News / Legal Brief
Jul 1,2020
Once a company is placed into a business rescue proceeding, the business rescue practitioners immediately step into a supervisory role and where the board of directors of the company become answerable, to a large degree, to such practitioners in respect of the ongoing conduct of the company’s operations and affairs.
When this occurs, we often find immediate tension arising between the duly appointed practitioners and the board of directors. Such directors (who have never been through a business rescue process before) are often confused and somewhat bewildered by their change of status and are often unsure as to their continued role in the company.
In this article, we explore the rights, duties and obligations of directors of companies that have been placed under the supervision of the business rescue practitioner in business rescue proceedings. Before we consider the practical approach that should be taken by directors in such a situation, we thought it useful to set out, in brief, aspects of what is expected of directors, standards of conduct and the potential of claims against directors if they fail in their duties and obligations.
Once a company goes into business rescue, Chapter 6 of the Act sets out certain roles and obligations (in this changed environment) for directors.
Practically, any duly appointed business rescue practitioner comes into the company cold. Such practitioner is heavily reliant on the existing board members and management. The practitioner is obligated, within a short space of time, to consult with creditors, suppliers and contracting parties, in order to ascertain whether or not there is a realistic prospect of the company being rescued. If not, the practitioner is obligated to place the company into liquidation.
Where the practitioner is of the view that there is a realistic prospect of rescuing the company, then the practitioner must develop and publish a business rescue plan, which would result in the company being placed into a position, where it can continue to trade on a solvent basis (after being restructured), or where the plan delivers a better dividend than what would have been achieved from the immediate liquidation of the company. These practitioners will, therefore, need to achieve a high level of cooperation with board members from the outset.
Further, section 142(1) and (2) places an obligation on the board to deliver to the practitioner (as soon as practicable after business rescue proceedings has commenced) all of the books and records of the company that relate to the affairs of the company and which are in the board’s possession. The director must, in terms of section 142(3) also provide the practitioner with a statement of affairs containing particulars relating to:
(a) Any material transactions involving the company or the assets of the company, and occurring within 12 months immediately before the business rescue proceedings began;
(b) any court, arbitration or administrative proceedings, including pending enforcement proceedings, involving the company;
(c) the assets and liabilities of the company, and its income and disbursements within the immediately preceding 12 months;
(d) the number of employees, and any collective agreements or other agreements relating to the rights of employees;
(e) any debtors and their obligations to the company; and
(f) any creditors and their rights or claims against the company.
Thus, there is an expectation on the part of the practitioner to be given full access to all of the relevant and pertinent information relating to the financial and operational affairs of the company. This will enable the practitioner to properly investigate the affairs of the company (section 141) and to develop a business rescue plan that can be published and placed before all affected persons at a section 151 meeting for approval.
During business rescue proceedings, the directors of the company will be relieved from their duties of a director as set out in section 76, and their liabilities as set out in section 77 of the Act, if the directors have acted in accordance with the express instructions or direction of the practitioner, to the extent that it was reasonable for them to do so.
In practice, the practitioners would engage with the board and report to the board on the business rescue process, the continued operation of the company, suspension/termination of contracts, the provision of post-commencement finance, and on the development of the business rescue plan.
If the practitioners require the board to assist them in the business rescue process, then the practitioners are entitled to request the board to do so in terms of section 137 of Act. If the practitioners’ request is reasonable, then the board is obliged to act in accordance with the practitioners’ express instructions or directions.
Having regard to section 137(3) and 137(5) of the Act, if any directors on the board do not wish to act in accordance with the practitioners’ express instructions or directions, then those directors should resign.
A failure to do so could result in the directors being removed from the board and declared delinquent, in terms of section 162 read with section 137(5), and the directors may also be held liable for any losses incurred as a result of their conduct in terms of section 218 of the Act.
Notwithstanding the above and for the sake of clarity, the practitioners are entitled to proceed to conduct the business rescue process without the consent of the board and which includes the practitioner obtaining post commencement finance and determining the suspension or cancellation of contracts. Further the practitioners are entitled to develop, publish and implement the business rescue plan without the consent of the board.
Business rescue proceedings can be complex and daunting for directors. In particular, if the business rescue proceedings become protracted and drawn out over a lengthy period of time.
It is suggested that if a director is faced with his/her company going into business rescue, that close attention is given to the above and to the provisions set out in Chapter 6 of the Act. If directors do not comply with their obligations, they might find themselves facing removal and where their already damaged reputation can be placed at further risk.
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