The price of oversight: BRP ordered to pay back fees after termination of business rescue proceedings

During the latter half of 2015, Danco found itself in financial distress, and ultimately filed for business rescue in October 2015. Cawood and Beer were the jointly appointed business rescue practitioners for Danco. Beer, however, played no role in the matter after November 2015 and also did not oppose the application.

The business rescue proceedings of the company commenced and proceeded in accordance with the provisions of the Companies Act 71 of 2008 (Companies Act). However, on 22 January 2016 the published and amended business rescue plan was rejected by creditors at the second meeting of creditors.

It was therefore resolved at this second meeting of creditors that an application would be made to convert the business rescue proceedings into liquidation proceedings (the conversion application). This application was subsequently made in the names of jointly appointed business rescue practitioners against Danco on 26 January 2016.

Despite the business rescue plan having been rejected on 22 January 2016, Cawood seemingly continued to act in his role as business rescue practitioner, and on 3 March 2016 he addressed correspondence to Danco to set out the way in which the business of Danco should be conducted pending the hearing of the conversion application. Cawood was also authorised to sign all relevant investment documentation on behalf of Danco in line with his appointment as business rescue practitioner.

Allan Gray investment account

As such, Cawood used his authority to open an Allan Gray investment account and on 6 May 2016, he transferred a sum of R600,000 into the account.

While the conversion application had been set down for hearing on 29 April 2016, the application was never moved, and was ultimately withdrawn. As such, nothing further transpired insofar as the business rescue proceedings were concerned until the end of July 2016.

During August 2016, a number of events took place which raised alarm bells for Danco. For one, Danco contacted Allan Gray to make enquiries regarding the investment funds in the account, only to be informed that Cawood had previously given notice to Allan Gray to cash in the investments held by it and to transfer these funds to a Standard Bank account that had been opened by him. It later came to light that at some stage during the business rescue proceedings, Cawood had opened this separate Standard Bank account in the name of Danco – this notwithstanding the First National Bank account which had been opened at the commencement of the business rescue proceedings that was intended to be used for business rescue activities. Cawood was the only person aware of the existence of the Standard Bank account and he was the only person who had authority to transact on the account.

The investment was transferred from the Allan Gray account into the Standard Bank account in two tranches in the sums of R386,870 and R209,088.95 respectively (a total of R595,958.95). Thereafter, the Rescue Company, an entity claimed to have been used by Cawood as a vessel for payment of fees for the services rendered by him in his capacity as a business rescue practitioner, raised an invoice for R519,074.45.

Cawood transferred a sum of R595,000 from the Standard Bank account, to the Rescue Company, and then closed the Standard Bank account on 25 August 2016.

Notice of termination of business rescue proceedings

On 29 August 2016, Cawood then filed a notice of termination of business rescue proceedings with the Companies and Intellectual Property Commission (CIPC) stating that the reasons for termination were that there was no reasonable prospect of rescuing Danco and further that the business rescue plan had been rejected by the majority of holders of voting interests.

The above turn of events brought Cawood’s conduct into question and, as such, led the parties to the current dispute wherein Danco sought an order for payment in the amount of R595,958.95, together with interest and costs against the Cawood and the Rescue Company (jointly and severally). 

In considering the application the court was presented with two issues: The first issue was considering when the business rescue proceedings in fact terminated – was it on 1 February 2016, after the plan had been rejected at the second meeting of creditors; or 29 August 2016, when the notice for termination of business rescue proceedings was filed with CIPC by Cawood?

The second issue was whether Cawood was entitled to make payment to the Rescue Company.

The Companies Act

In considering the first issue, the court considered section 132(2) of the Companies Act which regulates the duration of business rescue proceedings and determines how business rescue proceedings terminate. Section 132(2) provides as follows:

“132. Duration of business rescue proceedings

(2) Business rescue proceedings end when:

1. a) the court:
2. sets aside the resolution or order that began those proceedings; or
3. has converted the proceedings to liquidation proceedings;
4. b) the practitioner has filed with the Commission a notice of the termination of the business rescue proceedings;
5. c) a business rescue plan has been-
6. proposed and rejected in terms of Part D of this Chapter, and no affected person has acted to extend the proceedings in any manner contemplated in section 153; or
7. adopted in terms of Part D of this Chapter, and the practitioner has subsequently filed a notice of substantial implementation of the plan.”

Cawood argued that until the notice to terminate the business rescue proceedings was filed, the business rescue proceedings endured.
He went on to argue that the conversion application did not result in the ending of the business rescue as no order was granted in this regard, and further, the rejection of the business rescue plan did not automatically result in the termination of the business rescue. He premised this argument on the fact that section 132(2)(c)(i) referred to section 153 of the Companies Act, with subsection (5) providing for the filing of a notice of termination.

Ultimately, Cawood’s argument was such that the provisions of section 132(2)(a) to (c) could only be considered conjunctively and that the individual subsections which define when business rescue ends could not be regarded separately as individual grounds for termination of business rescue proceedings.

Contrary to the above, Danco argued that the business rescue came to an end when the business rescue plan was rejected and no further steps were taken in terms of section 153 of the Companies Act. Danco relied on the findings in the matter of Artio Investments (Pty) Ltd v Absa and Others in support of its argument.

Findings

From the authorities considered by the court, the court found in favour of Danco’s argument that the provisions set out in section 132(2)(a) to (c) are to be viewed disjunctively, each giving rise to a separate and distinct instance as to when business rescue proceedings come to an end. As such, the court found that the business rescue proceedings came to an end in terms of section 132(2)(c)(ii) on 22 January 2016.

This finding gave rise to the second question of whether Cawood was entitled to make payments to the Rescue Company, supposedly for his services rendered as the business rescue practitioner from date of appointment until the end August 2016.

The court noted that while the business rescue proceedings had come to an end on 22 January 2016, both Cawood and Danco proceeded on the mistaken belief that Danco was still under business rescue. Despite Cawood’s argument that the business rescue proceedings endured until end August 2016, the court found that Cawood’s conduct did not meet the standard expected of a business rescue practitioner in any event. Further, the court found that had Cawood been forthcoming in disclosing his intentions regarding the Rescue Company, he may well have avoided the current litigation and been deemed to have been entitled to the funds due to him for the work done as the appointed business rescue practitioner. Alas, his conduct warranted otherwise.

Given Cawood’s conduct and his failure to prioritise the needs of the business, the court found in favour of Danco and granted an order against Cawood and the Rescue Company for payment in the sum of R595,958.95 together with interest and punitive costs.