Claims against a Business Rescue Practitioner

 4 Nov 2021

Francois Uys Inc. Attorneys. 012 654 9247 / 082 852 3967

On 12 September 2014, the respondent was appointed the business rescue practitioner to rescue a group of companies. He was unable to do so. The group of companies were finally liquidated on 25 November 2014, following the rejection of the respondent’s business rescue plans. One of those companies was Boabab Holdings.

The Group’s financial difficulties started approximately twelve months preceding the business rescue. Transnet had previously allowed the Group twenty-four trains per week to move manganese from the mines to the harbours and that was reduced to one train per week. The companies were reliant on rail transport and because Transnet reduced the Group’s loads, it was forced to adjust its business strategy and become increasingly reliant on road transport. The consequence of this change was a massive capital expenditure programme in circumstances where the Group was already experiencing cash flow pressure due to the rail service delivery failure. The Group had to purchase trucks, trailers and containers on installment sale agreements. This resulted in the Group being indebted to several financiers, including FirstRand Bank. Several industrial strikes by drivers also hampered the Group’s ability to operate profitably. The above notwithstanding, the revenue generated by the Group increased after the re-structure, which is evident from the financial statements of the Group.

As a consequence of the foregoing, Mr Driscoll, a director of the companies and the person who ran the companies, engaged with a potential third party investor, being Vancor Participants SA and the Efferton Group (“Efferton”), in an attempt to re-capitalise the Group so as to fully implement the expansion programme and change in strategy, which was to place more reliance on road transport. In May 2014, a sale agreement was concluded between Mr Driscoll and Efferton. Efferton took control of the Group, including its bank accounts and management. The Group’s financial director, Mr Bryan Scannell left the Group’s employ and Efferton commenced with its own management. In about August 2014, Efferton pulled out of the sale, leaving the companies in a worse financial position than they had been, prior to the sale. More importantly, the previous administration had no accounting or books or software accounting for what transpired during Efferton’s tenure in charge of the Group.

Shortly after Efferton pulled out of the sale, the respondent was contacted in relation to assuming the responsibilities of a business rescue practitioner. He has a B.Proc degree and is a senior business rescue practitioner. He was appointed, along with his company, Eripio Business Rescue Consultants, to attend to the business rescue. On 12 September 2014, the Group went into voluntary business rescue.

When the respondent was initially approached he was under the impression that there was only one company involved in the business rescue, only to find that there were six companies that had to be rescued. Notwithstanding the fact that there were six companies, he was of the view that the companies could continue to be profitable if they scaled down, made use of Kudumane’s rail allocation, or if they used trucks or a combination thereof.

The respondent testified during the trial that, although each company initially had a separate business plan, the business rescue plan for Boabab could not be considered independently and had to be considered together with the consolidated business plan for the companies because of the interdependency of the companies and how they operated. He was also of the view that the moratorium contemplated in section 133 of the Act would ensure that Transnet had to continue providing services. He took legal advice in this regard from an attorney, Mr Van Deventer, as well as counsel. The respondent testified that he was provided with financial documents that were incomplete, but nevertheless endeavoured to distill the true financial position of the companies from these documents. He stated that he was not supported by the previous directors of the Group, save for the financial manager, Mr Bryan Scannell and, to a lesser extent, by Mr Driscoll, the only remaining director of the Group, through e-mail correspondence.

The Issue
This appeal centers on the respondent’s use of Boabab’s funds to discharge the debts of the Group. It was established during the evidence of the respondent that R24 228 315. 61 was collected from Kudumane and Black Magic Logistics, both debtors of Boabab, during business rescue. Boabab operated an Investec Bank account. However, subsequent to business rescue, Mr Driscoll instructed Kudumane to utilise a bank account operated by African Mining Logistics (“AML”) held with Standard Bank. Monies were accordingly deposited into this bank account. The respondent applied these funds to extinguish obligations of the companies in the Group (hereinafter referred to as “the disposal”), whilst knowing that Boabab had ceded all its book debts to, inter alia, Lombard Insurance (“Lombard”).3 A balance sheet, handed in during the trial, set out the amounts received by the Group and the amounts paid out in respect of each of the companies. For example, R400 000.00 was paid to Fidelity Security for security for the leased premises, and approximately R4 000 000.00 was paid in relation to salaries for all the companies. The funds were also used to pay for cell phone accounts and internet in respect of all the companies, including Boabab.

The duties of a BRP was under alot of scrutiny in this case

The respondent testified that all of the payments were made in order to service the Kudumane contract. He believed that Boabab’s funds ought to be used to pay immediate operating expenses of the Group until such time as the business rescue plans were approved, after which further investigations could be conducted. He testified that without the payments, Boabab would have been unable to continue trading. He denied that the amounts paid by Boabab in respect of the other companies’ expenses constituted loans, but were rather payments for services rendered.

There was also a cession of book debts in favour of FirstRand Bank.

The disposal, so the appellants alleged, was effected without compliance with section 45 and section 134 of the Act, and was in breach of the respondent’s fiduciary duties to Boabab in terms of section 76(3) of the Act. As a result of the contraventions, so it was alleged, Boabab had suffered a loss of R24 228 315.61 and the respondent should be held liable for the loss in terms of section 218(2), alternatively section 77(2)(b)(ii) of the Act.

The respondent denied liability, but pleaded that in the event of the court finding that he is liable to Boabab for any loss, that he acted in good faith in the course of the exercise of the powers and performance of his functions as a business rescue practitioner and was thus excused from liability in terms of section 140(3)(c)(i) of the Act. The respondent further pleaded that if it is found that he breached his fiduciary duties that he acted honestly and reasonably and should therefore be excused from any liability in terms of section 77(9) of the Act.

The court a quo dismissed the claim against the respondent with costs. Modiba J found that there was no factual basis to find that that the respondent advanced loans to companies associated with Boabab and therefore did not contravene section 45 of the Act. She, however, found that the respondent contravened section 134 of the Act as he “did not obtain Lombard’s consent as required by section 134 ……when he utilised Boabab’s book debts to pay expenses incurred by the other companies to service contracts in Boabab”. He was therefore liable in terms of section 77(2)(b)(ii) of the Act, but his liability was excluded in terms of section 77(9) of the Act. She further found that the respondent was not additionally excused in terms of section 140(3)(c)(i) of the Act, as the defence available in terms of this section was excluded by section 140(3)(b). In respect of the allegation that the respondent breached his fiduciary duties, the court a quo found that “to the extent that the transactions that he (the respondent) made using the ceded assets relate to expenses incurred by the other five companies to service contracts located in Boabab, they were made in good faith, for a proper purpose and in the interests of Boabab.” In addition, she found that the appellants had not established any loss by Boabab and that section 218(2) was impermissibly used by the appellants to attempt to circumvent the indemnity a business rescue practitioner enjoys under the provisions of section 77(9).

The Claim

The claim in the court a quo was divided into four separate and distinct claims, each seemingly pleaded in the alternative and for the same amount of money. The appellants’ heads of argument are less clear but appear, following the appellant’s notice of appeal, to pursue all four claims. It is agreed between the parties that sections 45, 77, 134, 140 and 218 of the Act therefore find application in this appeal as a result of the pleadings and evidence in this matter. A convenient place to start for purposes of the present matter is section 140 of the Act.

General duties and powers of a business rescue practitioner

In order to enable the business rescue practitioner to prepare a business plan, the Act provides the company (and the business rescue practitioner) with several rights and safeguards. One of those rights relate to a moratorium against legal proceedings as provided for in section 133 of the Act, and another is the right to suspend the rights of any creditors under any agreements, as set out in section 136 of the Act. One of the safeguards available to business rescue practitioners is that provided for under section 140(3) of the Act. Section 140 of the Act states as follows:

“General powers and duties of practitioners 140 (1) During a company’s business rescue proceedings, the practitioner, in addition to any other powers and duties set out in this Chapter-

  • has full management control of the company in substitution for its board and pre-existing management;
  • may delegate any power or function of the practitioner to a person who was part of the board or pre-existing management of the company;
  • may-
  • remove from office any person who forms part of the pre-existing management of the company; or
  • appoint a person as part of the management of a company, whether to fill a vacancy or not, subject to subsection (2); and
  • (d) is responsible to-
  • develop a business rescue plan to be considered by affected persons, in accordance with Part D of this Chapter; and
  • implement any business rescue plan that has been adopted in accordance with Part D of this Chapter.

During a company’s business rescue proceedings, the practitioner-

  • is an officer of the court, and must report to the court in accordance with any applicable rules of, or orders made by, the court;
  • has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77; and
  • other than as contemplated in paragraph (b)-
  • is not liable for any act or omission in good faith in the course of the exercise of the powers and performance of the functions of practitioner; but
  • may be held liable in accordance with any relevant law for the consequences of any act or omission amounting to gross negligence in the exercise of the powers and performance of the functions of practitioner.
  • If the business rescue process concludes with an order placing the company in liquidation, any person who has acted as practitioner during the business rescue process may not be appointed as liquidator of the company.


Business rescue has received alot of legal tests over the past 2 years

In terms of section 140(1)(a) a business rescue practitioner has full management control of the company in substitution for its board and pre-existing management. Section 137(2), however, provides that the directors of a company under business rescue must continue to exercise the “functions” of a director, subject to the authority of the practitioner and have a duty to the company to exercise any management function within the company in accordance with the express instructions or direction of the practitioner, to the extent that it is reasonable to do so.4 If the board of a company during business rescue proceedings, or one or more directors of the company, purports to take any action on behalf of the company that requires the approval of the practitioner, that action is void unless approved by the practitioner.5 A business practitioner alone determines the manner in which he (or she) will carry out his function. The business rescue practitioner has free rein to adopt any management, oversight, and control functions which he thinks appropriate to the carrying out of his duties under the Act. 6 If the business rescue practitioner abuses the office he can be removed by the court on application by an interested person.

It is common cause that when the companies went into business rescue there was only one director of the Group left, namely Mr Driscoll, and he was in Dubai. There is no evidence to suggest that the respondent formally delegated any of his powers or functions to Mr Driscoll, or that Mr Driscoll participated in any of the decisions complained of. The respondent took over the day to day management of the Group and was saddled with the same duties, responsibilities and liabilities of a director of the Group. It is important to note that the respondent did not become a director: he took full management control of the company in substitution for its board. He did so in the performance of his duties as a business rescue practitioner.

Section 140(3)(b) states that a business rescue practitioner has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77, and section 140(3)(c) states that the business rescue practitioner, “other than as contemplated” in section 140(3)(b):

  • is not liable for any act or omission in good faith in the course of the exercise of the powers and performance of the functions of practitioner; but,
  • may be held liable in accordance with any relevant law for the consequences of any act or omission amounting to gross negligence in the exercise of the powers and performance of the functions of practitioner.

The court a quo found that section 140(3)(c) is not applicable because of the words “other than as contemplated in paragraph (b)”. The learned Judge found that section 140(3)(b) excludes the defence in section 140(3)(c) where a business rescue practitioner has breached his fiduciary duties as the “ex officio director of the company.”

In interpreting section 140(3) the court must attribute meaning to the words used in the legislation, having regard to the context provided, by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears and the apparent purpose to which it is directed. Where more than one meaning is possible each possibility must be weighed in the light of all these factors. The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document. The “inevitable point of departure is the language of the provision itself”, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.10 In City of Tshwane Metropolitan v Blair Atholl Homeowners Association,11 the SCA reiterated that a restrictive consideration of words without regard to context has to be avoided and the words have to be interpreted sensibly and not have an unbusiness-like result. These factors have to be considered “holistically, akin to the unitary approach”.

The Loss
The court a quo found that the appellants had not established any loss by Boabab. The appellants do not attempt to deal with this considerable hurdle in their heads of argument.

The appellants claim the sum of R24, 228,315.61 from the respondent on the basis that this is the amount representing Boabab’s loss. It is, however, evident on the common cause facts that Boabab did not suffer a loss of R24, 228,315.61. The appellants simply adopt the figure that represents the actual receipt by the respondent of proceeds of the book debts as the loss suffered by Boabab. This, as correctly pointed out by counsel for the respondent, is an erroneous assumption. The appellants, firstly, failed to consider the fact that as a result of the respondent’s use of those funds, sales in an amount of approximately R18 million were generated post business rescue. Secondly, it ignores the fact that Lombard’s claim was for approximately R18 million and that it received a distribution of approximately R14 million from the liquidators leaving a deficit of only R4 million. Thirdly, it ignores the fact that some of the expenses paid by the respondent were directly those of Boabab and should be accounted for. Fourthly, it fails to consider that the respondent had utilised some of the monies received by him before he even received any demands from Lombard or FirstRand Bank.

These monies, should likewise be discounted. Lastly, despite the fact that the respondent requested further particularity from the appellants as to why Boabab’s funds were irrecoverable and what steps were taken to recover Boabab’s funds, there was no evidence that the amounts utilised by the respondent were irrecoverable.

The appellants had not established that the funds were irrecoverable or that they have attempted to recover Boabab’s funds. On this basis alone, the appellants have failed to make out a case.

The respondent is not liable to the appellants and the appellants’ appeal should be dismissed with costs, inclusive of the costs occasioned by the employment of two counsel.