Background

The directors of the respondent companies in business rescue, Ms Ronica Ragavan and Mr Dhanasegaran Archery, launched an application in the High Court, acting on the basis of their powers as directors of the companies, seeking to inter alia remove the first and second appellants and have the third and fourth appellants declared as not having been properly appointed as business rescue practitioners (BRPs) of the companies. Ragavan and Archery appointed Van der Merwe and Van der Merwe Attorneys (VDM) to act for the companies in the above application and filed resolutions and powers of attorney from Ragavan as the director of the companies in support of VDM’s authority to act for the companies.

The BRPs disputed the authority of VDM to act on behalf of the companies.

The High Court found that VDM was only authorised to act for the second respondent company (Koornfontein), which order the BRPs was granted leave to appeal only in respect of VDM’s authority to act for Koornfontein.

The submissions

The respondents contended that the appeal by the BRPs was misplaced as the High Court’s order was interlocutory and not final in nature in that it was not definitive of the parties’ rights and did not have the effect of disposing of any portion of the relief sought in the main application.

The BRPs, on the other hand, countered the above argument on the basis that the High Court’s judgment was final in nature pursuant to it permitting the company to proceed with unauthorised litigation contrary to section 139 of the Companies Act 71 of 2008 (Act). As such, the High Court’s order was not interlocutory in nature but definitive of the rights of the parties and appealable, which submission was accepted by the SCA.

Analysis

Section 66 (1) of the Act provides that a company’s board of directors “has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that this Act or the company’s memorandum of incorporation provides otherwise”.

The “provides otherwise” in section 66(1) of the Act, according to the BRPs, was that after business rescue commences, they substitute the directors in their exercise and performance of certain powers in respect of the company under supervision. In support for their contention, the BRPs relied on sections 137(2)(a) and (b) and 140 of the Act which provide that:

“137 Effect on shareholders and directors

(2) During a company’s business rescue proceedings, each director of the company-

(a) must continue to exercise the functions of director, subject to the authority of the practitioner; (b) has a duty to the company to exercise any management function within the company in accordance with the express instructions or direction of the practitioner, to the extent that it is reasonable to do so

…

140 General powers and duties of practitioners

(1) During a company’s business rescue proceedings, the practitioner, in addition to any other powers and duties set out in this Chapter:

(a) has full management control of the company in substitution for its board and pre-existing management;

(b) may delegate any power or function of the practitioner to a person who was part of the board or pre-existing management of the company;

…

(3) During a company’s business rescue proceedings, the practitioner-

…

(b) has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77.”

The SCA authoritatively confirmed that section 137(2) of the Act obliges the company’s directors to continue exercising their functions, subject to the authority or express instruction of its BRPs. Moreover, section 140 of the Act accorded the BRPs “full management control of the company” in place of its board and management of the company, but that they may delegate any of their powers and functions to a company’s directors or erstwhile management.

The court further confirmed that the powers and functions of directors are, once the company is in business rescue, subservient to the BRPs’ authority, instruction or direction in terms of the Act. This is pursuant to the BRPs’ duty to run and manage the day-to-day affairs of the company, which requires them to have full management control over the company’s property, including its financial resources.

The appointment of VDM then, as the court’s reasoning followed, would have the effect that the company’s property and assets, now vested in the BRPs, would be used to pay for legal fees, divesting the BRPs of the control statutorily endowed on them by the Act.

Conclusion

This judgment serves as a stark reminder of the consequences of business rescue, not only on the company but the powers of directors to act in respect of a company’s property and assets. While directors hold onto some of their powers pursuant to the office that they hold, they forgo the power to control the company’s property and assets and how these are dealt with during business rescue, subject to the Act’s accountability mechanisms to which business rescue practitioners must adhere.

It is important that a company’s directors, business rescue practitioners and all those engaging with them, properly understand the shifting of powers and functions once a company is placed in business rescue.