The first time the Supreme Court of Appeal had to deal with the concept of business rescue was in the matter of Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd (609/2012) [2013] ZASCA 68 (27 May 2013).
In that matter, the Court confirmed that business rescue had two distinct goals. The primary goal is to restore a financially distressed company to solvency. If that cannot be obtained, the secondary goal is to get creditors a better deal than would be the case if the company is liquidated. These principles are now well-established.
The onus is on the applicant to prove in its founding papers that there is a reasonable prospect that one of these objectives will be achieved. A ‘reasonable prospect’ is a lesser requirement than a ‘reasonable probability’ which was required for judicial management. It is however more than an ‘arguable possibility’. Moreover, the prospect of rescue must rest on reasonable grounds, not mere speculation.
Although the court refrained from being prescriptive about the way in which an applicant must show a reasonable prospect, it stated that the applicant must provide a substantial measure of detail about the proposed plan. Vague and speculative suggestions will not suffice. This does not mean that the applicant must set out a detailed plan, but the application must show that there is a reasonable prospect that the company will be returned to solvency or that the rescue will yield a better financial return for creditors.
In Oakdene, the SCA ultimately refused the application for business rescue on the merits, on the basis that business rescue should not be used as an alternative, more informal form of winding-up. One of the factors that influenced the Court was that liquidation would be more advantageous to creditors because it would vest with liquidators with investigative powers under s 417 and 418 of the Companies Act of 1973, which are not available during business rescue. The Court also paid attention to the fact that the company was engaged in a litany of litigation which would likely undermine and frustrate the business rescue process.
Another crucial factor that sunk the application was that the major creditors were not in favour of business rescue at all. Brand JA held as follows in this regard:
“If the majority creditors declare that they will oppose any business rescue scheme based on those grounds, I see no reason why that proclaimed opposition should be ignored. Unless, of course, that attitude can be said to be unreasonable or mala fide. By virtue of s 132(2)(c)(i) read with s 152 of the Act, rejection of the proposed rescue plan by the majority of creditors will normally sound the death knell of the proceedings. It is true that such rejection can be revisited by the court in terms of s 153. But that, of course, will take time and attract further costs…”
Key Takeaways
Oakdene is still one of the most important judgments for any party seeking to place a company in business rescue. It remains crucial to have the buy-in of the major creditors, and to lay a proper factual basis to persuade the Court and effected parties that there is a reasonable prospect that the company will be restored to solvency or that creditors will achieve a better dividend through business rescue than liquidation.
About the author
Freddie Terblanche is an attorney with more than 15 years post-qualification experience. For more guidance contact him at [email protected] or (076) 018 7214.