9 March 2022 by , and Business Rescue, Restructuring & Insolvency Newsletter

The role of directors in business rescue proceedings: To not get in their own way

The fundamental objective of a business rescue practitioner (BRP) is to assess whether (and how) a company could be rescued and, due to their independent nature, is well positioned to do so. What then is the role of the board of directors during the business rescue process and, moreover, what of directors who still want to be in control? As a point of departure, there is enough certainty in Chapter 6 of the Companies Act 71 of 2008 (Companies Act) to conclude that directors must give way to the BRPs.

In the matter between Ronica Ragavan and Others v Optimum Coal Terminal (Pty) Ltd (OCT) Case no. 53832/21, the Gauteng Local Division of the High Court (the court) were asked to resolve the tension that, in the view of the applicants, exists in business rescue proceedings. This tension stems from the BRP assuming full control of the company, while the board of directors is expected to continue performing its functions in terms of the Companies Act. The applicants, the directors of Tegata Exploration and Resources (Pty) Ltd (in business rescue) (Tegeta), brought an application for the declaration that the applicants, in their capacity as directors of Tegeta, should vote on behalf of Optimum Coal Terminal (Pty) Ltd (in business rescue) (OCT), at any section 151(1) meeting of creditors in respect of OCT and further that they may only exercise this vote upon receipt of a prior mandate adopted in terms of an adopted business rescue plan of Tegeta.

This decision came as part of a two-part series of proceedings between the parties, Part A being the granting of an interdict preventing the continuation of a section 151(1) meeting pending the outcome of this Part B decision. A section 151(1) meeting includes creditors convened by BRP’s with the desirable outcome being the preliminary approval of the business rescue plan.

After the granting the Part A interdict, new facts were brought before the court by way of several supplementary affidavits, which had the potential of redirecting the entire application and were thus not dealt with by the court. At the time of Part A of the dispute, Tegeta held a claim in OCT in excess of R47 million, was the major creditor of OCT and consequently held the right to veto any business rescue plan.

In determining the issues before it, the court considered the role of directors in terms of the Companies Act and referenced the decision of Judge Davis in Kaimowitz v Delahunt 2017 (3) (WCC), where Davis confirmed that section 66 of the Companies Act provided the overall supervision and management powers lay with the directors however, a director was not, as of right, entitled to participate in the daily management functions of the company. Additionally, the court emphasised that the Companies Act provided for the limitation of these powers, where appropriate.

The court used an internal versus external categorisation, in support of the view of the authors in Henochsberg, to distinguish between the roles of the BRPs and the directors. The internal or governance aspects would relate to the day-to-day internal aspects of the company like calling board and shareholder meetings, whereas the ‘external’ or ‘management’ aspects related to the company’s interactions with the outside world and its existence in general.

The court accepted that the management powers and functions of directors, i.e. the external aspects, are transferred to the BRP in business rescue proceedings in terms of section 140. The court also found that section 137(2) of the Companies Act, which requires directors to exercise their functions within the company subject to the authority of the BRP, clearly reinforced this transferal of power as the directors would only be able to exercise their management functions under express direction from the BRP.

It was found that section 151(1) meetings, including voting at such a meeting were external acts and were thus solely in the mandate of the BRP of the creditor company under business rescue.

In turning to the applicants’ second request, a declaratory order confirming that any right to vote at a section 151(1) creditors meeting would only be permissible in light of a prior mandate in terms of an adopted business rescue plan of Tegeta, the court quickly dismissed the applicants’ contention by finding that no such obligation exists in the Companies Act and that delaying the adoption of a business rescue plan for the resolution of these sorts of disputes would lead to long delays that frustrate business rescue proceedings.

This decision makes it clear that, where directors and BRPs understand their duties under the Companies Act, no tension exists between these responsibilities. Directors transfer their management powers and functions to BRPs while continuing their internal functions, subject to the authority of the BRPs practitioners. The golden rule to understand is that the directors, by virtue of their fiduciary duties, owes the BRP their full cooperation and these drawn-out disputes only serve to frustrate the business rescue process.

download PDF

The information and material published on this website is provided for general purposes only and does not constitute legal advice.

We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter.

We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.

Please refer to the full terms and conditions on the website.

Copyright © 2022 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com

You may also be interested in