Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd

• Jurisdiction: South Africa
• Judge: Eloff AJ
• Judgment Date: 23 November 2011
• Citation: 2012 (2) SA 423 (WCC)
• Docket Number: 15155/2011
• Hearing Date: 25 November 2011
• Counsel: FA Saint for the applicant. LS Kuschke SC for the first intervening party. AS de Villiers (with JT Benade) for the second intervening party.
• Court: Western Cape High Court, Cape Town

Eloff AJ:

[1] The commencement of the Companies Act 71 of 2008 (the new Act) introduced profound changes to the legislation governing companies in this country. One such change is a new remedy available to ailing G companies, being a business rescue. It constitutes a major theme of the new Act, and is amplified in s 7(k) thereof, which states that one of the purposes of the Act is 'to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders'.

[2] Like its Australian equivalent, [1] one of the aims of the remedy is to H render it possible for companies in financial difficulty to avoid winding-up and to be restored to commercial viability. [2] Both jurisdictions recognise the desirability of a company in distress to continue in existence. Business rescue does, however, not necessarily entail a complete recovery of the company in the sense that, after the procedure, the I company will have regained its solvency, its business will have been

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A restored and its creditors paid. [3] There is also the further recognition that even though the company may not continue in existence, better returns may be gained by adopting the rescue procedure. [4]

[3] The scheme created by the business rescue provisions in Ch 6 of the B new Act envisages that the company in financial distress will be afforded an essential breathing space while a business rescue plan is implemented by a business rescue practitioner. It is, however, necessary to caution against the possible abuse of the business rescue procedure, for instance, by rendering the company temporarily immune to actions by creditors so as to enable the directors or other stakeholders to pursue their own ends. C The courts in Australia have been careful not to allow their equivalent procedure to be used where there appears to be an ulterior purpose behind the appointment of an administrator by the directors. [5] It is necessary that an application for business rescue be carefully scrutinised so as to ensure that it entails a genuine attempt to achieve the aims of the statutory remedy. The instant case is one where such attempt was not D discernible from the affidavits filed of record.

[4] On 20 May 2011 Zoneska Investments (Pty) Ltd (Zoneska) launched an application for the compulsory winding-up of the respondent, Midnight Storm Investments 386 Ltd, based on its inability to pay E its debts.

[5] The amount of the indebtedness of the respondent to Zoneska was said to be R561 656,45, being the outstanding balance of moneys lent and advanced by Zoneska to the respondent in terms of a written agreement of loan. But for the application subsequently launched by F Southern Palace Investments 265 (Pty) Ltd (Southern Palace) on 27 July 2011 for business rescue proceedings to be commenced in respect of the respondent in terms of the provisions of s 131(1) of the new Act (the business rescue application), there was no reason for the winding-up application of Zoneska not to be granted. On 28 October 2011 I dismissed the business rescue application of Southern Palace with G costs and issued an order placing the respondent in provisional winding-up. My reasons for making these orders follow below.

[6] Southern Palace, represented by Mr R Hassim, relied for its locus standi to launch the business rescue application on a claim which it H acquired against the respondent from another creditor thereof. It accordingly qualified as an 'affected person', as defined in s 128(1)(a)(i) of the new Act.

[7] The Registrar of Banks featured as the first intervening party in the business rescue application, and Zoneska became the second intervening

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party. Each of these intervening parties delivered a detailed factual A response on affidavit to the business rescue application. Neither of them supported the application.

[8] The following facts served as background to the business rescue application:

[8.1]

Midnight Storm is one of several companies in the so-called B Realcor group, most of which find themselves in (voluntary) business rescue or in provisional liquidation.

[8.2]

These companies include Purple Rain Properties 15 (Pty) Ltd (Purple Rain) and Africa's Best 258 (Pty) Ltd (Africa's Best). At the instance of creditors of these two companies, I made orders on 27 October 2011 placing them in provisional winding-up. C

[8.3]

Some of the companies in the Realcor group such as Midnight Storm and Africa's Best involved themselves in the acquisition and development of commercial properties. Africa's Best established a retail shopping mall in Grabouw, Western Cape, and D Midnight Storm is the owner of a property in Blaauwberg on which the construction of a luxury hotel is in an advanced stage of completion. Purple Rain conducted a construction business, and it apparently performed much of the construction work in relation to the hotel.

[8.4]

The businesses of the companies were conducted under the E directorship of Ms Deonette de Ridder (De Ridder) and Mr WB Nortje (Nortje). De Ridder is also a director of various other companies in the Realcor group, including Gray Haven Riches 9 Ltd, Gray Haven Riches 11 Ltd and Iprobrite Ltd (the investment companies), to which I shall make reference below. F

[9] The business rescue application was one of three such applications, the other two relating to Africa's Best and Purple Rain. The applications relating to those two companies failed, which resulted in them being placed in provisional winding-up. In each of those cases there was no real answer to the liquidation application, and the business rescue application G was devoid of any merit. In fact, in respect of Africa's Best, counsel and the attorney acting for the applicants in the business rescue...