CAPE TOWN – An upcoming High Court case will address the constitutionality of certain sections of the Companies Act* and Insolvency Act** relating to business rescue of companies and trusts.
The Oosthuizen Development Group is a family business involved in property development and consists of about 40 inter-related companies and trusts. It has long term debt exposure to Investec Bank of about R83 million.
It also has assets valued at several times its debt, including serviced residential erven, larger unserviced erven and various tenanted factory sites. The group ran into cash-flow problems after the financial crisis when property values fell, developments stalled and banks valued vacant land as a risk.
One of the Oosthuizen group companies is in business rescue, but the company has been advised that the entire group should be put into business rescue as one entity links to another.
This is being opposed by Investec, which has launched five liquidation and sequestration applications against various group companies and trusts.
“You can’t implement a business rescue strategy on one of these companies alone,” says senior Group Business Rescue Practitioner, Jacques du Toit. “Each one links to another – they must be treated as a whole.”
Investec is arguing that the Companies Act does not make provision for the business rescue of trusts. The administration of trusts falls under the Insolvency Act, which does not allow for business rescue, only sequestration.
Hence the court challenge. “The Companies Act unfairly discriminates between juristic persons which are trusts, on the one hand and juristic persons such as companies and close corporations, on the other hand,” says Johan Victor, attorney of record for the group. “There is no justification for the omission of a trust from business rescue proceedings, in circumstances where the trust is in a subsidiary relationship to a company which has commenced business recue proceedings.”
“We think this is a gap in the Companies Act,” adds Du Toit. “A trust is a legal entity. It should have the same rights as other legal entities, companies in this case.”
The application, which will be heard on June 17, asks the Cape High Court to declare certain sections of the acts (Companies Act and Insolvency Act) unconstitutional. This Court will then grant temporary relief and refer the matter to the Constitutional Court for final adjudication.
If the business rescue plan is followed over the next 36 months, the Oosthuizen Group should be able to repay all remaining creditors, including Sars, says Du Toit. “It will be healthy, debt free and profitable at the end of the proposed trade out period, and at the same time it will still have a sizeable portion of development property in its portfolio.”
The company has already reduced its outstanding debt. In February 2010 the total debt owed to Investec was R194 million.
Two transactions for the sale of properties in the group portfolio are in the final stage and will transfer any day now, says Victor. “This will reduce the outstanding amount to Investec to an effective R55 million.”
Investec has been lenient to date, says Du Toit. “The bank has worked with this company for three years without pulling the plug. The problem is that they don’t believe the debt is coming down fast enough.”
Liquidations and forced sales would recover about 15% of the value of the assets. But the property market is picking up and with time we can trade them out of it.”
*Companies Act, 71 of 2008
**The Insolvency Act, 24 of 1936