Republic of Malawi IN THE HIGH COURT OF MALAWI COMMERCIAL DIVISION BLANTYRE REGISTRY INSOLVENCY CASE NUMBER 11 OF 2022 (Before Msungama, J.) IN THE MATTER OF SECTIONS 262 AND 264 OF THE COMPANIES ACT, CAP. 46:03 AND IN THE MATTER OF SECTION 18(1) OF THE INSOLVENCY ACT, CAP.11:01 AND IN THE MATTER OF RULE 26(1) OF THE INSOLVENCY RULES, 2017 AND IN THE MATTER OF AN APPLICATION FOR AN ORDER FOR THE REORGANIZATION OF THE PEOPLES TRADING CENTRE LIMITED AND CENTRAL POULTRY LIMITED AND OTHERS . INTERESTED PARTIES CORAM Msungama, J. Kaphale, SC, of Counsel, for the Applicant Kaonga, Dzimphonje, Imrani, Mnjathu, of Counsel for the Interested Parties Dzowela, Court Clerk RULING Factual background 1, Peoples Trading Centre Limited (“the Company”), was incorporated as a limited liability company on 2 May, 1973. The Company was wholly owned by Press Corporation Limited (“PCL”), The main business of the Company is the operation of retail shops popularly known as PTCs.2. Earlier this year the Company was sold by PCL to a company known as Tafika Holdings Limited (“Tafika”). A sale and purchase agreement (“the SPA”) was duly executed by the parties. 3. At the time the Company was being sold, it was neck deep in debt. In fact, it had debts in excess of MK18 billion. One of the terms of the sale was that PCL would settle debts of around MK12.5 billion. The balance of the debts of around MK6 billion would remain on the books of the Company and be settled by Tafika. The debts mainly comprised of amounts due to suppliers and overdue rentals on properties from which the Company operated its shops. It is difficult to understand why the owners of the Company allowed it to accumulate debts to this level. It is equally difficult to appreciate why the suppliers and owners of the shop buildings allowed the Company to owe them debts to the level indicated above. It is quite possible that the creditors may have had confidence of getting their money back because the Company was owned by a rich entity. However, the creditors may probably have lost sight of Salomon v Salomon! principle that a company is a separate legal personality from its owners. 4, After the execution of the SPA, PCL proceeded to settle the Company’s debts to the tune of MK12.5 billion as per the terms of the SPA. However, Tafika has not yet settled the MK6 billion portion of the debt as agreed. As there were two parties to the agreement, it is up to the other party to consider taking measures to seek remedies assuming this was a breach of the SPA by any of the parties thereto. No other party, including the creditors, would be entitled to take one of the parties to task over any non- compliance with the SPA as they are not parties to the agreement between the two” The Application 5. On the 29 July, 2022, the Company filed an application, through one of its new directors, Mr. Lloyd Laxton Enos Malola, for an order of company reorganization on the groynd that the Company is unable to settle its debts or that it is liable to be wound up unless itis granted an order to reorganize itself to settle the debts. In the circumstances, the Company requests the Court to: a) make a company reorganization order pursuant to S.19(1)(a) of the Insolvency ‘Act permitting it to reorganize itself and to fully resume trading in order to generate revenue to be used to settle its debts and remain solvent; ¥ Salomon v Salomon & Co. Ltd [1897] A.C. 22 * Principles governing privity of contract,b) appoint Mr. Hastings Bofomo Nyirenda to be the administrator of the Company; ©) grant the Company a moratorium of up to 12 months or such other duration as the court considers just, proper and equitable for the Company to settle its current liabilities; and 4d) make such other order as the court considers just, proper or equitable to prevent the Company from becoming insolvent and liable to be wound up. 6. Itis pertinent to mention at this stage that by virtue of the provisions of 8.27 of the Insolvency Act, an automatic moratorium kicked into effect the moment the ‘Company filed its papers in respect of the application for an order of reorganization. There is, therefore, as we speak, a stay of proceedings against the Company which will continue to be in effect until the determination by the court of this application. Ifat the end of the day it is the court’s decision to throw out this application, it will be in order for the court to consider if it is appropriate, in the circumstances, to order a winding up of the Company. On the other hand, if the court decides to grant the application, it will be necessary to make an ancillary order appointing someone to be the administrator of the Company for an initial period of 6 months’. 7. In the course of hearing the application, it came out clearly that as opposed to the debis of over MK6,pillion, the Company has assets worth just around MK1.6 billion. There is, therefore, absolutely no doubt at all that the Company, as it is now, is not capable of paying its debts. 8. It is also pertinent to mention that before the hearing of this application, several creditors filed their applications seeking permission allowing them to join the proceedings as interested parties. The Company was opposed to the idea of having these creditors join as interested parties but, nevertheless, the court granted them their wish and they were added as parties. After that ruling was delivered, several other creditors also sought, through without notice applications (formerly known as ex parte applications), the permission of the court to be added as interested parties. These were also allowed to join the proceedings as interested parties. 9. Coming to the swom statement in support of the application, Mr. Malola, in summary, depones that the Company has come up with a plan whereby it proposes to settle the outstanding debts within a period of 12 months. The plan, according >$.51(1) Insolvency Actto him, has been acceptable to utility companies as well as landlords but not to many supplier creditors some of whom have opted for legal action against the Company. This non-acceptance by the suppliers has affected the tumaround strategy. He has further deponed that PCL has failed to honour its undertaking to submit the signed financial statements for the Company which the potential investors in the Company wanted to have sight of before making any commitments to invest into the Company thereby negatively affecting the Company's ability to improve its solvency and liquidity. Mr Malola further deponed that the Company is confident that it has the potential to continue positively contributing to the economy of the country if tough interventions it intends to introduce are implemented. To this end, the Company is confident that with the appointment of Mr. Hastings Bofomo Nyirenda, who is a highly experienced insolvency practitioner, the short- and medium-term plans of the Company would be achieved. It is his view that the winding up of the Company will result in the loss of around 615 direct and approximately 400 indirect jobs on top of the loss of tax revenue by the Government. In his view, the order of reorganization will bring about a reasonable prospect of having the Company rescued from insolvency and protect it from creditors as well as ensure a petter retum, Conversely, an involuntary wind up will result ina situation where there is no reasonable prospect of the creditors to be paid in full. The issue 10. The issue for the determination of the court is whether an order of reorganization should be made in favour of the company and an administrator appointed to manage its affairs during the period of reorganization. Law 11. The legislation governing insolvency in Malawi is the Insolvency Act and the rules made thereunder. The beginning point is S.17 which states as follows: “The Court shall make a company reorganization order in relation to a company only if satisfied- (a) that the company is or is likely to become unable to pay its debts as they fall due; and (b) that the company reorganization order is reasonably likely to achieve the objective set out in section 1 4.” 12. $.14 which is referred to above states as follows:“(1) The administrator shall perform his functions with the objective of- (a) rescuing the company as a going concer; restoring the company to solvency and thereby preserving the company and its business operations as a going concern; ot (b) achieving a better result for the company's creditors as a whole than would be likely if the company were wound-up without first being in company reorganization, which may include a sale or a transfer of any business of the company as a going concern; or (©) realizing property in order to make a distribution to one or more secured or preferential creditors. (2) Subject to subsection (4), the administrator shall perform his functions in the interests of the company's creditors as a whole. (3) The administrator shall perform his functions with the objective specified in subsection (1) (a) unless he thinks that- (a) it is not reasonably practicable to achieve the objective; or (b) the objective specified in subsection (1) (b) would achieve a better result for the company's creditors as a whole. ~- (4) The administrator may perform his functions with the objective specified in subsection (1) (c) only if- ( a) he determines that it is not reasonably practicable to achieve the objectives specified in subsection (1) (a) or (b); and (b) the performance of his functions would not unnecessarily harm the interests of the creditors of the company as a whole. (5) The administrator shall perform his functions as quickly and efficiently as is reasonably practicable.” 13. As can be observed from the wording of $.17, the first condition to be satisfied is the one imposed by $.17(a) which is to the effect that the company must be likely to become unable to pay its debts. In the circumstances, any of the grounds described in S.182 and §,183 of the Insolvency Act may provide a basis on which acourt may make a finding that a company is unable to pay its debts. Fortunately, in the present matter, we do not need to embark on an exercise to determine whether the Company is unable to pay its debts as the position is very clear to all parties that in fact, the Company is unable to pay its debts. 514, The second condition is the one imposed by S.17(b) of the Insolvency Act, This is to the effect that the court must consider if the making of an organization order would likely result in the achievement of one or more of the objectives mentioned in S.14, This is what in England is referred to as the real prospect test!. As rightly observed by Mtambo J in Cotton Ginners Africa Limited & Abdul Kader Patel v Standard Bank Malawi Limited, Ecobank Malawi Limited, National Bank of Malawi limited, CDH Investment Bank Limited & Export Development Fund (Insolvency Cause No.1 of 2017, Unreported), we still do not have, in our jurisdiction, sufficient case authorities on company reorganization based on our Insolvency Act. In the circumstances, we are forced to have recourse to English decisions dealing with similar matters, Initially, in England, there were different approaches among different judges of the Chancery Division sitting as judges of the first instance, Some of the judges leaned towards a strict interpretation of the term ‘likelihood’ and insisted that it should be established that the attainment of an authorized purpose was more likely than not to occur. Using this approach, it was not sufficient for an applicant to show merely that there was a possibility that the purpose would be achieved. The courts required a strong possibility that the Purpose would be achieved. However, the view that came to prevail was that expressed by Hoffmann, J. in Re Harris Simons Construction Ltd [1989] 1 WLR 368. The facts of that case were that, Harris Simons Construction Ltd, a building company had its turnover increased from £830,000 in 1985 to £27 million in 1988. Most of its business came from one client called Berkley House ple with whom it had a close relationship. This relationship went sour. Berkley then dismissed them and withheld several million pounds in payments. Harris Simons could not pay debts as they fell due or carry on trading. The report of the Proposed administrator said it would be very difficult to sell any part of the business. Berkley said if an administration order (the equivalent of a reorganization order) were made it would give enough funding to let the company complete four contracts on condition that it removed itself from the sites that were in dispute. The company therefore proposed an administration order under their Insolvency Act 1986, section 8(3) (now Insolvency Act 1986, Schedule B1, para 12(1)(a)). The question was whether the court should exercise its jurisdiction in favour of the company and whether the order would be likely to achieve the specified purposes of administration, Hoffmann, J. held that an administration order should be made because there was a reasonable possibility that a purpose of administration, i.e. saving the company or business, would be achieved. This could also be termed as a “real prospect", or a "good arguable case", The court did not need to be satisfied that the administration would succeed on the "balance of probabilities", although “See Allan Hans Muhome in his book titled “Insolvency Law in Malawi” 6there needed to be a greater prospect of success than just a "mere possibility”. Lordship stated as follows: “For my part, therefore, I would hold that the requirements of section 8(1)(b) are satisfied if the court considers that there is a real prospect that one or more of the stated purposes may be achieved, It may be said that phrases like “real prospect” lack precision compared with 0.5 on the scale of probability. But the courts are used to dealing in other contexts with such indications of the degree of persuasion they must feel. “Prima facie case” and “good arguable case” are well known examples. Such phrases are like tempo markings in music; although there is inevitably a degree of subjectivity in the way they are interpreted, they are nevertheless meaningful and useful.”’ 15, This more liberal approach was endorsed by Vinelott, J. in Re Prilacks (U.K.) Ltd [1989] BCLC 734 in which His Lordship was of the view that too strict an interpretation would stultify the Act and serve no useful purpose. The real prospect formulation of test has become accepted in England: See Re S.C.L. Building Services Ltd [1990] BCLC 98; Re Rowbotham Baxter Ltd [1990] BCLC 397; Re Land and Property Trust Co. ple [1991] BCC 446. 16. In the Cotton Ginners matter referred to above, the judge adopted the reasonable prospect approach. In that matter, the applicant had debts of around MK23 billion against assets of worth MK 10 billion. The preliminary reorganization plan included sourcing new finances for the company operations from new financiers. According to the proposed plan, the company projected to make MK3 billion in five years by which time exposure would be well over MK23 billion due to interest charges, inflation and other costs. The plan would, therefore, have meant the creditors getting MK3 billion in five years instead of MK110 billion immediately. The judge found that there was no real prospect of success as none of the objectives set out in $.14 of the Insolvency Act would be achieved. He therefore dismissed the application and ordered the winding up of the company. Arguments in favour of the application 17. The arguments which have been advanced in support of the application for the grant of an order of reorganization can be summarized as follows: a) A moratorium that comes with a reorganization order will help in keeping off the Company’s creditors from executing on its assets thereby enabling the Company to take advantage of the environment to raise operating capital as well as do some trading which will enable it to pay off its debts. In the absence *P370of a reorganization order, the creditors will pounce on the Company and this will scupper any efforts aimed at serious trading. b) Anadministrator, who may be appointed as a consequence of the reorganization order, will have powers to set aside some voidable transactions of the Company such as preferences. Such an exercise is likely to bring to the Company money that has been paid to certain preferred creditors to the exclusion of the rest of the creditors. If that happens, the Company will have enough working capital to enable it to return to robust trading, In the opinion of the Company, the entire MK1255 billion paid by PCL could represent voidable preferences. The issue of wrongful trading by directors could also bring back some funds to the business which would enable the Company to meet one or both the objectives of the reorganization ©) Inthe absence of a reorganization order, the Company’s creditors, (the majority of whom are unsecured), may only que on a parri passu distribution scheme to get whatever little remains by way of company assets. This would be to the disadvantage of the creditors. 4) The Company has served millions of Malawians since its incorporation in 1973. The court has a duty to protect it from insolvency so that it continues to contribute to the economic development of Malawi through job creation and trade in Malawian products, contribute to corporate taxes and provide much needed competition to foreign owned trading entities. e) Some of the creditors are actually in favour of the reorganization order. f) Once the order is made, the administrator will engage the creditors with a plan which the creditors will be free either to accept or reject, in which case, the administrator will be able to approach the court to proceed with the liquidation of the Company. The point being made is that there will be no compromise of any debts without hearing the creditors as a whole and approval of such compromise by the requisite majority of the creditors. Arguments against the application 18. Those who are opposed to the reorganization order argue that it is not possible for the objectives that are specified in S.14 of the Insolvency Act to be achieved. In the circumstances, they believe that it would be irresponsible for this court to make a reorganization order. It is also argued that the creditors are likely to be worse off if the reorganization order is made as the indebtedness of the Company will likelyincrease. They further argue that it is important for the court to bear in mind the fact that when the Company was being sold, the idea was that the buyer would pay off the rest of the debts after the PCL paid the bulk thereof and that this did not happen. It is their argument that if Tafika had paid off the rest of the debts as agreed then the issue of reorganization would not even have arisen. They assert that as of, now, there is no evidence whatsoever that there are any funders who are willing to pump money into the Company. They are of a further view that if any lender gives money to the Company, this will only increase the Company’s indebtedness rather than increase its assets. They argue that the issue of the delayed audit report is just an excuse by the Company. They think, in its present state, the Company cannot be saved as it is as good as dead. On the issue of preference settlement of debts, they are of the view that a liquidator would equally be able to handle such an issue if the court orders that the Company should be wound up. They particularly take issue with the fact that the Company continued to trade for some time even afer it became insolvent. They conclude that, in their opinion, the application for a reorganization order has not been made in good faith as there appears to be no intention on the part of the relevant parties to revive the Company. Analysis and disposal 19. As may be appreciated, the main aim of a reorganization in an insolvency situation is to protect the interests of creditors and minimize loss by placing an insolvent but potentially viable company in the hands of an administrator with a view to rescue and rehabilitate it. The administrator also has the power to restructure the company in an effort to make it more solvent. In some cases, the reorganization may result in the company being liquidated, which means that all assets are sold off and creditors are paid as much as possible. This is done by selling off the assets of the company and using the proceeds to pay off debts. 20. Although I agree that Tafika seems to have failed to fulfill some of its obligations under the SPA, it is not an issue that should preoccupy the court’s mind at the moment as it is none of its business to decide whether any of the parties to the agreement has breached any of the provisions thereof. As indicated elsewhere above, any party to the agreement aggrieved by the conduct of the other party is at liberty to seek appropriate remedies, All the court needs to do now is to decide whether, regardless of the conduct of any of the parties to the agreement, any or both objectives specified in S.14 (1) (a) and (b) are likely to be achieved. For my part, therefore, I would hold that the requirements of S.14(1) (a) and (b) would be satisfied if I conclude that there is a real prospect that one or more of the stated purposes may be achieved. A stricter approach would have the effect of defeating the intention of the legislature in coming up with the concept of reorganization of companies which are in trouble due to debts.21. Coming to the position of Tafika, apart from the lofty statements and claims made by Mr. Malola in his sworn statement in support of the application, to wit, that there are financiers willing to pump funds into the Company, these assertions have not been able to be supported by any conerete evidence on the basis of which the court can base its comfort. No copies of any documents emanating from any possible financiers able and willing, albeit on certain conditions, to pump funds into the Company were brought to the court. The assertion that the absence of signed financial statements has put off certain financiers does not really sound convincing to the court. Further, there is absolutely no evidence at all to support the position that the new owners of the Company have been willing to pump funds into the operations of the company as they seem to persuade the court to believe. 22. Further, arguments suggesting that the court should exercise it discretion in favour of the Company by granting it a reorganization order because of the crucial role it has played in our society since its inception, are irrelevant in my view. This is not to suggest that this court is blind to the importance of having Malawians participating in the retail space. However, patriotism alone without consideration of the relevant applicable legal principles would not do. What is important for me is whether the reorganization order will benefit the interested parties, especially the creditors in this case. I am firmly of the view that it has not been demonstrated to me that the creditors would be better off if the Company is placed in an administration through a reorganization order than they would be if a winding up order is made. I agree with the observation that the Company is as good as dead. The creditors: would be better off scrambling for the proceeds which may be realised through the sale of the MK1.6 billion assets which the Company has as of now. 23. On the totality of the facts as presented to this court, I am of the considered view that there is no real prospect that a reorganization order will enable the Company's undertaking to survive or at least enable an administrator to effect a more advantageous realization of the assets than would be effected in a winding up. Consequently, in the circumstances, I find that it is more probable than not that none of the specified purposes will be achieved. I accept the position that the making an order winding up the Company offers the best prospect for maximizing the realization of the company's assets for the benefit of its creditors. 24. I therefore decline to grant the Company the order of reorganization as applied for. Consequently, there is no need for the appointment of an administrator of the Company. Like my brother judge in Cotton Ginners, I exercise my power under $.19(c) of the Insolvency Act and treat the application as if it was a winding up 10petition of the Company. I order that the Company be wound up. The Official Receiver shall act as a Provisional Liquidator and shall act as such until such time that another person becomes a liquidator and is capable of acting as such. 25. On the issue of costs, I order that these be costs in the liquidation of the of the Company. Delivered on 7" day of October, 2022 at the High Court, Commercial Division, Blantyre Registry. M.T. Msungama JUDGE c