Optimum Coal Mine business rescue practitioners’ discretion questioned

One of the liquidators of a former Gupta company has attacked the wide discretion afforded to business rescue practitioners (BRPs), in court papers supporting an application for the liquidation of the Optimum Coal Mine.

This allegedly leads to abuse, with some creditors preferred at a cost to others and the manipulation of voting rights for the approval of the business rescue plan.

Optimum Coal Mine has been in business rescue since February 2018 and the application has the support of the Optimum creditors committee. The business rescue practitioners have not yet filed a response.

Chavonnes Cooper is an insolvency practitioner at CK Trust and one of the liquidators of Westdawn Investments, a former Gupta company that performed the actual mining activities at Optimum. It is also one of Optimum’s creditors.

Cooper’s attack comes against the background of an increase in companies going into business rescue as a result of low economic growth, coupled with the impact of the Covid-19 pandemic.

In December South Africa Airways (SAA) became the first state-owned company to be placed in business rescue, followed by SA Express earlier this year. The SAA business rescue is ongoing, with questions about funding, while SA Express has since been placed in provisional liquidation.

In several instances stakeholders have turned to the courts to challenge decisions by BRPs, despite limitations on such litigation.

Cooper in an affidavit argues that the Companies Act is unconstitutional and in conflict with natural justice, to the extent that it fails to provide mechanisms for business rescue stakeholders to be heard or it leads to unconstitutional results.

This is in stark contrast to the liquidation process, which is overseen by the Master of the High Court and to whom creditors can turn if they believe they have been unfairly prejudiced, Cooper argues.

He alleges that the Optimum business rescue practitioners’ conduct unfairly benefits Eskom and another big creditor Centaur, to the detriment of Westdawn and other creditors. The Optimum BRPs are opposing the application.

According to Cooper, BRPs are often appointed by shareholders of the company in distress, while the Master, who is an independent third party, decides who will be appointed as liquidators.

BRPs have the sole discretion to accept and quantify claims and classify creditors. If they dispute the BRP’s decisions, the only recourse is to litigate, which can be onerous on creditors who are already suffering financial pressure due to the fate of the distressed company.

The Companies Act does not provide for creditors to be heard and thereby contravenes the ‘audi alteram partem’ principle (to hear the other side). This renders the Act unconstitutional in this regard, Cooper argues.

A creditor’s voting rights are determined by the value of its claim and it is easy for the BRP to manipulate the process to ensure acceptance of the business rescue plan that will be binding on all creditors, by a majority.

Even more so because the meeting of creditors for voting purposes is led by the BRP.

Cooper argues that such manipulation creates a false impression of the company’s finances and creditors are expected to vote for or against the business rescue plan without having the whole and accurate picture. The hurdle for acceptance is a mere majority of votes.

In a liquidation process the meeting is led by an independent third party form the Master’s office and creditors are afforded an opportunity to object to the treatment of their own or another party’s claim. Over and above that, there is a legal obligation on liquidators to investigate claims.

Liquidators have to get the approval of the Master, or publish the liquidation and distribution account for stakeholders to object, before they are allowed to pay liquidation dividends.

They further need the approval of other creditors to settle any claims for damages, which is not the case in business rescue.

Liquidators act under the guidance and supervisions of the Master and further must furnish security upon appointment to the value of the company’s assets, which is not the case with BRPs, Cooper states.

Werner Human, deputy CEO for legal affairs at the trade union Solidarity agrees that there are gaps in the current business rescue regime and the way it is applied.

He says while Westdawn stops short of asking for a declaration of unconstitutionality, a finding in its favour could pave the way for such a challenge.

He points out that the Companies Act does provide for the board or liquidators of a distressed company to settle directly with creditors without a business rescue practitioner, noting: “That can save time and resources in the interest of all stakeholders.”

Recent instances of stakeholders challenging BRP decisions:

• Airlink challenged a decision by the SAA BRPs to classify its claim for revenue from ticket sales that SAA conducted on behalf of SAA, as a concurrent claim. It lost in the High Court, but Airlink’s appeal is due to be heard in the near future.
• Westdawn Investments is applying for the liquidation of Optimum. Westdawn alleges that the Optimum BRPs are favouring Eskom and another creditor Centaur Investments, to the detriment of Westdawn and other creditors. The BRPs are opposing the application.
• Westdawn Investments has applied for the liquidation of the Koornfontein mine. It alleges that the BRPs unlawfully removed Westdawn from the list of creditors after it objected to Eskom’s voting rights. The case has not yet been concluded.
• After battling to get information from the BRPs, 48 shareholders in construction group Group Five have turned to the court to set aside a decision to grant a guarantee to a related party. They further want the court to place the company in liquidation. The shareholders believe this will give them the opportunity to question the directors about possible negligence in the running of Group Five. The BRPs are opposing the application.
• A former investor in the Highveld syndication scheme laid criminal charges against a BRP of Orthotouch and Zephan regarding the alleged unlawful payment of more than R1 million from an attorney’s trust account to Orthotouch. The BRP denies any wrongdoing.

This article first appeared on Moneyweb and was republished with permission.