Evolving power dynamics between a board and business rescue practitioners: It’s a balancing act
Evolving power dynamics between a board and business rescue practitioners: It’s a balancing act
As a result of the decision from the Supreme Court of Appeal (SCA) in the case of Tayob and Another v Shiva Uranium (Pty) Ltd and Others  ZASCA there have been, and will continue to be, burning questions surrounding which powers shift from the board to the business rescue practitioners (BRPs) once a company has been placed under business rescue supervision. In the Shiva case, the court found that certain administrative powers were retained by the board. For more on the Shiva case see our articles here and here.
At a glance
- In Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others  ZASCA 34, the Supreme Court of Appeal had to decide if the board or business rescue practitioners (BRPs) hold the power to vote on the business rescue plan of another company which it is a creditor of.
- Relying on section 66(1) of the Companies Act 71 of 2008 (Act), the appellant’s directors averred that the board of directors holds the plenary powers of the company, with the business rescue process in Chapter 6 of the Act being a "hybrid cohabitation model”, where the board maintains a decisive role in the company's running alongside the BRPs after it has been placed in business rescue.
- Among other things, the SCA found that the vote on the plan of a debtor simply entails a decision over the company’s property and it would be illogical to not provide the BRPs with the power to vote on the plan of a debtor. It dismissed the directors’ appeal with costs.
Recently, in Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others  ZASCA 34, taken on appeal from the Gauteng Local Division of the High Court, the SCA had to decide the following legal question:
“When a company in business rescue (Company A) is a creditor of another company in business rescue (Company B), and Company B is a wholly-owned subsidiary of Company A, [does] the right to cast a vote on any matter contemplated under [subsection] 151 and 152 of the Companies Act [71 of] 2008, [vest] in Company A’s business rescue practitioners or its board of directors?”
In this case, Company A was Tegeta Exploration and Resources (Pty) Ltd (in business rescue) (Tegeta) and Company B was Optimum Coal Terminal (Pty) Ltd (in business rescue) (OCT). Tegeta and OCT, along with the BRPs of both entities, were respondents in the appeal. The appellants are Tegeta’s directors.
OCT and Tegeta were placed under voluntary business rescue. The OCT BRPs published a business rescue plan (plan) and notified OCT’s affected persons of the meeting to vote on the proposed plan for OCT. One such affected person was Tegeta, as a creditor of OCT.
The directors of Tegeta (appellants) contended that the power to vote on OCT’s plan lay with them, not with the BRPs of Tegeta. The BRPs felt differently.
Therefore, the question before the court a quo was: who had the power to exercise Tegeta’s right to vote on OCT’s proposed plan? OCT’s meeting was interdicted, pending the decision on this right to vote.
The court a quo found in favour of Tegeta’s BRPs, ruling that they held the right to vote as they were given full management control under Chapter 6 of the Companies Act 71 of 2008 (Act). Tegeta’s directors then brought the matter on appeal to the SCA.
Tegeta’s directors’ argument
Relying on section 66(1) of the Act, Tegeta’s directors averred that the board of directors holds the plenary powers of the company, with the business rescue process in Chapter 6 of the Act being a “hybrid cohabitation model”, where the board maintains a decisive role in the company’s running alongside the BRPs after it has been placed in business rescue.
This hybrid cohabitation model argument stems from section 137 read with section 142 of the Act, with the former requiring each director of the company to continue to exercise their functions during business rescue, subject to the authority of the BRPs and the latter dealing with the duty of the directors to co-operate with and assist the BRPs.
Using the Shiva case, Tegeta’s directors tried to distinguish between “management” and “governance”, holding that management is restricted to the day-to-day affairs of a company, where the BRPs’ powers are superior to those of directors. Governance, however, they contended, relates to the strategic positioning of the company, where the directors maintain their authority.
Continuing with the line of a “hybrid cohabitation model” Tegeta’s directors further contended that the authority of the BRPs must be considered in two phases, being (i) before; and (ii) after the adoption of the plan. Prior to the adoption of the plan, the business rescue process is not yet certain, so the BRPs must defer to the directors’ strategic positioning of the company. Following the adoption of a plan, the dynamic would change, and the BRPs would be empowered in line with the plan.
The court’s decision
The court held that Tegeta’s directors’ argument regarding the powers of the board must be determined through the appropriate interpretation of the Act by first looking at the language in the relevant provision, which should not change depending on the facts of the case.
The court noted that although section 66(1) of the Act authorises the board to manage the business affairs of the company and to exercise all the company’s powers and perform its functions, it is “except to the extent that [the] Act … provides otherwise”, ruling that Chapter 6 is one such exception. Chapter 6 provides the BRPs with full management powers for the duration of the business rescue.
The court held that the question of who had the right to vote was determined by whether that power fell within the ambit of the “full management control” of the BRPs as contemplated in section 140(1)(a). As “management” is not defined in the Act, the court had regard to the ordinary meaning of the word, with “full management control” signifying control of the property of the company, which would include the company’s debtors’ book. The court found that as a creditor, the vote on the plan of a debtor simply entails a decision over the company’s property.
The court went on to refer to provisions of the Act which support the view that “full management control” entails the BRPs’ exercise of control over the property of the company, such as:
- section 128(1)(b), which describes business rescue as providing for “the temporary supervision of the company, and of the management of its affairs, business and property”;
- a practitioner is defined in the Act as a person appointed “to oversee a company during business rescue”;
- section 133(1)(a) states that:
- “during business rescue proceedings, no legal proceedings, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced and proceeded with in any forum, except – (a) with the written consent of the practitioner”,
which demonstrates the practitioner’s control in relation to claims by third parties to the property of the company; and
- in terms of section 134(1)(c) “no person may exercise any right in respect of any property in the lawful possession of the company, irrespective of whether the property is owned by the company, except to the extent that the practitioner consents in writing”.
In highlighting the above, the court concluded that the range of powers afforded clearly envisage the BRPs having the power to vote on the plan of a debtor company to determine the extent to which a particular debt would be recovered under that plan or not.
The court further held that the primary purpose of business rescue is to enable the BRPs to prepare and implement a plan as well as to:
“rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors, or shareholders than would result from the immediate liquidation of the company.”
The court found that determining what the company’s assets are and whether debts can be recovered form an integral part of the process of preparing a plan. The court asserted that it would be illogical to not provide the BRPs with the power to vote on the plan of a debtor, as the BRPs would then not meet the requirements of section 141(2)(a) and (b), in terms of which the BRPs must undertake a proper investigation of the affairs of the company to determine if it is in financial distress and whether there is a reasonable prospect of rescuing it. This would undermine the very principle of Chapter 6 of the Act.
Interpreting “full management control”
Thus, the court found that the words “full management control” in section 140(1)(a) must be interpreted as including the power to vote on a plan for a debtor company and so the question of whether the board retains any power on strategic matters of the company during business rescue does not need to be determined.
The court also held that Tegeta’s directors’ reliance on Shiva was incorrect, as that case dealt with a narrower issue, relating to whether the board of an affected person represented “the company” in appointing a new BRP in terms of section 139(3) of the Act in situations where a BRP dies, resigns, or is removed from office. In Shiva, the power of the board was found in section 139(3) and was not expressly qualified. Put differently, that function fell outside the ambit of the BRP’s authority and could not be subject to the BRP’s authorisation as detailed in section 137(2)(a) of the Act.
The court further held that the “hybrid cohabitation model” distinction between pre- and post-adoption of the plan has no foundation in the provisions of Chapter 6 of the Act, as that concerns the creditors’ right to vote as contemplated in section 151 read with section 152.
Accordingly, the court dismissed Tegeta’s directors’ appeal with costs.
There is no doubt that the Shiva and Ragavan cases have the potential to open up whole new avenues of questions and debates around the shifting power between the board of directors and the BRPs. However, as long as the answers result in advancing the spirit of Chapter 6 – the rescuing of companies in distress – they are most welcome.
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