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REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

CASE NUMBER: 32686/2019

In the matter between:

MAVIS LEMAO MOTAUNG                                                                                     Applicant

and

TIS INVEST (PTY) LTD                                                                                      Respondent

(Registration number: 2015/375794/07)

AFFECTED PERSONS AS SET OUT IN SCHEDULE 1

(TE CONNECTIVITY SOLUTIONS GMBH as Opposing Creditor)

 

JUDGMENT

DIPPENAAR J

[1] This is an application to place the respondent (“TIS”) under supervision in terms of Chapter 6 of the Companies Act 71 0f 2008 (“the Act”) and to commence business rescue proceedings under section 131 of the Act. The application was initially launched as an urgent application on 17 September 2019 in response to a winding up application launched by TE Connectivity Gmbh (referred to as “the opposing creditor” or “TEC”) during August 2019. By agreement between the parties, the two applications were to be consolidated.

[2] Pursuant to certain directives issued by Justice Lamont on 29 November 2019, including leave to file certain additional affidavits, the business rescue application was enrolled as a semi urgent application. Although in dispute on the papers, the urgency of the application was not contested at the hearing.

[3] TIS is a company with three directors, each holding an equal shareholding. It conducts business as a manufacturer and supplier of electrical and telecommunications equipment and accessories. One of the directors, Mr Malefane, has broken rank and supports the position adopted by TEC. TIS has 81 employees.

[4] TEC is one of the major suppliers of raw or incomplete components to TIS. The other is Commscope EMEA Limited (“Commscope”). TEC has launched liquidation proceedings against TIS. It opposes the present application and maintains the stance that it will not grant any financial support to TIS in business rescue by affording it credit facilities. It will also not support any proposed business rescue plan. An arrangement has been made with Commscope for the return of certain materials. The majority of TIS’s business is reliant on supplies from these suppliers. 

[5] Although various other issues are raised on the papers, the parties were in agreement at the hearing that the main disputes between the parties centered around two issues: first; whether the applicant has established the necessary locus standi as shareholder to bring the application; second; whether the applicant has illustrated a reasonable prospect that the first respondent can be rescued, as envisaged by s 131(4) of the Act. The alternative object of ensuring a better return for creditors was not contended for in argument by the applicant. TEC contends that if it’s challenge on either of these grounds was successful, it would be dispositive of the application and it should fail.

[6] The jurisdictional requirements envisaged by s131 of the Act are fourfold. At the hearing, the parties were in agreement that the jurisdictional requirements of service and notice to all affected persons in terms of s131(2) had been complied with, although there was some debate on the papers pertaining to one of TIS’S creditors, Aberdare Cables (Pty) Ltd. TEC did not persist with this contention in argument. It is unclear from the papers whether notification of the application was properly given to all affected persons[1] as the notice of motion baldly refers to “TIS Invest (Pty) Ltd creditors”. The application was properly served on the respondent and CIPC as required by s131(2)(a) of the Act.

[7] It was further also not disputed that TIS was financially distressed as envisaged by s131(4)(a)(i) of the Act. TEC disputed that it would be just and equitable to place the first respondent under supervision for financial reasons. It being common cause that TIS is financially distressed, it is not necessary to consider this issue and I agree with the contention of TEC that this is one of the issues to be considered for purposes of s131(2)(a) of the Act. The main dispute pertaining to the jurisdictional requirements centered around whether there is a reasonable prospect of rescuing TIS and whether the applicant had sufficiently illustrated her locus standi as shareholder of TIS. 

[8] TEC disputes the applicant’s locus standi and shareholding in TIS on the basis that no proof of such allegation was provided in the founding papers. TEC relies on the definition of shareholder in the Act and emphasises that no mention was made by the applicant in her founding papers that she has been entered into the securities register of TIS. It is contended that this is a necessary averment based on the definition of shareholder in the Act which means, subject to s57(1), a holder of a share issued by the company and who is entered as such in the certificated or uncertificated securities register.

[9] In reply, the applicant sought to meet the challenge to her locus standi by producing a share certificate. During the hearing, applicant’s counsel sought to hand up a copy of the shareholders’ register, as foreshadowed in her replying affidavit. TIS objected to the admission of the register on the basis that it constituted inadmissible evidence, as the document was not produced as part of the application papers, but rather belatedly and as an attachment to the applicant’s heads of argument. The applicant seeks to overcome this difficulty on the basis that she has substantially complied with the obligation to prove her shareholding in TIS and her status as shareholder.

[10] In my view it is not necessary to make any determination on the legal issues raised as it is not determinative of the application. The approach adopted by TEC is a technical one. Other than challenging the cogency of proof in support of the applicant’s contention that she is a shareholder, TEC has not fundamentally challenged the applicant’s shareholding in TIS, nor has it put up evidence contradicting the version of the applicant. The applicant has put up evidence substantiating such shareholding in order to meet the challenge, albeit that the shareholders’ register was not produced by way of affidavit. I do not think that an overly technical approach in the present matter, serves the interests of justice.

[11] I turn to the central issue in the application, to wit whether the applicant has illustrated a reasonable prospect of rescuing TIS. In essence, this entails the exercise of a value judgment considering all the facts presented[2] in order to determine whether the applicant has illustrated the achievement of either of the two goals envisaged by s128(1)(b) of the Act. The relevant test whether the applicant has in her founding papers illustrated a factual basis for the existence of a reasonable prospect, being a prospect based on reasonable grounds that the desired object can be achieved[3].

[12] The applicant’s case focusses on the restoration of TIS to a solvent going concern, although reliance is placed in bald terms of the alternative goal envisaged in s128(1)(b), being a better return for creditors and shareholders. No particularity is however provided in the founding papers, enabling a proper consideration of such alternative goal.  The high water mark of the applicant’s case is “that the liquidation of TIS would have catastrophic consequences to its two biggest creditors as they will receive no dividends”. This falls woefully short of the mark of what is required.

[13] The applicant’s case is the following: During 2018, she became aware that certain payments had not been made to TEC and Commscope as they had made deliveries before the scheduled delivery dates, pursuant to which certain disputes arose. At the time, another director, Ms Moloko, was in control of the day to day management of TIS and the other two directors were not actively involved in the management of the business. This resulted in the credit limits afforded to TIS being exceeded and the suspension of TIS’s trading accounts with the aforesaid suppliers. The applicant assumed the responsibilities of chief executive officer on 19 May 2019.

[14] TIS was not in a position to pay upfront for the needed materials, as it had made substantial payments in excess of R12 million to two related entities, Simatech (Pty) Ltd (“Simatech”) and Samo Engineering (Pty) Ltd (“Samo”). This in turn resulted in TIS being unable to deliver on the orders from the majority of its clients, resulting in TIS becoming commercially insolvent and financially distressed. The applicant blames poor management and the resultant suspension of its trading accounts with its two biggest suppliers for its present financial woes.

[15] The applicant emphasised the well- known dictum of Tsoka J in Welman v Marcelle Props 193 CC[4] that: “Business rescue proceedings are not for 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.”  The applicant contends that TIS is such an entity. In support of such contention, the applicant relies on the attempts made to identify sources of income and to resolve existing problems within its business. 

[16] Despite the applicant, as chief executive officer of TIS, being in a position to disclose all relevant information pertaining to TIS, the founding papers do not present a clear picture of its present financial position. No financial statements or management account were put up to support the applicant’s bald contentions that TIS could be restored to a solvent viable concern. The applicant contends that it is not necessary to do so.

[17] Whilst it may not in all instances be necessary to provide recent financial statements in an application such as the present, it is however incumbent on an applicant to put up sufficient cogent evidence to enable a court to assess the financial position of a company as part of its consideration of whether a reasonable prospect exists that a company may be rescued. In the present instance, the applicant has proffered no reasons why the relevant financial information has not been disclosed. For the reasons set out below, this is ultimately fatal to her case.  

[18] The only information provided of TIS’ present financial position is contained in a schedule entitled ‘age analysis of creditors’. The age analysis reveals a total liability to the listed creditors and the South African Revenue Services of R71 562 605.96 as at 31 August 2019. Significantly, the list does not refer to the bankers of TIS, Nedbank Ltd, nor does it particularise any of its other or long term liabilities to other creditors. The document appears to refer to trade creditors, rather than constituting a comprehensive list of liabilities.

[19] The only information which is available in relation to Nedbank Limited, is a single redacted bank statement referring to an overdraft limit of R7 million, which the applicant contends represents the increased overdraft facility approved by Nedbank. No information is provided regarding how much of that facility has been utilized,  or how much is available to fund TIS’s daily expenses. TEC points out the applicant’s version contradicts the version put up in the liquidation application that Nedbank had agreed to a structured reduction of its overdraft facility.

[20] There is thus no cogent basis on which to determine the extent of TIS’ liabilities or how that relates to the information which is provided by the applicant relating to TIS’s income generating abilities. No information is provided regarding TIS’ assets.

[21] In bald terms, it is contended that TIS is owed an amount of R19 941 536.00 by its related entities and debtors. More than R12 million is owed by Simatech and Samo. The existence and recovery of this debt formed the basis of a dispute which has arisen between TIS’ directors and the deadlock which has arisen by Mr Malefane’s withdrawal of his support for the present application. This is a factor which militates against the granting of the application, as liquidation is often regarded as the most appropriate remedy to unravel the deadlock between directors and/or shareholders, rather than business rescue, where the unwillingness of antagonists to cooperate in a deadlock situation often sounds the death knell to those proceedings[5].

[22] A large part of the applicant’s papers is devoted to explaining the commercial relationship between the TIS and TEC and how TEC brought about the present financial distress in which TIS finds itself, by delivering unscheduled orders contrary to the terms of the agreement between the parties. This is presented as a basis to dispute TIS’s liability to TEC in the amount averred by it. This does not avail the applicant, having admitted TEC’s status as creditor and effected person as defined in s128(1)(a)(i) of the Act. 

[23] On the applicant’s own version, TIS is reliant on its major suppliers, TEC and Commscope for supply in order to generate an income. TIS has been in commercial discussions with TEC and Commscope and it is contended a commercial resolution is possible, which should be pursued by the proposed business rescue practitioner. In reply, it is averred that Commscope has agreed to accept return of materials which were not delivered in accordance with the agreed schedules. It is not contended that Commscope has agreed to supply materials to TIS on credit. It is contended that various solutions have been suggested to TEC, which it has unreasonably, so it is contended, refused to accept.

[24] The applicant relies on various schedules indicating future and prospective business opportunities, and new business and contracts which are less dependent on TEC for supplies. Reliance is also placed on the processing of back orders for which goods are required from TEC and Commscope.

[25] The applicant contends that the business of TIS may be effectively restructured, which will result in its debts and liabilities being satisfied within a business rescue regime and will allow it to exist on a solvent basis. In support of this contention, a schedules is provided reflecting back orders of R33 549 753.82 which TIS is attempting to process in order to make sales. It contends that it requires TEC to supply an amount of R4.9 million worth of supply, resulting in sales of R15 million being generated.

[26] TEC has however refused to provide any credit to TIS, who is unable to pay the required R5 million for such stock. The processing of the back orders is further predicated on both TEC and Commscope opening TIS’ trading accounts. There is no evidence that they are willing to do so.

[27] The applicant further relies on a schedule reflecting TIS’s pre-existing contracts with an average duration of 3 years, termed “business opportunities”, with a projected income of R219 216 666. It is averred that only 5 of the contracts are partially reliant on supply from TEC and that TIS is working to reduce its reliance on TEC even further. However, no supporting documents are attached to the schedule which evidence that the opportunities will indeed manifest. The schedule further does not provide for the costs associated with the generation of the proposed income.

[28] TEC has expressed the view that it will not support any proposed business rescue plan which requires its involvement and that it will not supply any materials to TIS on credit. It cannot in my view be said that this view is unreasonable or mala fide. It disputes the applicant’s accusations that it was responsible for the current state of affairs. The declared intent of a major creditor is a factor which must be taken into account.[6]

[29] These limitations casts doubt on TIS’ ability to process the back orders and generate the sales in respect of the listed business opportunities contended for. At present, these averments amount to no more than speculation and in my view do not illustrate any reasonable prospect that TIS can be rescued.

[30] The applicant’s bald contention that the aggregate amount of the creditors’ claims can be met by the aggregate revenue in relation to the back orders and new business, subject to management structures being put in place, is unsubstantiated by the facts.

[31] The attempts by TIS to relocate its offices to a smaller building to save on rental costs illustrate its financial distress, rather than a prospect to be restored to solvency. TIS’ inability to procure assistance from a possible co-investor, Aberdare Cables (Pty) Ltd, who ceased its due diligence investigations and is no longer interested in pursuing the recapitalisation of TIS, is a further factor which militates against the placing of TIS under supervision.

[32] To exacerbate matters, there are at least two winding up applications pending, launched on 14 and 15 August 2019 respectively. The applicant has not disclosed the identity of the other creditor. From the papers, it is clear that TEC is persisting with its application. Even if TIS succeeds in resisting TEC’s application based on the commercial disputes particularised in its papers, it will still be faced with the other applications. The applicant has not disclosed any facts pertaining thereto. 

[33] I agree with TEC’s argument that the applicant has not placed a clear, logical and convincing evidential foundation that TIS would exist on a solvent basis or that business rescue would yield a better return to creditors than its immediate liquidation.

[34] In evaluating the evidence provided, I have come to the conclusion that the applicant has not illustrated a reasonable prospect of rescuing TIS or made out a case for business rescue. It follows that the application must fail.

[35] The normal principle is that the costs follow the result. There is no basis to deviate from this principle. Although TEC was not formally joined to the proceedings as a party, it was common cause between the parties that it was a creditor and affected person and entitled to oppose the application. 

[36] I grant the following order

[1] The application is dismissed;

[2] The applicant is directed to pay the costs of the opposing creditor, TE Connectivity GmbH.

 

_____________________________________

EF DIPPENAAR

JUDGE OF THE HIGH COURT JOHANNESBURG

 

           

APPEARANCES

DATE OF HEARING: 04 December 2019

DATE OF JUDGMENT: 13 December 2019

APPLICANT’S COUNSEL: Adv. SB Nhlapo & Adv. MJS Langa

APPLICANT’S ATTORNEYS: Ledwaba Mazwai attorneys

RESPONDENT’S COUNSEL: Adv. JE Smit

RESPONDENT’S ATTORNEYS: Werksmans Attorneys

[1] Including Nedbank Limited

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