SCA gives clarity on the meaning of conflict of interest for business rescue practitioners

In February 2018, eight companies in the Oakbay Group were placed in voluntary business rescue. Amongst these companies were the first respondent, Tegeta Exploration and Resources (Pty) Ltd, and its three subsidiaries, Optimum Coal Mine (Pty) Ltd (OCM), Koornfontein Mines (Pty) Ltd and Optimum Coal Terminal (Pty) Ltd (OCT).

Oakbay Investments (Pty) Ltd, the company that controlled the group, was not placed in business rescue. Oakbay applied for the removal of the appointed business rescue practitioners (BRPs) of Tegeta who had also been appointed as BRPs for OCM and Koornfontein. Oakbay alleged that these appointments gave rise to a conflict of interest.

According to Oakbay, when Tegeta purchased the shares in OCM, Koornfontein and OCT, they were indebted to their erstwhile holding company for inter-company loans. Following the sale, Tegeta alleged that it became the party to whom those loans were owed. The subsidiaries disputed the indebtedness though.

The application centred on section 139(2)(e) of the Companies Act, 2008 which empowers the court to remove a BRP from office on the grounds of ‘conflict of interest or lack of independence’.

Oakbay argued that the appointment of the BRPs was inappropriate as it led to a conflict of interest as the BRPs were required, on behalf of Tegeta, to pursue the loan claims with vigour, whilst also being required, on behalf of the subsidiaries, to resist the claims.

The Supreme Court of Appeal noted that the ordinary understanding of a “conflict of interest” is a situation where the private interests of the BRP conflict with their obligations to the company – which was not the case here. The conflict did not exist factually anyway because when the business rescue plans were published they all treated the indebtedness of subsidiaries to Tegeta in the same way, namely they all stated that the claims were disputed.

The court said that the misconception underlying the argument by Oakbay resulted from it confusing business rescue with insolvency. In insolvency, an obligation rests on the liquidator to collect the assets of the company in liquidation, sell them and distribute the funds among the creditors. In business rescue, no such obligation rests upon the BRP. A BRP is obliged to investigate whether there is a reasonable prospect of the company being rescued. When dealing with a complex group of companies, all ultimately controlled by the same people, there is little point in the BRP becoming involved in issues of inter-company indebtedness, unless that indebtedness must be resolved to address the conflicting interests of third party creditors.

The Supreme Court of Appeal thus dismissed the application for leave to appeal sought by Oakbay Investments (Pty) Ltd.

The case is: Judgment-Oakbay Investments (Pty) Ltd v Tegeta Exploration and Resources (Pty) Ltd and Others

*This article was co-authored by Alaika Alli