Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others

• Jurisdiction: South Africa
• Judge: Victor J
• Judgment Date: 18 January 2022
• Court: Gauteng Local Division, Johannesburg
• Hearing Date: 18 January 2022
• Counsel: P Louw SC (with L van Gass) for the applicants. G Wickins SC (with L van Tonder) for the respondents. P Stais SC (with J Brewer) for Liberty Energy (Pty) Ltd.
• Docket Number: 52832/2021

Victor J:

Introduction

[1] There are few things more important for the business rescue industry than certainty and clarity. Where the Companies Act [1] does not draw a bright line between powers of the directors sitting on the company board and the powers and ambit of business rescue practitioners (BRPs), it is left to the courts to develop the jurisprudence and lend greater clarity and certainty if necessary.

[2] A fundamental element of the business rescue process is that independent professionals become involved, and it is a far more nuanced process than liquidation, where the only interests are essentially those of the creditors. In business rescue a more holistic approach is adopted to assess not only the demands of creditors, but also an assessment of whether the company can be saved, and with that goes the issue of job losses and other important elements.

[3] This case is illustrative of what at first glance may seem like a grey area in the Companies Act, where clarity is needed to resolve the tension between directors who still want to be in control and view matters subjectively, and the BRPs who have a more holistic view of what is good for the company in business rescue and want to do things their way, and are armed with statutory powers. [2] This is where the perceived uncertainty in the Companies Act needs to be addressed. The applicants assert

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that there is tension between the proper interpretation of ss 137 and 140. The BRPs take over full management control of the company in business rescue, in substitution of its board of directors and pre-existing management. The BRP is tasked with developing and then implementing a business rescue plan which is in the best interests of all affected parties, which includes creditors, employees, trade unions and shareholders. All the while the board of directors retains obligations in terms of the Companies Act while the BRPs take full control.

[4] The role of governance versus management requires analysis in the business rescue process. In essence, outside of the business rescue context, governance by the board involves the strategic aspects of the company, while management attends to the running of the company. The duties and responsibilities of management are quite different from those of the directors. Where ch 6 of the Companies Act applies, those duties and responsibilities of the directors have to be interpreted within the overarching purpose of ch 6. Whilst ch 6 does not spell out in minute detail the different roles of directors and BRPs, there is sufficient certainty in the provisions of ch 6 to enable an interpretation within the business rescue context that suggests that directors must yield to the BRPs. In essence, therefore, the ultimate result is not as vague or confusing as the applicants claim.

[5] The purpose and goal of business rescue are described in s 128(1)(b) of the Companies Act, and were adopted in FirstRand Bank Ltd v KJ Foods CC as the —

'development and implementation of a plan to rescue an entity by restructuring its affairs, business, property, debt and other liabilities in a manner that maximises the likelihood of the entity continuing in existence on a solvent basis. If it is not possible for the entity to so continue in existence, the plan must be developed and implemented in a manner that results in a better return for the entity's creditors or shareholders than would result from its immediate liquidation.' [3]

Parties

[6] The applicants are the directors of Tegeta Exploration and Resources (Pty) Ltd, the fifth respondent (in business rescue). The relevant respondents are Optimum Coal Terminal (Pty) Ltd (OCT) (in business rescue); the second and third respondents are the business rescue practitioners of OCT. The fourth respondents are all parties affected by the business rescue process in OCT. Only one of the fourth respondents has filed an answering affidavit, Liberty Energy (Pty) Ltd (Liberty). The

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fifth respondent is Tegeta Exploration and Resources (Pty) Ltd (in business rescue). The sixth and seventh respondents are the business rescue practitioners of Tegeta.

Issues

[7] The applicants seek a declarator to the effect that —

[7.1]

the applicants as directors of Tegeta should vote on behalf of OCT at any s 151(1) meeting of creditors in respect of OCT;

[7.2]

the applicants may only exercise their vote as set out above upon receipt of a mandate in terms of an adopted business rescue plan of Tegeta; alternatively that the practitioners of Tegeta may only exercise a vote at any s 151(1) creditors' meeting in respect of OCT upon receipt of an adopted business plan of Tegeta.

Relevant background facts

[8] Tegeta is a major creditor of OCT. There was to be a s 151(1) meeting on 10 November 2021 to vote on the business plan. In part A this court interdicted the holding of that meeting pending the determination of part B. The BRPs of Tegeta have not published a business plan yet as they await the outcome of the OCT business plan. Tegeta is the holding company owning 100% of the shares in OCT, Optimum Coal Mine (OCM), and Koornfontein, all in business rescue. OCT has as its sole asset 7,8% of the shares in Richards Bay Coal Terminal (RBCT). The value of the OCT shares is substantial and worth hundreds of millions of rand. Tegeta holds a claim in OCT in excess of R47 million.

[9] Between the grant of part A and the hearing today, the applicants introduced a plethora of new facts in various affidavits, all of which resulted in a flurry of affidavits, including a supplementary founding affidavit by the applicants introducing new material relating to the alleged conflict of interest by the sixth and seventh respondents. The new material included disputing that the meeting of OCT was necessary, where the BRPs claimed calamitous consequences if the meeting did not go ahead. The new material dealt with a dispute about the suspension of the RBCT for OCT and the question of the urgent need to hold the s 151(1) meeting for OCT. The applicants advised that OCT as shareholder in RBCT could not be refused berthing facilities and this removed the urgency of the s 151(1) meeting of OCT. They also dealt with the alleged conflict of interest where certain BRPs were removed pursuant to a ruling of the Constitutional Court in the matter of Shiva Uranium. [4] There is also an assertion introduced that the business rescue plan in OCT would result in the transfer of the OCT business, leaving no funds for distribution.

[10] Further new material was introduced relating to the change in Tegeta's right of veto. At the time part A was launched, Tegeta was the major creditor and had in excess of 25% of the claims against OCT and consequently held the right of veto of any business rescue plan. By the

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time part B was heard, Liberty became the major creditor in the amount of R95 million and held 65% voting power at a s 151(1) meeting. In the result Tegeta's position at the time of the hearing of part A to the hearing of part B, changed, as it would no longer have a veto right. Liberty's claim was comprised in the form of post-commencement finance in terms of s 135 of the Companies Act.

[11] The applicants contend that this post-commencement finance was foisted on OCT and was not in the interests of OCT, and was a stratagem to undermine Tegeta's position.

[12] Initially the BRPs and the applicants were agreed that the applicants in their capacities as directors of Tegeta would vote at the s 151(1) meeting of OCT. This changed when the BRPs received an opinion that this was wrong. The opinion advised that it was only the BRPs who could vote on behalf of Tegeta at the OCT meeting. This resulted in a dispute between the applicants and the BRPs on the right to vote.

[13] The applicants have been of the view for some years that there may be a better business plan for OCT but they were unable to present that to the BRPs for consideration. The applicants contended that they were being hindered by the business rescue situation and the disputes, and therefore did not search the markets to find other buyers. In the new material the applicants put up a better offer in the amount of R275 000 000 from a Mauritian-based foreign company. They now challenge the valuation the BRPs have placed on the shares of OCT and assert that they are significantly undervalued.

[14] The applicants contend that, without a business plan in Tegeta, their residual powers, functions and management duties cannot be properly exercised. They assert that, because there are three subsidiaries in Tegeta — OCM, OCT and Koornfontein — all the plans should have been coordinated and not dealt...