To fee or not to fee – that is the question

After the two Diener N.O. judgments and the Mazars judgment, the judgment of the full court in the appeal of Werner Cawood N.O. and Cloete Murray N.O. & Others (case no. A127/19 – Gauteng Division, Pretoria – unreported at present), appears to be a welcome arrival for a business rescue practitioner. But is it so welcome?

This article deals with this judgment. For convenience it is referred to as the Cawood judgment.

No inherent power
The appeal court in the Cawood judgment unanimously found that:

“[58]    …. the court does not have an inherent power to order a business rescue practitioner to repay fees for misconduct. Such an order would be beyond the court’s powers in terms of the principle of legality”

The relevant facts are as follows:

• two connected close corporations known as Phehla Umsebenzi Trading No. 48 CC (“Phehla”) and Tiar Construction CC (“Tiar”) were, by way of members’ resolutions, placed into voluntary business rescue on 28 May 2013 and Cawood and one De Beer were appointed as their respective BRPs on 3 June 2013;

• Cawood and De Beer in separate applications, just 2 years after their appointment, applied in terms of Section 141(2)(a)(ii) of the Companies Act as read with Section 81(4)(a) to have the business rescue proceedings terminated and for Phehla and Tiar to be placed in liquidation;

• SARS, after conducting an audit in 2015, issued certain findings which resulted in huge tax liabilities for both corporations. The quantum of their liability (of approximately R183 million) was unexpected by these corporations;

• the BRPs had estimated that for Tiar there was a liability to SARS of R800,000.00 and for Phehla R47 million. Based on SARS’ claims they concluded that both corporations were no longer capable of being rescued;

• SARS applied for and was given leave to intervene in both these applications and opposed the relief to convert the business rescue process to liquidation. Strangely so, SARS also brought (by way of a counter application) an application seeking the liquidation of both Phehla and Tiar;

• the judgment records that the difference between the relief sought by the BRPs and that of SARS, was simply that SARS sought an order first setting aside the resolutions placing the corporations into business rescue and then respective liquidation orders;

• there were certain inter-company loans and dividends paid which SARS contends the BRP should have been aware of at the outset of rescue which were not genuine transactions and that the BRPs should have, but did not, take steps to deal therewith;

• SARS alleged that they were not aware of how much the BRPs earned as fees whilst BRPs of these two corporations, that these corporations were never candidates for business rescue and that there was collusion between the BRPs and the members of these corporations;

• SARS further alleged that the likely purpose of the rescue was “… probably to get rid of a SARS claim.”

In its affidavits, SARS stated in respect of the BRPs that “it would appear that their duty to act honestly towards the court and strictly in the best interests of their client was sacrificed on the altar of personal enrichment” and that the court should show its disapproval of the BRPs conduct by “disallowing the BRPs fees.”

The court a quo, after rejecting the BRP’s explanations, held:

“The conclusion is inescapable that the applicants failed to fulfil their functions as business rescue practitioners as set out in the Companies Act. I am of the view that a case for the setting aside of the resolutions has been made and that the applicants’ conduct is worthy of censure.

“I am troubled by the fact that the application is brought years after the business rescue practitioners were appointed. This means possibly large fees have been earned and large disbursements have been incurred. Business rescue practitioners who do not perform in accordance with what their appointment demands, have only themselves to blame when caught out. The flaccid approach which they opted for to the detriment of the general body of creditors as well as the shareholders. The court must show its approval through the fees they earned and stood to earn.”

The court a quo then ordered that the BRPs were not entitled to the fees that they had earned. The learned judge did not in his judgment set out the legal basis for the court’s power to set aside these fees and only did so in the application for leave to appeal (which was also refused). The judge in this judgment explained that the court had an inherent power to do so relying for support for this view on the Diener judgment.

The BRPs, on refusal of their application for leave to appeal, petitioned the SCA and were successful. The SCA directed that the full court hear the appeal rather than the SCA itself.

On appeal, SARS, in its attempt to justify their unprecedented claim for the courts to set aside the BRP’s fees, drew an analogy to the effect that BRPs who practice as such are in a similar position to practising advocates. They did so as there were no reported cases directly in point and could only find support for their argument (so they believed) in the SCA decision of General Counsel of the Bar of South Africa v Geach & Others. In Geach the SCA, dealing with the setting aside of advocates’ fees for misconduct, stated that the court had such inherent power to do so.

In developing this argument, SARS also relied on Section 140(3)(a) of the Companies Act which reads as follows:

“140(3)    during a company’s business rescue process proceedings, the practitioner –

    (a)    is an officer of the court and must report to the court in accordance with any applicable rules of or orders made by the court;”

Relying hereon SARS argued that BRPs, like advocates and attorneys, are officers of the court or that this provision renders BRPs (as in the case of attorneys and advocates) subject to the court’s inherent powers recognised by the majority in Geach. Hence (so they argued), BRPs can be ordered in appropriate circumstances as a consequence of the court’s disapproval of the way they have conducted themselves, to forfeit their fees. Geach does recognise, notwithstanding the minority’s disagreement as to the extent of the consequence of the court’s inherent powers, that the courts have inherent disciplinary powers over legal practitioners.

Knuckling down to the crisp issue
Thus, the crisp issue to be decided on appeal in the Cawood judgment was whether or not the courts have the same inherent power over BRPs as they do over advocates and attorneys “… for without it the power to order repayment of fees cannot be inferred.”

Wallis JA in Knoop NO at paragraph [33] stated as follows with regard to Section 140(3)(a) of the Companies Act:

“In any event I do not think that describing a BRP as an officer of the court adds anything to their duties or responsibilities. The expression “officer of the court” is most commonly used to refer to advocates or attorneys who are admitted by the courts and ethically owe special duties to the courts that may at times conflict with the interests of their clients” …. “To say that someone is an officer of the court conveys little practical meaning. It “is a vague term without legal content.” At most it conveys that a fairly high standard of personal integrity is called for from the person so described.”

Manoim J for the full court in the Cawood judgment states at paragraph [45] that:

“This case [a reference to Knoop N.O] suggests that the (sic) despite the fact that practitioners are described as officers of the court they are not, simply by reason of that label, in an analogous position to advocates or attorneys.”

Over-extention
The full court then referred to Geach and to the fact that it did not apply to advocates and attorneys who were once in practice on the roll but were no longer practising as such. Therefore, whilst recognising the existence of the power the courts had over advocates and attorneys, noted that this power did not extend to an order against those attorneys and advocates who were not practising, to repay their fees.

Taking all of this into account Manoim J for the full court concluded as follows:

“I find the court does not have an inherent power over BRPs. I say so for the following reasons:

In the first place Knoop is authority for the proposition that when we consider BRPs as officers of the court this does not add anything to their duties and responsibilities. Put differently the court limited the meaning of the concept in respect of BRPs, albeit it is not directly on point in respect of the issue of ordering the repayment of fees.

But this is not the only source. The language and structure of Section 140(3)(a) also suggests a limited meaning should be given.

First, the section says the BRPs are only officers of the court …. during a company’s business rescue proceedings. This limited duration suggests that BRPs are officers of the court only temporarily whilst they (sic) are appointed in a specific case. Thus, they are unlike the legal practitioners who are still on the roll for whom being an officer of the court is a continuous, uninterrupted obligation.

Second, the sub-section couples a notion of BRPs being officers of the court to their reporting duty in terms of “…. any applicable rules of or orders made by the court.” This means that when they report to the court, they are subject to a higher fiduciary duty because in this respect they are officers of the court. But there is no suggestion that beyond this specified function they are subject to further obligations as officers of the court akin to those of legal practitioners.

Third, the structure of the section which goes on to say that the BRP has the responsibilities and duties of a director suggests that this is an office holder sui generis. Not quite an officer of the court or a company director in the traditional sense.

In the Geach case the fees overreach for which the majority held a forfeiture order was competent, related to a violation of a professional rule about charging multiple trial fees.

The business rescue practitioner, unlike the advocate or attorney is not subject to the same set of ethical rules which carry with them disciplinary consequences for non-compliance.

The conduct complained of in this matter ranges in a spectrum, from negligence to gross negligence to bad faith. A different kind of misconduct to that in the Geach case because it does not entail a contravention of a professional rule which sets out how fees must be charged.

Remedying the charging of multiple days of trial fees is of a different order to remedying the prolonging of a business rescue process if that is what the present conduct may amount to.

I find therefore that the court does not have an inherent power to order a business rescue practitioner to repay fees for misconduct. Such an order would be beyond the court’s powers in terms of the principle of legality.”

SARS raised a second argument that the court has statutory powers in terms of the Companies Act to order the BRPs to repay their fees when they apply for conversion, i.e., for liquidation. For this argument SARS relied on Section 141(2)(a)(ii) of the Companies Act which must be read with sub-section 141(3). This gives the court an additional residual power when considering such an application. Section 141(3) reads as follows:

“141 (3)    a court to which an application has been made in terms of sub-section 2(a)(ii) may make the order applied for, or any other order that the court considers appropriate in the circumstances.”

Thus, so SARS argued, the words “any other order” was wide enough for a court to order that a BRP must repay his fees.

Manoim J disagreed. He advised that this reads too much into this residual power and that the residual power deals with (and is thus limited to) a situation where the court decides whether or not to convert a business rescue into liquidation. It cannot bear the meaning SARS tried to attribute to it. This, so Manoim J ruled, would lead to a lacuna. It could, so he said, be given a wider reading to include a condition to be attached to the conversion order but not to give the court a statutory power to order a BRP to repay fees when a BRP applies to convert a business rescue to a liquidation.

But this is where the good news ends as Manoim J then goes on to suggest that although the standard of gross negligence is not easy to establish, it is possible (after referring to Diener, although not directly in point), that the fees issue is capable of a solution however, not by the courts invoking its inherent power to do so. Thus, it appears from the judgment that although the courts do not have an inherent power to reduce or reverse a BRP’s fees the court can if gross negligence is proven, then order a reduction in or reversal of the BRP’s fees.

The Cawood judgment is authority that, based on the principle of legality, the courts do not have power to order a BRP who is guilty of misconduct to repay his fees earned during the rescue proceedings. The Cawood judgment does not end here. It goes further to suggest that aggrieved parties are not remedy-less and that the court has an inherent power to reduce or set aside a BRP’s fees where the BRP has been found to be grossly negligent. This, however, is for another day and in another case which we obviously look forward to.

Conclusion
Although on first reading this case appears to be good news for BRPs it is not all good news for BRPs. It is in fact good news in a limited sense. It confirms that BRPs who have been found to have acted with gross negligence are at risk in having their fees reduced or reversed (in toto) by the courts.

Thus, the light at the end of the tunnel created by a first reading of the Cawood judgment is in fact not a light but a burning candle only to be blown out by the wind (or even a mild breeze) of gross negligence.

Colin Strime is the Joint CEO of Fluxmans & Director: Business Rescue & Insolvency, Litigation