Clouds Kraal Boerdery CC v Nieu Woudtiville Roobos (Pty) Ltd and Another (1065/2020) [2020] ZANCHC 67 (24 August 2020)

IN THE HIGH COURT OF SOUTH AFRICA

(Northern Cape Division, Kimberley)

In the matter of:

CLOUDS KRAAL BOERDERY CC

Applicant

and

NIEU WOUDTVI LLE ROOIBOS (PTY) LTD

First Respondent

THE COMPANI ES & INTELLE CTUAL PROPERTY

COMM ISSION

Second Respondent

Coram: Van Tonder, AJ

REASONS FOR JUDGMENT

VAN TONDER, AJ

[1] On 10 July 2020, the applicant applied, on an urgent basis, for the first respondent to be placed under supervision and commencing

business rescue proceedings in respect of the first respondent.

[2] The Notice of Motion and annexures were served on the first and the second respondents on 20 July 2020. The first respondent opposed the application and on 10 July 2020 the following order was made by agreement between the parties:-

"1. The matter is postponed to Thursday 23 July 2020 at 09:30;

2. The applicant's replying affidavit will be filed on or before Friday 17 July 2020;

3. Heads of Argument to be filed on or before Tuesday 21 July 2020 at 12:00;

4. Costs of the postponement to stand over for adjudication on 23 July 2020."

[3] The answering and replying affidavits were filed by the parties and the matter was argued before me on 23 July 2020 on which date I granted a final order for the relief as prayed for.

[4] The following order was made:-

"1. The non-compliance with the requirements regarding forms and service as provided for in the Uniform Rules of Court is condoned and the matter is heard as one of urgency.

2. The applicant's point in limine regarding the authority of Mrs Moletsane is dismissed.

3. The first respondent be placed under supervision and commencing business rescue proceedings in respect of the first respondent in terms of s131(1) of the Companies Act 71 of 2008.

4. Confirming that the first respondent entered business rescue proceedings on the date upon which this application was issued.

5. Appointing Mr Herman Bester as interim business rescue practitioner as intended in s131(5) of the Companies Act, with all the powers and duties entrusted to him in terms of the Act, pending ratification of such appointment by the creditors at their first meeting.

6. Directing the first respondent to notify each affected person of this order within 5 (FIVE) days of it being granted.

7. The costs of the application is to be paid from the estate of the first respondent."

[5] I indicated that reasons for the order would be provided upon being requested to do so by any of the parties, which reasons were subsequently requested by the first respondent, wherefore I provide the reasons for the aforesaid order.

FACTUAL BACKGROUND

[6] The applicant Clouds Kraal Boerdery CC trades as a commercial agricultural farming operation in respect of the cultivation and production of rooibos tea and related products.

[7] The first respondent, Nieuwoudtville Rooibos, was initially established as a company to acquire, produce and store and as a wholesale distributor to market rooibos tea, a unique natural health product. The State has a 100 % shareholding in the first respondent, which was established with the assistance of the Northern Cape Department of Agriculture, Land Reform and Rural Development, to stimulate the economy of the Hantam area to create jobs and business opportunities for previously disadvantaged individuals and to support small and upcoming farmers.

[8] The first respondent's primary business is to acquire raw rooibos tea from local farmers to prepare, sort and package the tea. Thereafter, the first respondent markets the packaged rooibos products as a wholesaler to various local and international outlets, such as supermarkets, tea companies and manufacturers and distributors of health and cosmetic products.

[9] The first respondent concluded production agreements with various farmers in terms whereof the farmers commit to supply fixed quantities of their rooibos tea harvest to the first respondent at a predetermined price per kilogram, in order to secure a steady and reliable source of rooibos tea for the first respondent’s operations.

[10] The first respondent has contracted at least 84 farmers to supply rooibos to it, these being small-scale emerging farmers being completely dependent on the first respondent for their income, and the commercial farmers largely dependent for their income on the first respondent.

[11] The business model of the first respondent, as well as the agreement entered into between the applicant and the first respondent, as well as similar agreements with other farmers, are common cause between the parties.

[12] The locus standi of the applicant is common cause as well as the fact that the first respondent is indebted to the applicant in the sum of Rl,753,872.22, and that the applicant is an affected party as defined in s128(1) of the Act.

[13] It is common cause that the applicant had sent a letter of demand to the first respondent on 12 December 2019, for the amount then due namely R1 972 482.58, and also that the first respondent had sent out a notice to its producers on 14 April 2020 which letter stated the following:-

"Ons land en die wereld word negatief geraak deur die uitbreek van die Corona-virus. Ons maatskappy voe/ ook die effek van die Corona-virus. Die bestellings wat ons gehad het is alma/ vorentoe geskuif om ons probleme met die uitvoere ondervind. Die maatskappy is met ons kliente in gesprek om depositos te probeer onderhandel, maar was tot dusver onsuksesvol.

Dit spyt my om u mee te deel dat die maatskappy op die stadium nie die betalingsooreenkoms kan eerbiedig soos ooreengekom nie. Die COVID-19 virus raak ons alma/ negatief en ons hoop dinge sal so gou as moontlik na normaal terugkeer.

Die produsente is prioriteit vir ons en ons hoop om die betalings so gou as moontlik te kan maak.

U begrip in hierdie moeilike tyd word hoog op prys gestel."

[14] The first respondent does not deny that the amount of R1, 753,872.22 remains outstanding in respect of payment due to the applicant for the 2019 crop year.

[15] The first respondent, however, sets out that the applicant was initially owed an amount of R12,618,624.20, of which the major portion was paid, and that only 14% of the original amount due to the first respondent in terms of the 2019 crop year, still remains outstanding.

[16] It is also common cause that, since receipt of the letter of demand, the first respondent has made further payments to the applicant, resulting in the amount of R1, 753,872.22 that remains outstanding.

THE PARTIES' CONTENTIONS

[17] The first respondent opposed the application on a number of bases, the first of which is the first respondent's contention that the matter is not urgent, and that the applicant's grounds for urgency are either untrue, speculation or hearsay.

[18] The first respondent also contended that the application constitutes an abuse of process, as it was instituted for the purpose of obtaining payment of the applicant's debt without following due process.

[19] The first respondent furthermore contended that with stock on hand valued at approximately R20 million to R30 million, it is clearly not insolvent and there is no need for the matter to be heard on an urgent basis.

[20] The first respondent also contended that the applicant has failed in its founding papers to set out sufficient facts to merit the application being heard on an urgent basis.

[21] The first respondent alleged that the applicant has failed to make out a case to satisfy the test laid down by s131(4) of the Companies Act.

[23] The first respondent denied its inability to settle its debts and set out numerous factors which had contributed to the non-payment of the applicant's bill.

[24] In this regard, the first respondent alleges that, due to a further drop in prices due to the global COVID-19 pandemic, the first respondent was treading cautiously in dealing with its stock on hand valued between R20 and R30 million to prevent flooding the market and lowering the prices even further.

[25] The first respondent indicates that it is however now left with no choice but to proceed to sell such stock on hand and it contends that the value of the stock far exceeds the first respondent's indebtedness and that the applicant's debt will be settled.

[26] The first respondent also alluded to the fact that they saw no need to raise a defence to the applicant's claim as no action had been instituted by the applicant and that the first respondents, in good faith, set about settling the claim without having to resort to raising the defence of supervening impossibility.

[27] In respect of the applicant's allegations regarding debts owed to other creditors, the first respondent contends that the application is based on blatantly incorrect and bloated submissions and hearsay, as well as unsubstantiated facts, designed to make the financial position of the first respondent appear worse than what it in actual fact was.

[28] The first respondent contended that, as the first respondent was not financially distressed, this honourable Court could not determine that there was a reasonable prospect that the contemplated business rescue objective could be achieved.

[29] The first respondent also contended that it would not be just and equitable for the first respondent to be placed under business rescue, and that it would not be in the best interest and the rights of all relevant stakeholders, as it would also jeopardise the intended Spar-group contract as well as efforts to obtain investment opportunities already sought and in process with a view to a deal with a German company in this regard.

[30] The first respondent furthermore contended that it had a viable and sustainable plan in place to meet short­ term and long-term obligations, particularly those arising within the next 6 months, and that there was no need for a business rescue practitioner or a business rescue plan to rescue the first respondent. In this regard, the first respondent relied on its plan consisting of inter alia the following:-

30.1 selling the stock on hand with due regard to not flooding the market and further dropping prices;

30.2 confirmed sales for June to December 2020 amounting to R10,290,008.07;

30.3 projected sales of R6,404,000.00 for the same period;

30.4 an expected contract with a German company which is in the testing phase;

30.5 potential investments with whom discussions have already commenced;

30.6 the first respondent's shareholder, the Department of Agriculture, has given a commitment to recapitalise the first respondent on any shortfall;

30.7 the first respondent has already commenced proceedings to reconstitute its Board of Directors.

[31] The first respondent contends that, in contrast to the above, the applicant has failed to provide sufficient details of its proposed business rescue plan in order to be successful with its application for business rescue.

[32] In this regard, during argument, Ms Snyders, on behalf of the first respondent, referred to numerous case law setting out the fact that in founding papers in a business rescue application, the papers must contain sufficient factual detail to enable the Court to determine whether the business rescue practitioner will probably have a viable basis to undertake the task or, at the very least, make out a case for the Court to hold that an investigation by a business rescue practitioner to that end, appears to be justified.

[33] The applicant took a point in limine to deal with the authority of Ms Moletsane to depose to the answering affidavit herein, which point in limine I dismissed in the interest of justice, also based on the fact that, at the hearing, a resolution was in fact handed up from the Bar, confirming the authority of Ms Moletsane to depose to the answering affidavit herein.

[34] Mr Lever, on behalf of the applicant, contended that at the very least there was a prima facie basis to show that the first respondent was in fact financially distressed.

[35] In this regard, he submitted that on the first respondent's own version, the amount of Rl,753,872.22 that remained outstanding was due to the applicant in respect of the 2019 rooibos tea season.

[36] Mr Lever argued that, on the basis that the first respondent has failed to disclose its full financial position and/or financial statements in this regard, as well as the fact that the first respondent has no bona fide defence to the applicant's claim, it is clear that the first respondent is in fact in financial distress.

[37] Mr Lever also contended that if the applicant had in fact wanted to ensure or force payment as alleged by the first respondent, the applicant could have proceeded with an application for liquidation as was referred to in the correspondence.

[38] He further stressed that if the applicant had brought an application for liquidation, the first respondent would have had difficulty in opposing such an application.

[39] Mr Lever contended that the letter dated April 2020, constitutes a deed of insolvency, and in view of the fact that the first respondent has committed such an act of insolvency, it is abundantly clear that the first respondent is in fact financially distressed and/or trading under insolvent circumstances.

[40] Mrs Snyders, on the other hand, contended that the aforesaid letter does not necessarily constitute an act of insolvency and secondly, that it does not in fact indicate that the first respondent is in financial distress, as is denied by the first respondent.

[41] She however conceded that if the applicant were to have brought an application for liquidation, the first respondent would have been hard-pressed to oppose such an application.

[42] Mr Lever furthermore argued that the applicant is not privy to all the information in respect of the first respondent's financial position, wherefore the applicant cannot be expected to set out the full financial position of the first respondent as such knowledge falls squarely within the ambit of the first respondent.

[43] In this regard, Mrs Snyders argued that the applicant has failed to set out a sufficient basis in terms of which (in the event of the Court finding that the first respondent is in fact in financial distress) the business rescue proceedings will have a reasonable prospect of success.

[44] Mrs Snyders argued that the applicant's application fell short of the requirements in respect of the details of the requested business plan.

[45] Mr. Lever however contended that the matter stands to be distinguished from matters where the application for business rescue was brought by the company in distress itself, as the Applicant was an affected party, without detailed and full knowledge of the first respondent's financial position.

THE LEGAL POSITION

[46] The Companies Act 72 of 2008 defines "financially distressed" as follows in s128(f) :-

"Financially distressed" in reference to a particular company at any time means that:

i) It appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or

ii) It appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months."

[47] Section 131 of the Companies Act states as follows:-

"Court Order to begin business rescue proceedings:-

(1) Unless a company has adopted a resolution contemplated in s129, an affected person may apply to a court at any time for an order placing the company under supervision and commencing business rescue proceedings.

(2) …

(3) …

(4) After considering an application in terms of ss(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; or

(b) dismissing the application, together with any further necessary and appropriate order, including an order placing the company under liquidation."

[48] In the matter of PROPSPEC INVESTMENTS (PTY) LTD v PACIFIC COAST INVESTMENTS 97 LTD, 2013 (1)SA 542 (FSB) in respect of the requirements for business rescue proceedings it was stated as follows:-

“11 . I agree that vague averments and mere speculative suggestions will not suffice in this regard. There can be no doubt that in order to succeed in an application for business rescue, the applicant must place before the Court a factual foundation for the existence of a reasonable prospect that the desired object can be achieved. But with respect to the learned colleagues, I believe that they placed the bar too high.

12. In my view, a prospect in this context means an expectation. An expectation may come true or it may not. It therefore signifies a possibility. A possibility is reasonable if it rests on a ground that is objectively reasonable. In my judgement a reasonable prospect means no more than a possibility that rests on an objectively reasonable ground or grounds."

[49] As set out in the matter of MHLONIPHENI v M EZEPOLI MELROSE ARCH (PTY) LTD AND OTHERS; LWAZI v MEZEPO LI NI COLW AY (PTY) LTD; MOTO v PLAKA EASTGATE RESTAURANT CC AND ANOTHER; MOHSEN AND ANOTHER v BRAND KI TCHEN HOSPITALITY (PTY) LTD AND AN OTHER, (2020/10556; 2020/10555; 2020/10955; 2020/10956;) [2020] ZAGPJHC 136 (3 June 2020) in respect of urgency the following was held:-

"6. The respondent companies in each of the matters before the Court submitted that the application was not urgent as none of its creditors were threatening action against them for payments of amounts owing. Business rescue proceedings are, in my view, inherently urgent. As stated by Binns­ Ward, J in Koen v Wedgewood Village Golf and Country Estate (Pty) Ltd[1]

'It is axiomatic that business rescue proceedings by their very nature must be conducted with the maximum possible expedition. In most cases, a failure to expeditiously implement rescue measures when a company is in financial distress will lessen or entirely negate the prospect of effective rescue'.

7. I accordingly find that the matter should be dealt with on an urgent basis."

[50] In my view, the fact that the first respondent is indebted to the applicant in an amount of Rl,753,872.22, which liability originates from the 2019 season, and which amount, even on the first respondent's own version, the first respondent is currently unable to pay, is a strong indication that the first respondent is in fact in financial distress.

[51] Even more so, in view of the fact that the first respondent, although not relying on a defence of impossibility of performance, does suggest that it might avail the first respondent as a defence in the matter, which by itself an admission that the first respondent is unable to pay the aforesaid amount at this point in time.

[52] In this regard, the aforesaid indications are confirmed by the fact that the first respondent fails to set out full comprehensive facts regarding its financial position, (especially its liabilities) which fall peculiarly within the knowledge of the first respondent, and linked to the fact that no indication whatsoever is given as to when the applicant and/or other creditors of the first respondent will in fact be paid.

[53] In this regard, referring to the applicant's alleged lack of sufficient detail in respect of the financial position of the first respondent to indicate the fact that it is in financial distress, one should bear in mind that there would be a significant difference between the case where the Board adopts a resolution to place a company under supervision on the one hand, and on the other hand where an affected person brings an application to place a company under supervision and business rescue in terms of s131.

[54] In this regard, it is clear that such a Board will have full knowledge of the company's financial situation, as to what it is still capable of achieving and what could reasonably be required to rescue the company. This is, however, in stark contrast to the knowledge of the company's affairs that another affected person would have when the application is brought under s131(4).

[55] The first respondent contends that there is no need to be placed under business rescue proceedings as the first respondent has compiled its own business plan in order to remedy the problems experienced by the first respondent.

[56] However, on the other hand, the first respondent contends that the applicant has failed to show that placing the first respondent under business rescue proceedings, will have a reasonable prospect of remedying the difficulties experienced by the first respondent.

[57] The first respondent cannot blow hot and cold, alleging on the one hand that the Board of Directors of the first respondent will be able to save the first respondent in terms of its existing business plan, without the need for a business rescue practitioner being appointed, while on the other hand, alleging that business rescue proceedings will not have a reasonable prospect of succeeding in saving the first respondent.

[58] In this regard, in the matter of ZIEGLER SOUTH AFRICA (PTY) LTD v SOUTH AFRI CAN EXPRESS AI RWAYS SOC LTD AND OTHERS 2020 (4) SA 626 (GJ) at par. 60 the Court held that:-

"Section 131(4) of the Act affords a Court a discretion in a loose sense, and requires of the Court no more than a value judgment. As to whether there is a reasonable prospect of rescuing a company, it cannot be said that it involves a range of choices which a Court can legitimately make. The answer to the question can only be 'Yes' or 'No'."

[59] In this matter the first respondent denies that it is in financial distress, however, the first respondent on its own admission, does not pay the applicant the amount due to it since 2019, does not dispute its indebtedness in the aforesaid amount, does not indicate when and how the applicant will be paid, and does not disclose its full financial position to the Court in order for it to indicate that they are not in financial distress.

[60] The aforesaid debt predates the COVID-19 lockdown, although the said lockdown may have exacerbated the problems of the first respondent.

[61] In view of the aforesaid, I am of the view that the remark of Tsoka J, as set out in the matter of WELMAN v MARCELLE PROPS 193 CC AND ANOTHER, [2012] JOL 28714 (GSJ) in par. 28, is also relevant herein: -

"In my view, business rescue proceedings are not for the terminally ill close corporations. Nor are they for the chronically ill. They are for ailing corporations which, given time, will be rescued and become solvent."

[62] By reason of the aforesaid, I am satisfied that the first respondent is financially distressed, inter alia because it appears unlikely that the first respondent will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, and that it is just and equitable for it to be placed under business rescue for financial reasons, and that there is a reasonable prospect of rescuing the first respondent.

[63] These are the reasons why I granted the order made on 23 July 2020.

AG VAN TONDER

ACTING JUDGE

On behalf of the Applicant: Adv. L. Lever (oio Duncan & Rothman Inc.)

On behalf of First Respondent: Ms. J. Snyders (oio Engelsman, Magabane Inc.)

[1] Koen and Another v Wedgewood Village Golf & Country Estate (Pty) Ltd and Others, 2012 (2) SA 378 WCC, par. 10