Publications | August 2016

Rescue from the rescuer

Since the inception of business rescue, misconduct by business rescue practitioners (BRPs) has been one of the biggest causes of complaint (and headaches) by creditors. More and more disgruntled creditors and other affected persons are pursuing the removal of rogue BRPs of companies in business rescue. 

In terms of section 139 of the Companies Act 71 of 2008, a BRP may only be removed from office in terms of section 130, or as provided for in section 139. Furthermore, only the court is authorised to remove a BRP from office, both in terms of sections 130 and 139. 

The existence of two separate but expressly related sections for removal of a BRP has led to a degree of confusion when deciding on which section to rely when making application. Both provisions provide for:

• an application to court by an affected person;
• the removal of the BRP by court order; and 
• the subsequent replacement of the BRP. 

On what grounds may a BRP be removed from office?

Section 130 provides that any time after the adoption of the resolution in terms of section 129, until the adoption of the business rescue plan in terms of section 152, an affected person may apply to court for an order setting aside the appointment of the BRP, on the grounds that the BRP:

• does not satisfy the requirement of section 138;
• is not independent of the company or its management; or 
• lacks the necessary skills, having regard to the company's circumstances.

Section 139 provides that, upon request of an affected person, or on its own motion, the court may remove a BRP from office on any of the following grounds: 

• incompetence or failure to perform the duties of a BRP of particular company;
• failure to exercise the proper degree of care in the performance of the BRP's functions;
• engaging in illegal acts or conduct;
• if the BRP no longer satisfies the requirements set out in section 138(1);
• conflict of interest or lack of independence; or
• the BRP is incapacitated and unable to perform the functions of that office, and is unlikely to regain the capacity within a reasonable time.

Chapter 6 fails to provide any guidance on what each of the above grounds of misconduct entail, and our courts are accordingly left to interpret them on a case-by-case basis. 

The differences between a removal of a BRP under sections 130 and 139 respectively

Legislative differences:

1. In terms of section 130(6), the court must appoint an alternative BRP who satisfies the requirements of section 138, recommended by, or acceptable to, the holders of a majority of the independent creditors' voting interests who were represented in the hearing before the court. In terms of section 139(3), the company, or the creditor who nominated the BRP, must appoint a new BRP if the current BRP is removed from office.
2. Section 130 only applies to the removal of the BRP who was appointed by a board resolution in terms of section 129. Section 139 applies to the removal of the BRP who was appointed by either a board resolution or by an affected person upon court application in terms of section 131. In other words, in the case of section 130 it is only the appointment of a BRP by the company under section 129 that can be attacked on the grounds provided for in that section, whereas the court may also remove a BRP under section 139 in the instance where the BRP was appointed in terms of a section 131 court application by an affected person. 
3. An application for the removal of a BRP in terms of section 130 may only be made until a business rescue plan has been adopted. After that, an application for removal can only be brought in terms of section 139. An application for removal in terms of section 139 can be brought at any time during the business rescue process, even after substantial implementation of the business rescue plan. 
4. In terms of section 130, only an affected person may opt for the removal of a BRP. In terms of section 139, a court may, of its own volition (in the absence of a formal court application by an affected person), remove a BRP from office.
5. In terms of section 130, only independent creditors may nominate a BRP for appointment. For purposes of section 139, non-independent creditors may also apply for the removal of the BRP.

"In principle" differences:

1. One of the intentions of section 130 is to protect affected persons from situations where the very initiation of voluntary business rescue proceedings by the company is an abuse.
2. Section 139 can be relied on right throughout the business rescue process, and makes provision for misdemeanours by the BRP even after the adoption of the business rescue plan. 

Which sections should an affected person rely on for removing a BRP?

An affected person should base the application for removal of a BRP on both sections 130 and 139. The reliance on additional grounds for removal of the BRP would provide an affected person with more leverage in the application, and elevate the chances of success. Section 139 also provides broader grounds that could cover almost any non-compliance by the BRP.

Liability of BRPs as directors

Apart from and in addition to the removal of the BRP as set out above, a BRP may also be exposed to liability in terms of section 140 of the Act. Section 140(3) provides that, during a company's business rescue proceedings, the BRP is an officer of the court and has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77 of the Act. The court ought to take these considerations into account when interpreting and applying the grounds of misconduct set out in sections 130 and 139. Section 140(3) further provides that a BRP 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 the BRP. 

Alternative remedies

The Companies and Intellectual Property Commission (CIPC), as the regulatory body for companies, has the powers and authority to regulate the appointments and removals of BRPs. In this regard, the CIPC issues a conditional license for a BRP to act as such, after a BRP has applied to the CIPC for a license to serve as a BRP of a company. It is, however, not compelled to issue a license to any BRP, and may refuse to do so. In terms of Regulation 126(3) and (4) to the Act, the CIPC will "consider" an application by the BRP for appointment, and "may" issue a license to a BRP if it is satisfied that the BRP has met certain requirements. In terms of Regulation 126(6), the CIPC must, after considering an application by a BRP, either issue the license or refuse to issue the license by notice in writing to the BRP, setting out the reasons for refusal. 

Furthermore, the CIPC is entitled suspend or revoke a BRP's license should a BRP act in violation of his duties. In terms of Regulation 126(7), it must revoke the license of a BRP who becomes disqualified from such an appointment, and may suspend or revoke a license should it have reasonable grounds to believe that the BRP is no longer qualified to be licensed, or has contravened the conditions of the license. In addition, the terms of the licenses themselves provide that "Failure to comply with these conditions will be regarded as reasonable grounds for the Commission to suspend or withdraw the license of the Practitioner in terms of Regulation 126(7)(b) for a particular rescue proceeding or on good cause, for all business rescue proceedings".

Although the CIPC does have the power to regulate the appointments and removals of BRPs, to date it has not been seen to have done so. Unfortunately, the CIPC has in many instances been re-issuing certain BRPs with conditional licenses, notwithstanding that these individuals repeatedly breached their duties in previous business rescues. Furthermore, it has not as yet taken steps to withdraw BRPs’ licenses as provided for in Regulation 126(7). 

In addition, the CIPC lacks the capacity to enforce the Act, even if it was inclined to regulate BRPs. Nor does it require that a BRP be a member in good standing of any accredited profession or any other private body, further negatively impacting its ability to regulate BRPs. The CIPC, therefore, still has a long way to go in terms of properly regulating the appointment and removal of BRPs.

Private bodies like the Turnaround Management Association of Southern Africa (TMA) and the South African Restructuring and Insolvency Practitioners Association (SARIPA) are currently doing what they can to regulate non-compliant BRPs through formal disciplinary action. However, these private bodies may only take action against actual members and it has become common for BRPs to resign from these bodies as soon as disciplinary action is instituted against them. In short, private bodies can only regulate their own members and there is no compulsion on a person wishing to take an appointment as a BRP to be a member of any private body. The CIPC is currently working on an accreditation model for BRPs, whereby private bodies like SARIPA and the TMA will participate in the licensing process, but it's going to take time.

A creative tool for permanently removing a BRP from acting in the future may be to apply to court to declare the BRP a delinquent director in terms of section 162 of the Act. The effect of an order of delinquency is that a person is disqualified from being a director of a company (section 69(2)). By virtue of section 140(3)(b) such an order would automatically disqualify the offender from taking any further appointments as a BRP. A delinquency application would be particularly useful to remove from the system rogue BRPs who are repeat offenders but who keep getting appointments. Another option would be that when affected persons make application to court to set aside business rescue resolutions, they seek costs orders against BRPs in their personal capacities. This may make BRPs think twice before acting in non-compliance with the Act. 

I am hoping that we can get to a place in business rescue in the future where it is a prerequisite to being issued a license that a BRP be a member in good standing of one of the recognised accredited bodies. Furthermore, should a BRP continue to misbehave during a rescue, the CIPC should build the capacity to remove their license (and permanently in the case of repeat offenders). 

For now, it is a waiting game, and affected persons are encouraged to approach the courts in terms of sections 130, 139 and/or 162 of the Act.

As published in Without Prejudice in August 2016.

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