29 June 2021 by and Dispute Resolution Alert

Conflicts of interest: An analysis by the Supreme Court of Appeal within the context of business rescue

Section 139(2)(e) of the Companies Act 71 of 2008 (the Act) empowers the court upon the request of an affected person, or on its own motion, to remove a business rescue practitioner (BRP) from office on the ground of ‘conflict of interest or lack of independence’.

The Supreme Court of Appeal (SCA) in the recent case of Oakbay Investments (Pty) Ltd v Tegeta Exploration and Resources (Pty) Ltd and Others (1274/2019) [2021] ZASCA 59 (21 May 2021), considered the scope of this section when determining the outcome of the Oakbay Group’s application for leave to appeal, which was ultimately dismissed with costs.

In the High Court

In February 2018, eight companies in the Oakbay Group (Oakbay) were placed in voluntary business rescue. These included Tegeta Exploration and Resources (Pty) Ltd (in business rescue) (Tegeta) and its three wholly owned subsidiaries, Optimum Coal Mine (Pty) Ltd (OCM), Koornfontein Mines (Pty) Ltd and Optimum Coal Terminal (Pty) Ltd, of which Mr Klopper, Mr Knoop or both were business rescue practitioners (BRPs).

In an application before the High Court, Gauteng Division Pretoria, Oakbay sought the removal of Mr Knoop and Mr Klopper as BRPs of Tegeta. The application was dismissed, with the court refusing leave to appeal. Oakbay petitioned the Supreme Court of Appeal.

On appeal

In the application before the SCA, Oakbay’s primary contention was that the appointment of the same BRPs in respect of companies in a single group was ‘inappropriate as it had led to conflicts of interest due to the existence of inter-company loans and claims’. This contention was not pursued in casu as the SCA had already rejected it in Knoop NO and Another v Gupta (Tayob as intervening party) [2020] ZASCA 163; 2021 (3) SA 88 (SCA) (the Knoop case), which involved an attempt to remove the same two BRPs from office in two other Oakbay Group companies.

The secondary issue was that the BRPs treatment of the Tegeta claim against OCM - which the BRPs deemed irrelevant, as it was their contention that there would be no free residue available to pay a dividend to Tegeta after paying all other OCM creditors - demonstrated that they were conflicted because, when acting on behalf of Tegeta, they were obliged to pursue the claim with vigour, while on behalf of OCM, they were required to resist the claim.

When does a conflict of interest arise?

In discussing the grounds for removal of BRPs in terms of the sub-sections of section 139(2) of the Act, the court stated that each appears to be concerned with a personal quality or action of the BRP whose removal is sought. These qualities include:

‘incompetence; failure to perform their duties; failing to exercise due care in the performance of their duties; engaging in illegal acts or conduct; no longer satisfying the requirements of s 138(1) for their appointment; conflict of interest or lack of independence; or incapacity or inability to perform their functions.’

The ordinary understanding of a conflict of interest, being ‘a situation where the private interests of the BRP conflict with their obligations to the company in respect of which they have been appointed’ did not accord with the complaint in the present case, as Oakbay has alleged that the conflict arose between the interests of Tegeta and OCM, rather than between the BRPs and either company.

The duties of the BRP

Where an inter-company conflict arises, it may still necessitate the BRP resigning or being removed from office, but this would be due to the conflict preventing them from performing, or resulting in their failure to perform their duties, or alternatively it might render it impossible to exercise the proper degree of care owed to each company.

The underlying misconception arose from a submission that the main difficulty lay in the fact that when the BRPs were ‘wearing their Tegeta hats, they had a duty to pursue the Tegeta claim on behalf of Tegeta’. However, the court cautioned that this confused concepts of business rescue with insolvency. During insolvency, an obligation rests on the trustee or liquidator to collect the assets, reduce them to monetary amounts and distribute them among the creditors, whereas this obligation does not rest on a BRP. The BRP must investigate and ascertain whether there is a reasonable prospect of the company being rescued, which means more than that the company will return to solvent trading, and includes a situation where the company is wound down on terms that provide better return for creditors or shareholders than on immediate liquidation.

The court stated that unless third party creditors’ conflicting interests must be addressed, there is little point in the BRPs becoming ‘embroiled in arguments’ regarding inter-company indebtedness within a complex group of companies.

The current case was distinguished from that of Standard Bank of SA Limited v The Master of the High Court (Eastern Cape Division) 2010 (4) SA 405 (SCA), where there was a fundamental conflict between the claim being advanced by liquidators on behalf of the holding company and the interests and claims of the two banks. The liquidators of the subsidiary were also liquidators of the holding company and had concluded a fee-sharing agreement with their co-liquidators, which would be affected depending on the outcome of the disputes regarding the claims.

Ultimately, the court was satisfied that Oakbay’s complaints were not established and there was no reasonable possibility of an appeal succeeding, the application for leave to appeal being dismissed with costs.

Conclusion

In light of this decision, it appears that the scope of section 139(2)(e) of the Act contemplates a personal conflict or lack of independence, resulting in the private interests of the BRP conflicting with their obligations to the company in respect of which they have been appointed. This does not extend to inter-company conflicts, unless these conflicts have prevented the BRP from performing, or resulted in their failing to perform their duties, or renders it impossible to exercise the proper degree of care owed to each company.

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