Reckless trading, fraud, contraventions and the onus on business rescue practitioners

Reckless trading, fraud, contraventions and the onus on business rescue practitioners
24 Jan 2020

In a recent Pretoria High Court matter, Chetali Gupta, wife of one of the well-known Gupta brothers, brought a special motion proceeding against five respondents, two of whom are business rescue practitioners (BRP) of two Gupta-related companies, namely Island Site Investments 180 (Pty) Ltd (Island Site) and Confident Concept (Pty) Ltd (Confident Concept). Chetali Gupta (Chetali) owned 25% of the issued share capital of both companies.

Pursuant to, inter alia, Section 139(2)(a),(b) and (e) of the Companies Act, Chetali sought the removal of the first and second respondents, alleging their removal was necessary as:

  • “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”; and
  • “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”.

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, however, to report the boards and shareholders to the relevant authorities and this appears to be common cause on the papers.

This decision was handed down last month. The courts had to effectively 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”.

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.”; and
  • 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.

Taking all of this 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)”.

In addition, they 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.

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 the time or inclination to fully investigate this and to subsequently refer management and the board to the relevant authorities while handing over all such evidence to them.

Going forward and following this judgment, BRPs should now, as part of the discharge of their duties, take the time to investigate whether there was any reckless, fraudulent and/or unlawful conduct perpetrated by management and the like. As seen in this case, if they fail to do so, and omit to refer this evidence and subsequent report to the relevant authorities, they run the risk of being removed by an affected party who learns of, or is aware of, it.

This does, however, lead to the interesting question of ‘who is or what constitutes the “relevant authorities”?’ It seems it must refer to the prosecuting authorities for criminal conduct and the CIPC for other breaches of the Companies Act.

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))”.

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.

BRPS need to take note that until the SCA or the Constitutional Court rules to the contrary, this case holds as law on their duties and obligations for now.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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