COMPANIES IN FINANCIAL DISTRESS – BUSINESS RESCUE PROCEEDINGS AND THE POSSIBLE CRIMINAL AND CIVIL PITFALLS OF NOT ACTING TIMEOUSLY AND WISELY

Whilst waiting to see what the exact consequences of Covid-19 are going to be, directors of companies should continue to remain aware of their legal duties and liabilities which they have towards their company.

In terms of Section 76 of the Companies Act, Act 71 of 2008, a director’s duty of care and skill towards the company demands a higher standard than its common law counterpart. A director is accordingly required to act with the necessary care, skill and diligence that may reasonably be expected from someone in his/her position. Directors have a principle fiduciary duty towards the company in situations where they are confronted with financial instability and uncertainty, which could ultimately lead to the liquidation of the company, and even criminal prosecution of directors in terms of inter alia section 424(3) of the Act.

In terms of section 77(2)(a) of the Act, a director of a company may be held liable in accordance with the principles of the common law relating to the breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of his/her duties.

Chapter 6 of the Companies Act permits economically troubled companies an opportunity to rearrange and reorganize their economic activities through the business rescue process. Business rescue is a statutory process to enable and expediate the rehabilitation of a company, where it seems to be relatively improbable that the company will be in a position to pay all of its debts when it becomes due and payable, or where it emerges that the company will become insolvent.

The business rescue practitioner is obliged, upon their appointment, to consult with creditors, suppliers, and contracting parties, to establish whether there is a genuine likelihood of the company being salvaged. There is a duty upon the practitioner to develop and publish a business rescue plan, which will ensure that the company can trade in a solvent manner upon the termination of the business rescue proceedings. Throughout the business rescue proceedings, practitioners will be considered responsible for the management of the company’s affairs, whilst a temporary moratorium precludes its creditors from instituting legal proceedings against it.

The business rescue practitioner is further bound by the Act in so far as his/her responsibilities are concerned towards the company, which includes acting in good faith as an officer of the court. He/she further has the responsibilities, duties and liabilities of a director of the company, as set out in sections 75 to 77 of the Act, whilst he/she remains appointed, and any court ought to take these considerations into account when interpreting and applying the grounds of misconduct set out in sections 130 and 139.

Section 143 of the Companies Act further specifically regulates the remuneration which practitioners are entitled to; or enables companies to enter into agreements with practitioners to allow for a specified remuneration structure, suitable to all parties. It is imperative for boards of directors to at all times carefully consider, and implement a strategy to ensure that they remain informed, and involved as to the work completed by practitioners, specifically considering that  business rescue proceedings may either have aiding effects or disastrous effects.

Should boards of directors be concerned about the conduct of a business rescue practitioner, consideration should be given to section 139 of the Act, which allows for an affected person to approach a competent court in terms of section 130(1)(b) to set aside the appointment of a business rescue practitioner who has been appointed in terms of the board resolution on the basis that the business rescue practitioner either:

(i)         does not satisfy the requirements for appointment (in terms of section 138);

(ii)        is not independent of the company or its management; or

(iii)       lacks the necessary skills, having regard to the company’s circumstances.

The alternative would amount to a formal request of an affected person, by way of an application to court, or of the courts own accord, if the business rescue practitioner is:

 (i)        incompetent or fails to perform his duties;

 (ii)       fails to exercise the proper degree of care in the performance of his functions;

 (iii)      engages in illegal acts or conduct;

 (iv)      no longer satisfies the requirements for appointment in section 138; or

 (v)       if the practitioner is incapacitated and unable to perform the function of his office, and is unlikely to regain that capacity within a reasonable period of time.

It is the writer’s firm view, that boards of directors should actively participate in business rescue proceedings, to ensure that a constructive, and practical business rescue plan is adopted, which specifically makes reference to the remuneration of a business rescue practitioner, to ensure that companies are afforded the highest opportunity to trade in a solvent manner upon termination of business rescue proceedings. Failure to do this may have the opposite effect, to that intended.