In the recent decision of the Western Cape High Court in the matter of Gormley vs West City Precinct Properties (Pty) Ltd & Others, the court was confronted with an application for business rescue brought by a major shareholder and director of a company (West City) whilst an intervening affected party brought a simultaneous application for liquidation of West City.

It was argued on behalf of the applicant for business rescue that there was a reasonable prospect of rescuing the business of West City. It appeared that the application was based on the premise that, provided the court suspended the obligations of West City to repay the bank the debts owed to it, West City’s income from rentals earned on the immovable property would be sufficient to cover its monthly expenses. Accordingly, it would be regarded as being factually and commercially solvent.

West City owed the bank in question almost R220 million which West City was unable to pay from its available resources.

The court held that to contend that a company is solvent within the meaning of the Act because of the suspension of its obligations vis-à-vis the bank for a period (in the present matter of between 3 and 5 years) cannot hold water. It was clear that the application had as its object a moratorium of 3-5 years during which the assets of West City would be disposed of supposedly with the aim of securing a larger dividend to creditors than what would have been the case had the company simply been liquidated.

In dealing with chapter 6 of the Companies Act and the concept of business rescue, the following 4 criteria of a successful application for business rescue were highlighted:

1. The company must be financially distressed as defined in the Act. In this regard it must appear reasonable unlikely that the company will be able to pay all of its debts as they become due and payable with the immediately ensuing 6 months or it must appear to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months.

2. An actual business rescue plan must be in place for consideration and possible adoption by creditors, which plan must have as its aim the rehabilitation of the company involved to a solvent entity, to the ultimate advantage of creditors of the company.

3. The business rescue practitioner must take on a prominent role in the process and must not simply, as a puppet does, act out the desires of the puppeteer (referring to the directors or shareholders of a company). It is not good enough for the business rescue practitioner to take a so-called “back-seat” whilst the directors and/or shareholders of a company continue trading with the company’s assets and thereby, in the process, further subverting the bank’s security.

4. A majority of more than 75% of holders of the creditors’ voting interest must approve the business rescue plan. If the applicant cannot show that such a majority approves the plan, the application must fail.

In the above case these requirements were not met by the applicant and the application for business rescue was dismissed and a liquidation order granted by the court.

Written by Leander Opperman, Adams & Adams