Insolvency & Business Rescue News January 2012

In a previous article, I commented on the trend in South African courts that the judges are saying that there must be a detailed, proposed business rescue plan before any application for business rescue will be granted.

This trend was reinforced by a judgment in the Western Cape High Court, Cape Town under case number 24850/2011. The judgment was delivered on 9 December 2011 by the Honourable Mr Justice Binns-Ward.  
The important paragraph of the judgment is on page 14 (paragraph 23), which reads as follows:

"It is not clear which of the two possible objects of business rescue the applicants seek to achieve by having the company placed under supervision. In their founding papers it appears to be to restore it to solvency, while in their reply it appeared that a better return for creditors than would be achieved on immediate liquidation was the intended objective.  It does not really matter, however, because on either approach the applicants have fallen woefully short of furnishing the court with the material required to make the assessment of whether a reasonable prospect of business rescue succeeding exists."

In this matter the applicants, William and Yvonne Koen, brought the business rescue application in respect of a planned development which was to become a golf course estate. The judge commented that the company's expenditure in the development outpaced the receipts received in respect of the sale of plots to such an extent that the company was unable to sustain the development. By 2009 only 14 of the 18 holes were completed and thereafter the infrastructure was left to deteriorate and was abandoned.

The company was indebted to Nedbank Limited in the amount of approximately R60 million and the court heard evidence that approximately R81.5 million was required to complete the development work.

There was evidence on an unnamed potential investor in the development. The judge commented on this saying "their case is manifestly dependent on the provision by the mystery potential investor of the means to enable a business rescue practitioner to draw up a feasible rescue plan".

The trend has been reinforced by this judgment. The South African courts will only grant orders in terms of section 131 of Act 71 of 2008 if a fully motivated and structured business rescue plan based on Part D of Chapter 6 of Act 71 of 2008 is filed of record. The applicant needs to be transparent about the identities of potential investors. Affected parties intending to bring an application in terms of section 131 of Act 71 of 2008 must interact with all the stakeholders, especially the financial institutions, to design a workable business rescue plan with the business rescue practitioner being the key player because, after all, business rescue can only succeed if the business rescue practitioner successfully interacts with all the affected parties.

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