The Local Division of the High Court, Johannesburg recently considered the personal liability of business rescue practitioners and the costs associated with litigation where a practitioner is found not only to have acted grossly negligent in exercising his powers and functions but also considered acts or omissions not performed in good faith and the application of Section 140(3) (b) of the Companies Act 71 of 2008 in this regard.

The Local Division of the High Court Johannesburg was recently called upon in the matter of JE Kudumela & 2 Others v M Carmody & 2 Others (Case Nr 2022/17204) to consider an application for leave to appeal instituted by a business rescue practitioner.

The Appeal was sought against a judgment in terms of which the business rescue practitioner was ordered to pay the costs of the application to remove him as business rescue practitioner in his personal capacity.

During the application to remove the business rescue practitioner the Court also found that the practitioner failed to comply with his statutory obligations. 

The Court further found that there was also a liquidation application which demonstrated that the business rescue would not be successful and as such the Court found that the company in question is to be placed in liquidation in lieu of business rescue and that the removal of the practitioner would no longer be necessitated.

The practitioner instructed his attorneys to initiate leave to appeal proceedings. The Court however found that the application was drafted in a manner which bordered on being vexatious.

Yacoob J held that:

“An application for leave should be succinct, cogent, and void of all extraneous matter. It should demonstrate that a careful analysis of the judgment sought to be appealed has taken place. It should, like all pleadings, notices and other documents filed in legal proceedings, make logical, grammatical, and contextual sense. Argument should be left for the hearing or the heads of argument, if any”.

The Applicant submitted that the Court did not have the right to take into account the liquidation application in determining the removal application. The Court found that there was not merit in this submission and that there is sufficient authority for the proposition that two applications are so intertwined that the outcome of one can affect the other.

The Court further held that it did not rely on the liquidation application to find that the removal application should succeed but rather exercised its discretion in favour of the liquidation application rather than the continuation of the business rescue.

The Applicant also argued that the Court did not find that the business rescue practitioner was grossly negligent because the Court did not order the practitioner to pay back the fees he charged during the business rescue proceedings and thus that Section 140(3)(c) of the Companies Act 71 of 2008 (hereinafter referred to as “the Act”), precludes the Court from making a cost order against the practitioner in his personal capacity.

The Court held that it did not make a finding on whether the practitioner was grossly negligent and that an order for the repayment of the funds was irrelevant. The Court did however find that the practitioner's conduct amounted to a dereliction of his duties.

 In terms of Section 140(3)(c)(i) a practitioner may be held liable for an act or omission not conducted in good faith and in addition also be held liable in terms of Section 140(b) as read with Sections 75 to 77 of the Act.

 The Court found that the practitioners actions fell foul of the provisions of Section 76(3)(b) and (c) and that Section 77(2) permitted the Court to hold him personally liable for the costs of the proceedings as he had been found to be in breach of his fiduciary duties.

Our office is fully equipped to advise parties that are considering business rescue proceedings or require further guidance on the business rescue process whether it be as the distressed company or as a creditor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.