Le Roux Hotel Management (Pty) Ltd and Another v E Rand (Pty) Ltd (FBC Fidelity Bank Ltd (Under Curatorship), Intervening)

• Jurisdiction: South Africa
• Judge: Josman J
• Court: Cape Provincial Division
• Citation: 2001 (2) SA 727 (C)
• Counsel: M Steenkamp for the applicants. No appearance for the respondent. E A Limberis for the intervening creditor.
• Docket Number: 3770/2000

Josman J:

[1] In this matter the first and second applicants, Le Roux Hotel Management (Pty) Ltd and Le Roux Construction (Pty) Ltd, brought an application in this Court for an order that the respondent, E Rand B (Pty) Ltd, be placed under judicial management in accordance with the provisions of s 427 of the Companies Act 61 of 1973.

[2] The intervening creditor, FBC Fidelity Bank Ltd (Fidelity Bank), which is itself under curatorship, is the principal creditor of the respondent. Respondent is the owner of an hotel in Midrand that has C recently been constructed and the intervening creditor's claims against the respondent are secured by a mortgage bond over the respondent's immovable property on which the hotel is situated.

[3] The application was brought before this Court on short D notice, the intervening creditor having sought leave to intervene since it is the applicant in an application for the compulsory winding-up of the respondent that was brought in the Transvaal Provincial Division prior to the institution of the present application. Although initially opposed, leave to intervene was granted by consent and the intervening creditor has filed answering affidavits. E Further affidavits were then filed by the parties and, although there were objections by both the applicants and the intervening creditor to these affidavits, this Court has decided to hear the matter on the basis of all the evidence presented, following the practice established in this Division by Corbett J (as he then was) in Divisional Council, Cape v Mohr 1973 (2) SA 310 (C) at 321C - F and 323D - G. To the extent that there are disputes of fact on F the papers, these will be dealt with in accordance with the principles established for the resolution of factual disputes in opposed motion proceedings.

[4] At this stage it needs to be mentioned that the application for the compulsory winding-up of the respondent in the Transvaal G Provincial Division has been postponed pending the determination of this case. The reason why this application was brought in this Division is because the registered office of the respondent is now in Cape Town. The intervening creditor argued that the tactic of bringing this application in this Court, a form of forum-shopping, is an illustration of the applicants' bad faith in an effort to gain a tactical advantage H over the intervening creditor. Suffice it to say that nothing emerged during the hearing of this matter to substantiate this allegation. There may well be valid reasons for choosing a neutral venue for the hearing of an application for judicial management when there is a contested application for the compulsory liquidation of the company in I another jurisdiction. This Court can hear the matter untrammeled and without having to consider the circumstances and issues raised in the liquidation proceedings. To the extent that any issues raised in that matter might be relevant in this matter, they are no doubt dealt with in the papers before this Court.

[5] The background to this matter is as follows. Sometime prior to 1997 J

Josman J

a project was proposed to establish an hotel in Midrand, which A is one of South Africa's fastest growing areas. The hotel was to have 114 rooms and would be operated under franchise from Days Inn in the United States of America through a locally established franchisor known as Disa Hotels (Pty) Ltd (Disa) which is owned by two South Africans, Mr Mahesh Amarath and Mr Ramesh Gokal. Disa is an acronym for Days Inn of South Africa. Training for the operation of the hotel in accordance B with the franchise would come from America. Mr Caroth Bosman, formerly of the Ciskei Peoples Development Bank, who had been trained at Days Inn in the United States, was both a promoter of the project and was to take on the management of the hotel. The estimated project cost was R19,5m and the funding was to derive from various sources. As is C apparent, there is a substantial affirmative action component in the ownership and management of the project.

[6] The Days Inn franchise concept provides for limited service accommodation, which is ideal for business people attending centres such as Midrand on brief trips. The project proposal was prepared on D the assumption that Midrand was inadequately serviced in this respect and that establishing such an hotel in Midrand to cater for this need would ensure its success.

[7] The International Finance Corporation (IFC), which is a member of the World Bank Group, whose primary function is to provide E loan and equity financing for private sector projects in the developing world, agreed to provide part of the funding.

[8] As at January 1997 one-third of the shares in the respondent company were to be owned by Mr Bosman, Mrs Shongwe, Mrs Skosana and Mr Patidir. The remaining two-thirds of the shares were to F be owned by the IFC and a local financial institution. Mr Bosman was to be the general manager of the project and Disa, the South African franchisor, was to be the operator. The project was therefore conceived as a good and sensible business venture, providing employment for previously disadvantaged groups in an hotel project as well as broader G participation in the ownership and management thereof.

[9] A shareholders' agreement was subsequently entered into between Mr Bosman, Disa, The Jaysheila Family Trust, the IFC and the second applicant (which was to construct the hotel), dealing with the proposed operation of the respondent company. The shareholding was to be as follows: H

Bosman	17,1%
The Jaysheila Trust	10,5%
Disa	5,7%
Le Roux Construction (second applicant)	33,3%
IFC I	33,3%

As stated, second applicant was to construct the hotel and the respondent was to be a sub-franchisee of Disa. In June 1998 the first applicant had concluded a prior franchise agreement with Days Inn, USA, for the operation in Cape Town of a Days Inn hotel through a local entity, and J

Josman J

in December 1998 it had concluded a similar arrangement in respect of A the Roodepoort Days Inn. Although it was initially contemplated that the proposed local financial institution would hold shares in respondent, the institution selected, Future Bank Corporation (FBC), preferred to make funds available by way of a loan and concluded an agreement with the respondent to advance the sum of R10,5m, to be secured by a mortgage over the immovable property. All B shareholders' loan accounts were to be subordinated to the FBC loan.

[10] Mr Oosthuizen, who signed the founding affidavit on behalf of both applicants, attested to the fact that he had considerable experience in the field, both as a businessman generally and from having been directly and personally involved in hotel management C through his directorship of the first applicant. He stated that as a general measure new hotel projects take between three to five years to become truly profitable and that it normally takes between ten and 15 years for such a project to recoup its capital. This is not really in dispute. A management agreement was concluded between first applicant D and the respondent in respect of the Midrand hotel on 5 May 1999. After the untimely death of Mr Bosman earlier this year, Mr Oosthuizen was appointed as a director of the respondent. The first applicant was a creditor of the respondent in an amount of R265 112,44 for management fees as at the end of April 2000. E

[11] IFC contributed R2m by way of share capital and provided a venture loan of R4,9m to the respondent which was to enure for ten years, the interest rate for the latter being fixed at 9% per annum. Furthermore a two-year grace period was proposed to avoid undue pressure on debt service coverage. The optimistic forecast contained in F the project proposal was that in 1999 cash generated from operations would just about service debt. In the event of this not materialising, there were other funds that could be used. The project proposal's assessment of the hotel's prospects, which was based on the assumption that the demand for rooms in the area already exceeded supply, was that demand would become even more acute in the future because of the G anticipated growth in Midrand.

[12] Despite the initial assessment that the total cost of the project would be R19,5m, the final development cost, which includes the purchase price of the land, amounted to R22,5m, thereby exceeding budget by R3m. This amount was, however, financed out of additional H loan capital from FBC, which imposed an additional interest burden on respondent.

[13] The hotel was officially opened in January 1999. Despite the optimistic predictions in the project proposal and the budget estimate which anticipated that E Rand would be able to meet its monthly interest commitments to FBC, this did not happen. The reason I why the hotel did not function as projected is very much in issue on the papers.

[14] Applicants ascribe the hotel's woes to the interest rate hike, the prime rate having risen as high as 25,5% in August 1998. By January 1999 when the hotel opened, it was still hovering at 22% and although it started declining thereafter and reached 18% by the end of June 1999 J

Josman J

it was only at the end of 1999 that it was down to 15,5%. A The applicants say this had a significant impact on development in the Midrand area, which had a direct effect both on the occupation levels at the hotel and on the daily room rates that had to be lowered to be competitive. This in turn affected the cash flow of the hotel for at least the first 12 months of operation. In the founding papers the interest rate factor was singled out as the most significant cause of E B Rand's failure to achieve its budget forecast. The result was that it was unable to meet its monthly obligations...