The Western Cape High Court judgment in Limbouris and others v Du Toit NO and others [2024] JOL 66238 (WCC), dealt with several issues, including the investigative role and duties of business rescue practitioners (BRPs) during the preparation of a business rescue plan (BR plan).
Section 150 (2) of the Companies Act (the Act) provides that:
"The business rescue plan must contain
all the information necessary to facilitate affected persons in deciding whether or not to accept or reject the plan and that it must be divided into three different parts, with "Part C - Assumptions and conditions" providing, inter alia, that such assumptions and conditions must include:
"(iv) a projected-
(aa) balance sheet for the company; and
(bb) statement of income and expenses for the ensuring three years, prepared on the assumption that the proposed business plan is adopted."
The creditors of Coast2Coast Capital (Pty) Ltd (now Cambridge Services (Pty) Ltd) (in business rescue) (the Company) brought an application in terms of section 133(1)(b) of the Act for leave to bring the application and to commence action proceedings in which they sought an order setting aside the BR plan in respect of the Company.
By way of background, the Company was placed under business rescue in terms of a resolution adopted by its sole director, which was filed with the Commission for Intellectual Property and Companies in November 2019. The BRP was appointed as the Company's sole business rescue practitioner, and he published the BR plan on 5 March 2020. The BR plan was adopted on 13 March 2020.
Part of the relief sought by the creditors in the draft particulars of claim is the setting aside of the BR plan and its adoption on the basis of fraud. The creditors alleged that the vote in favour of the BR plan was actuated by fraudulent misrepresentation, in that the BRP of the Company incorporated representations into the BR plan in circumstances where neither the BRP, nor the sole director of the Company, held any honest belief in the truth and achievability of such representations, projections and estimates, but nevertheless incorporated them into the BR plan.
The court, in deciding on the misrepresentation allegations, discussed the role that representations as to projections play in the business rescue construct.
The court held that affected persons, when exercising their right to vote on a BR plan, rely on the representations made by the BRP in terms of section 150 (2) of the Act. This means that BRPs must conduct a meaningful, thorough and sufficiently in-depth investigation into the affairs of the company in question, in order to inform themselves and be in a position to make representations that they are able to make as being correct and which affected persons can use reliably and with confidence.
Acting Judge Kantor held that BRPs should not simply take at face value what they are informed by officers of the company, as they serve as "an independent filter between the officer(s) of the company in question (who may, or invariably may, have their own vested interests)" through sufficient investigations. The court explained that this means BRPs should not merely rely on what someone from the company (especially those who may have their own vested interests) has told them, without properly and independently satisfying themselves as to the correctness and reliability thereof.
The court took the view that BRPs serve as "gatekeepers" for whether business rescue should proceed and that it is not only the representations but also the quality, relative independence and reliability of the investigations regarding that.
The court recognised that BRPs have a responsibility to refrain from making representations to affected persons where unfamiliar circumstances could influence the outcome of projections, such as when the BRP does not have an honest belief in the achievability of the projections, or has not consulted independent experts to guide and advise them regarding the projections, especially when the BRP is not an expert in the field of the company in rescue. The court further held that, in circumstances where the BRP cannot confidently know or predict the impact of novel circumstances, it would be fraudulent to make representations and projections about the future performance of the business.
In this case, the court found that a claim based on fraudulent misrepresentation to set aside the BR plan was actionable on a
prima facie basis.
This judgment is a reminder that BRPs must approach their roles with heightened awareness of their duties as independent gatekeepers, ensuring thorough investigations, proper documentation, and genuine independence from interested parties.
