Directors be warned: There is not absolution in rescue

As a juristic person under section 19 of the Companies Act 71 of 2008 (Act), a company has all the legal powers and capacity of an individual. The company itself is unable to exercise this capacity. Therefore, the power to exercise it normally vests in the company’s board.

11 May 2022 5 min read Business Rescue, Restructuring & Insolvency Newsletter Article

At a glance

  • Powers and capacity of directors: Under the Companies Act, a company has legal powers and capacity similar to an individual, but the directors are responsible for exercising these powers on behalf of the company.
  • Powers of directors in business rescue: In a business rescue scenario, directors retain certain powers and duties, although subject to the authority of the business rescue practitioner (BRP). Directors continue to play an active role in the internal day-to-day governance of the company.
  • Distinction in powers: The courts have distinguished between internal powers (retained by directors) and external powers (transferred to BRPs) in business rescue. Directors have the power to make decisions outside the scope of day-to-day management, and their fiduciary duties remain intact. Directors should be aware of their retained powers and seek independent advice to navigate their responsibilities in the business rescue process.

When a company enters business rescue under the provisions of the Act, the business rescue practitioner (BRP) is given wide-ranging powers in order to successfully try and rescue the company. It is a common misconception that these powers mean that the directors, like in a final liquidation scenario, effectively become redundant.

However, that is not the case. Either as prescribed by the Act or on the court’s interpretation of the business rescue provisions of the Act directors (i) continue exercising certain powers and duties, albeit subject to the authority of the BRPs; or (ii) retain certain powers and duties without requiring the approval of the BRP.

Therefore, although business rescue limits the directors’ powers and their roles, it does not mean that the directors are incapacitated and no longer hold power or have fiduciary duties to remain active participants in the running of the company.

Determining who has which powers

In a previous article Cliffe Dekker Hofmeyr - Residuary powers of directors of companies in provisional liquidation the limits to the powers of provisional liquidators, and the residual powers of directors of companies in liquidation were discussed. These scenarios raise the question of whether a similar situation exists where directors of companies in business rescue are concerned.

The answer to this question seems to lie in distinguishing certain powers and precisely delineating whose responsibility it is to exercise them - the directors or the BRP.

The High Court dealt with this question in Ronica Ragavan v Optimum Coal Terminal (Pty) Ltd (Optimum). As we pointed out in a previous article the court made the distinction between internal powers and duties (internal day-to-day governance of a company) and external powers and duties (external relationships between a company and those outside it). The court confirmed that (i) the directors retain the former, subject to BRP authority; while (ii) the latter powers are transferred to BRPs.

In the recent case of Shiva Uranium (Pty) Ltd v Tayob (Shiva) the Supreme Court of Appeal (SCA) and the Constitutional Court introduced nuances to this distinction. Here, the court had to pronounce on the validity of the appointment of BRPs themselves following the resignation of previous BRPs (see our previous article). 

The facts, in short: Shiva Uranium’s directors resolved to place the company under voluntary business rescue. To this end they appointed two BRPs. However, Shiva Uranium’s largest creditor launched an application in the High Court to remove the BRPs. Before the matter was heard, these BRPs resigned. Upon hearing the matter, the High Court appointed a replacement BRP and ordered the Companies and Intellectual Properties Commission (CIPC) to appoint a second replacement BRP, which the CIPC did.

When the court-appointed BRP wished to resign, he and the remaining BRP passed a resolution appointing his replacement BRP. However, Shiva Uranium’s directors passed a resolution to appoint different BRPs instead to replace the resigning BRP. The question thus became: which BRP was validly appointed – the one appointed by the existing and resigning BRPs, or the ones appointed by the directors.

Section 139(3) of the Act provides that a company must appoint a new BRP where it is in voluntary business rescue and an existing BRP resigns. The court in Shiva held this power of appointment to vest in a company’s directors, and not the resigning BRP. This was on the basis that in voluntary business rescue there is a balancing of rights and interests of stakeholders. This suggests that, where a company has elected to enter business rescue, its directors retain certain powers and are not absolved of continuing to act as the company’s directors, albeit in a limited capacity.

At first this appears to break from the strict curtailment of powers put forward in Optimum. However, these two decisions can be reconciled.

Instances of voluntary business rescue

Shiva specifically concerned voluntary business rescue and must be read in this context. The court’s decision therefore was a recognition of the company taking steps to bring its affairs into order. As in any other business rescue process, the company comes under the control of the BRPs, but where the danger of a gap in this control appears (i.e. the resignation of a BRP), the company remains the rudder of the process, having the power to appoint a new BRP who it sees as suitable to carrying the process forward.

Warning to Directors

A further consequence of these cases, and equally important to note, is that directors have to be alert to the fact that they are not absolved of actively continuing to fulfil their fiduciary duties once a company is placed in business rescue, and they do not merely relinquish all their powers to the BRP during the business rescue process.

This is especially so when considering the following:

  • In Shiva, the SCA made a ruling that BRPs are only ordained with the powers and duties relating to the “management” of the company – i.e. in relation to the “day-to-day” running of the business.
  • The SCA ruled that any other functions falling outside of the parameter of what was considered “management” of the company remained directors’ functions and “were not subject to the authority of the [BRP]”.
  • The Constitutional Court neither verified nor dispelled this ruling made by the SCA as the parties did not persist with the argument before the Constitutional Court.

The effect of this is that the SCA’s decision on this issue is binding, and directors remain the sole decisions makers for a company on all issues which fall outside the definition of the day-to-day management of the company.

Therefore, there will be instances where a BPR does not hold the power to make certain decisions during the rescue process, and these decisions would still fall on the company’s directors. Failing to be aware of this could lead to instances where directors are found wanting in fulfilling their fiduciaries duties, resulting in potential liability from which the BRP is absolved, and the directors are accountable.

It is for this reason that we recommend that directors of companies in rescue seek independent advice to assist them with navigating the quagmire between the powers that are retained and those that are relinquished (hopefully only temporarily until the company is financially stable again) as a result of the company being placed in business rescue (whether voluntarily or through court proceedings).

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