Social Housing Regulatory Authority v Free State Social Housing Company (NPC) and Others (421/2020) [2020] ZAFSHC 49 (11 March 2020)

IN THE HIGH COURT OF SOUTH AFRICA

FREE STATE DIVISION, BLOEMFONTEIN

Case no. 421/2020

In the matter between:

SOCIAL HOUSING REGULATORY AUTHORITY and FREE STATE SOCIAL HOUSING COMPANY (NPC) NATIONAL HOUSING FINANCE CORPORATION SOC LTD MANGAUNG METROPOLITAN MUNICIPALITY DEPARTMENT OF HUMAN SETTLEMENT, FREE STATE PROVINCIAL GOVERNMENT Applicant First Respondent Second Respondent Third Respondent Fourth Respondent

CORAM: I VAN RHYN, AJ

HEARD ON: 3 MARCH 2020

JUDGMENT BY: I VAN RHYN, AJ

DELIVERED: 11 MARCH 2020

INTRODUCTION:

[1] This is an application brought in terms of Section 18(1) read with Section 18(3) of the Superior Courts Act[1] for leave to execute the order granted on 17 December 2019 in Case Number 1751/2019 by Mbhele J. The first respondent, the Free State Social Housing Company (“FRESHCO”) lodged an application for leave to appeal the judgment and order granted on 17 December 2019 whereafter the applicant brought this application on 31 January 2020, on an urgent basis, seeking to put into immediate operation, implementation and for execution the judgment and order in its favour granted against FRESHCO.

[2] The applicant, Social Housing Regulatory Authority is an entity of the National Department of Human Settlements established in accordance with the provisions of Section 7 of the Social Housing Act. (“the Housing Act”).[2] Applicant brought an urgent application on 18 April 2019 for an order placing FRESHCO under administration of the applicant in terms of the provisions of Section 12 of the Housing Act. The matter became opposed and was postponed on numerous occasions. On 10 May 2019 the applicant was instructed to appoint a forensic auditor to investigate the affairs of FRESHCO and the opposed application came before Mbhele J on 12 September 2019. The parties had by then fully exchanged affidavits and supplementary reports.

[3] On 17 December 2019 FRESHCO was placed under administration accompanied by ancillary orders intended to regulate the administration process to be performed by the applicant. Aggrieved by the judgment, FRESHCO, on 20 December 2019 lodged an application for leave to appeal. The hearing of the application for leave to appeal is tentatively scheduled to be during the period of 23rd and 27th of March 2020.

[4] On 13th February 2020, when this matter came before Daniso J, it was postponed at the instance of FRESHCO to the 3rd March 2020. It was ordered that FRESHCO pay the wasted costs occasioned by the postponement to 3 March 2020 and furthermore to file its opposing affidavit on or before the 20th February 2020, the Applicant to reply on or before the 25th February 2020. The applicant’s Heads of Argument had to be delivered by 27 February 2020 and FRESHCO’s Heads of Argument to be delivered by 28 February 2020. FRESHCO’s Heads of Argument were delivered on 28 February 2020 even though the applicant has defaulted in that it did not file its Heads of Argument as per the Court Order. The applicant’s Heads of Argument is dated 28 February 2020 and was filed with the Registrar of the High Court, Free State Division on 2 March 2020.

[5] The applicant is the regulator and funder of the Rental Social Housing Sector in South Africa. FRESHCO, like other social

housing institutions was established with a purpose of developing housing rental stock, using the institutional subsidy administered

through the applicant together with loan funding from the National Housing Finance Corporation. The National Housing Finance Corporation

is cited as second respondent in this application and filed a notice to abide by the decision of the court in this proceedings.

BACKGROUND.

[6] The events giving rise to this application are the following: on 15 November 2018 a provisional winding-up order was granted by the court against FRESHCO in favour of one of its creditors. The applicant intervened in the winding-up application. The second respondent was of the view that FRESHCO’s financial dilemma necessitated a formal inquiry due to the fact that FRESHCO failed to honour monthly instalments for monies advanced to it in terms of two (2) facility agreements entered into in 2011 and 2012. The applicant appointed a management consultant firm (“Letsema”) to undertake an investigation into FRESHCO’s affairs. The Letsema report indicated that FRESHCO was indeed an “ailing institution” and that urgent intervention was required.

[7] A forensic audit followed which confirmed the findings by Letsema. In the meantime the applicant settled the liability of FRESHCO in a successful attempt to avoid the winding-up of FRESHCO. Mbhele J found that there was evidence of maladministration in respect of FRESHCO and made several damning findings against senior officers of FRESHCO. The available evidence showed that FRESHCO is factually insolvent and needs to be rescued. It was furthermore held that “the manner in which the First Respondent (FRESHCO) carried out its business threatens the State’s ability to fulfil its constitutional mandate of providing housing to its inhabitants”.

APPLICABLE LEGAL PRINCIPLES.

[8] Section 18 of the Superior Court Act is concerned with the suspension of a decision pending appeal. The noting of an appeal suspends the operation and execution of the order pending the decision on appeal or application for leave. Section 18 simply restates the common law rule.[3]

[9] Section 18 of the Act provides that:

“[18] Suspension of decision pending appeal:

1.1 Subject to subsection (2) and (3), and unless the Court under exceptional circumstances orders otherwise, the operation and execution of a decision which is the subject of an application for leave to appeal or of an appeal, is suspended pending the decision of the application or appeal.

1.2 Subject to subsection (3), unless the Court under exceptional circumstances orders otherwise, the operation and execution of a decision that is an interlocutory order not having the effect of a final judgment, which is the subject of an application for leave to appeal or of an appeal, is not suspended pending the decision of the application or appeal.

1.3 A Court may only order otherwise as contemplated in subsection (1) or (2), if the party who applied to the Court to order otherwise, in addition proves on a balance of probabilities that he/she will suffer irreparable harm if the Court does not so order and that the other party will not suffer irreparable harm if the Court so orders.

1.4 If a Court orders otherwise, as contemplated in subsection (1) –

(i) the Court must immediately record its reasons for doing so;

(ii) the aggrieved party has an automatic right of appeal to the next highest Court;

(iii) the Court hearing such an appeal must deal with it as a matter of extreme urgency; and

(iv) such order will be automatically suspended, pending the outcome of such appeal.

1.5 For the purposes of subsections (1) and (2), a decision becomes the subject of an application for leave to appeal or of an appeal, as soon as an application for leave to appeal or a notice of appeal is lodged with the Registrar in terms of the rules.”

[10] Previously Courts were empowered with a wide discretion when determining whether to grant an order allowing execution pending the outcome of an appeal or not. The common law rule of practice in our courts has been that generally the execution of a judgement is automatically suspended upon the noting of an appeal, with the result that, pending the appeal, the judgement cannot be carried out and no effect can be given thereto. For the court to direct otherwise, the applicant, seeking immediate execution of the judgment should, in terms of Section 18(2) show presence of exceptional circumstances. The court’s discretion has now been curtailed by the enactment of subsection (2) and (3). Subsection (4) and (5) too, are innovative. The parties seeking immediate execution of the judgment should, in terms of Section 18(3) prove on a preponderance of probabilities that he/she will suffer irreparable harm if the court does not so order and that the other party will not suffer irreparable harm if the court so orders. Subparagraph 4 and subparagraph 5 make it imperative for the court hearing the matter to immediately record its reasons if it decides to grant the application to execute and then bestow upon the losing party a right to an automatic appeal which has to be treated “as a matter of extreme urgency” by the appellate court. A Section 18(4) appeal lies only in respect of orders falling within the purview of Sections 18(1) read with 18(3), i.e. where the orders of the court a quo has the effect of a final judgment, and the court granting leave to appeal has ordered that the order appealed against be immediately operative despite the appeal.

[11] In University of the Free State v Afriforum and Another[4] it was held that whether or not ‘exceptional circumstances” for the purposes of Section 18(1) are present, must necessarily depend on the peculiar facts of each case. Counsel on behalf of FRESHCO denied the allegation that FRESHCO will “continue to stagger toward its inevitable demise” in the absence of any urgent intervention to rescue it and to restore it to viability. It is contended that FRESHCO has embarked on a serious cost-cutting programme in order to improve the financial viability in that FRESHCO have relocated from their previous offices, where they had to pay rental in the amount of R65 000.00 per month to a more affordable office in Westdene, Bloemfontein, where they pay rental in the amount of R20 000.00 per month. The resultant saving of the said relocation is R45 000.00 per month which FRESCHO now uses to service other debts. Furthermore, the telecommunication system has been downgraded leaving a further saving of R8 000.00 per month. Many measures for example saving on garden services as well as cleaning services were implemented to ensure their financial viability.

[12] FRESHCO has furthermore embarked on an aggressive drive to collect rental from their tenants. It is argued that there has been an exponential improvement in the collection of rental and a target threshold of 90% is aimed for. On behalf of FRESHCO it is argued that the applicant has failed to point out the harm that the applicant will suffer if the immediate execution order is not granted. Furthermore, the applicant also failed to state the converse, namely that FRESHCO would not suffer irreparable harm in the event of the court ordering immediate execution. Counsel on behalf of FRESHCO stressed that applicant has not demonstrated urgency that warranted that the matter should be treated extraordinary as the applicant became aware of the leave to appeal on 7th January 2020 but only instituted the present urgent application on 31st January 2020, somewhat twenty two (22) days thereafter which militates against the whole notion that the matter was urgent. On behalf of FRESHCO it is submitted that the application should be dismissed with costs.

[13] Counsel on behalf of the applicant argued that the Letsema report, the joint provisional liquidators’ report, the forensic audit report and the findings of Mbhele J are all at one in regard to the urgent need for the administration process to unfold in order to attempt restoring FRESHCO to viability. The mere fact that the applicant settled the debt of FRESHCO with respect to one of its creditors is a further consideration constituting exceptional circumstances and warranting the intervention by this court. Immediate execution of the administration order is required in order to enable the applicant to exercise the powers provided for in the judgment delivered on 17 December 2019 in order to salvage the entity and to restore it to viability.

[14] Counsel on behalf of the applicant argued that the default position of the suspension of the administration order will result in the further deterioration of the affairs of FRESHCO. The applicant therefore stands to suffer irreparable harm should the administration order not be immediately executable whereas FRESHCO does not stand to suffer irreparable harm. On behalf of the applicant it was contended that the strained relationship between the tenants at the Brandwag flats in Bloemfontein and FRESHCO, which led to the tenants, amongst other things stop paying rental to FRESHCO, as well as FRESHCO’s factual insolvency culminated to the Section 12 administration application.

[15] In her judgment, Mbhele J held as follows:

“I am not of the view that the people who are currently at the helm of the first respondent have the capacity to take the respondent out of the mess it finds itself in. The first respondent failed to meet the requirements for its accreditation. It is unfathomable how the Board could have approved incentive bonus for a CEO who is steering a sinking ship. It is not clear what was the Board rewarding when he got his incentive bonus. This is a clear indication that the Board is not in touch with the affairs of the organization it is overseeing. I am satisfied that the applicant has established maladministration in the first respondent and that the first respondent must be placed under administration.”

[16] FRESHCO maintains that the findings of Ligwa Advisory Services, as contained in its report, are fundamentally flawed and shall be overturned on appeal which would ultimately result in the order to place FRESHCO under administration also to be overturned on appeal. FRESHCO is therefore of the considered view that another court would arrive at a different outcome. On behalf of the applicant it was argued that each day that passes by with the administration of FRESHCO in suspension on account of the application for leave to appeal, poses a serious threat to the continued existence of FRESHCO. The creditors might, just like the provisional liquidators, consider placing FRESHCO under liquidation in spite of the administration order. Any further delay in commencing the administration process will only serve to render the task of restoring FRESHCO to viability, more complicated and difficult.

[17] Regarding the urgency of the application, the applicant indicated that its offices closed on 20 December 2019 at 12H00 and the legal unit only resumed on 9 January 2020 whereafter the application for leave to appeal was considered and a way forward was deliberated whereafter instructions were given to the legal representatives to proceed with the urgent application. It has to be kept in mind that the judgment by Mbhele J was delivered on 17 December 2019, three days prior to the start of their holiday period.

[15] The joint provisional liquidators, which had been appointed to undertake the winding up of FRESCHO prior to the intervention by the second respondent and the applicant, delivered a letter of demand for payment of an amount of R1 414 545.89. The attorneys acting on behalf of the provisional liquidators further hold instructions to proceed with the liquidation of FRESHCO. I am convinced that the applicant will suffer irreparable harm if the applicant is not afforded the opportunity to take immediate control of FRESHCO’s business and operations and furthermore permitted to engage legal, accounting and/or the necessary advanced and specialized assistance in an endeavour to defray reasonable expenses during the administration of FRESHCO to achieve its restoration to viability.

[16] In conclusion, FRESHCO will most probably not, in my view, suffer irreparable harm should the order be made operational. It is plain from the facts and circumstances alluded to by the applicant that the applicant would indeed suffer irreparable harm if the order granted by Mbhele J is not put into operation. On behalf of the applicant it is therefore argued that exceptional circumstances have been demonstrated as well as the presence of irreparable harm to the applicant and the absence of irreparable harm to FRESHCO. I am in agreement with the contentions on behalf of the applicant that the prospects of success in the appeal are poor merely on the basis of the findings of my sister Mbhele J and to which was referred to above.

[17] I am convinced that the applicant (as well as the second respondent) will most probably be worse off if the order is not put into operation. Rather than “weighing up” to discern a “preponderance of equities” it is incumbent to find “exceptional circumstances” for purposes of section 18(1). It is plain from the facts and circumstances regarding the “mess” or predicament in which FRESHCO finds itself, that the demise of its business was caused by maladministration of the board and the “people currently at the helm”. I see no reason why costs should not in the circumstances follow the result.

In the result the following order is made:

1. The forms and time limits stipulated in Rule 6(12) of the Uniform Rules of Court are dispensed with and this matter is heard as one of urgency.

2. The Order of this Court per Mbhele J, issued on 17 December 2019 under Case Number 1751/2019 is declared operational, executable and not suspended pending the final determination of the first respondent’s application for leave to appeal and any subsequent appeal proceedings which may follow.

3. The costs of this application shall be paid by the first respondent.

_______________________

I VAN RHYN, AJ

On behalf of the Applicant: ADV MOKWENA

Instructed by: MATSEPES ATTORNEYS

On behalf of the First Respondent: ADV W MOKHARE

Instructed by: MOROKA ATTORNEYS

NO APPEARANCE ON BEHALF OF SECOND,

THIRD AND FOURTH RESPONDENTS.

[1] Act 10 of 2013.

[2] Act 16 of 2008.

[3] South Cape Corporation (Pty) Ltd v Engineering Management Services (Pty) Ltd 1977 (3) SA 534 (A) at 544 H – 545 A.

[4] 2018 (3) SA 428 (SCA).