April 13, 2023
The restructuring of companies in financial distress has increased drastically in South Africa and across the globe, as many countries are experiencing significant levels of inflation, interest rate hikes, fuel price hikes and unemployment. In recent years, major companies have also approached our courts to enter business rescue proceedings, companies such as Edcon, South African Airways, Mango airlines, Comair, SA Express, Ster-Kinekor and Optimum Coal Mine to name a few.
The business rescue process which came into force in 2011, is designed to facilitate the rescue of a company that is close to insolvency. The primary objective with the business rescue proceedings is to save the company as a going concern. If this is not achieved, the second option to consider is to try and restructure the company in a manner that shareholders and creditors get a return on their investment. During this process, the company is supervised by a business rescue practitioner, who manages the company’s affairs, business and property during the restructuring of the company in the rescue process.
In terms of section 128 (1) (b) of the Companies Act 71 of 2008 (“The Act”), business rescue is defined as “proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for –
Section 128 (1) (f) of the Act provides that, a financially distressed company is a company that appears to be reasonably unlikely to be able to pay all its debts as they become due and payable within the immediately ensuing six months or a company that appears to be reasonably likely to become insolvent within the immediately ensuing six months.
Once a company begins the process of business rescue proceedings either voluntarily (by way of a resolution as provided in section 129 of the Act)( and in such a case, the preliminary actions have been taken or by an order of court (on application by an affected person as set out in section 131 of the Act), the following steps are prescribed by the Act –
In terms of the Act, business rescue practitioners are given extensive powers to manage the company’s business and to monitor its assets with the aim to rescue the company. In return, the Act imposes a great deal of responsibility on them. The success of the business rescue proceedings depends to a large extent on the competency, skills and experience of the business rescue practitioner. The practitioner has a large number of duties and functions to perform.
The directors of the company are not removed from office when the business rescue practitioner steps in to assist the company. The rationale behind this approach is that the directors are the persons most familiar with and best equipped to know the financial affairs of the company and the extent of its difficulties. The directors are thus required by law to continue to exercise their functions as directors, but they are subject to the authority of the business rescue practitioner as set out in section 137 of the Act. The effect of this provision is that, directors must exercise any management function in accordance with the express instructions or directions of the practitioner. More importantly, each director is expected to attend to the practitioner’s requests at all times and must provide the practitioner with any information about the company’s affairs that may reasonably be required. Co-operation between the business rescue practitioner and the directors is essential to a successful business rescue. Furthermore, if a director is impeding the practitioner from performing his duties, in the management of the company, or in the development or the implementation of a business rescue plan, the director may, on the application of the practitioner, be removed from office by a court. In addition to this, where a director takes any action on behalf of the company that requires the approval of the practitioner, if the practitioner is not involved, that action is void unless approved by the practitioner.
In the Klopper N.O and others v Ragavan and others [2019] JOL 43074 (GJ) case, the applicants claimed that they were being frustrated in the carrying out of their duties as business rescue practitioners. It was reported that the respondents were refusing to grant them access to the premises where they had to perform their statutory duties and functions as business rescue practitioner. The applicants sought an order interdicting and restraining the respondents from refusing them access to the premises where they were required to perform their duties. The applicants also asked the court to direct the respondents to assist them and their nominated agents in the performance of their duties. The court held that the applicants as business rescue practitioners, have a clear right to exercise the powers afforded to them in terms of the Act. The court further stated that the applicants are obliged to take whatever steps necessary to carry out their obligations and powers under the Act. Thus, the respondents were interdicted from obstructing and/or refusing the applicants access to the premises. The respondents were further directed by the court to co-operate and assist the applicants and their nominated agents in the performance of their duties as the appointed business rescue practitioners.
Another case which dealt with the relationship between the directors of a company placed under business rescue and the business rescue practitioners is the Ragavan and others v Optimum Coal Terminal (Pty) Ltd and others [2022] JOL 52124 (GJ) case, the applicants, who were the directors of the company sought a declarator that they, instead of the company’s business rescue practitioner, should vote on behalf of the company at any meeting of creditors in respect of section 151 (1) of the Act, which provides as follows:
“Within 10 business days after publishing a business rescue plan in terms of section 150, the practitioner must convene and preside over a meeting of creditors and any other holders of a voting interest, called for the purpose of considering the plan.”
The court held that business rescue practitioners take over full management control of the company in business rescue, in substitution for its board of directors and pre-existing management. The court emphasised that Chapter 6 of the Act made it clear that the powers of the directors are limited in business rescue proceedings and confirmed that there is a legal transfer of power to the business rescue practitioners. The court further stated that nothing of significance can be done by the directors during business rescue proceedings without the authorisation by the business rescue practitioners.
From the above mentioned, it is clear that in terms of the Act, business rescue practitioners take over full management control of the company in business rescue. In an event where directors and business rescue practitioners understand their duties under the Act, no tension exists between these responsibilities. The directors of a company placed under business rescue transfer their management powers and functions to the business rescue practitioners. Although the directors are subject to the authority and directions of the practitioner, they are not relieved of all their statutory and fiduciary duties. This means directors by virtue of their fiduciary duties, owe the business rescue practitioners full co-operation.
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