By Sean Buskin, Candidate Attorney and Caitlin Wilde, Partner
The purpose of this article is to provide the reader with a basic and general understanding of what section 140 and section 141 of the Companies Act 71 of 2008 (“the Act”) entails, with specific reference to the powers which a business rescue practitioner holds in the course of business rescue.
What does section 140 of the Act provide?
This section of the Act sets out the powers, duties and functions conferred on a business rescue practitioner. The business rescue practitioner will, in substitution for the board or prior management of the company, be entitled to handle the full management control of the company. In the exercise of this control, a business rescue practitioner will be entitled to unrestricted access to the premises and administrative offices of the company. Section 137(2)(a) of the Act provides that certain powers and functions of the directors of the company will remain, with the exclusion of any management powers and functions, subject to the authority of the business rescue practitioner.
The business rescue practitioner is further entitled to delegate any of his powers and functions to persons who formed part of the pre-existing management of the company but will still have the overriding authority.
In addition to the powers and functions described above, the practitioner is further empowered to remove from office any person forming part of the pre-existing management of the company. However, any such removal will be subject to existing employment-related legislation. The practitioner, in contrast to his powers of removal, is also empowered to appoint any person as part of the management of the company or as an advisor to the practitioner, subject to the condition that the appointed person’s integrity, impartiality or objectivity would not be affected in occupying that position.
What are the investigative powers, in terms of section 141 of the Act, of a practitioner?
Section 141 of the Act seeks to ensure that a practitioner conducts a full investigation into the affairs of the company to ensure that the company is in fact financially distressed and there remains a reasonable prospect of rescuing the company. It must be observed that it is not incumbent upon the practitioner to conduct a forensic investigation into the company’s affairs – what will constitute a “full investigation” as required will depend on the circumstances of the company in question, and whether it is apparent that a deep investigation is necessitated in order to ascertain the true state of the company’s affairs.
If the practitioner’s investigation reveals that a company is not financially distressed, then the practitioner ought to take actions to immediately bring an end to the business rescue proceedings. On the other hand, if the practitioner concludes the company is financially distressed, the practitioner will thereafter, in consultation with the creditors and employees of the company, develop a plan to rescue the company.
If the practitioner concludes that there are no reasonable prospects of rescuing the company, either immediately following his investigation or at any point during the business rescue proceedings, he is required to inform the Court, the company and all other affected persons. Thereafter, the practitioner will make an application to Court in order to place the company in liquidation. The Court however, as decided in case of CSARS v Benginsel 2013 (1) SA 307 (WCC), has overriding discretion to disregard the decision of the practitioner, where the practitioner has committed a ‘material mistake’ and to continue business rescue proceedings where same would be in the best interests of the company’s creditors.
Reckless trading, fraud, or contravention of any other law relating to the Company:
Should the practitioner, in the exercise of his investigative powers and functions, find evidence that in the dealings of the company prior to the commencement of the business rescue proceedings, reckless trading, fraud or a contravention of any other law has occurred, the practitioner will be required to:
- forward the evidence to the appropriate authority, for investigation and, if necessary, prosecution; and
- instruct the management of the company to take steps to rectify the matter, including the recovery of any misappropriated assets, in the course of dubious dealings.
Liability of the practitioner in the exercise of his powers and functions:
Throughout the exercise of the practitioner’s powers and functions, for purposes of developing and implementing a business rescue plan, the practitioner will be regarded as an officer of the Court. As an officer of the court, the practitioner will have the same responsibilities, duties and liabilities as any other director of the Company. Sections 75, 76 and 77 of the Act prescribe the standards of directors and prescribed officers’ conduct, as well as the scope of their liability for contraventions of such duties and standards and loss, damages and costs sustained by the company as result of their conduct. More generally, a practitioner will be liable for the consequences of any act or omission amounting to gross negligence in the performance of their powers and functions.
The case of Booysen v Jonkheer Boerewynmakery (Pty) Ltd and Another 2017 (4) SA 51 (WCC), illustrated the importance of holding the practitioner liable to the provisions of the Act. The court stated that “The Act also requires the practitioner to be a person of integrity and impartiality who must not have any relationship with the company he is to supervise, such as would lead a reasonable and informed third party to conclude that he was compromised in any way, and during the course of rescue proceedings the practitioner functions as an officer of the court and must account to the court in accordance with its rules and any orders or directions it may make.” [emphasis added]
This case dealt with, inter alia, a failure by the practitioner to provide any indication of the date or manner in which an amendment to the business rescue plan would be affected, with the practitioner completely ignoring his liability to the court. The court held that “This is, with respect, not what is required of an officer of the court occupying the position of the second respondent [the practitioner] and one is left with an uneasy feeling that the necessary impartiality, objectivity and independence which is required of the office he occupies may not be present in this matter.” [emphasis added]
The provisions of section 140 and section 141 outline clearly the powers of the practitioner in the exercise of his far-reaching duties and functions. However, at all times the practitioner will remain liable for any act or omission amounting to gross negligence in the exercise of his powers and functions. It is important that the practitioner be impartial, objective and independent.