INTRODUCTION
In 2018, the legislature enacted the Insolvency Act [Chapter 6:07] (hereinafter the Act). One of the notable advancements in the Act is the introduction of corporate rescue proceedings to replace judicial management which was repealed in terms of the Companies and Other Business Entities Act [Chapter 24:31]. It is apparent that in introducing the Part XXIII corporate rescue procedure in our law the legislature transplanted the South African Chapter 6 business rescue provisions in the Companies Act 71 of 2008 (hereinafter the Companies Act).
A corporate rescue may be initiated through voluntary means or by order of a court (Section 122 and 124 of the Act). Commenting on the equivalent provisions in South Africa, Delport et al Henochsberg 462(3) states that the test for a ‘reasonable prospect’ is uniformly applied in both cases of voluntary and involuntary corporate rescue. Unfortunately, the Act does not provide a definition of the term ‘reasonable prospect’ which leaves this question open to judicial interpretation.
The interpretation of the phrase reasonable prospect has been extensively interrogated by the courts in South Africa. Two opposing viewpoints emerged. The first approach suggests that a reasonable prospect of rescue requires a substantial amount of detail on the proposed corporate rescue plan, see Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 (Pt) Ltd 2012 (2) SA 423 (WCC) [24] (hereinafter Southern Palace). The second approach, which is the current legal position in South Africa, requires that a reasonable prospect of rescue must be based on reasonable grounds see Oakdene Square Properties (Pty) Ltd and Others v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others 2013 (4) SA 539 (SCA) [29] (hereinafter Oakdene).
This article therefore critically evaluates the two approaches with the aim of providing some recommendations on the correct interpretation for the courts in Zimbabwe to adopt.
COMMENTARY ON THE CONFLICTING DECISIONS IN SOUTH AFRICA
FIRST APPROACH
The first approach suggests that a reasonable prospect of rescue requires a substantial amount of detail on the proposed corporate rescue plan Southern Palace [24]. This approach lays down a somewhat prescriptive formula on what an applicant must prove in an application for corporate rescue. In the Southern Palace case [24.1-24.4] the court states as follows:
“One would expect, at least, to be given some concrete and objectively ascertainable details going beyond mere speculation in the case of a trading or prospective trading company, of:
24.1. the likely costs of rendering the company able to commence with its intended business, or to resume the conduct of its core business;
24.2. the likely availability of the necessary cash resource in order to enable the ailing company to meet its day-to-day expenditure, once its trading operations commence or are resumed. If the company will be reliant on loan capital or other facilities, one would expect to be given some concrete indication of the extent thereof and the basis or terms upon which it will be available;
24.3. the availability of any other necessary resource, such as raw materials and human capital;
24.4. the reasons why it is suggested that the proposed business plan will have a reasonable prospect of success.”
This approach in the Southern Palace case was endorsed in subsequent decisions Koen and Another V Wedgewood Village Golf & Country Estate (Pty) Ltd and Others 2012 (2) SA 378 (WCC) [18]. However, the decision in the Southern Palace case came under criticism and was subsequently overruled in the Oakdene case [30-31].
SECOND APPROACH
In Propspec Investments (Pty) Ltd v Pacific Coast Investments 97 Ltd and Another 2013 (1) SA 542 (FB) [11] (hereinafter Propspec Investments case) the court agreed with Southern Palace on the finding that speculative suggestions and vague averments would not suffice to meet the evidential threshold required Southern Palace [25]. The applicant would be required to present a factual foundation for the existence of a reasonable prospect Propspec Investments [11]. However, the court in Propspec Investments [12] was of the view that the prescriptive requirements set in the Southern Palace case went beyond the threshold of a reasonable prospect for rescue.
The rational of the court in the Propspec Investments [12] case is that a prospect is an expectation which could either eventuate or not. Furthermore, a prospect is a possibility which is reasonable and a reasonable possibility is one which is objectively reasonable. In reaching this determination the court also made reference to the underlying purpose in section 7 of the Companies Act. A lesser burden of proof would take cognizance of the fact that an applicant for corporate rescue such as an employee or creditor may not have the necessary knowledge to reach the requirements as prescribed in the Southern Palace case. See Propspec Investments [13].
A further point is that it is the responsibility of the corporate rescue practitioner and not the applicant to investigate the affairs of the company with a view to making a determination whether there are reasonable prospects for rescue Propspec Investments [13]. This can only be done after an order for corporate rescue is granted by the court and the corporate rescue practitioner commences his investigation in terms of section 134(1) of the Act.
The Propspec Investments case was subsequently endorsed by the Supreme Court of Appeal in the Oakdene case [30-31] and is the current legal position in South Africa with respect to the test for a ‘reasonable prospect for rescue’.
A CRITICAL ANALYSIS OF THE TEST FOR ‘REASONABLE PROSPECT’
Commenting on the equivalent South African Chapter 6 provisions of the Companies Act, Loubser A Some Comparative Aspects of Corporate Rescue in Southern African Company Law (LLD thesis University of South Africa 2010) at 58 (hereinafter Loubser) opines that the choice of the word ‘prospect’ may not have been the most appropriate given that it may denote a possibility or a probability. Loubser at 58 and 59 suggests that it may have been preferable or prudent to use the word ‘possibility’ instead of prospect. These comments are equally apposite for the corporate rescue procedures in section 122 and 124 of the Act.
PROSPECT VS PROBABILITY
A crucial distinguishing feature between the test for judicial management and corporate rescue is that the former required proof of a ‘reasonable probability’ whilst the later requires a ‘reasonable prospect’ see sections 300(a)(ii) and 305(1) of the repealed Companies Act [Chapter 24:03]. The high threshold of proof in judicial management was a significant constraint in the success of judicial management as a corporate rescue system in Zimbabwe Dzvimbo R S Should the Zimbabwean Companies Act move away from Judicial Management and adopt Business Rescue? (LLM thesis University of Cape Town 2013) at 55.
In Ellingbarn Trading (Private) Limited v Assistant Master of the High Court & Another 2013 (1) ZLR 332 (H) (hereinafter Ellingbarn Trading) the court cited with approval the principle enunciated in Feigenbaum and Another v Germanis and others 1998 (1) ZLR 286 (HC) when it stated:
“it was held that judicial management is an extraordinary procedure available to a company in special circumstances and for statutorily prescribed purposes and is only adopted when the court is satisfied that there is a reasonable possibility that, if placed under judicial management, a company which is unable to pay its debts will be able to do so in full, meet its obligations and became a successful concern.”
Further in the Ellingbarn Trading case, the court cites Tenowitz v Tenny Investments (Pty) Ltd 1979 (2) SA 680 at 685 F – G where it stated:
“Judicial management is clearly not an experiment to determine whether a company can extricate itself from financial difficulties --- and the fact that it would have to continue for at least a number of years before [it] could hope to pay its debts suggests that it is not capable of becoming a successful concern within a reasonable time.”
The above citations clearly affirm how onerous and almost impossible it was for an applicant to succeed in an application for judicial management. The success of judicial management as a corporate rescue system was particularly hamstrung by the culture of liquidation which prevailed prior to the enactment of the Act. In the Ellingbarn Trading case the court emphasised the creditor supremacy in the insolvency regime that prevailed prior to the enactment of the Act when the court stated:
“Where a company is unable to pay its debts, as is the position in the present case, an unpaid creditor has a right ex debito justitiae to have it placed in liquidation.”
It is therefore important for the courts to distinguish and give effect to the difference in wording between the two tests in judicial management and corporate rescue Southern Palace case [20-21]. The success or failure of corporate rescue largely depends on the burden of proof ascribed to the test for a reasonable prospect and it is recommended that the courts lower the threshold per the findings in the Oakdene case [30-31].
THE ROLE OF THE CORPORATE RESCUE PRACTITIONER
The construction of the corporate rescue provisions reveals that it is not the role and obligation of an applicant in terms of section 124(4) of the Insolvency Act to provide concrete ascertainable evidence. This is because section 134(1) of the Insolvency Act requires a corporate rescue practitioner, once appointed, to investigate the affairs of the company with a view to ascertaining whether there is a reasonable prospect of rescuing the company.
Section 134(1) of the Insolvency Act reads as follows:
“(1) As soon as practicable after being appointed, a corporate rescue practitioner must investigate the company's affairs, business, property, and financial situation, and after having done so, consider whether there is any reasonable prospect of the company being rescued.”
Commenting on the equivalent provisions in South Africa, Delport et al Henochsberg at 482(2) states that the purpose of corporate rescue is to appoint an independent person in place of the board and management to investigate the affairs and express an opinion on whether there is a reasonable prospect of rescue. It would therefore be unfairly prejudicial to applicants for the courts to require a preliminary corporate rescue plan when that is the prerogative of the corporate rescue practitioner to establish and develop after an order for corporate rescue has been granted see Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations Limited and Another, In Re; AFGRI Operations Limited v Solar Spectrum Trading 83 (Pty) Ltd [2012] ZAGPPHC 359 (16 May 2012) [19] (hereinafter Solar Spectrum).
ACCESS TO INFORMATION
An application for corporate rescue is commenced by an affected person (section 124(1) of the Act). An affected person is defined as a shareholder, creditor, employee or their registered trade union (section 121(1)(a) of the Act). An important consideration that one must have in mind is the differing extent of knowledge of the classes of affected persons on the financial situation and operations of the company Delport P A et al Henochsberg at 482(2).
In voluntary corporate rescue proceedings, it is the board of the company that initiates corporate rescue in terms of section 122(1) of the Act. A board would naturally be expected to have knowledge on the financial state and operations of the company and could reasonably be expected to provide a preliminary corporate rescue plan Delport P A et al Henochsberg at 482(2). However, in the case of voluntary corporate rescue this would only apply where an affected person objects to the resolution to commence corporate rescue on the grounds that there is no reasonable prospect of rescuing the company see section 123(1)(a)(ii) of the Act.
In the South African case of African Banking Corporation of Botswana v Kariba Furniture Manufacturers & Others 2015 (5) SA 192 (SCA) [30] the Supreme Court of Appeal stated:
“I am mindful of the warning by this court in Oakdene against being prescriptive about the assessment of reasonable prospects of rescue. But there can be no dispute that the directors voting in favour of a business rescue must truly believe that prospects of rescue exist and such belief must be based on a concrete foundation.”
In making the above analysis, the author is not suggesting that there should be different tests for a reasonable prospect see Solar Spectrum [18]. The court should assess the relation or proximity of the affected person (involuntary) or board (voluntary) to the company with a view to establishing the threshold that a reasonable class of litigant in the same position could adduce in support or defense of their claim.
THE FIRST VS THE SECOND APPROACH IN SOUTH AFRICA
As alluded above, the first approach as expounded in the Southern Palace case has been criticised for being overly prescriptive and placing an unduly high burden on applicants Oakdene case [30-31]. Delport et al Henochsberg at 482(4) warns that adopting a one size fits all prescriptive approach would condemn corporate rescue to the same fate as its predecessor judicial management.
Although the position in South Africa is now settled by the Supreme Court of Appeal decision in the Oakdene case. There is admittedly some level of uncertainty in determining the meaning of a reasonable prospect of rescue Solar Spectrum case [34]. There is therefore need for an applicant to present evidence and facts that the future prospects of rescuing the company are reasonable as opposed to certain Solar Spectrum case [34].
In the Solar Spectrum case [17] the court opined that the decision in Southern Palace had been misunderstood. This was based on the qualification of the guidelines by the court in Southern Palace [24] that each case was to be determined on its own merits.
The Solar Spectrum case [17] then clarified that in assessing the reasonableness of the prospects a court should bear in mind the position of the applicant in relation to the company. The guideline is by no means rigid and an applicant would not be required to provide any or all of the requirements mentioned by the court in the Southern Palace case see Swart W J C “Business rescue: do employees have better (reasonable) prospects of success? Commentary on Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations Limited (North Gauteng High Court, Pretoria” (unreported) 2012-05-16 Case no 6418/2011; 18624/2011; 66226/2011; 66226A/11 Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations Limited (North Gauteng High Court, Pretoria (unreported) 2012-05-16 Case no 6418/2011; 18624/2011; 66226/2011; 66226A/11)” 2014 Obiter 35 406-420 at 419 .
Delport et al Henochsberg at 482(3) concedes that the guidelines in Southern Palace may be of use to a corporate rescue practitioner when he is carrying out an enquiry in terms of section 134(1) of the Insolvency Act. As clarified by Solar Spectrum [16] these guidelines are not static and therefore there is no need for a court to discount the guidelines. The court must assess the best criteria for weighing the evidence before it with a view to reach a determination on the prospects for rescue.
It is argued that in out rightly disregarding the guidelines in Southern Palace as directed by Oakdene a court would also be applying an equally deleterious prescriptive threshold by ignoring a subjective assessment of the capacity of the applicant to adduce a preliminary corporate rescue plan. It is submitted that where this is not possible a court should weigh the reasonable prospects based on the access to information that an affected person could reasonably be expected to have.
Swart 2014 Obiter 419 opines that in order to avoid confusion, when faced with an application for corporate rescue the court should restrict itself to asking whether the company is in financial distress and whether there is a reasonable prospect for rescuing the company. The burden of proof in a corporate rescue application is significantly lighter as compared to the one required for judicial management, however, even then, Loubser at 60 identifies the difficulties an affected person may have in proving financial distress as a constraint. The difficulties identified by Loubser apply with equal force and measure to the access to information for an applicant to be in a position to prove reasonable prospects.
POTENTIAL CREDITOR VETO IN ASSESSING REASONABLE PROSPECTS
Once a corporate rescue practitioner is appointed she must prepare and propose a corporate rescue plan see section 142 of the Act. A meeting of creditors and other holders of voting interest is convened wherein the proposed corporate rescue plan is tabled for adoption by a vote, see sections 143 and 144 of the Act. It is therefore possible for a major creditor acting in isolation or in common purpose to argue at the time of an application for corporate rescue that there are no reasonable prospects of rescue because the major creditors will not vote in favour of the corporate rescue plan see Nedbank Ltd v Bestvest 153 (Pty) Ltd; Essa v Bestvest 153 (Pty) Ltd 2012 (5) SA 497 (WCC) [55] ( hereinafter Nedbank case).
This issue arose in the Nedbank case in South Africa. In Nedbank [55] the court declined to accept submissions by the major creditors that the corporate rescue application was an exercise in futility because the creditors would veto the plan. The court reasoned that a creditor should be open to a proposal that had a likelihood of rejuvenating the company for its benefit see Nedbank [55]. The court ruled that such an approach would be contrary to the purpose of corporate rescue which is aimed at saving rather than destroying a business Nedbank Nedbank [55] .
This approach in the Nedbank case has merit given that it would be inappropriate for the creditors to outrightly declare an intention to veto the corporate rescue process prior to the production of a corporate rescue plan. In the words of the court in Southern Palace on another issue, such an approach may amount to “placing the cart before the horse”.
However, in the Oakdene case [37-38] the Supreme Court of Appeal differed with the approach in the Nedbank case. The court in Oakdene [38] was of the view that, absent any mala fides or unreasonableness, an expression of opposition by creditors to the envisaged corporate rescue plan should not be ignored. The court premised its findings on the basis that, barring any intervention in terms of section 145 of the Insolvency Act, section 125(2)(c)(i) puts an end to corporate rescue proceedings once the corporate rescue plan is declined by a majority of creditors see Oakdene case [38].
One may argue that section 145 of the Insolvency Act is the appropriate remedy to determine the reasonableness or otherwise of a negative vote for a corporate rescue plan. In the Oakdene case [38] the court explained that this would further delay the outcome and attract further litigation costs. Furthermore, a court could only interfere with a creditors decision where the decision was found to be unreasonable see Luthuli Power Corporation (Pty) Ltd and Others v Transfix Transformers SA (Pty) Ltd and Another 2017 JDR 0806 (FB) [33-39].
On reflection, it would appear that the decision in the Oakdene case [37] is the most preferable given that the court prefaced its analysis by the statement, “In these circumstances I do not believe.” This implies that each case is to be determined on its own merits. Where the objection is bona fide and absent any malice there is no reason for the court to discount the genuine views of creditors in assessing the prospects of rescue. Similarly, where an objection is mala fide the court may exercise its discretion and ignore the submission in assessing the same see Delport P A et al Henochsberg at 482(15).
CONCLUSION
In the early days of the corporate rescue procedure in Zimbabwe it is important for the courts to distinguish corporate rescue from its predecessor judicial management system. One way of doing that is to give effect to the different wording between a “reasonable prospect” and a “reasonable probability”. No doubt there is a comparative similarity between corporate rescue and the business rescue procedure in South Africa. However, where necessary, there is need for our courts to reflect on the jurisprudence for this procedure and to distinguish its application from its South African counterpart.
On the interpretation of a reasonable prospect it is recommended that we adopt a hybrid approach of merging the tests outlined in the Oakdene, Southern Palace and Solar Spectrum cases. In respect of the veto power of creditors and its weight in assessing a reasonable prospect a court must assess the bona fides of such an objection.
Ultimately each case must be decided on its own merits and the courts must apply a value judgement giving effect to the purposes of the legislation.
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