Caratco (Pty) Ltd v Independent Advisory (Pty) Ltd

Independent Advisory Services (Pty) Ltd (IAS), a company specialising in business rescue, was appointed as joint business rescue practitioners for Galaxy Jewellers (Pty) Ltd, a financially distressed company, on 9 October 2015. A success fee of R2 million (later R2.28 million plus VAT) was negotiated and agreed between IAS and Caratco (Pty) Ltd, a creditor and related company that held an indirect controlling interest in the Galaxy group. Mr Tom Watson, Caratco's managing director and Galaxy group's controlling mind, confirmed the agreement on 20 February 2016. Caratco's attorney, Mr Christopher Holfeld, on 24 March 2016 indicated that he would advise which entity in the Galaxy group would be responsible for payment to maximize tax advantages. On 30 March 2016, Holfeld requested IAS to invoice Caratco and stated payment would only be made after the notice of substantial implementation was filed with CIPC and published. IAS complied and invoiced Caratco on the same day, but Caratco refused to pay. IAS sued Caratco for the debt. In its answering affidavit in the motion proceedings, Watson admitted the agreement but denied liability on other grounds. The matter was referred to trial. At trial, Caratco changed its position in its plea, denying the agreement was concluded and raising numerous defences including that the agreement was void for illegality or contrary to public policy. IAS called its director Mr Klopper as a witness who testified and was cross-examined. Caratco called no witnesses, including Watson or Holfeld, to support its defences. The High Court (Makume J) found in favour of IAS and ordered Caratco to pay R2.28 million plus costs on an attorney and client scale. Caratco applied for leave to appeal.

• Whether section 143 of the Companies Act 71 of 2008 is the sole means by which a business rescue practitioner may be remunerated
• Whether a special success fee agreed between a business rescue practitioner and a third party creditor (not the company under business rescue) falls within the scope of section 143
• Whether such a success fee agreement is void for illegality or contrary to public policy
• Whether the business rescue practitioner breached fiduciary duties under sections 75 and 76 of the Companies Act by entering into the success fee agreement
• Whether there were reasonable prospects of success for the appeal or other compelling reasons to grant leave to appeal

The application for leave to appeal was dismissed with costs.

Section 143 of the Companies Act 71 of 2008 regulates the remuneration of business rescue practitioners by the company under business rescue, but does not apply to or prohibit fee arrangements between a business rescue practitioner and third parties such as creditors. A statute does not render an agreement void merely because it falls outside the scope of a regulatory provision unless there is clear language indicating the lawmaker's intention to invalidate such agreements, such as through express prohibition or penalties. The fiduciary duties imposed on business rescue practitioners under sections 75 and 76 (by virtue of section 140(3)(b)) must be properly pleaded with factual particularity to establish a defence that an agreement is void or voidable. Where a party seeks to impugn an agreement on public policy grounds, it must plead and prove the facts upon which such a defence is founded.

The court observed that at common law, where a director fails to disclose a conflict of interest in a contract with the company, the contract is voidable (not void) at the company's instance. The court also noted that if there was any prejudice to other creditors arising from the deletion of the success fee from the draft business rescue plan that was voted on, that would have to be laid at Caratco's door (not IAS), since it was Caratco's attorney who requested the deletion. The court commented on the extraordinary and opportunistic nature of Caratco's attempt to invoke unproven prejudice to creditors when it was seeking only to avoid its own payment obligations, noting that if this were truly Caratco's concern it would have joined the other creditors to the proceedings. The court found that the punitive costs order on an attorney and client scale was warranted given the manner in which Caratco conducted the litigation.

This judgment clarifies the scope of section 143 of the Companies Act 71 of 2008, establishing that it regulates remuneration between business rescue practitioners and the company under business rescue, but does not prohibit or regulate separate fee arrangements between practitioners and third parties (such as creditors). The case is important for business rescue practice as it confirms that business rescue practitioners may enter into additional fee arrangements with third parties without violating the Act, provided there is no breach of fiduciary duties owed to the company under business rescue. The judgment also demonstrates the court's approach to interpreting whether statutory provisions impliedly prohibit conduct and render agreements void - absent clear language or penalties in the statute, such intention will not be imputed to the lawmaker. The case illustrates the importance of properly pleading defences with sufficient factual particularity and calling necessary witnesses to support those defences, with the court willing to draw adverse inferences where parties fail to do so.