Who holds the authority to appoint a new practitioner?

Being a business rescue practitioner or a turnaround professional is a highly stressful job. A successfull rescue or turnaround is dependent on the ability of the practitioner to put specific controls in place, and for the distressed company to follow a specific formula to help them navigate their distress.

Practitioners may resign from their position for a number of reasons, some may be personal, others may be because the company that they are trying to rescue or turnaround is simply not listening to advice.

Whatever the reason, once a resignation takes place, who has the authority to appoint a new practitioner? This issue was initially discussed in an article that was published by Turnaround Talk on 28 December 2021. However, a lot of questions have been raised since then. The issue of appointment was highlighted in a recent editorial by Shakelton Risk.

In the beginning
The question of who can appoint a new rescue practitioner was asked in the case of Tayob & Januarie vs Shiva Uranium (Pty) Limited (in business rescue) & Monyela and Damons.

In 2018 the Board of Directors of Shiva Uranium (Pty) Limited (‘Shiva’) resolved in terms of Section 129 (1) of the Companies Act, 2008 to place Shiva under business rescue. Shiva, being a large company as defined in regulation 127 of the Companies Regulations (2011), required a Senior Business Rescue Practitioner to be appointed.

The Board of Directors of Shiva appointed Louis Klopper and Kurt Knoop as the company’s BRPs. Both are Senior Business Rescue Practitioners.

The Industrial Development Corporation (IDC), a large creditor of Shiva, launched an application in the High Court for the removal of Klopper and Knoop. The IDC further suggested that they be substituted by Cloete Murray. The court made an order to that effect on 31 May 2018.

The order stated that Klopper and Knoop must resign as Shiva’s BRPs and that Murray take over as the company’s new BRP on the same date. The court order also directed the Companies and Intellectual Property Commission (CIPC) to appoint an additional practitioner within 48 hours of the appointment of Murray. This practitioner had to be vetted by the IDC.

The CIPC appointed a Junior Business Rescue Practitioner, Mr Monyela with Murray. In terms of Regulation 127, Monyela could only act as an assistant to a Senior Business Rescue Practitioner, which in this case was Murray.

On 18 September 2018, Murray and Monyela resolved (in anticipation of the resignation of Murray), to appoint a third BRP, Juanito Damons, as Murray’s substitute. Murray resigned the following day.

Three days later on 22 September 2018, the Board of Directors of Shiva appointed Mahomed Tayob and Eugene Januarie as substitute BRPs together with Monyela.

A question of validity
The question which came before the court was, which resolution was valid?

In terms of section 129(4)(a) of the Companies Act 2008, notice of the appointment of a practitioner by a company has to be given by filing a prescribed form with the CIPC. To this end, Murray and Monyela had given notice of the appointment of Damons which was filed with the CIPC. Similarly, a Director of Shiva had also submitted the prescribed notification to the CIPC of the appointment of Tayob and Januarie.

The question then became: which application carries more weight?

The CIPC accepted the notification of the appointment of Tayob and Januarie (the BRPs appointed by Shiva) and refused to accept the notification in respect of Damons (Murray and Monyela’s appointed practitioner who would work with Monyela).

This caused Monyela, to urgently approach the Companies Tribunal to overturn the decision of the CIPC. The Tribunal directed the CIPC to accept the filing of the notification in respect of Damons and to remove the notification in respect of Tayob and Januarie.

Aggrieved by this decision, Tayob and Januarie subsequently approached the North Gauteng High Court (in Pretoria) on an urgent basis for an order interdicting the CIPC from giving effect to the order of the Companies Tribunal pending determination of its application. However, the High Court dismissed their application with costs on the basis that the BRPs approval had not been obtained.

Taking the fight further
Tayob and Januarie did not accept the dismissal from the court and made application for leave to appeal to the Supreme Court of Appeal (SCA) which had to consider the two ways that a BRP can be appointed following the directives of the Companies Act (of 2008).

First, a company may voluntarily begin business rescue proceedings by adopting a resolution in terms of Section 129(1). In the absence of such a resolution, an affected person may apply to a court for an order placing the company under supervision and commencing business rescue proceedings. According to the Act, affected persons includes creditors.

Section 129(3)(b) of the Act provides that within five days of the adoption and filing (with the CIPC) of a resolution under Section 129(1), the company must appoint a business rescue practitioner who satisfies the requirements of Section 138 and who has consented (in writing) to accept the appointment. If the board fails to comply with this provision, its resolution to begin business rescue proceedings lapses and is a nullity.  The SCA commented that this was suggestive that an appointment must be made by the board of a company.

Second, when the court makes an order placing a company under business rescue in terms of Section 131(4)(a), Section 131(5) applies.

It states: ‘If the court makes an order in terms of subsection (4) (a), the court may make a further order appointing as interim practitioner a person who satisfies the requirements of section 138, and who has been nominated by the affected person who applied in terms of subsection (1), subject to ratification by the holders of a majority of the independent creditors’ voting interests at the first meeting of creditors, as contemplated in section 147.

In terms of Section 139(1) of the Act, a practitioner may only be removed from office by a court order in terms of Section 130 or as provided for in Section 139.  Section 139(2) provides that upon the request of an affected person, or on its own motion, the court may remove a practitioner from office on any of the grounds tabulated in subsections 139(2)(a)-(f).  Section 139(3) reads: the company, or the creditor who nominated the practitioner, as the case may be, must appoint a new practitioner if a practitioner dies, resigns or is removed from office, subject to the right of an affected person to bring a fresh application in terms of section 130(1)(b) to set aside that new appointment.

In the circumstances, the SCA held that the Shiva Board did not require the consent of the practitioners to appoint a substitute and that the word company should bear its ordinary meaning and the same meaning which it had in Section 129.

The SCA further considered the following:

• that the removal of the only practitioner meant he couldn’t appoint someone else as he had no authority;
• the removal of a Senior Business Rescue Practitioner meant the authority of the Junior Business Rescue Practitioner was being exceeded, (making both of these unworkable options);
• that during the temporary business rescue, the Board of a company retains all its powers and functions except to the extent that the Act provides otherwise; and
• that the appointment of a practitioner does not fall within the powers or authority of a BRP.

Based on this reasoning, leave to appeal was granted and the appeal was upheld.

Turnaround Talks view: a plethora of questions to be answered
From the outset, there are a lot of questions attached to this case.

• Why were the original BRPs removed by the IDC? What reasons did they give?
• Why did Murray resign from his position so quickly? This paints a specific picture of the rescue and may indicate that there were problems with Murray’s initial appointment;
• If this was the case, and the law sates that a company can appoint a BRP, why weren’t Tayob and Januarie initially appointed as opposed to Murray?
• Finally, reading between the lines, this was never going to be a straightforward rescue and possibly had significant challenges associated with it. Was the appointment of a Junior Business Rescue Practitioner prudent? Should the CIPC have looked for the best skills to work with Murray as opposed to under him?

This is one of those cases which highlights the legal complexities of business rescues and business turnarounds. While business rescue and business turnaround has been in existence (Under Chapter 6 of the Companies Act) for 13 years, a lot of development surrounding the legal framework governing these processes still needs to take place.

Further, at the adoption of Chapter 6, the Department of Trade and Industry (currently run by Minister Ebrahim Patel) pointed out that there would be an appointment of a regulator and the establishment of an Ombudsman that would settle disputes. The CIPC is doing a good job as the de facto Regulator. If they are to continue, then their appointment needs to be made permanent by the Minister.

An office of the Ombudsman also needs to be established so that disputes, such as the one above, can be resolved before these matters go to court, which takes both time and money.