Oakbay Investments (Pty) Ltd v Tegeta Exploration and Resources (Pty) Ltd and Others

In February 2018, eight companies in the Oakbay Group were placed in voluntary business rescue after four major South African banks terminated their banking facilities, rendering them commercially insolvent. Tegeta Exploration and Resources (Pty) Ltd (first respondent) and its three wholly-owned subsidiaries (Optimum Coal Mine, Koornfontein Mines, and Optimum Coal Terminal) were among these companies. Oakbay Investments (Pty) Ltd (applicant), the controlling group company, was not placed in business rescue. Messrs Knoop and Klopper (second and third respondents) were appointed as business rescue practitioners (BRPs) of Tegeta and the subsidiaries. Oakbay sought to remove the BRPs on grounds of conflict of interest arising from their simultaneous appointment as BRPs of Tegeta and its subsidiaries, given inter-company loans between these entities. The inter-company loans were significant, with original debts running into billions, though the amounts were disputed. All companies' audited financial statements contained disclaimers regarding the completeness and validity of related party transactions. The BRPs, after investigation, found the inter-company loan records unreliable and treated Tegeta's claim against OCM as disputed in both business rescue plans. A subordination agreement existed whereby Tegeta subordinated its claim against OCM for the benefit of other creditors.

• Whether the simultaneous appointment of the same business rescue practitioners to a holding company and its subsidiaries, where inter-company loans exist, constitutes a conflict of interest warranting removal under section 139(2)(e) of the Companies Act 71 of 2008
• Whether the BRPs' treatment of disputed inter-company loans in the business rescue plans demonstrated a conflict of interest
• The proper interpretation and scope of 'conflict of interest' under section 139(2)(e) of the Companies Act
• Whether BRPs have a duty to pursue inter-company claims with vigour analogous to liquidators' duties to collect assets

The application for leave to appeal was dismissed with costs, including costs consequent upon the employment of two counsel where two counsel were employed, and the costs of the application to lead further evidence on appeal.

The binding legal principle is that the simultaneous appointment of business rescue practitioners to a holding company and its subsidiaries does not constitute a conflict of interest warranting removal under section 139(2)(e) of the Companies Act 71 of 2008 merely because inter-company loans exist between those entities. A conflict of interest justifying removal requires an actual, not hypothetical or future possible, conflict. Business rescue practitioners are not under the same duty as liquidators to aggressively pursue and collect all debts and assets. Their duty is to investigate whether there is a reasonable prospect of rescuing the company. Where inter-company loan records are unreliable and disputed, BRPs act properly in treating such claims as disputed in business rescue plans for both debtor and creditor companies. This does not demonstrate conflict but rather appropriate caution. In administering complex corporate groups, BRPs need not become embroiled in disputes over inter-company indebtedness unless necessary to resolve conflicts affecting third-party creditors' interests.

Wallis JA made several non-binding observations: (1) It is debatable whether inter-company conflicts (as opposed to conflicts between a BRP's personal interests and their duties to a company) fall within section 139(2)(e) at all. The section appears concerned with personal qualities or actions of the BRP. (2) If inter-company conflicts do warrant removal, the appropriate provisions might be section 139(2)(b) (failure to perform duties) or section 139(2)(c) (failure to exercise due care), which could result in removal from both companies rather than just one. (3) The existence of section 145(5)(b), which provides for independent valuation of subordinated claims, actually reduces the possibility of BRPs being conflicted over such claims. (4) Oakbay's approach of seeking removal only from Tegeta while leaving the BRPs in place for OCM and other companies was "somewhat peculiar" if a true conflict existed.

This case provides important guidance on the interpretation of section 139(2)(e) of the Companies Act 71 of 2008 regarding removal of business rescue practitioners for conflict of interest. It clarifies that: (1) the simultaneous appointment of BRPs to related companies in a group does not per se constitute a conflict of interest; (2) the role and duties of BRPs are fundamentally different from liquidators - BRPs are not obliged to pursue all claims aggressively but must investigate prospects of rescue; (3) treating inter-company claims as disputed when accounting records are unreliable does not demonstrate conflict; (4) conflict of interest under section 139(2)(e) likely refers to situations where the BRP's personal interests conflict with their obligations to the company, not merely inter-company conflicts; and (5) where such inter-company conflicts do arise, the appropriate ground for removal may be failure to perform duties under section 139(2)(b) or failure to exercise due care under section 139(2)(c) rather than conflict of interest. The judgment reinforces the principle established in earlier Oakbay Group litigation that pragmatic administration of related companies in business rescue does not automatically give rise to disqualifying conflicts.