CHENG v TIMSITE ENTERPRISES (PVT) LTD and OTHERS (161 of 2024) [2024] ZWHHC 161 (20 March 2024)

HCHC 130/24 HH-161-24 MINGLEI CHENG Versus TIMSITE ENTERPRISES (PVT) LTD And THE MASTER OF THE HIGH COURT, N. O And THE REGISTRAR OF COMPANIES HIGH COURT OF ZIMBABWE COMMERCIAL DIVISION CHIRAWU –MUGOMBA J Harare, 20 March 2024 UNOPPOSED COURT APPLICATION S. Chikotora, for the applicant CHIRAWU MUGOMBA J: This matter was placed before me as an unopposed court application for corporate rescue in terms of s124 of the Insolvency Act [Chapter 6:07], “the Act”. Although the first respondent filed a notice of opposition and an opposing affidavit, at the hearing I treated the matter as unopposed because I had several queries to raise with the applicant’s legal practitioner. The deponent to the applicant’s affidavit is one Mirirai Chabenga. Through this representative, the applicant averred that he is a Chinese citizen currently based in China. He holds 15% shares in the first respondent. He is therefore an affected person for purposes of s121 (1) (a) (i) of the Act. In support of his shareholding, a license from the Zimbabwe Investment Agency, "ZIA” was attached. After the issuance of the relevant authority, applicant avers that as the managing director, set up a gold mining company in the form of the first respondent in Bindura. The first respondent holds assets of two million United States Dollars and has been trading since its inception. The applicant left Zimbabwe after HH-161-24 HCHC 130/24 unfortunate events. In the meantime, as a form of deception, a company called Timsite Mining (pvt) Ltd, was set up to deceive authorities and members of the public. Applicant narrates a plethora of reasons which support the placement of the first respondent under corporate rescue. These include lack of transparency and accountability and a debt owed to ZESA. Upon perusing the application, I noted three pertinent issues and I raised these with the applicant’s legal practitioner at the hearing. These are: - (a) proof of shareholding of the applicant in first respondent (b) affected persons in the form of employees and lastly manner of service of the application on the affected person. I inquired from Mr. Chikotora whether he is aware of the Supreme Court decision in Metallon Gold Zimbabwe (pvt) Ltd and three ors –vs- Shatirwa Investments (pvt) Ltd and three ors, SC -107 -21. He was magnanimous enough to submit that he was unaware of that case. The Metallon case sets out extensively the law on corporate rescue. After discussing the law on corporate rescue including the shortcomings of judicial management, the court stated as follows, “It is in light of these developments that the Legislature enacted the current Insolvency Act with the new concept of corporate rescue procedures. Corporate rescue is defined in s 121(1) (b) of the Insolvency Act as follows: “(b) ‘Corporate rescue’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for — i) ii) iii) the temporary supervision of the company, and of the management of its affairs, business and property; and a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company … .” The purpose of corporate rescue is to avert the eventual failure of a company and to achieve the above objectives. The only acceptable outcome at the end is the survival of the financially distressed company. HH-161-24 HCHC 130/24 THE PROCEDURE AND EFFECT OF CORPORATE RESCUE The Insolvency Act provides two ways of commencing corporate rescue proceedings. The first procedure is in terms of s 122(1) of the Insolvency Act, which provides that the board of a company or its shareholders can make a resolution to institute corporate rescue proceedings. This procedure is voluntary and does not require the company to approach a court. The resolution placing the company under supervision can only be taken if the company is financially distressed, in that it is unable to pay its debts and there appears to be reasonable prospects of rescuing the company. For the resolution to be effective, it must be filed with the Master of the High Court, the Registrar of Companies and the Registrar of Cooperative Societies, in the case of a cooperative society. The company must within five business days after filing the resolution notify every “affected person” and appoint a corporate rescue practitioner who satisfies the requirements of s 131 of the Insolvency Act. The responsibility of the corporate rescue practitioner is to oversee management of the company during the corporate rescue proceedings. The second procedure, which is the procedure adopted in this matter, is made by way of an application to court for an order commencing corporate rescue proceedings. The procedure to be followed in terms of s 124 of the Act is as follows: “(1) Unless a company has adopted a resolution contemplated in section 122, an affected person may apply to a Court at any time for an order placing the company under supervision and commencing corporate rescue proceedings. (2) An applicant in terms of subsection (1) must — (a) (b) serve a copy of the application on the company, the Master and the Registrar of Companies; and notify each affected person of the application by standard notice. (3) Each affected person has a right to participate in the hearing of an application in terms of this section. (4) After considering an application in terms of subsection (1), the Court may — (a) make an order placing the company under supervision and commencing corporate rescue proceedings, if the Court is satisfied that— (i) (ii) the company is financially distressed; or 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 HH-161-24 HCHC 130/24 (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.” The application for corporate rescue is filed before the High Court by any affected person. Section 121(1)(a) of the Insolvency Act defines “affected person” as follows: “i) ii) iii) a shareholder or creditor of the company; and any registered trade union representing employees of the company; and if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives”. It therefore follows that if a court is satisfied that the company is financially distressed, or has failed to pay any amount in terms of a public regulation, or contract, with respect to employment related matters, or it is otherwise just and equitable to do so for financial reasons, it may make an order placing the company under supervision and commencing corporate rescue proceedings. Alternatively, the court can dismiss the application and make any further necessary and appropriate orders, which include an order placing the company under liquidation. The court will also appoint a corporate rescue practitioner to manage the affairs of the company”. Further, the court went on to state as follows, “APPLICATION OF THE LAW TO THE FACTS It appears to the Court that this matter can be disposed of by answering one pertinent issue, which is: whether or not the failure to comply with the mandatory provisions of the Act rendered the application a nullity. It has already been established that s 124 of the Insolvency Act provides for the procedure to be followed when approaching the court for an order of corporate rescue. Section 124(1) provides that: “124 Court order to commence corporate rescue proceedings (1) Unless a company has adopted a resolution contemplated in section 122, an affected person may apply to a court at any time for an order placing the company under supervision and commencing corporate rescue proceedings.” The statute is specific in relation to the appropriate applicant who is entitled to make an application for corporate rescue. The statute is specific so as to curb the abuse of the process by parties who may not have a substantial interest in the rehabilitation of a company HCHC 130/24 as well as parties who may only be interested in their personal financial gain and not the rehabilitation of the company. HH-161-24 In terms of the Insolvency Act, there is no ambiguity as to whom an affected person is. It is either a shareholder, a creditor of the company, a registered trade union representing the employees of the company or the employees of the company who are not represented by a registered trade union. An applicant for corporate rescue is therefore confined to such persons. In casu, the second respondent cannot be held to be an affected person in terms of the Insolvency Act. It was never alleged by the second respondent that it was a shareholder. Therefore it cannot qualify in terms of the first criterion set out in s 121(1)(a)(i). Instead, the second respondent alleged that it was a creditor because it was in possession of a judgment against the first appellant. It is apparent from the record that the judgment which the second respondent relied on is a judgment, not against the first appellant, but another company, identified as Metallon Gold, that is based in the United Kingdom. The judgment does not establish that the second respondent was a creditor of any of the appellants. In the absence of any other evidence to prove that indeed the second respondent was a creditor of any of the appellants, the Court cannot possibly clothe the second respondent with creditor status. The second respondent further alleged that it qualified as an affected person in terms of s 121(1)(a)(ii) of the Insolvency Act, in that it was a registered trade union in the mining industry. The Insolvency Act does not provide for a registered trade union in the industry but specifically provides for a “registered trade union representing the employees of the company”. Lastly, the second respondent does not qualify as an employee of the company in terms of s 121(1)(a)(iii) of the Insolvency Act. As such, the second respondent does not meet the requirements of an affected person and therefore had no locus standi to institute corporate rescue proceedings against the appellants. There is no reason to deviate from the definition of “affected person” prescribed by the Act. The respondents failed to comply with the provisions of s 124(2) of the Insolvency Act, which made their application a nullity as they failed to comply with peremptory provisions of the statute. Section 124(2) provides that: “(2) An applicant in terms of subsection (1) must — a) b) serve a copy of the application on the company, the Master and the Registrar of Companies; and notify each affected person of the application by standard notice.” Section 2 of the Insolvency Act provides that: “’standard notice’ means notice by registered mail, fax, e-mail or personal delivery.” This provision shows that the court a quo misdirected itself when it found that neither the manner of notification nor the form or content of “standard notice” was defined in the Insolvency Act. The court a quo went on to express the view that there was a lacuna in the law that needed to be addressed by the Legislature as it created confusion in the procedure. HH-161-24 HCHC 130/24 The court a quo failed to appreciate the statutory definition of standard notice as set out in s 2 of the Insolvency Act. It is clear that standard notice can only be effected through registered mail, fax, e-mail or personal delivery. Nowhere in the Act is there a provision for standard notice to be by way of publication in a newspaper. Such notice was a nullity which vitiated the entire proceedings. Service by way of standard notice is a peremptory requirement as the Act uses the word “must”. Deviation from peremptory requirements of the Act render an application fatally defective. It is imperative to conduct corporate rescue proceedings with the utmost diligence and care as they have far-reaching consequences, not only on the creditors, shareholders and employees of a corporation but the society at large. Corporate rescue is predicated on a broader social justice perspective unlike the old law of judicial management that was based on private corporate interest. Consequently, it is critical that the procedures laid down for corporate rescue be complied with to the letter. In Top Trailers (Pty) Ltd and Anor v Kotze [2017] ZAGPPHC 1268 the court expressed the following sentiments in respect of notification of affected persons: “How Kotze should have become aware of the business rescue proceedings is not explained by the applicants. The applicants have the obligation to notify all affected persons of the resolution but have not done so and have not proffered any explanation for their breach. They are now approbating and reprobating, demanding that Kotze should perform miracles. The applicants themselves had not complied with the law but are using the same legislation that they disregarded, to achieve a perverted outcome. The Court will not allow itself to be a party to an illegality … The main argument relied on by Kotze at the proceedings before JUSTICE KHUMALO was that the resolution placing Top Trailers under business rescue was a nullity because of the company's non-compliance with section 129(3) of the Companies Act. From a reading of the affidavit filed by Kotze at the hearing before JUSTICE KHUMALO, it is clear that Kotze was attacking the resolution adopted by the Board of Directors. The attack was to the effect that because he, as an affected person, was not notified of the resolution as provided for in section 129 of the Companies Act, the resolution stood to be set aside. I cannot disagree with his reasoning on this score … I find that Kotze as an affected person, a creditor of the company, should have been notified of the resolution placing Top Trailers under business rescue but he was not notified. The fact that Kotze was not notified clearly infringes on his rights as an affected person and creditor of the company.” It is apparent that the failure to notify affected persons is not only a breach of peremptory provisions, but it also prejudices affected persons who have a substantial and legitimate interest in the fate of the company as they are not afforded an opportunity to respond to the application. Ultimately, the outcome of the application may prove to be adverse to them. The effect of non-compliance by an applicant for corporate rescue with the provisions of the Insolvency Act relating to notifying affected persons by standard notice renders the application a nullity”. The applicant’s legal practitioner’s contention is that the Z. I. A licence is proof of shareholding. This cannot be. The proof of shareholding in a company is a HH-161-24 HCHC 130/24 share certificate. A license from Z. I. A does not appear anywhere in the Companies and Other Business Entities Act [Chapter 24:31] as constituting proof of shareholding in a company. As a matter of fact, a shareholders certificate is the document recognised as prima facie proof of shareholding- see s153(3) of the Companies and Other Business Entities Act. In the absence of a shareholding certificate, there is no proof that the applicant is an affected person. The applicant has therefore not established locus standi to file the application. Mr. Chikotora agreed with me that the first respondent is trading. This means that it has employees. In terms of the Act, they are affected persons and must be served with the application by way of the standard notice as discussed in the Metallon case. There is no proof that the employees were served through standard notice with the application. I echo the important observation espoused in the Metallon matter that corporate rescue is a drastic process and affects employees among other entities. Mr. Chikotora prayed that the matter be removed from the roll. However on the authority of the Metallon case, apart from failure to establish locus standi through proof of a share certificate, failure to comply with the peremptory provisions of the Act, renders the application a nullity. As such, it cannot be removed from the roll but dismissed. It is on that basis that I dismissed the application with no order as to costs. This is due to the fact that I did not give the first respondent’s legal practitioners audience. DISPOSITION 1. The application be and is hereby dismissed with no order as to costs. Rubaya and Chatambudza, applicant’s legal practitioners 7