SARIPA Insolvency Law Update 6 of 2015 dated 25 March The views expressed in this update are those of the writer, Martinus (Tienie) Cronje.

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1 SARIPA Insolvency Law Update 6 of 2015 dated 25 March The views expressed in this update are those of the writer, Martinus (Tienie) Cronje. HEADLINES Shoprite Checkers (Pty) Limited v Berryplum Retailers CC The failure by a company under business rescue to publish a proposed business rescue plan within 25 business days after the date on which the business rescue practitioner was appointed, or such longer time as may be allowed by the court or allowed by the holders of a majority of creditors voting interests, does not of itself put an end to the business rescue process. The enquiry into inappropriateness as a ground to set aside a vote on a business rescue plan should be viewed purely from the perspective of the persons who voted against the plan. A consideration such as the loss of jobs by employees was not one of the factors a court might take into account, at least directly, in the evaluation of an application in terms of section 153 of the Companies Act 71 of Read more Syrex (Pty) Ltd v Ramfolo If upon the hearing of a claim for a penalty in terms of a contract, it appears to the Court that the penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances. Read more

2 Paulsen and Another v Slip Knot Investments 777 (Pty) Limited Outstanding arrear interest is not permitted to run during the course of litigation once the double of the capital debt has been reached. Read more Section 8(a) of the Insolvency Act inserted by the Natonal Credit Amendment Act 19 of 2014 A debtor who has applied for a debt review must not be regarded as having committed an Act of insolvency. Read more

3 Shoprite Checkers (Pty) Limited v Berryplum Retailers CC (47327/2014) [2015] GP (9 March 2015) The failure by a company under business rescue to publish a proposed business rescue plan within 25 business days after the date on which the business rescue practitioner was appointed, or such longer time as may be allowed by the court or allowed by the holders of a majority of creditors voting interests, does not of itself put an end to the business rescue process. The enquiry into inappropriateness as a ground to set aside a vote on a business rescue plan should be viewed purely from the perspective of the persons who voted against the plan. A consideration such as the loss of jobs by employees was not one of the factors a court might take into account, at least directly, in the evaluation of an application in terms of section 153 of the Companies Act 71 of Section 150(5) of the Companies Act 71 of 2008 provides: The business rescue plan must be published by the company within 25 business days after the date on which the practitioner was appointed, or such longer time as may be allowed by- (a) the court, on application by the company; or (b) the holders of a majority of the creditors' voting interests. DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others 2014 (1) SA 103 (KZP) par [28] and [32] remarked in passing (obiter dictum) that a meeting had to be convened and a vote taken in order for it to be said that a majority of creditors 'allowed' an extension of time; if this was not done the business rescue proceedings came to an end after the 25 day period elapsed; the stated need for strict adherence to time limits and the need for certainty have as a necessary corollary that the time to publish a plan cannot be extended after it has elapsed. The decision in Shoprite Checkers disagrees with this decision in DH Brothers on the following grounds:

4 1. The omission of any reference in section 132 to the position where the 25 day period has passed. Section 132(2) provides when business rescue proceedings end. (Par 23) 2. Section 7(k) provides that one of the purposes of the new Companies Act is to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. An interpretation which would allow a court, on good cause shown, to extend the 25 day period, even after its expiry, would better promote this purpose. (Par 24) 3. An inflexible interpretation would defeat a potentially worthy rescue if instructions for the necessary application to court under section 150(5) were given timeously but, because of misfortune suffered by or negligence on the part of, eg, the company's attorney, the application were only brought (or heard) after the expiry of the period. The flexible interpretation would enable a court to balance competing interests as it does, routinely, in cases where condonation is sought for failure to comply with the Rules. (Par 25) 4. The flexible interpretation would not lead to an absurdity because a creditor, aggrieved by the failure of a practitioner timeously to publish a plan, is not left entirely without a remedy. If a plan is not so published within the 25 day period, it may only thereafter be published with the consent of creditors or the leave of the court. An application to set aside a business rescue where no plan has been published within the prescribed period would generally have to succeed on that ground alone unless the company under business rescue obtained an extension through the consent of creditors or order of court upon a counter-application or other appropriate procedural step. (Par 26) 5. The flexible interpretation would undoubtedly give cynical business persons more scope to duck and to dive. But this consideration, weighty as it is, does not justify the inflexible interpretation. As stated in DH

5 Brothers, supra, para 25, there is a loophole in the legislation which governs business rescue proceedings. But the reduction of the scope for this mischief is for the Legislature to deal with, if it sees fit. The Legislature should make it more difficult for such stratagems to succeed. Legislative measures that facilitate the evasion of obligations do not promote the interests of justice. However, courts must guard against the temptation to use, under the guise of interpretation, their interpretational powers to amend statutory measures of which they do not approve. (Natal Joint Municipal Pension Fund v Endumeni Municipality SA 593 SCA para 18.) (Par 27) Section 153(1)(a)(ii) provides for an application to court by the business rescue practitioner and section 153(1(b)(ii) for an application by an affected person present at the meeting to set aside the result of the vote on the grounds that it was inappropriate. The term "inappropriate" in its context was debated. In argument Counsel for the intervening parties submitted that a vote against the acceptance of a plan by creditors where the vote of each such creditor was cast on the basis that the creditor concerned believed that its Interests were better served by a rejection of the plan could in some circumstances nevertheless be inappropriate. In what counsel advanced as the strongest example in support of the submission, counsel pointed to a vote which would result in a substantial number of employees of the company losing their jobs. (Par 35) The loss of jobs weighed with the court in Copper Sunset Trading 220 (Pty) Ltd v Spar Group Ltd and Another SA 214 LP para 36. No analysis of the meaning of the term inappropriate was undertaken by the learned judge. It appears that the court found that a vote was inappropriate where the major creditor, which voted against the plan, would be the only beneficiary upon liquidation and that it sound[ed] reasonable" (para 35) to grant an order setting aside the vote coupled with an order that if the finance necessary for

6 the plan to succeed were not raised within a stated time, the practitioner would be obliged to file a notice of termination of the business rescue proceedings. (Par 36) The court in Shoprite Checkers did not accept that a vote by a creditor which was cast in good faith, in the sense that the creditor genuinely believed that a vote against the proposed plan would advance that creditor's interests, could be inappropriate. The court could see nothing unsuitable, unfitting or improper in a vote that honestly reflected a voter's opinion as to his best interests.. The court did not think that the purposes of the new Companies Act would be advanced by vesting in the courts a power to impose upon business people financial risks which they, on honest reflection, judged ill advised. (Par 38) The enquiry into inappropriateness should be viewed purely from the perspective of the persons who voted against the plan. It would seem to follow that a consideration such as the loss of jobs by employees was not even one of the factors a court might take into account, at least directly, in the evaluation of an application to set a vote aside on the ground that it is inappropriate. (Par 44) On the papers before the court, which ran to well over 800 pages, there was no reasonable prospect that any court would find that a vote rejecting the plan was inappropriate. But even if a court were minded to declare the vote inappropriate, the refusal of consent by Shoprite under section 134(3), required because the proposal involved the disposal of property over which Shoprite held security or "title interest, would not be forthcoming. Shoprite could not be compelled so to consent. Without such consent, the plan could simply not be implemented, regardless of the views of the court on the appropriateness of the vote. (Par 53) The court made an order ending the current business rescue process and no order for a fresh such process was made. (Par 56)

7 The close corporation was unable to pay its debts and its position could only worsen, to the detriment of creditors and employees generally. In these circumstances, immediate liquidation was appropriate. Counsel were agreed that no purpose would be served by an order provisionally winding up the close corporation. (Par 58) Extracts 8 Under s 150(1) read with s 150(5) [Fn Section 150(5) provides: "The business rescue plan must be published by the company within 25 business days after the date on which the practitioner was appointed, or such longer time as may be allowed by- (a) the court, on application by the company; or (b) the holders of a majority of the creditors' voting interests.],the Practitioner was required to prepare a business rescue plan which Berryplum was obliged to publish within 25 business days after the date of the Practitioner's appointment. The Practitioner did not prepare such a plan. Section 150(2) sets out that such a plan must contain... all the information reasonably required to facilitate affected persons in deciding whether or not to accept or reject the plan... 9 Instead, on 23 May 2014, the last of the 25 days allowed under s 150(5), the Practitioner sent an to "All Known Creditors and Affected Persons" in which he said that he was unable to publish a business plan at that stage. He asked for an extension to 30 June He also disclosed that Berryplum was still trading. 11 Shoprite took the view, on the authority of DH Brothers Industries (Pty) Ltd v Gribnitz NO and Others SA 103 KZP, that once the 25 day period had elapsed without consent of creditors or an extension allowed by the court upon an application as contemplated by s 150(5), the business rescue proceedings lapsed by operation of law. By notice of motion dated 25 June 2014, Shoprite applied to this court, citing Berryplum and the Practitioner as respondents, for orders declaring the business rescue proceedings to be discontinued and terminating such proceedings and for leave to perfect its securities under its notarial bonds. The application was not brought solely on the narrow ground that the proceedings had lapsed by operation of law. Shoprite also contended that it would be just and equitable to terminate the rescue proceedings. [Fn Subject to a qualification not presently relevant, an affected person may at any time until the adoption of a business rescue plan in terms of s 152 apply to court under s 130(1 )(a)(ii) for an order setting aside the s 129(1) resolution, on the grounds that there is no reasonable prospect for rescuing the company.] All affected persons received notice of Shoprite's application. 20 These issues are firstly, whether the failure by the Company to publish a business plan within the requisite 25 business days resulted without more in the ending of the business rescue proceedings; secondly, if those proceedings have not ended, whether it would be just and equitable to order that they now end; thirdly, if termination is ordered, whether a fresh business rescue regime should be imposed; and, fourthly, if a fresh business rescue regime is not imposed, whether a liquidation order should issue.

8 21 The only reported judicial consideration of the effect of a failure to comply with the provisions of s 150(5) which counsel and I have been able to find is that in DH Brothers, supra:... [28] I favour the approach that the failure to publish a plan within the given or extended period results in the termination of the business rescue proceedings. This has the benefit of allowing creditors to enforce their rights against the company as soon as the time lapses. The need for certainty is met and the rights of creditors in particular are trespassed on to the least possible extent. Even if the failure to publish a business rescue plan timeously does not, in and of itself, bring an end to the business rescue proceedings, three possibilities emerge. First, and perhaps most likely, the practitioner can file a notice of termination of the business rescue proceedings in terms of s 132(2){b). Secondly, an affected person would be entitled to bring an application under s 130{ 1) on the basis that it would be just and equitable for the resolution to be set aside. Thirdly, since one of the bases listed in s 130(2){a) for the termination of business rescue proceedings is the setting-aside by the court of a resolution or order, an application may perhaps be brought under that subsection. Any of these can be done as soon as the 25-day period elapses without being extended. For the purpose of this application it is not necessary to make a positive finding on this issue. However, what is clear is that the stated need for strict adherence to time limits and the need for certainty have as a necessary corollary that the time to publish a plan can not be extended after it has elapsed. [footnotes omitted] 22 In my opinion the considerations mentioned in these paragraphs are apposite and weighty. And yet I respectfully cannot agree, if such was the finding of the learned judge, that the effluxion of the 25 business day period without a plan's having been published terminates the business rescue process. 23 Firstly, I would give more weight, at the level of language, to the omission of any reference in s 132 to the position where the 25 day period has passed. Section 132(2) provides when business rescue proceedings end: (2) Business rescue proceedings end when- (a) the court- (i) sets aside the resolution or order that began those proceedings; or (ii) has converted the proceedings to liquidation proceedings; (b) the practitioner has filed with the Commission a notice of the termination of business rescue proceedings; or (c) a business rescue plan has been- (i) proposed and rejected in terms of Part D of this Chapter, and no affected person has acted to extend the proceedings in any manner contemplated in section 153; or

9 (ii) adopted in terms of Part D of this Chapter, and the practitioner has subsequently filed a notice of substantial implementation of that plan. I can see no reason why, if the intention had been to provide for termination upon the failure timeously to publish a business plan, an express provision to this effect was not included in s 132(2). 24 Secondly: the measure must be interpreted in the light of the purpose of the legislation. [Footnote omitted] Section 7(k) provides that one of the purposes of the new Companies Act is to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. I think that an interpretation which would allow a court, on good cause shown, to extend the 25 day period, even after its expiry, would better promote this purpose. To take an extreme example: if a practitioner were to suffer some personal misfortune and be unable to fulfil or neglect his duties during the critical period, so that the plan was published one day late, the inflexible interpretation could cause a deserving rescue to fail. The flexible interpretation, on the other hand, would promote the balancing of the rights and interests of "relevant stakeholders". 25 Thirdly, and further on this score: the inflexible interpretation would similarly defeat a potentially worthy rescue if instructions for the necessary application to court under s 150(5) were given timeously but, because of misfortune suffered by or negligence on the part of, eg, the company's attorney, the application were only brought (or heard) after the expiry of the period. The flexible interpretation, however, would enable a court to balance competing interests as it does, routinely, in cases where condonation is sought for failure to comply with the Rules. 26 Fourthly, the flexible interpretation would not lead to an absurdity because a creditor, aggrieved by the failure of a practitioner timeously to publish a plan, is not left entirely without a remedy. As I read the measures, a practitioner may of right prepare and the company may of right publish a plan within the 25 day period. If a plan is not so published within that period, it may only thereafter be published with the consent of creditors or the leave of the court. A business rescue cannot succeed unless there is in the first instance a business rescue plan. It follows, as I see it, that an application to set aside a business rescue where no plan has been published within the prescribed period would generally have to succeed on that ground alone unless the company under business rescue obtained an extension through the consent of creditors or order of court upon a counter-application or other appropriate procedural step. 27 A company that wants to avoid the legitimate commercial consequences of a failure to pay its creditors and has no prospect of being rescued can, pursuant to s 129(1), achieve by a stroke of its own pen the moratorium provided for in s 133. The ease with which this may be done has produced a mischief commonly encountered in this Division. The flexible interpretation would undoubtedly give cynical business persons more scope to duck and to dive, as the expression is. But I do not think that this consideration, weighty as it is, justifies the inflexible interpretation. I agree with the view expressed in DH Brothers, supra, para 25 that there is a loophole in the legislation which governs business rescue proceedings. But the reduction of the scope for this mischief is in my view for the Legislature to deal with, if it sees fit. I wish that the Legislature would make it more difficult for such stratagems to succeed.

10 Legislative measures that facilitate the evasion of obligations do not promote the interests of justice. However, courts must guard against the temptation to use, under the guise of interpretation, their interpretational powers to amend statutory measures of which they do not approve. [Fn Natal Joint Municipal Pension Fund v Endumeni Municipality SA 593 SCA para 18.] 28 For these reasons I conclude that the failure by a company under business rescue to publish a proposed business rescue plan within the 25 business day period prescribed by s 150(5) does not of itself put an end to the business rescue process. I find, therefore, that the business rescue process in relation to Berryplum has not yet come to an end. 34 If the plan is not approved, a number of options are provided by s 153 for the further conduct of the business rescue. All but two of these options require, directly or indirectly, the approval of creditors. The other two options provide for an application to court by the practitioner [Fn Section 153(1)(a)(ii)] or an affected person present at the meeting [Fn Section 153(1)(b)(ii)] to set aside the result of the vote on... the grounds that it was inappropriate. 35 The term "inappropriate" in its context was debated. In argument Counsel for the Berrydust intervening parties submitted that a vote against the acceptance of a plan by creditors where the vote of each such creditor was cast on the basis that the creditor concerned believed that its Interests were better served by a rejection of the plan could in some circumstances nevertheless be inappropriate. In what counsel advanced es the strongest example in support of the submission, counsel pointed to a vote which would result in a substantial number of employees of the company losing their jobs. 36 The loss of jobs weighed with the court in Copper Sunset Trading 220 (Pty) Ltd v Spar Group Ltd and Another SA 214 LP para 36. No analysis of the meaning of the term inappropriate was undertaken by the learned judge but it appears that the court found that a vote was inappropriate where the major creditor, which voted against the plan, would be the only beneficiary upon liquidation and that it sound[ed] reasonable" [para 25) to grant an order setting aside the vote coupled with an order that if the finance necessary for the plan to succeed were not raised within a stated time, the practitioner would be obliged to file a notice of termination of the business rescue proceedings. What the likely dividends would be if the plan were allowed to go ahead, over what period these dividends would be paid, what security the major creditor, which had notarial bonds over some or all of the applicant's movables, would receive if the plan were approved and finance obtained do not appear from the judgment. [Fn The only other reported judgment touching on the point which I have been able to find is Advanced Business Technologies & Engineering Co (Ply) Ltd (In Business Rescue) v Aeronautique et Technologies 2012 JDR 0345 GNP.] 37 I respectfully disagree with this approach. The Shorter Oxford Dictionery gives inappropriate the meaning of not appropriate; not suitable to the case; unfitting; improper. The same work gives as the meaning of appropriate apposite to the present enquiry specially suitable; proper. The word "inappropriate" is used in the new Companies Act only in two instances, both in the present context. [Fn Sections 153(1)(a)(ii) and 153(1)(b)(i)(bb).] The word is used once in the Companies Act 61 of 1973, (the old Companies Act) with the meaning of unsuitable and thus in a context that sheds no light the present interpretational problem.

11 38 I do not accept that a vote by a creditor which is cast in good faith, in the sense that the creditor genuinely believes that a vote against the proposed plan would advance that creditor's interests, can be inappropriate. I can see nothing unsuitable, unfitting or improper in a vote that honestly reflects a voter's opinion as to his best interests. I can find, against counsel's submission to the contrary, nothing in the purposes of the new Companies Act and in particular those purposes expressed in s 7(k) which supports counsel's contention. Subject to s 146(d), only creditors vote on the proposal that a plan be approved and the meeting is a meeting of creditors, not affected persons in general. Representatives of employees have no more than a right to be heard at such a meeting before a vote is taken. The purposes of business rescue, broadly stated, are to revive faltering companies or achieve improved dividends for those companies which cannot be revived; in short, to put more money in the pockets of affected persons in general. In this context the interests of creditors, whose own money is at risk, are predominant. Whether either of these results can be achieved in a particular case depends on a forecast, which itself is based on one or more assumptions; in short on an assessment of risk. The business of companies and their creditors, in the present context, is the pursuit of monetary profit. I do not think that the purposes of the new Companies Act will be advanced by vesting in the courts a power to impose upon business people financial risks which they, on honest reflection, judge ill advised. 41 Under s 311 of the old Companies Act, the court had the power to sanction a compromise or arrangement approved by three-fourths of, broadly, creditors and members, voting separately at meetings called for the purpose of considering such a proposal and thereby render the compromise or arrangement binding on all such creditors and members, including those who had voted against the proposal. Approval was generally granted in such a case when the compromise or arrangement was such as a person of business would generally approve and be fair and reasonable as regards the various classes of creditors and members. [Fn Henochsberg on the Companies Act 61 of 1973 (looseleaf ed) note to s 311 Sanctioned by the Court.] 42 Under s 155 of the new Companies Act, compromise proposals by companies other than those under business rescue may be put to any class of creditors of the company. If such a proposal is accepted by a majority in number representing 75% in value of the creditors or class at a meeting called for that purpose, the company has the right to apply to court for an order approving the proposal. The court is then empowered to approve the proposal, if it considers it just and equitable to do so, having regard to the number of creditors who were present at the meeting and voted in favour of the proposal and, in the case of a company being wound up, a report by the Master. 43 It seems to me that the power to assess whether a proposal is just and equitable is wider than a power to determine whether a vote was inappropriate. It will be seen further that no power was or is conferred on the court to override the decisions of creditors where they voted sufficiently against a compromise or arrangement. I see no reason why this sound legislative policy should not operate, within the limits I have described, in relation to plans in business rescue proceedings. 44 It appears, moreover, having regard to the factors listed in s 153(7), that the enquiry into inappropriateness should be viewed purely from the perspective of the persons who voted against the plan. It would seem to follow that a consideration such as the loss of jobs by employees is not even one of the factors a court may take

12 into account, at least directly, in the evaluation of an application to set a vote aside on the ground that it is inappropriate. 46 Counsel for the Berrydust intervening parties submitted that employees of Berryplum (whom counsel of course did not represent) should not be denied a hearing and suggested that the position of employees at such a meeting was analogous to that of a director at a board meeting. I do not think that the analogy is apt. 50 The irresistible conclusion is that creditors are being asked to approve a plan under which the purchase prices for the businesses are to be funded from the conduct of the businesses themselves. These are the very businesses which, even though assisted by the purchasing power of Shoprite and the goodwill that attracts to its brand, became financially distressed. There is nothing to suggest that either of the purchasers has any capital of its own or that either of the businesses is to be recapitalised. No capital is being put into the transaction other than the R which I mentioned earlier. No security is provided against the risk of default by either of the purchasers. The legal remedy available to Shoprite on default is almost certainly commercially worthless. 53 I would go so far as to say that no reasonable person of business would approve the January 2015 plan. No matter what pleas were to be made to Shoprite at the proposed meeting, the plan will not be approved. On the papers before me, which run to well over 800 pages, there is no reasonable prospect that any court would find that a vote rejecting the plan was inappropriate. But even if a court were minded to declare the vote inappropriate, the refusal of consent by Shoprite under s 134(3), required because the proposal involves the disposal of property over which Shoprite holds security or "title interest, will not be forthcoming. Shoprite cannot be compelled so to consent. Without such consent, the plan can simply not be implemented, regardless of the views of the court on the appropriateness of the vote. 56 It follows that an order ending the current business rescue process must be made and that no order for a fresh such process should be made. The remaining question is whether, under s 130(5)(c)(ii), an order for the liquidation of Berryplum should issue. A liquidation order was urged by counsel for the Berrydust intervening parties but resisted by counsel for Shoprite. 57 Counsel for Shoprite submitted that Shoprite would be prejudiced by an immediate order for liquidation because a portion of its claim would only become completely secured upon perfection of its bonds before liquidation. However, the portion of Shoprite's security which requires perfection to achieve that end will nevertheless rank above the claims other concurrent creditors In a liquidation. The only respect in which counsel suggested Shoprite might be at risk in this regard is in relation to claims of employees. Having regard to the balancing of interests enjoined by s 7(k), I do not think that this consideration should weigh against an immediate 58 Berryplum is unable to pay its debts and its position can only worsen, to the detriment of creditors and employees generally. In these circumstances, in my view, immediate liquidation is appropriate. Counsel were agreed that no purpose would be served by an order provisionally winding up Berryplum. [Back to top]

13 Syrex (Pty) Ltd v Ramfolo [2015] JOL (LC) If upon the hearing of a claim for a penalty in terms of a contract, it appears to the Court that the penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances. In terms of section 1(1) of the Conventional Penalties Act [Act 15 of 1962], a penalty stipulation is defined to be a term which provides as follows: "... that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money or deliver or perform anything for the benefit of any other person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages..." It was pointed out in Pearl Assurance Co. Ltd v Union Government 1933 AD 277 at 290 that to be a penalty stipulation the clause in issue must have been inserted "... as a fine, or as a punishment, or to frighten the obligor to carry out the terms of [the] contract". (Par [27]) Section 3 of the Conventional Penalties Act, provides as follows: If upon the hearing of a claim for a penalty, it appears to the Court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the Court shall take into consideration not only the creditor's proprietary interest, but every other rightful interest which may be affected by the act or omission in question. The Court must apply the provisions of section 3 where it appears to it that

14 there is a disproportion such as is visualised by the section. The Courts will therefore apply section 3 even where, in an action for enforcement of a penalty, the debtor is in default of appearance. A Court will not reduce the penalty unless it is clear or plain to the Court that the penalty is 'out of proportion to the prejudice suffered'. By the use of these words it was intended that the penalty is markedly, not infinitesimally, beyond the prejudice suffered, and that the excess is such that it would be unfair to the debtor not to reduce the penalty. It is a matter left entirely to the discretion of the Court which, should only interfere if, bearing in mind that an object of a penalty clause is to compel the debtor to implement obligations under the contract by providing harsh consequences should the debtor default, it nevertheless is of the opinion that the penalty is unduly severe to an extent that it offends against one's sense of justice and equity. (Par [34]) There is no indication of the costs that were actually incurred to train the respondent in this case. There is, equally, no indication of whether indeed such training was offered and for how long. In the exercise the court s judicial discretion, it would be just and equitable to reduce the penalty to NIL. (Par [40]) The court found no prejudice suffered which would warrant the enforcement of the penalty stipulation, whether fully or partially. It concluded, therefore, by holding that the penalty of R was exceedingly severe and offended the courts sense of justice and equity. In the circumstances, the applicant's claim to recover the said penalty failed. (Par [42]) Extracts [6] It was the approach of this Court in SA Music Rights Organisation Ltd v Mphatsoe [(2009) 30 ILJ 2482 (LC)] that a claimant, in matters of the present nature, must establish the actual loss consequent on the breach of contract. This approach was reiterated by this Court in Labournet Payment Solutions (Pty) Ltd v Vosloo [(2009) 30 ILJ 2437 (LC) at para [23]], where it was ultimately found that the claimant had "..failed to show the alleged loss it suffered (either because of failure to give 30 or seven days' notice as the case may be) was as a result of the breach of the employment contract by the respondent". [21] In the contract of employment between the parties, the applicant puts value to the training to be provided during the probation period. To this end, clause 14.6 of the contract of employment states that "... the total value of the in-occupation probationary training contemplated by [the contract of employment], which includes

15 time, expertise and actual disbursements expended by the company, shall be in the amount of three times the employee's monthly cost to company salary". [23] On account of the respondent not having served the minimum period of at least one year, the applicant now invokes the provisions of clause and seeks to recover the value of the in-occupation probationary training. The applicant labels this as "training costs". [24] It seems to me that clause of the contract of employment is nothing but a penalty stipulation. In terms of section 1(1) of the Conventional Penalties Act [Act 15 of 1962], a penalty stipulation is defined to be a term which provides as follows: "... that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money or deliver or perform anything for the benefit of any other person, hereinafter referred to as a creditor, either by way of a penalty or as liquidated damages..." [26] When a question arises as to whether a particular clause amounts to a penalty stipulation as contemplated by subsection 1(1) of the Conventional Penalties Act, it becomes useful to employ the basic test that was laid down in De Pinto and another v Rensea Investments (Pty) Ltd [1977 (2) SA 1000 (A) at 1007A], where the then Appellate Division stated thus: "... the test is whether the [parties] intended it to operate in terrorem, i.e. as a penalty in the common law sense." [27] It was also pointed out in Pearl Assurance Co. Ltd v Union Government[1933 AD 277 at 290.] that the clause in issue must have been inserted "... as a fine, or as a punishment, or to frighten the obligor to carry out the terms of [the] contract". [28] In my view, clause of the contract of employment was introduced as a weapon in terrorem. The clause was inserted to force the respondent to stay with the applicant for, at least, one year or else face liability of an amount three times her monthly cost to company salary. [32] Being thus satisfied that clause is a penalty stipulation, I do feel dutybound to consider the implications of section 3 of the Conventional Penalties Act thereon. This necessity arises from the observable excessiveness of the penalty sought to be recovered from the respondent on account of her breach of clause of the contract of employment. Under section 3 of the Conventional Penalties Act, it is stated thus: "If upon the hearing of a claim for a penalty, it appears to the Court that such penalty is out of proportion to the prejudice suffered by the creditor by reason of the act or omission in respect of which the penalty was stipulated, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances: Provided that in determining the extent of such prejudice the Court shall take into consideration not only the creditor's proprietary interest, but every other rightful interest which may be affected by the act or omission in question." [34] In Western Bank Ltd v Meyer; Western Bank Ltd v De Waal; Western Bank Ltd v Swart and another [1973 (4) SA 697 (T) at 699E F], the following authoritative stance was taken: "The word 'may' in sec. 3 does not merely confer a discretion, but a power coupled with a duty. See Western Credit Bank Ltd. v Kajee, 1967 (4) SA 386 (N) at p. 393B. The Court must apply the provisions of sec. 3 where it appears to it that there is a disproportion such as is visualised by that section. The Courts will therefore apply sec. 3 even where, in an action for

16 enforcement of a penalty, the debtor is in default of appearance. See Ephron Bros. Holdings (Pty.) Ltd. v Foutzitzoglou, 1968 (3) SA 226 (W)." The court went further and held as follows at 699F 700A: "The meaning to be assigned to the words 'if it appears to the Court' in this context has been discussed in Maiden v David Jones (Pty.) Ltd 1969 (1) SA 59 (N) at p. 64. There is no reason to differ from what is there said. It follows that a Court will not reduce the penalty unless it is clear or plain to the Court that the penalty is 'out of proportion to the prejudice suffered'. The words 'out of proportion' have also been interpreted. It seems that by the use of these words it was intended that the penalty is markedly, not infinitesimally, beyond the prejudice suffered, and that the excess is such that it would be unfair to the debtor not to reduce the penalty. (See Western Credit Bank Ltd v Kajee, (supra) at p. 391C - D). In this regard the Legislature has not provided any yardstick by which the 'proportion' is to be measured, or to be determined. It is a matter left entirely to the discretion of the Court which, so it seems to us, should only interfere if, bearing in mind that an object of a penalty clause is to compel the debtor to implement his obligations under the contract by providing harsh consequences should he default, it nevertheless is of the opinion that the penalty is unduly severe to an extent that it offends against one's sense of justice and equity." [39] It is, in the final analysis, my considered view that the alleged "training costs" are exceedingly excessive and the penalty is way out of proportion to the prejudice that may have been suffered by the applicant in providing training to an employee on probation. [40] As indicated herein before, there is no indication of the costs that were actually incurred to train the respondent. There is, equally, no indication of whether indeed such training was offered and for how long. In the exercise of my judicial discretion, it would be just and equitable to reduce the penalty to NIL. [42] In conclusion, I find no prejudice suffered which would warrant the enforcement of the penalty stipulation, whether fully or partially. I conclude, therefore, by holding that the penalty of R is exceedingly severe and does offend my sense of justice and equity. In the circumstances, the applicant's claim to recover the said penalty cannot succeed. It stands to fail. [Back to top] Paulsen and Another v Slip Knot Investments 777 (Pty) Limited [2015] ZACC 5 Outstanding arrear interest is not permitted to run during the course of litigation once the double of the capital debt has been reached. A credit agreement is not invalid on the ground that the credit provider was not registered as a credit provider in terms of the National Credit Act 34 of (Par [41]).

17 The in duplum rule is a long-standing and well-established part of our law. It provides that arrear interest ceases to accrue once the sum of the unpaid interest equals the amount of the outstanding capital. (Par [42]) Standard Bank of South Africa Ltd v Oneanate Investments (Pty) Ltd (in liquidation) [1997] ZASCA 94; 1998 (1) SA 811 (SCA) decided that the in duplum rule should operate pendente lite meaning from the date of service of the process initiating the proceedings until the date of judgment. (Par [46]). This decision was overturned by the majority decision of the Constitutional Court. (Par [94]) Extracts [10] In order to succeed in the quest to intervene King Sekhukhune must satisfy this Court that he, or the community he represents, has a direct and substantial interests in the application to wind up ABM, which could be prejudiced should the Court issue an order winding it up. He must satisfy this Court that the application is not brought frivolously and that the facts or allegations it wishes to draw the attention of the Court to will affect the course of the judgment and any order that follows in a material respect. Furthermore, the direct and substantial interest has to be an interest in the right to challenge the winding-up application and not just a mere financial interest. (Minister of Local Government and Land Tenure and another v Sizwe Development and others: In re: Sizwe Development v Flagstaff Municipality 1991 (1) SA 677 (Tk) at 678H 679C. See also Registrar of Banks v Regal Treasury Private Bank Ltd (under curatorship) and another (Regal Treasury Bank Holdings Ltd intervening)2004 (3) SA 560 (W) at 573E F.) [17] Apart from asserting the existence of a shareholding (or a loan, if the oral submission is to be accepted), no further factual substratum is provided to show that the intervention, if allowed, is necessary and will affect the outcome of the winding-up application. As mentioned above, the law is settled on this score: a party that wishes to intervene must demonstrate an interest in the proceeding that is not just a mere financial interest. An application to intervene solely as a shareholder or solely as a creditor is insufficient. The aspirant intervener must demonstrate that he has a legal interest to protect and not just a financial interest in the matter. The legal interest must also be material enough to affect the outcome of the winding-up application. Anything less than that will not do. [20] As mentioned above, ABM brought an application to postpone the hearing which application was initially grounded in the fact that there was an application for leave to intervene which was not ripe for hearing as, by the time the application for postponement was launched, not all the papers in the intervention application were filed. However, this was no longer the case when the hearing was held and as a result this ground for the postponement fell away. Nevertheless, ABM persisted with the application for postponement. The application was based on the contention that, as far as the winding-up application was concerned, this Court was bound by a decision of the Supreme Court of Appeal ("the SCA") in Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd (2014 (2) SA 518 (SCA) [also reported at

18 [2014] JOL (SCA) Ed]), thus rendering the opposition of ABM to the windingup application in this Court valueless. This makes it necessary for ABM to seek leave from the Constitutional Court ("the CC") for direct access, in order to ensure that its right to challenge the pronouncement of the SCA regarding winding-up applications of this nature. Hence, ABM contended that the winding-up application should only be heard after the CC has pronounced on its application for direct access. It has not yet launched an application for direct access, but asks that this Court postpone this matter pending "the filing of an application for leave for direct access". In its oral submissions ABM indicated that such an application could be brought by 19 December [21] The winding-up application is based on an allegation that ABM is commercially insolvent. The application is brought in terms of section 344(f) read with section 345 of Companies Act 61 of 1973 ("the 1973 Act"). The SCA has ruled that section 344(f) read with section 345 of the 1973 Act allows for the winding-up of an insolvent company. In such a case the applicant does not have to prove that there are just and equitable grounds for the winding-up of the insolvent company. ABM wants an opportunity to call upon the CC to allow it to challenge this finding without having to present its case in this Court and in the SCA. Absent that opportunity, it claims that justice cannot be done to its case. This it says is so because this Court is bound by the decision of the SCA. Accordingly, it says that there is no purpose for it to continue with its opposition except if it gets an opportunity to present its case to the CC, where it will be able to challenge the correctness of the SCA's decision. ABM claims that the SCA's decision is wrong because it failed to impose upon an applicant for the winding-up of an insolvent company the duty to show that, notwithstanding the company's insolvency, it is just and equitable for it to be wound up. [23] ABSA submitted that the application was brought merely to delay the proceedings. This, it says, is manifest in the manner and the timing of the application. I hold that there is great merit in this submission. ABM does not give any substantive reasons why the SCA was wrong in Boschpoort. [24] In my view, to grant this application would only encourage litigants like ABM to flood the CC with applications for direct access simply because they believe, however unreasonable that belief may be, they would not be able to fully ventilate their case in this Court and in the SCA. In my view, there is only one judiciary and one system of law in this country. The judiciary is, for good reason, organised along hierarchical lines. Litigants must present their cases in the lowest applicable court in the first instance and, if they have a deserving case, go through the various stages of the courts before they should be able to call on the attention of the highest court. This is the only way the rule of law can be maintained. For the rule of law to function effectively the highest court should only in rare cases be asked to sit as a court of first and final instance. The CC has already on numerous occasions over the last 20 years alerted litigants to this basic principle. Identifying those authorities would only serve to pad this judgment with unnecessary citations. However, one authority does stand out: "It is, moreover, not ordinarily in the interests of justice for a court to sit as a court of first and last instance, in which matters are decided without there being any possibility of appealing against the decision given. Experience shows that decisions are more likely to be correct if more than one court has been required to consider the issues raised. In such circumstances the losing party has an opportunity of challenging the reasoning on which the first judgment is based, and of reconsidering and refining arguments previously

19 raised in the light of such judgment." (Bruce and another v Fleecytex Johannesburg CC and others 1998 (2) SA 1143 (CC) [also reported at [1998] JOL 2235 (CC) Ed] at para [8]) [33] The only defence put up by ABM is, that despite its financial woes, it would be unjust and inequitable for it to be wound up. It concedes that the provisions of section 344(f) read with section 345 of the 1973 Act do not require ABSA to show that it is "just and equitable" for it to be wound up, but argues that this requirement should be introduced by this Court by developing the common law to this end. Should this Court agree with ABM then, without doubt, the winding-up application should fail, as ABSA has not made out any case to the effect that it is "just and equitable" to wind up ABM. It was suggested that this should be done in order to bring the provisions of section 344(f) read with section 345 of the 1973 Act in line with the provision of section 81(1)(c) of the 2008 Act. Section 81(1)(c) of the 2008 Act allows for the winding-up of a "solvent" company if "it is otherwise just and equitable for the company to be wound-up". It is immediately noticeable that this provision applies to solvent companies only. Hence, even the 2008 Act does not require that it be shown that it is "just and equitable" to wind up an insolvent company. In fact, as far as an insolvent company is concerned it has left the law as enunciated in the 1973 Act unchanged. Moreover, it has, in terms of item 9 of Schedule 5, done so explicitly. (In which case it is not even necessary to consider the applicability of the maxim unius est alterius exclusio, which, of course, has to be guardedly engaged (see Administrator, Transvaal and others v Zenzile and others 1991 (1) SA 21(A) at 37F H).) To follow the course suggested by ABM would, if followed, result in this Court amending the legislation. That, without doubt, falls outside the remit of this Court. [34] In Boschpoort, the SCA has reiterated that there are good grounds to wind up a commercially insolvent company. It expressed the reasons in this way: "That a company's commercial insolvency is a ground that will justify an order for its liquidation has been a reality of law which has served us well through the passage of time. The reasons are not hard to find: the valuation of assets, other than cash, is a notoriously elastic and often highly subjective one; the liquidity of assets is often more viscous than recalcitrant debtors would have a court believe; more often than not, creditors do not have knowledge of the assets of a company that owes them money and cannot be expected to have; and courts are more comfortable with readily determinable and objective tests such as whether a company is able to meet its current liabilities than with abstruse economic exercises as to the valuation of a company's assets. Were the test for solvency in liquidation proceedings to be whether assets exceed liabilities, this would undermine there being a predictable and therefore effective legal environment for the adjudication of the liquidation of companies: one of the purposes of the new Act, set out in s7(l) thereof." (At para [17]) [35] In the present case, ABSA has, without doubt, made out a case for the relief it seeks in the winding-up application. It is entitled to an order in this regard. [Back to top]