Business Rescue Practitioner’s Duties Re Reckless Trading, Fraud and Contravention of any Company Law – By Colin Strime

  1. This duty or more aptly stated this obligation on the part of business rescue practitioners was dealt with in a recent matter[1] of Chetali Gupta (the wife of one of the Gupta brothers) in a special motion proceeding brought by her before three judges of the North Gauteng Local Division of the High Court, Pretoria against five respondents, the first two respondents being the business rescue practitioners of two Gupta related companies known as Island Site Investments 180 (Pty) Ltd (“Island Site”) and Confident Concept (Pty) Ltd (“Confident Concept”). The decision was handed down last month.
  1. The main relief sought was for the removal of the first and second respondents as the business rescue practitioners of Island Site and Confident Concept pursuant to, inter alia, Section 139(2)(a),(b) and (e) of the Companies Act. The applicant alleged that their removal was necessary because:
  • “the conduct of the first and second respondents in respect of the companies has not been in good faith”;
  • “the conduct of the first and second respondents amounts to a failure to perform the duties of a business rescue practitioner as contemplated in terms of Section 139(2)(a) of the Act”;
  • “the conduct of the first and second respondents amounts to a failure to exercise the proper degree of care in the performance of a business rescue practitioner’s functions as contemplated in terms of Section 138(2)(b) of the Act”;
  • “the conduct of the first and second respondents evidences a conflict of interest or lack of independence as contemplated”;
  • “the conduct of the first and second respondents is not consistent with the conduct of an officer of a court as contemplated in terms of Section 140(3)(a) of the Act”;
  • “the conduct of the first and second respondents is not consistent with the responsibilities of a director of the companies in question as contemplated in Section 140(3)(b) of the Act”;
  1. Chetali Gupta owned 25% of the issued share capital of both Island Site and Confident Concept.
  1. The respondents in their papers referred to the fact that there existed “an element of criminal unlawfulness in the manner in which the board and shareholders have conducted the affairs of the companies”. They failed to report the boards and shareholders to the relevant authorities. This appears to be common cause on the papers.
  1. Effectively the courts had to determine whether the respondents had executed their duties in accordance with the standards set out not only by the Act but by the courts as judicial officers of whether the applicant has successfully made out a case demonstrating that the BRPs acted in a manner short of the required standard in terms of the Act.
  1. The three judges found the first and second respondents’ omissions to be unacceptable and advised that:
  • the business rescue practitioners bore the onus of reporting such suspicions to the relevant authorities. Their failure to do so in this Court’s view is dispositive. Not only does this mean that the first and second respondents investigation into the affairs of the companies being tainted as a result of their potential failure to be forthcoming regarding any dubious activities on the part of the board of the shareholders, the first and second respondents failure to report its findings to the relevant authorities in turn also taints their impartiality as officers of the court.”
  • “Given the nature of the office of a BRP and that the ability to execute one’s duties as a BRP requires a high level of impartiality and independence, the conduct of the first and second respondents in failing to report such findings is critical and speaks to whether the respondents are indeed fit and proper to execute the duties of a BRP.”
  • “Again, if the first and second respondents were so aggrieved at the alleged mismanagement of the companies and the unsavoury and criminal activities that the companies were being subjected to at the hands of the board and shareholders, as an integral part of their judicial duty, the first and second respondents could have and should have reported their findings to the appropriate authorities.”
  • “It is in turn both intriguing and troubling that the first and second respondents have filed papers vilifying the companies’ board and shareholders alleging that they have mismanaged the affairs of the companies and in the same breath want to rescue the companies for the ultimate benefit of the same board and shareholders. This again speaks to the credibility of the first and second respondents and begs the question whether the accusations levelled at the board and shareholders are truly being raised in good faith. Lastly the Court cannot overlook the position of conflict that the first respondent may potentially find himself in as a BRP for both companies. The Court finds that the gravity of the position held by a BRP requires the utmost level of impartiality and independence and in the event that such impartiality and independence may potentially be compromised intervention is warranted.”

[the above underlining is the authors]

  1. Taking all of the above into account the courts found in terms of Section 139(2) “…. that a case has been made out for the removal of the first and second respondents as BRPs on several grounds; namely a failure to perform the duties of a BRP in terms of Section 139(2)(a) and the presence of a conflict of interest / lack of independence in terms of Section 139(2)(e)”.
  1. Furthermore, the courts found “… that a sufficient case has been made out justifying the removal of the first and second respondents as BRPs of both companies. The fact that the first and second respondents’ conduct may have been tainted with impropriety and the fact that a potential conflict may exist compromising the first and second respondents’ execution of their duties is sufficient to warrant their removal bearing in mind the high standard of professional and ethical duty that BRPs are held to in terms of the Act.”
  1. Often BRPs are faced with evidence of reckless trading, fraud and/or unlawful conduct on the part of management and the board. However, because of the speed at which rescues are required to be completed and because BRPs focus on other relevant matters, they very seldom in practice have time or the inclination to fully investigate these matters and to refer management and the board in these instances to the relevant authorities and hand over all such evidence to the relevant authorities.
  1. However, going forward and because of this judgment, BRPs should now as part of their discharge of their duties take time to investigate whether there was any reckless, fraudulent and/or unlawful conduct perpetrated by management and the like. Per this case, if they fail to do so, and fail further to refer this evidence, with a report arising out thereof to the relevant authorities, they run the risk of being removed by an affected party who learns of or is aware of this omission. The interesting question is who is or what constitutes the “relevant authorities”. In the author’s view it must refer to the prosecuting authorities for criminal conduct and the CIPC for other breaches of the Companies Act. This case makes it quite clear that BRPs are now obliged to make these enquiries and to report thereon to the relevant authorities.
  1. Furthermore (as required by the Act) there is the additional duty on BRPs to request management who are not involved in such conduct “to take any necessary steps to rectify the matter, including recovering any misappropriated assets of the company (Section 141(2)(c)(ii)(bb))”.
  1. Also of importance in this matter is the courts finding that BRPs are to exercise a high standard of professional and ethical duties and that this is a requirement of the Companies Act.
  1. The case in question has not yet been reported. It should be reported in due course.
  1. Until the SCA or the Constitutional Court rules to the contrary, this case holds as law on the duties and obligations of business rescue practitioners.

[1] Chetali Gupta v Knoop NO, Klopper NO & Others – High Court, Pretoria, Case no. 84095/2018 dated 13/12/2019 (unreported at present).

– By Colin Strime