Grounds for the removal of business rescue practitioners clarified by the SCA
Ricky Klopper
Director at Klopper Attorneys Inc.
ricky@klopper.co.za
The Supreme Court of Appeal (SCA) has overturned the decision of a full bench in the Pretoria High Court and reinstated the business rescue practitioners (BRPs) of certain companies owned by the Gupta family in the case of Knoop and Another NNO v Gupta (Tayob Intervening).[1]
In their decision, the SCA set out certain important principles relating to the removal of business rescue practitioners by a court, including the following:
- Business rescue practitioners can only be removed by a court order in terms of section 130(1)(b) of the Companies Act[2] (prior to publication of the business rescue plan) or in terms of section 139(2) (at any time while the business rescue practitioner is in office). This point can be inferred from the provisions of the Companies Act and the SCA confirmed this to be the case.
- The SCA clarified that in order for a court to remove a business rescue practitioner in terms of section 139(2) of the Companies Act, one or more of the grounds for removal must first be established based on the evidence. Thereafter, the court has a discretion whether or not to actually remove the business rescue practitioner based on the circumstances of the case.
- The appointment of a business rescue practitioner of two related companies which have a debtor-creditor relationship does not necessarily give rise to a conflict of interest or impact on the practitioner’s independence. The mere possibility that a conflict may arise does not establish a ground for removal of a business rescue practitioner. This ground will only be established if the facts indicate that there is a real conflict of interest.
In this article, we briefly summarise the findings of the High Court decision before considering some of the important parts of the SCA judgment.
A full bench of the High Court in Pretoria[3] had held that the BRPs had failed to execute their duties with the highest level of good faith, objectivity and impartiality which justified the BRPs’ removal. This was so, according to the High Court, because the BRPs had failed to timeously conclude the business rescue proceedings and had continued to earn fees and commissions while selling off the assets of the companies without having a plan regarding how the business would operate once the creditors of the companies had been paid. Furthermore, the High Court took issue with the fact that one the BRPs had been the appointed business rescue practitioner of two related, but different, companies. Lastly, the Court criticised the BRPs for raising allegations of criminal unlawfulness against the companies’ directors despite not having reported their suspicions of such criminal activity to the relevant authorities at an earlier stage despite being required to do so by law.
In its analysis of the High Court decision, the SCA pointed out that there had been no findings of fact by the High Court in respect of various issues relating to the alleged conduct of the BRPs.[4] The SCA stated that in an application for the removal of a business rescue practitioner, the facts relied on by the applicant must be measured against the circumstances in which the court is entitled to remove the business rescue practitioner as are set out in section 139(2) of the Companies Act 71 of 2008 (the Act).[5]
When the board of a company places it under business rescue, the business rescue practitioners are appointed by the board of directors of the company. In such a case, the business rescue practitioner can only be removed in two ways.
Firstly, a court can set aside the appointment of the business rescue practitioner on the basis that he or she: (i) is not qualified for the job (does not satisfy the required qualifications of a business rescue practitioner provided in section 138 of the Act); (ii) is not independent of the company or its management; or (iii) does not have the necessary skills, having regard to the company’s circumstances. These are the grounds listed in section 130(1)(b) of the Act. One may only remove a business rescue practitioner under this section prior to the adoption of a business rescue plan.
The second route to removing a business rescue practitioner is in terms of the provisions of section 139(2) of the Act, which may be relied on at any time to remove a business rescue practitioner from office.
In the facts of the case under discussion, a business rescue plan had already been adopted and the applicants accordingly applied for the BRPs’ removal in terms of the provisions of section 139(2) of the Act. This section provides as follows:
‘Upon request of an affected person, or on its own motion, the court may remove a practitioner from office on any of the following grounds:
(a) Incompetence or failure to perform the duties of a business rescue practitioner of the particular company;
(b) failure to exercise the proper degree of care in the performance of the practitioner’s functions;
(c) engaging in illegal acts or conduct;
(d) if the practitioner no longer satisfies the requirements set out in section 138(1);
(e) conflict of interest or lack of independence; or
(f) the practitioner is incapacitated and unable to perform the functions of that office, and is unlikely to regain that capacity within a reasonable time.’
When considering these grounds for removal, the SCA provided that these grounds must be conclusions drawn from proven facts.[6] Only once these grounds are established based on the facts, does a court have a discretion to then remove a business rescue practitioner.
After considering the allegations made against the BRPs by the applicant in the High Court, the SCA found that none of the allegations had not been proven on a balance of probabilities.[7] The SCA held that because none of the grounds had been established based on proven facts, the High Court had no discretion to exercise.
The SCA then proceeded to analyse the High Court judgment. The SCA found that the High Court had made various adverse findings against the BRPs without reference to evidence.
For instance, the High Court had criticised the BRPs and questioned their good faith for raising allegations of criminal unlawfulness against the company shareholders and directors without having reported their suspicions of criminal unlawfulness to the relevant authorities. The High Court had found this to be a sufficient reason to justify the removal of the BRPs.
The SCA pointed out that this had not been raised in the papers by the applicants and furthermore that it had transpired that this was factually incorrect as the BRPs had reported their suspicions of potential criminal conduct to various authorities including SAPS and the NPA, among others. Thus, this “failure” by the BRPs to report criminality, which had been raised by the High Court on its own accord had been proven to be manifestly false.
The SCA further considered whether the appointment of the same business rescue practitioner in two companies in the same group would inevitably result in a conflict. The SCA pointed out that in liquidations of groups of companies it is often the case that there would be lead liquidators appointed for the whole group and that this generally facilitates the process rather than gives rise to conflicts, even when there are debtor-creditor relationships between the companies in the group.[8]
The High Court had expressed concern over the position of conflict that business rescue practitioners may find themselves in when appointed as BRP of two companies in the same group and had intimated that this may affect the BRP’s impartiality and independence.[9] The SCA held that the fact alone that there is potential for a conflict to arise does not warrant the BRPs’ removal and should not, on its own, prevent a BRP from being appointed. Whether there is a conflict of interest that justifies a BRP’s removal must be determined in the circumstances and an actual conflict borne from the facts of the case, rather than a notional one, is required. The SCA concluded that no such conflict or lack of independence had been proven in this case.[10]
The SCA therefore held that the High Court had erred in its decision and that the applicant, Ms Gupta, had failed to make out a case for the BRPs’ removal.
[1] Knoop and Another NNO v Gupta (Tayob Intervening) [2021] 1 All SA 725 (SCA).
[2] Act 71 of 2008.
[3] Gupta v Knoop NO and Others 2020 (4) SA 219 (GP).
[4] SCA judgment para 13.
[5] SCA judgment para 14.
[6] SCA judgment para 19.
[7] SCA judgment para 108.
[8] SCA para 141.
[9] High Court judgment para 32.
[10] SCA para 142.
