 311: Ex parte Kaplan and Others NNO: In re Robin Consolidated Industries Ltd 1987 (3) SA 413 (W).

Thirdly, the terms of the proposal and the circumstances in which it is made should be such as to establish a reasonable measure of certainty that, if the Court should authorise the summoning of meetings, the E proposer will indeed put an offer to the meetings. It must appear moreover that such offer will be a serious offer in the sense that, if it is accepted by the requisite majority at the meetings, it will become binding on the proposer, subject only to the sanction of the Court.

If the proposal is made subject to the fulfilment of additional F conditions over and above the sanction of the Court, it must be shown at the stage when leave to summon the meetings is sought that the circumstances are such that there is a probability that the additional conditions will have been duly fulfilled before the arrival of the time to approach the Court for its sanction. In the very nature of things, the sanction of the Court (being the step which will render the entire scheme binding on all affected by it, and which will vary the rights of G the minority creditors against their will) should be the final step, to be taken only after all else is in place, including the fulfilment of all conditional provisions: cf Practice Manual at 22a, K 2.9.7.

A likelihood that such final step will successfully be reached must H therefore be established as a feature of the initial step at which leave to summon meetings is sought. Such leave should be refused if the proposal is made subject to any condition which renders it substantially uncertain whether an offer will ever be put to the meeting; or which, if the offer is put and carried, is nevertheless such as to leave substantial uncertainty as to whether the proposer will ever be obliged I to perform it: cf Ex parte Singh and Another (Pty) Ltd: In re Orkin Brothers (Pretoria) Ltd (under Judicial Management) 1950 (1) SA 471 (T) at 475 - 6.

Fourthly, it must be shown that the information which must be placed before the creditors has been gathered. Such information must be made available to the Court to enable it to consider the sufficiency thereof for the purpose it is intended to serve. Such information includes the J statement

Stegmann J

A explaining the effect of the proposal to creditors in terms of s 312(1)(a)(i) of the Companies Act 1973; the facts about any material interest of any of the directors of the company, whether as directors or as members or as creditors, and the effect of the proposal on such directors' interests insofar as it may be different from its effect on the interests of the creditors, as required by s 312(1)(a)(iii) of the Act; and all other information needed by the creditors to assess the B relative merits of the proposal and of the alternatives to the proposal: cf Ex parte Ruskin NO: In re Peace Distributors (Pty) Ltd (in Liquidation) 1959 (2) SA 747 (W) at 749G - 751C; Du Preez and Another v Garber: In re Die Boerebank Bpk 1963 (1) SA 806 (W) at 823C - 828E; Ex parte Seafare Investments Ltd 1970 (2) SA 417 (C); Rennie NO v Ruca C Styles (Pty) Ltd 1973 (4) SA 266 (C) at 269B - 271F; Ensor NO v South Pine Properties (Pty) Ltd and Another 1978 (2) SA 755 (N) at 760B - 761E.

Fifthly, it must be shown that what may be called the practical business merits of the proposal are good enough to suggest that it is reasonably probable that the proposal will be accepted by the requisite D majorities of the creditors or of the classes of creditors concerned. One of the questions to be asked is whether the offer is of such a nature that a man of business would reasonably approve it: Ex parte Turkstra and Others 1941 TPD 169; Bagus Allie v Meer-Onia (Pty) Ltd 1948 (4) SA 550 (C) at 552; Ex parte Bruyns NO: In re Mammoth Construction & E Drilling Co (Pty) Ltd (under Provisional Liquidation) 1973 (3) SA 721 (T).

Sixthly, there should be nothing in the proposal, or in the circumstances in which it is put forward, to show that no Court could possibly sanction the proposal even if it should receive the approval of the necessary majority of creditors: Cf Liquidator Dainty Foods Ltd v F Glenton and Mitchell (supra). Indeed, it should be established positively that there is reason to believe that at the last stage a judicial exercise of the Court's discretion would probably require the grant of the Court's sanction, unless some unexpected development should in the meantime have occurred to justify the withholding of the sanction. In this regard the Court is guided not only by the results of the meetings, but...