We have often read that the root of distress can often be management or mismanagement. Earlier in the week we focused on the Dudu Myeni Delinquency Ruling which painted a very serious picture of mismanagement at South African Airways (SAA).
If it is determined that management was the root cause of distress, and a Director feels that it the company would benefit from his/her resignation, can they resign from their position during the implementation of a business rescue plan?
The following article is from Fluxmans and was published in March 2021.
Sensitive matter
This question is a difficult one to answer for the following reasons:
- the relevant legislation in this regard is unclear and in certain respects contradictory;
- there is at present no case law on this topic;
- from a practical perspective the CIPC will not formally record a director’s resignation whilst a company is in business rescue;
- there is very little academic writing on this point.
We are thus at this time left with no choice other than to interpret, as best we can, the relevant provisions of the Companies Act.
Vacancies on board
Subject to sub-Section (2), a person ceases to be a director, and a vacancy arises on the board of a company if the person:
- resigns or dies; or
- is declared delinquent by a court or placed on probation under conditions that are inconsistent with continuing to be a director of the company, in terms of Section 162 of the Companies Act.
Accordingly, a director can, in terms of this Section resign his directorship at any time, by simply addressing a letter to the board recording such resignation; this Section does not contain any qualification or provision which precludes its operation whilst a company is in business rescue.
Sections in Chapter 6 (the business rescue chapter) complicate matters. The first of such Sections is Section 137 and it reads as follows:
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The effect on Shareholders and Directors
During a company’s business rescue proceedings, each director of the company:
- must continue to exercise the functions of director, subject to the authority of the practitioner; and
- has a duty to the company to exercise any management function within the company in accordance with the express instruction or direction of the practitioner, to the extent that it is reasonable to do so.
During a company’s business rescue proceedings, each director of the company must always attend to the requests of the practitioner and provide the practitioner with any information about the company’s affairs as may reasonably be required.
Thus, in terms of Sections 137(2) and (3), a director is obliged to “continue” to exercise functions of a director “during” business rescue proceedings and is obliged to discharge management function duties in accordance with the express direction or instruction of a business rescue practitioner (“the BRP”). The words “during” and “continue” suggest that for the entire duration of the supervision a director cannot simply resign his directorship.
Section 137(5) is also relevant and reads as follows: at any time during the business rescue proceedings, the practitioner may apply to court for an order removing a director from office on the grounds that the director has:
- failed to comply with the requirements of this chapter; or
- by act or omission, has impeded, or is impeding –
(i) the practitioner in the performance of the powers and functions of practitioner;
(ii) the management of the company by the practitioner;
Sub-Section (5) is in addition to any right of a person to apply to court for an order contemplated in Section 162.
Section 140
The above Sections 137(5) and (6) clearly indicate that a BRP cannot remove a director during business rescue proceedings without a court order and can only secure a court order on limited grounds, i.e. if the directors failed to comply with the requirements of this chapter (i.e. a reference to, inter alia, Sections 137(2)(a) and (b) and 142(1), (2), (3)(a) to (f) and (4) and/or if the director by act or omission has impeded or is impeding the practitioner in the performance of his powers and functions as a BRP or by act or omission is impeding or impeded the management of a company by the BRP.
General Powers and Duties of Practitioners
During a company’s business rescue proceedings, the practitioner, in addition to any other powers and duties set out in this Chapter:
- has full management control of the company in substitution for its board and pre-existing management;
- 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.”
Directors of Company to Co-operate with and Assist Practitioner
Section 142 states that:
- as soon as practicable after business rescue proceedings begin, each director of a company must deliver to the practitioner all books and records that relate to the affairs of the company and are in the director’s possession; and
- any director of a company who knows where other books and records relating to the company are kept, must inform the practitioner as to the whereabouts of those books and records.
Within five business days after business rescue proceedings begin, or such longer period as the practitioner allows, the directors of a company must provide the practitioner with a statement of affairs containing, at a minimum, particulars of the following:
- any material transactions involving the company or the assets of the company, and occurring within 12 months immediately before the business rescue proceedings began;
- any court, arbitration, or administrative proceedings, including pending enforcement proceedings, involving the company;
- the assets and liabilities of the company, and its income and disbursements within the immediately preceding 12 months;
- the number of employees, and any collective agreements or other agreements relating to the rights of employees;
- any debtors and their obligations to the company; and
- any creditors and their rights or claims against the company.
No person is entitled, as against the practitioner of a company, to retain possession of any books or records of the company, or to claim or enforce a lien over any such books or records, unless such books or records are in the lawful possession of such person and he or she has made copies available to the practitioner or has afforded the practitioner a reasonable opportunity to inspect the books or records concerned.
Other relevant (practical) considerations to be taken into account
BRPs also have certain duties and obligations. The important ones for this opinion are the duty to acquire knowledge, form views and opinions and investigate and report. For all of these a BRP would certainly require much assistance, information and knowledge from directors and their teams. By way of example: Acquisition of knowledge by the BRP
Unless the Business Rescue Practitioner (“BRP”) has engaged with the board and management prior to the commencement of business rescue, a BRP when appointed usually has very little or no knowledge of the assets, liabilities, business affairs and the like of the company; and is bound by strict time limits to form a view on and advise the general body of creditors whether in his opinion there is a reasonable prospect of the company being rescued.
Opinion the BRP has to form
Clearly then this opinion can only be formed by and with the full input, co-operation, and assistance of the board, especially the financial director and his team and after access to all relevant books and financial records.
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Obligation to investigate and/or report
In addition, the BRP is obliged to investigate the affairs of the company and report any voidable dispositions, frauds and/or other irregularities he uncovers during this process. For this he would certainly require the assistance of the board and managers.
Therefore, inherent in the discharge of these duties and obligations, a BRP would require the commitment, assistance and help of directors. One can then develop the argument that:
directors certainly cannot resign their directorships prior to discharging all their duties and obligations as provided for in Chapter 6 a BRP certainly requires directors to remain in office until such time as they have served their purpose, i.e., provided him with all the knowledge, assistance, and information he needs to enable him to discharge all his duties and obligations.
The provisions of Chapter 6 are irreconcilable with the provisions of Section 70.
This then begs the question as to whether directors can resign once they have served their useful purpose. There will be a time in every rescue when one or more of the directors become a hindrance to the BRP both from a financial burden perspective and a perspective that they no longer serve any useful purpose.
To the extent that Section 70 is irreconcilable with certain of the provisions of Section 137, 140 and 142 there exists a lacuna in the Act which can only be cleared up by amendment or judicial pronouncement of the High Court.
Applying commercial and practical logic there exists room for a common sense interpretation, namely that at the point in a business rescue proceeding when a director no longer serves any useful purpose and becomes a burden, he should be entitled to resign similar to the process as recorded in Section 70. However, this resignation should be conditional upon the director agreeing unconditionally to hold himself or herself available to the BRP and at the BRP’s request to:
exercise any management function in accordance with the express instructions and directions of the practitioner, to the “extent that it is reasonable to do so” always attend to the discharge of his duties and obligations at the request of the practitioner; and provide the practitioner with any information about the company’s affairs as may reasonable be required.
Furthermore, during this period, i.e., after resignation but whilst agreeing to be available to the BRP, if the director requires access to the company’s books and records to assist the BRP he should be given the same under the supervision of the BRP.
No entitlement
Until such time as a director has discharged his duties and obligations to the BRP, he should not be entitled to resign.
Once all these duties and obligations have been discharged, he should be entitled to resign subject to his/her unconditionally agreeing to hold himself/herself available to the BRP, to assist the BRP and to provide the BRP with all information and the like as the BRP may reasonably require and to carry out the duties assigned to him by the BRP to the extent that it is reasonable to do so.
It is our recommendation then that at the time of resignation the BRP should enter into a written agreement with the director which agreement would record all of these ongoing rights and obligations and the directors unconditional undertaking to hold himself available to the BRP to assist the BRP insofar as the BRP requires his assistance.
