In the high court of south africa [western cape high court, cape town]

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Case number: 25051/11
In the matter between:

KOVACS INVESTMENTS 571 (PTY) LTD Intervening Party/Applicant


ASLO HOLDINGS (PTY) LTD Second Respondent
In re:
Case number: 18112/2011

In the matter between:



[1] The central issue for determination in this matter is whether an order should be granted to place the Second Respondent, ASLO Holdings (Pty) Ltd under supervision in order to commence with business rescue proceedings.

[2] In September of last year, Investec Bank Limited ("Investec") launched liquidation proceedings against three companies that is part of the so-called ASLO Holdings Group, based on their inability to pay their debts, namely Dormell Properties 560 (Pty) Ltd ("Dormell 560") under Case No. 1811/11 ("the Dormell liquidation application"), Rapiprop 135 (Pty) Ltd ("Rapiprop 135") under Case No. 18113/11 ("the Rapiprop liquidation application") and Aslo Holdings (Pty) Ltd ("Aslo") under Case No 18112/2011 ("the Aslo liquidation application").

[3] These three liquidation proceedings are interrelated. In a bid to stave off the liquidation of its subsidiaries, Aslo in October of last year launched applications in terms of section 131 of the Companies Act 71 of 2008 ("the 2008 Companies Act") for business rescue proceedings in favour of Dormell 560 and Rapiprop 135 respectively. Pursuant to these applications, the business rescue proceedings in respect of Dormell 560 and Rapiprop 135 were withdrawn and final liquidation orders in the two matters were granted.

[4] In the present instance, the intervening party, Kovacs Investments 571 (Pty) Ltd ("Kovacs"), is of the view that there exists a reasonable prospect that a better return can be achieved for the creditors of Asio under business rescue than in liquidation. It was also stated in the founding papers of Kovacs that there will be a significant loss of asset value in the event of Aslo being liquidated: At paragraphs 49 and 50 of the founding papers the following is recorded:-

"The realisable value of the ASLO group's property portfolio will therefore diminish from the current R335,484,561.00 to R138,135,768.00"


'The net result will be that the secured creditors will receive a dividend of only 47 cents in the Rand and no concurrent dividend will be paid. Investec Bank, the liquidating creditor, will receive no dividend."
[5] As a result of these views, a proposed business rescue plan of Asio was argued by Kovacs, where the following outcome is reasonably anticipated.

5.1 In respect of Rand Merchant Bank's exposure of R189,348,358.05, the following was recorded:

a. Dormell Properties 251, Rapiprop 89, Quickvest 130 and Rand Merchant Bank are presently involved in a two year workout plan regarding the properties in the Somerset Links projects. According to Kovacs, should Aslo be wound up, the transaction with Eris Property Group (who is managing this property portfolio), Rand Merchant Bank and Dormell Properties 251, Rapiprop 89 and Quickvest 130 would be at risk. It was also suggested that even if the liquidator agrees to continue with the process of a work out with the Eris Property Group, a fee of 3% on the asset value of R145.6 million would be payable to the liquidator as well as of 10% of the monthly rental income, to the detriment of Rand Merchant Bank, other creditors of these entities and Asio.
b. Rapiprop 145 owns 3 portions of the development land in the Hart and See development in Hartenbos. The first portion, Portion 65, has recently been rezoned to "commercial" and a sale contract has been concluded with Shoprite Checkers for an amount of R 18.5 million (excl. vat). In this instance Rapiprop 145 is in final negotiations with the Mosselbay Municipality with regard to the service agreement and bulk services contributions. According to Kovacs once this is concluded certain bulk services have to be installed by Rapiprop 145 at an anticipated cost of approximately R 4.5 million. Kovacs is of the view that in the hands of a liquidator the perfection of the Shoprite Checkers deal will be highly unlikely.
c. The second portion, portion 64, has been zoned "residential" with an anticipated 310 opportunities that can be constructed at only R60 000.00 per opportunity which means that a further R18.6 million will be generated. The proposal is that once the Shoprite Checkers transaction has been concluded the value will be realizable. The third portion is still zoned "agriculture" but within the urban edge, and if the Shoprite Checkers transaction is concluded the current vaiue, which is estimated at R3.5 million, should increase to R 5 million. The view in terms of these proposals is that in the hands of a liquidator the Shoprite Checkers deal will be highly unlikely. The construction of Portion 64 will be impossible and the possible realizable value of R40,100,000.00 would diminish to less than the municipal valuation of R 6,235,000 should Aslo be placed under liquidation.

5.2. In respect of ABSA Bank's exposure of R31,685,884.96, the proposal is for ABSA to conclude a management agreement with JLK Holdings (Pty) Ltd, with whom it is well acquainted, to manage the properties as listed at a monthly fee of R65 000,00, which include zoning costs for a period of 12 months. According to this proposal ABSA Bank will recover all of its debt including interest over a period of 4 years with sufficient profit for the developer.

5.3. In terms of Nedbank's exposure of R3,933,256.20, it is suggested that Nedbank also signs a management agreement with JLK Holdings or its nominee similar to the plan proposed in respect of ABSA bank with regard to the lists of the properties. Here the view is also that in liquidation the required sales prices will not be obtained to cover the bank's exposure and it will be detrimental to other creditors and sureties.
5.4. In respect of Standard Bank's exposure of R344,138.87, the suggestion is that the De Oude Werf property can be sold on private auction to cover the outstanding exposure to Standard Bank.

[6] Investec opposes the proposed business rescue on the following main grounds. Firstly, the contemplated business rescue period of four years is inordinately long and a delay in liquidating Asio merely exposes the company to an escalating interest indebtedness of approximately R1.9 million per month and an additional layer of costs. Secondly, the protracted business rescue proceedings will delay the liquidator's investigations and the exercise of his function to have impeachable transactions set aside. Thirdly, the proposed business rescue plan, in the main, does not involve the properties or businesses of Aslo but of its subsidiaries and the projected return on the proposed and pending developments are speculative and are not based on cogent evidence. And lastly, Kovacs has failed to establish a reasonable prospect that the proposed business rescue will achieve a better return for Aslo's creditors or shareholders.

[7] Mr JD De Vries appeared for Kovacs. Ms BDJ Gassner (SC) appeared for Investec. Both filed extensive heads of argument in the matter. Both counsel also filed further supplementary notes. Several grounds have been raised by Investec in order to resist the reiief sought by Kovacs. As a result of the view that I have taken, I do not deem it necessary to deal separately with each of the arguments raised by counsel for the respective parties.

[8] Mr. Anton Louw ("Louw") deposed of the founding affidavit in the Aslo business rescue application. He is a co-director of Kovacs and was the chairman of the Aslo Group until 2008. He is also a 25% shareholder of Aslo and until recently was a director of Rapiprop 135 and Dorrnell 560. He also appears to have been a director of Aslo until 2008 when he resigned.

[9] It is common cause that the Aslo Group of companies trade with immovable properties and is involved in the development, selling and also leasing of these properties. Therefore the "stock trade" of the Aslo Group of companies is its extensive portfolio of immovable properties. According to Louw the group's present portfolio consists of 260 properties with an aggregate value in an amount of R335,484,561.00 (VAT exclusive). The main underlying reason according to Louw why the various subsidiaries in the Aslo Group ran into serious financial difficulties was as a result of the "collapse" of the property market in 2007. It was also recorded in the management agreement conducted in respect of three subsidiaries which own the Somerset Links Development that these entities have been unable to meet their commitments to Rand Merchant Bank.

[10] As far as the financial position of Aslo is concerned, Louw points out that the liquidation of Dormell 560 and Rapiprop 135 - in which final orders have been granted - will have an adverse knock-on effect on Aslo as there will be no prospects of recovering any part of Aslo's concurrent claims against these subsidiaries and its shareholding in these insolvent entities will be worthless.

[11] Louw also states that as a result of the collapse of the property market from August 2007, the Aslo Group has restructured its business models and by performing a "workout" in cooperation with Rand Merchant Bank Limited, ABSA Bank Limited and Investec Bank, the Aslo Group managed to reduce its total bond liabilities from an amount of R518,376,197.34 in August 2007 to an amount of R320,135,431.51. He further states that taking into account pipeline transactions, this amount will be reduced to approximately R310,000,000.0O by March 2012.

[12] It is plain from the papers filed of record in the Aslo liquidation application and the Aslo draft 2010 annual financial statements (prepared on 9 September 2011) that Asio is unable to pay its debts in the normal course of business. This is borne out by Louw's acceptance in the papers filed of record that Aslo "is financially distressed" and the following recordal in the directors' report of Aslo in 2010:-

"Due to the financial and economic crisis in the rest of the world as well as in South Africa, sales of inventory of the group have not been as anticipated. The substantial decrease in sales of the group during the year has put enormous pressure on the company's cash flow. At year end, as well as thereafter, the company is dependent upon the bankers' {of the group) support to enable them to get through this downturn in the property market as commitments to the banks could not be fulfilled given the current trend."
[13] There can be no doubt that the Companies Act 71 of 2008 ("the Act") brought about a new approach to rescue companies that are in financial difficulties to avoid unnecessary loss of jobs and productive economic activity. It seems the object of the provisions relating to business rescue is to provide a less cumbersome and more effective procedure for reviving companies that are financially distressed in a manner that balances the rights and interests of all relevant stakeholders. In this regard see section 7(k) of the Act.

[14] In terms of s 131(4) of the Act a court having jurisdiction to which an application for business rescue is made by an affected person may-

'(a) make an order placing the company under supervision and commencing business rescue proceedings, if the court is satisfied that-
(i) the company is financially distressed;

(ii) 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

(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'.

[15] A person making an application for business rescue in terms of s 131(1) of the Act must satisfy the court that there is a reasonable prospect that the company in question can be rescued in the relevant sense by being placed under supervision.

[16] In this instance according to the evidence of Louw the intended object of the business rescue which Kovacs seeks to achieve by having Aslo placed under supervision is not the company's restoration to solvency, but to obtain a better return for creditors than would be achieved on immediate liquidation.

[17] Whatever the object of the proposed business rescue, in order to succeed in the application an applicant must be able to place before a Court, convincing evidential information to support the existence of a reasonable prospect that the desired object can be achieved. While it is the function of the business rescue practitioner, if appointed, to draw up a business rescue plan to be considered by the 'affected persons', the founding papers in a business rescue application must nevertheless contain sufficient factual detail to enable the court to determine whether the business rescue practitioner will probably have a viable basis to undertake the task, or, at the very least, make out a case for the court to hold that an investigation by a business rescue practitioner to that end, in terms of section 141(1) of the Act, appears to be justified. In this regard see Koen v Wedqewood Village Golf & Country Estate fPtv) Ltd and Others. WCC Case No. 24850/11 (9 December 2011).

[18] In respect of what will, in general, be required of an applicant seeking a supervision order to put a company into business rescue to return it to solvent operation, the remarks by Eloff AJ in Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd (Registrar of Banks and another intervening) WCC no. 15155/2011 at paragraph 24 is apposite in this instance. It was considered that at least "some concrete and objectively ascertainable details [should be given] going beyond mere speculation in the case of a trading or prospective trading company, of:
(i) the likely costs of rendering the company able to commence with its intended business, or to resume the conduct of its core business;

(ii) 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;

(iii) the availability of any other necessary resource, such as raw materials and human capital;

(iv) the reasons why it is suggested that the proposed business plan will have a reasonable prospect of success ."

[19] In an application in which the object of the proposed business rescue is to secure a better return than would be obtained under immediate liquidation the applicant would be required to set out in the founding papers a reasoned factual basis for the alternative scenarios that the court will have to consider and lay a cogent foundation to enable the court to determine that there is a reasonable prospect that the better return evident on one of those scenarios can be achieved. Vague and speculative averments in the founding papers will not suffice to provide a proper basis for a court to make the required determination that there is a reasonable prospect, if the company were to be placed under supervision, that the contemplated business rescue objective could be achieved.
[20] In the present instance, a closer scrutiny of the proposal suggested by Louw is nothing different to what Aslo's business model has been the past few years, being the managing, marketing and selling of property.

[21] In the Somerset Links, the remaining 148 units and apartments, which are owned by the subsidiaries Dormell 251, Rapiprop 89 and Quickvest 130 and are bonded in favour of RMB, are to be managed and sold pursuant to a management agreement expiring at the end of 2012. The parties to the management agreement ("the Somerset Links management agreement") are RMB, the subsidiaries involved and the manager, Seedstone Fund Advisors (Pty) Ltd, now substituted by the Eris Property Group. The Somerset Links management agreement does not entail a restructuring of Aslo's and or the subsidiaries' indebtedness of R189 million to RMB. In fact, Aslo is not a party to the management agreement. This agreement is also terminable on one month's notice. In terms of this agreement the manager is paid a management fee of R85 000.00 per month. It is clear from the evidence that the management agreements do not and are not intended to incorporate a restructuring of the substantial RMB and Absa debts. All that they purport to achieve is the sale of a string of properties by "a manager", as opposed to a liquidator, with no reliable forecast or certainty as to the sale volumes and prices during the management period.

[22] The second element of the business rescue plan involves portions 64, 65 and 66 in the Hart and See development in Hartenbos, owned by the subsidiary Rapiprop 145, that is also mortgaged to RMB. The proposal is that Rapiprop 145 installs services (after successful negotiations with the Mossel Bay municipality), at an anticipated cost of R4.5 million to perfect the sale agreement it has concluded with Shoprite Checkers in respect of portion 65 for a purchase price of R18 million. Louw speculates that if the Shoprite Checkers transaction is successfully concluded, portion 65, which is zoned residential, could be sold for R18.6 million on the basis that a 310-unit apartment complex could be constructed on it. Similarly, he predicts an increase in value of R5 million for portion 66. On these assumptions Louw predicts a realisable value of R40.1 million for the Hart and See development, compared to the current municipal valuation of R6.235 million. However, Louw does not indicate any possible developers and or investors who may be interested in investing in the Hart and See development, or who are prepared to fund the R4.5 million necessary to complete the Shoprite Checkers deal on which the projections are based.

[23] At the heart of the four-year business rescue plan and the major anticipated injections of profit into the business, which is pivotal for a better return on business rescue, are the proposed Die Eiland, and Hart and See developments. In respect of Die Eiland development, Louw projects "profits" over a four-year period of R20 million in addition to the R28 million reduction in the Absa consolidated debt of the Aslo Group which is also to be funded through this development. According to Louw, the Hart and See development will realise R41.6 million, as opposed to the municipal value of R6.235 million, if bulk services are provided to secure the Shoprite/Checkers deal.

[24] In both instances, however, Louw does not identify the source of the substantial capital required by the Aslo Group to fund these projects. In the case of Die Eiland, the amount is R135 million and for Hart and See an amount of R4.5 million.
[25] On the papers filed of record there can be little doubt that Aslo is commercially insolvent and over a protracted period of time has failed to meet its existing commitments, running into millions of rand, to its bankers. It is also noteworthy that in the various rescue scenarios outlined by Kovacs for the management, development and sale of the various properties, no other external investor has been identified. Moreover, there is no indication that Aslo's current bankers (RMB, Absa, Standard or Nedbank) will invest further in the developments.

[26] In my view, the proposed business rescue plan does not address the root cause of the Aslo financial difficulties, namely the collapse of the property market. The recovery of the market is an external factor and a highly speculative one beyond the control of Aslo. This has been recognised in an e-mail by Dormell 560 in August 2011 (of which Louw is a co-director) to Investec, in which the state of the property market is described as the "worst in eighty years" and the future as most uncertain. The uncertainty of the property market is also confirmed in a report by Alliance Group dated 24 February 2009 (relied on in the Asio business rescue application in a different context):

"Liquidly shortages worldwide have resulted in downward pressure on property prices. The length of this current cycle is unknown and therefore difficult to predict what impact this may have on the volume and value of future sales. The target market of owner occupiers, investors and speculators find themselves in uncharted waters with many sitting on the sidelines. Any material change to the economic landscape requires that certain development assumptions adopted be challenged. After peaking in late 2007, house prices in SA have since showed signs of decline, as is illustrated on the chart below, sourced from the First National Bank borne loans. ... South Africa is currently experiencing house price deflation (-10.6% y.o.y). Golf course developments around the country have experienced a significant slowdown in demand. Our opinion is that holiday homes and land sales are the worst affected."
[27] The report further describes an over-supply of units in developments in the Hartenbos area and questions the viability of developments in current market conditions. The market analysis set out in the Alliance Group report is germane to the proposed Die Eiland and Hart and See developments, which are both located in the Hartenbos area. Given that there are a number of reported developments in the Hartenbos and Mossel Bay area which are underperforming, the envisaged developments are highly questionable as the cornerstone of any business rescue.

[28] Louw's sales and profit projections is also highly speculative. There is a remarkable absence of any objective and independent evidence in this regard. In my view Louw's highly optimistic view regarding sale volumes and achievable purchase prices are pure conjecture and are gainsaid by the poor performance of the Aslo Group of companies in the past, the state of the property market described in the Alliance Group report, as well as the pessimistic views expressed in the recent August 2011 e-mail by Dormell 560, of which Louw is co-director.

[29] Moreover, on a proper reading of the business rescue plan envisaged by Kovacs, it does not involve a restructuring of Aslo's "affairs, business, property, debt and other liabilities", as provided for in section 128 (1) (b), as read with section 150 of the Act, but simply to involve a moratorium on Aslo's liquidation for an extensive period to allow, in the main, the proposed management, development and sale of properties owned by several of its subsidiaries, namely, Dormell Properties 251 (Pty) Ltd ("Quickvest"), Rapiprop 145 (Pty) Ltd ("Rapiprop 145"), Cshell 456 (Pty)Ltd ("Cshell"), Dormell Properties 577 (Pty) Ltd ("Dormell 577) and Aslo Projects Global (Pty) Ltd ("Aslo Projects").

[30] In my view, Kovacs business rescue application is largely based on the proposed sales of property, which in the current market is highly speculative and uncertain. As indicated in paragraph 20, the proposal suggested by Louw appears to be nothing more than the business model which Aslo followed in the past. Based on this information, I am unable to determine whether the business rescue practitioner will have a viable basis to undertake the task, or, at the very least, make out a case for the court to hold that an investigation by a business rescue practitioner to that end, in terms of section 141(1) of the Act, appears to be justified. It follows that the application for business rescue proceedings cannot succeed.

[31] The Applicant in the main application, Investec seeks an order for the winding up of Aslo. The ground on which the application is based is the inability of Aslo to pay its debts as provided in Section 344(f) of the Companies Act 61 of 1973.

[32] On the papers filed of record I can find no reason why a provisional winding -up order in this matter should not be granted.

[33] In the result the following order is made:-

1. The respondent in Case No. 18112/11, Aslo Holdings (Pty) Ltd, Registration No. 1998/005636/07 ("the respondent"), is placed under a provisional order of liquidation.
2. A rule nisi is issued calling upon the respondent and all persons concerned to appear and show cause to the above Honourable Court at lOhOO on Tuesday, 20 March 2012 why:
2.1. A final order of liquidation should not be granted;

2.2. The costs of this application should not be costs in the liquidation.

3. Service of this order is to be effected:
3.1. on the respondent at its registered office;

3.2. by one publication in the Cape Times and Die Burger newspapers;

3.3. on the respondent's employees by affixing a copy thereof to any notice board to which the employees have access inside the respondent's premises or by affixing a copy thereof to the front door of the premises which the respondent conducts business;

3.4. on any registered trade union that represents any of the respondent's employees; and

3.5. on the South African Revenue Service.

4. The business rescue application under Case No. 25051/11 ("the business rescue application") is dismissed;

5. The costs incurred by Investec Bank Limited in opposing the business rescue application shall be borne by Kovacs Investments 471 (Pty) Limited, including the costs of senior counsel.


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