Civil Engineering Development CC v Blue Horizon Investments 11 (Pty) Ltd (Cranbrook (Pty) Ltd and Another Intervening) (28463/2016) [2017] ZAGPPHC 398 (29 June 2017)

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG DIVISION, PRETORIA

CASE NO: 28463/2016

Not reportable

Not of interest to other judges

Revised.

29/6/2017

In the matter between:

CIVIL ENGINEERING DEVELOPMENT CC APPLICANT

and

BLUE HORIZON INVESTMENTS 11 (PTY) LTD RESPONDENT

CRANBROOK (PTY) LTD 1st INTERVENING APPLICANT

JOTHAM MAPUNDI 2nd INTERVENING APPLICANT

JUDGMENT

KUBUSHI J

INTRODUCTION

[1] There are effectively three applications before me, two of which are competing against the one. The first application is launched by an entity known as Civil Engineering Development CC ("Civil Engineering") for an order for the winding­ up of the respondent therein, a company known as Blue Horizon Investments 11 (Pty) Ltd ("Blue Horizon"). I shall refer to this

application as "the liquidation application" or simply as "the liquidation". The second application is an intervention application aimed at procuring an order to put the respondent therein - Blue Horizon, under supervision and commencing

business rescue proceedings, and is brought by a company known as Cranbrook (Pty) Ltd ("Cranbrook"). This application shall, in this judgment, be referred to as "the first business rescue application" or simply as "the business rescue". The third and final application is also an intervention application by Jotham Mapundi ("Mr Mapundi") for an order to place Blue Horizon under business rescue. I shall refer to this application as "the second business rescue application" or "the second business rescue".

[2] The parties are, in essence, opposing each other's applications, that is, Civil Engineering is opposing the business rescue proceedings, whilst Cranbrook and Mr Mapundi are opposing the liquidation. The parties are, nevertheless, agreed, correctly so in my view, that the liquidation application and the business rescue applications should be dealt with simultaneously and that the status of the business rescue applications should be determined first. Ideal, in this judgment, with the two business rescue applications separately because they each rely on different grounds.

BACKGROUND

[3] Before I deal with the issues raised by the parties I find it apposite that I first set out a background of the facts that led to the applications before me.

[4] Cranbrook is the holding company of a group of companies which is primarily involved in property development in Limpopo Province.

Different companies are used by Cranbrook for different projects it undertakes. Blue Horizon is one of the companies in the Cranbrook

group of companies; and, is a special purpose vehicle created exclusively by Cranbrook for the Lephalale development project. In

2006 Blue Horizon acquired property in the Lephalale area which was earmarked for a huge residential development. According to Cranbrook, the property is valued at between R46 200 000 and R69 400 000; which is alleged to be the difference between a forced sale value and the market value of the property.

[5] Blue Horizon is said to have the following creditors:

5.1. The major creditor is the Development Bank of South Africa ("the Development Bank") with a claim of approximately R75 million;

5.2. Civil Engineering who's claim is R15 million [Civil Engineering contends that its claim amounts to approximately R23 million]; and

5.3. The Lephalale Local Authority's claim in the region of R9.5 million [Cranbrook is contesting the amount].

[6] It is alleged that Blue Horizon had generated more than R200 million through the project it had with Eskom, an amount far exceeding the original loan the Development Bank granted Blue Horizon for the Lephalale project. The only explanation for the loan balance of the Development Bank's loan to Blue Horizon is said to be the existence of undeclared intercompany loans between Blue Horizon and other companies in the Cranbrook group. This is illustrated in the papers by what happened in Cranbrook's Burgersfort project outlined hereunder.

[7] Another relevant development project of Cranbrook is in Burgersfort. For this development Cranbrook uses a company called Proline Trading 60 (Pty) Ltd ("Proline"). The Development Bank also provided a loan to this company for purpose of a development in Burgerfort. Blue Horizon's property in Lephalale served as collateral security in this transaction . This property was sold to a third party for a purchase price of R132 500 000. The allegation is that this property was sold in an attempt to release Proline from the bond registered in favour of the Development Bank to the prejudice of the creditors of Cranbrook group of companies, including Civil Engineering; and as such, the contention is that the transaction has to be investigated by a liquidator.

Cranbrook in its replying affidavit is denying all the allegations in relation to its Burgersfort project.

[8] Civil Engineering is a business which renders primarily civil engineering services and is employed by Cranbrook to render such

services in more than one project within the Cranbrook group of companies. One of these projects is the Lephalale development project. Civil Engineering rendered civil engineering services to Blue Horizon and was also appointed as project manager for the

building of 350 houses on various stands in Lephalale. As an incentive for the residential building project, it was agreed that

Civil Engineering and Blue Horizon would share the profits relating to the building project on a 50/50 basis. After the building project was finalised, a dispute arose between Civil Engineering and Blue Horizon regarding the exact amount of the net profit to be shared. After some negotiations and on 8 April 2011 a written settlement agreement was entered into between Civil Engineering and Blue Horizon. In terms of the settlement it was essentially agreed that Blue Horizon will pay Civil Engineering an amount of R15 million together with compound interest to be calculated as set out in the settlement agreement. Blue Horizon undertook to pay the said amount together with the agreed interest thereon, on or before 7 April 2016. Based on this indebtedness, Civil Engineering launched a winding-up application against Blue Horizon based on its inability to pay its debts. In retaliation thereto, the sole shareholder of Blue Horizon, Cranbrook, launched an application for business rescue.

[9] Mr Mapundi, on the other hand, is a director and employee of Blue Horizon and is intervening in these proceedings in his capacity as such as well as a representative of two other employees of Blue Horizon. He contends in his papers that the three of them are

interested and affected parties which, gives him the locus standi to bring the business rescue application.

INTERVENTION APPLICATION

[10] I take into account that counsel for Civil Engineering has objected to the hearing of Mr Mapundi's application [the second rescue application] on the basis that it is not properly before court.

[11] It is, nevertheless, my view that, Mr Mapundi and the two employees he is representing, like Cranbrook as Blue Horizon's holding company, have a 'direct and substantial interesf in the subject matter of the proceedings before me and all of them should be allowed to intervene in these proceedings. The rule is that an applicant for intervention has to satisfy the court that: (i) she or he has a direct and substantial interest in the subject matter of the litigation , which could be prejudiced by the judgment of the court; and (ii) the application is made seriously and is not frivolous, and that the allegations made by the applicant constitute a prima facie case or defence - it is not necessary for the applicant to satisfy the court that she or he will succeed in her or his case or defence. This test has been held to apply only to persons wishing to intervene as respondents or defendants, as is currently the case in this instance.[1] It is also trite that an application for leave to intervene may be brought at any stage of the proceedings.[2]

[12] Uniform Rule 12 provides further that the intervention application must be brought on notice to all the parties. I take note of the fact that Mr Mapundi's application is not on notice to all the parties. In paragraph 7 of Mr Mapundi's founding affidavit, he sets out a list of about 8 persons including Blue Horizon and CIPC as interested and affected persons that would have to be notified about his application ; and to which he undertakes to serve the application upon. Except for Civil Engineering and Blue Horizon, who in any event were to be in court on the date of hearing, there is no indication on the papers before me that the other persons were notified of this application. Because of some measure of urgency involved in cases of this nature and the ruling I intend to make in relation to the two business rescue applications , I am of the view that this discrepancy should be overlooked and Mr Mapundi's application be allowed.

[13] In the premise, I grant both Cranbrook and Mr Mapundi leave to intervene in these proceedings.

THE BUSINESS RESCUE APPLICATIONS

The Issue to be Determined

[14] The crux is whether Cranbrook and Mr Mapundi have made out a case for business rescue against Blue Horizon.

The Law

[15] The salient provisions of the Companies Act 71 of 2008 ("the Companies Act") relevant to the business rescue proceedings are the following:

Section 131 (4) (a) of the Companies Act reads thus

"(4) After considering an application in terms of subsection (1), the court may –

(a) make an order placing the company under supervision and commencing business rescue proceedings, if the court is satisfied that –

(i) the company is financially distressed;

(ii) the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract,

with respect to employment-related matters; or

(iii) it is otherwise just and equitable to do so for financial reasons,

and there is a reasonable prospect for rescuing the company ."

Business rescue is defined as follows in s 128 (1) (b) of the Companies Act:

19.1. On the first point raised, it is an established rule of law that an applicant in a business rescue application is not required to set out a detailed business rescue plan. The rule was established by the Supreme Court of Appeal in Oakdene Square Properties (Ply) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd[4] whereat the following is stated:

"I have indicated my agreement with the statement in Propspec[5] that the applicant is not required to set out a detailed plan. That can be left to the business rescue practitioner after proper investigation in terms of s 141. But the applicant must establish grounds for the reasonable prospect of achieving one of the two goals in s 128 (1) (b)."

The court went further to say in para 31 that

"Self-evidently the development of a plan cannot be a goal in itself. It can only be the means to an end. That end, as I see it, must be either to restore the company to a solvent going concern, or at least to facilitate a better deal for creditors and shareholders than they would from a liquidation process."

19.2. On the second point, the court in the Oakdene-judgment confirmed that the achievement of any one of the two goals referred to in s 128 (1) (b) of the Companies Act, that is, (a) the return of the company to solvency, or (b) the provision of a better deal for creditors and shareholders than what they would receive through liquidation, would qualify as 'business rescue' in terms of s 131 (4).[6] The following is said in the Oakdene-judgment above, para 23

"The potential business rescue plan in s 128 (1) (b) (iii) thus contemplates two objects or goals: a primary goal, which is to facilitate the continued existence of the company in a state of solvency and, a secondary goal, which is provided for as an alternative, in the event that the achievement of the primary goal proves not to be viable, namely, to facilitate a better return for the creditors or shareholders of the company than would result from immediate liquidation."

[20] The requirement is that the applicant for business rescue must establish grounds for the reasonable prospect of achieving one of the two goals in s 128 (1)(b) of the Companies Act. A 'reasonable prospect' requires more than a prima facie case, an arguable possibility or mere suggestive speculation. It must be a prospect based on reasonable grounds. A court's assessment of whether there is a reasonable prospect for rescuing a company does not entail the exercise of a narrow discretion but involves a value judgment.[7]

[21] I, shall, for purposes of this judgment, deal ad seriatim, with the two business rescue applications.

Cranbrook's Case

[22] Cranbrook's argument is that a business rescue scenario would yield a far better return for creditors and interested parties if a business rescue plan is developed which, makes provision for a sale over time of the Blue Horizon's property, with further provision in it for an allowance by the Development Bank of some dividend or compensation to Civil Engineering, then a business rescue will be far more advantageous for the Development Bank, far more advantageous for Civil Engineering and if matters go well, there is even a prospect that members of Blue Horizon might benefit too.

[23] The question, therefore, is whether Cranbrook has been able to establish grounds for the reasonable prospects of achieving a better deal for creditors and shareholders than what they would receive through liquidation.

[24] The submission by Cranbrook that in a fire sale, which will inevitably follow if there is a winding-up of Blue Horizon, Civil

Engineering will, on the probabilities, receive nothing and might be required to pay a contribution is of no assistance to Cranbrook's

case as it appears that even under business rescue Civil Engineering may still receive nothing. In my opinion, even if Blue Horizon's

property is sold at the envisaged valuation price, that would not be enough to satisfy the major creditor who is owed at least R75 million; this without the inclusion of the interest accruing thereon on a monthly basis. It will also leave all the other debts unpaid. There is no evidence on record suggesting how the business rescue practitioners would satisfy the other outstanding debts and where the remuneration of the business rescue practitioner himself will come from.

[25] Cranbrook's further submission that there is a prospect for Civil Engineering to receive something in a business rescue because there is an incentive for the Development Bank, in order to get the matter into business rescue, to allow some dividend to be made available to Civil Engineering as part of a business rescue, which in effect will have the result that the Development Bank to an extent, relinquish some security which it would otherwise enjoy, is also unfounded. There is no evidence on the papers to found this argument by Cranbrook - neither in its founding papers nor in its replying affidavit. There is also no evidence before me that the Development Bank is or will be amenable to the proposition of allowing that some dividend should be made available to Civil Engineering.

[26] The high water mark of Cranbrook's argument that the Development Bank is strenuously objecting to the idea that there be a fire sale of the property over which it enjoys security, has no basis, as well. Cranbrook does not in its papers adduce any evidence in support of this bare allegation. In its replying affidavit a letter from the Development Bank in support of this assertion is referred to but not attached.

[27] In an attempt to have the letter introduced into evidence, Cranbrook's counsel applied, from the bar, to have a supplementary

affidavit to which the letter is attached handed in. This was strongly objected to by counsel for Civil Engineering. I provisionally allowed the supplementary affidavit to be handed in and undertook to rule on its admissibility in this judgment. Although Cranbrook's counsel submits that the supplementary affidavit be admitted into evidence in the interest of justice, my view is that it should not be admitted.

[28] What however, seems to be problematic is that the supplementary affidavit is attested to by a director of Cranbrook and Blue Horizon. The deponent submits in the supplementary affidavit that he solicited the Development Bank's view as to whether the bank prefers a liquidation or business rescue proceedings. Pursuant thereto the bank provided a letter which is the subject matter of the supplementary affidavit. There is no confirmatory affidavit from the bank.

[29] It is thus my view that the point raised by Civil Engineering's counsel in objection to the letter being admitted, that an affidavit from the Development Bank ought to have been filed either handing the letter in or confirming the contents of the letter, is valid.

[30] The letter, in any event, is not helpful. It is stated in the letter that the Development Bank is not in support of the liquidation/winding up of the company. But, the letter goes further to mention that this is a preliminary assessment of the matter and that a more informed view will be arrived at once further due diligence has been undertaken as to whether to support a business rescue application or not. This to me indicates that the Development Bank has not as yet taken a final view on the issue whether it will support the liquidation or the business rescue; Cranbrook can, as such, not rely on the letter in support of its application.

I, in the circumstances rule that the letter is inadmissible.

[31] To the extent that disputes of facts exist as is the case in this instance, the matter must be decided on Civil Engineering's

version.[8] Civil Engineering in its papers refers to possible improper dispositions of the company's assets which might have taken place and

that the said transactions should be investigated. The dispositions are denied by Cranbrook in its replying affidavit. Liquidation

proceedings will be appropriate in such circumstances. The liquidator is empowered in terms of s 417 and 418 of the Companies Act 1973, to investigate such impropriety and where possible to save the company's assets.[9]

Mr Mapundi's Case

[32] The arguments in this application are based only on the founding affidavit of Mr Mapundi since Civil Engineering did not file any answering affidavit. Even though Civil Engineering's papers are not before court, Mr Mapundi must in the papers before me prove his case. My view is that he has failed to do so.

[33] Mr Mapundi in his papers relies on four grounds to establish that there is a reasonable prospect of restoring Blue Horizon to a solvent going concern. The said grounds are set out in his papers as follows:

33.1. An action recently instituted by two plaintiffs, Proline Trading 60 (Pty) Ltd ("Proline) and Blue Horizon Investments 11 (Pty) Ltd ("Blue Horizon") for an amount of R19 532 603, 37 against Civil Engineering. The submission is that should that pending action succeed, Proline tenders to cede and assign to Blue Horizon a portion of the proceeds of the claim. This, according to Mr Mapundi, will allow Blue Horizon, in turn, to invoke set-off of any possible claim which Civil Engineering may have against it and will result in Civil Engineering not having locus standi in the winding-up application.

33.2. It is against the wishes of the major creditor, the Development Bank of South Africa, that Blue Horizon be liquidated. The contention is that should the court sanction the commencement of business rescue there are attractive prospects that 75% of the independent creditors, the Development Bank being the major creditor, will at the meeting of creditors to be convened by the business rescue practitioner to be appointed, vote in favour of the business rescue plan. I have already ruled against this proposition.

33.3. There have been recently important developments in four projects, which were accepted by the Housing Development Agency ("the Agency"), an agency of the Department of Human Settlement. It is submitted that the Agency has ultimately accepted in principle four of the projects Blue Horizon together with Praline and Cranbrook had proposed to them, one of which is a project of Blue Horizon. The specific project of Blue Horizon is the provision of 8 000 affordable housing State subsidized residential units in the municipality of Lephalale, the development value of which is R1 billion. The contention is that these projects may yield benefits for Blue Horizon, its creditors and the local community.

33.4. There are serious discussions underway by means of which negotiations are conducted with the Lephalale Local Authority in order to utilise some of Blue Horizon's development land in Lephalale for the construction of a hospital upon that land. It appears that Blue Horizon is the registered owner of an institutional zoned property of approximately 8 hectares in size which is ideally located for the construction of a hospital. The Provincial Department of Health has expressed an interest in acquiring the land even though nothing has yet been confirmed in writing.

[34] Section 128 (1) (b) of the Companies Act envisages that measures to be taken in order to facilitate the rehabilitation of the company should provide for temporary supervision, and for a temporary moratorium of the rights of the creditors against the company. They are not meant to provide companies with a mechanism with which to delay payments to creditors with no feasible plan of ever paying its debts, or a means of restructuring its debts over lengthy periods of time.[10]

[35] It is my opinion that the grounds on which Cranbrook relies are made without any substantiation. All the projects alluded to by Cranbrook do not have time frames when they will yield any funds to enable Blue Horizon to continue business in a solvent state and do not have certainty. There are no contracts in place as indication that the projects are viable. If all these projects are to be waited for it will be a long time before Blue Horizon will become solvent. In particular the following should be noted:

35.1. The Department of Health has at his stage only expressed an interest. There is no certainty whether the Department will eventually agree to contract with Blue Horizon for the development of the hospital or not.

35.2. As regards the Housing Development Agency the acceptance is only in principle and does not confirm that ultimately the tender to build the houses will be awarded to Blue Horizon. Projects of this nature are normally awarded through the tender system. It is well-known that tender processes take a long time before they could be finalised.

35.3. It is not certain what the prospects of success are in relation to the case alluded to by Mr Mapundi. It is not clear from the papers when the pending case against Civil Engineering was instituted and how long it will take before it is finalised. Besides, it is a well-known fact that court processes take long to be finalised.

[36] In that sense, Civil Engineering's intent to oppose both business rescue applications cannot be said to be unreasonable. For me, liquidation appears to be more advantageous to the creditors than the proposed business rescue proceedings.

THE LIQUIDATION APPLICATION

[37] Civil Engineer's submission that the outcome of the business rescue application will ultimately determine whether or not Blue Horizon should be wound­ up. If the application for business rescue is unsuccessful, there is no doubt that a winding-up order should be granted.

[38] I am of the view that Civil Engineering has made out its case, Blue Horizon is clearly commercially insolvent and should be liquidated. All the requirements of the Act relating to liquidation have been complied with and the order prayed for by Civil Engineering ought to be granted.

[39] There is no reason, none has been offered, why the costs of the applications should not follow the event. Civil Engineering is the successful party and should be awarded the costs.

ORDER

[40] I make the following order:

1. Both the applicants in the business rescue applications are granted leave to intervene.

2. The applications for an order placing the respondent (Blue Horizon Investments 11 (Pty) Ltd) under supervision and commencing business rescue proceedings in terms of section 131 (1) and (4) of the Companies Act 71 of 2008 are dismissed with costs.

3. The application for the final winding-up of Blue Horizon Investments 11 (Pty) Ltd is granted with costs and Blue Horizon Investments 11 (Pty) Ltd is placed under final winding-up.

_______________________

E. M. KUBUSHI

JUDGE OF THE HIGH COURT

APPEARANCES

HEARD ON THE : 05 May 2017

DATE OF JUDGMENT : 29 JUNE 2017

APPLICANT'S COUNSEL : ADV. J.G. WASSERMAN

APPLICANT 'S ATTORNEYS : VAN DER MERWE & ASSOCIATES

RESPONDENT & FIRST INTERVENING

PARTY'S COUNSEL : ADV. M.P. VAN DER MERWE

PARTY'S ATTORNEYS : COUZYN HERTZOG & HORAK

SECOND INTERVENING PARTY'S COUNSEL : ADV. J. HERSHENSOHN

SECOND INTERVENING PARTY'S ATTORNEYS:CROUSE INCORPORATED

[1] See Shapiro v SA Recording Rights Association Ltd 2008 (4) SA 145 (W) at p152 para 17, and Erasmus: Superior Court Practice Vol. 2 pD1-138.

[2] See Uniform Rule 12.

[3] See Oakdene-judgment above, para 26.

[4] (609/2012) [2013) ZASCA 68 (27 May 2013) para 31.

[5] Prospec Investments v Pacific Coasts Investments 97 Ltd 2013 (1) SA 542 (FB) para 11.

[6] See Oakdene-judgment above, para 26.

[7] See First Rand Bank v Normandie Restaurants (189/2016) (2016] ZASCA 178 (25 November 2016) paras 14 and 15.

[8] See National Director of Public Prosecutions v Zuma [2009] ZASCA 1; 2009 (2) SA 277 (SCA) para 26.

[9] See the Oakdene-judgment above at para 35.

[10] See Normandie-judgment above para 19.