Ethics to the Rescue: Discharge your duties with care

Given the importance of the functions and duties of business rescue practitioners, coupled with the fact that they act in a fiduciary relationship to the company in business rescue and all affected persons, ethics should and does play a major role when they discharge their duties and obligations.

The business rescue provisions set out in Chapter 6 of the Companies Act 71 of 2008 (“the Companies Act”) contain certain limited provisions which seem to require ethical standards and high levels of honesty of business rescue practitioners.  These provisions oblige business rescue practitioners to adhere to a set of standards and provide for sanctions or removal if certain minimum standards are not met. 

We explore the extent of these ethical duties and responsibilities which originate in many provisions of the Companies Act and continue to develop as matters come before our courts.  What is clear is that business rescue practitioners are required to always act with a high degree of integrity and honesty.   This applies before the commencement of business rescue proceedings, during those proceedings, after the adoption of a business rescue plan, and often after the company is taken out of rescue.

Accepting an appointment
When considering a potential appointment, a business rescue practitioner should always conduct a thorough and proper financial assessment of the company in question.

One of the more important ethical considerations which arises in this context is what a business rescue practitioner should do if, at this early stage, he or she identifies that the business rescue will not be a traditional rescue but rather an alternative rescue (or quasi-liquidation). In the latter instance, the entity is put into business rescue solely for the purpose of realising a better outcome for creditors and employees than in liquidation.

If the business rescue practitioner is not reasonably certain that the “quasi-liquidation” will be successful and will devolve into a traditional liquidation during business rescue, he or she should not take the appointment.  If, however, the prospective alternative rescue is a viable one or is at the very least thought to be, there is nothing wrong with accepting such an appointment given that an alternative rescue is recognised by section 128(1)(b)(iii) of the Companies Act.

Certainly in reaching any decision in this regard a business rescue practitioner must act solely in the interests of affected persons and the company. He or she must have no regard to his or her personal position or potential to earn fees by taking the appointment. This is the ethical duty he or she will have to discharge.

Is a BRP an officer of the court or a Director?
The sections of the Companies Act that deal with this question are sections 140(3)(a) and 140(3)(b).  These sections state that a business rescue practitioner is “an officer of the court and has the duties and responsibilities of a director as set out in Sections 75 to 77 of the Companies Act”.

The recent SCA judgment, Knoop & Another v Gupta & Another All SA 726 (SCA), analysed these sections and set out some interesting thoughts in respect of their interpretation.  In his judgment, Wallis J comments that whilst it does not appear that a business rescue practitioner acts “as an officer of the court”, this does not change his/her duties or responsibilities and conveys “that a fairly high standard of personal integrity is called for from the person so described”.  In effect, this is a reference to honesty and ethics and accordingly suggests that a business rescue practitioner and more aptly, a discharge by a business rescue practitioner of his or her duties, must be conducted with a high level of integrity and ethics and with uncompromising honesty.

Section 140(3)(b) of the Companies Act in its wording also suggests that the office of a business rescue practitioner carries with it the responsibilities, duties and liabilities of a director. Section 76 of the Companies Act has now codified most (but not all) of the common law duties of directors as follows:

76.     Standards of directors conduct.

(3)      Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director –

(a)    in good faith and for a proper purpose;

(b)    in the best interests of the company; and

(c)    with the degree of care, skill and diligence that may reasonably be expected of a person –

(i)    carrying out the same functions in relation to the company as those carried out by that director; and

(ii)    having the general knowledge, skill and experience of that director.”

The use of the words “good faith”, “best interests”, “care”, “skill” and “diligence” carry with them a level of integrity and ethics. Certainly, directors by virtue of their office owe fiduciary duties to companies.  That too carries with it a level of honesty, integrity and ethics.

The judgment in the Knoop case indicates that whilst a business rescue practitioner does not become a director and the application of Sections 75 and 76 is problematic, there can be no doubt that business rescue practitioners are required to behave ethically and with a high level of integrity, honesty, skill and diligence in discharging their duties.

Personal financial interests and BRPs fees
The Companies Act is clear that a person should not accept an appointment as a business rescue practitioner of a company if he or she is not independent of the company.  The wording of Section 138(1)(e) of the Companies Act reinforces the notion that a business rescue practitioner is expected to uphold only the highest ethical standards.  The section is set out below:

“138 (1) A person may be appointed as the business rescue practitioner of a company only if the person:

              …

    (e) does not have any other relationship with the company such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship;”

The inclusion of a reference to Section 75 of the Companies Act (which deals with director’s personal financial interest and conflicts and how to deal with such conflicts) seems superfluous.  It appears that the purpose of this repetition is to ensure that when business rescue practitioners deal with the business of a company and the sale of its assets or business, they must avoid any form of conflict in the sense that they must not act in a manner in which they personally gain or family members or friends personally gain in the matter to the detriment of the company and/or affected persons.

In this regard, business rescue practitioners would more than likely have the same duties and responsibilities and apply the same level of ethics as liquidators would.  At the very least, they must apply the same standards as directors in this regard.

One of the possible conflicts that can arise in business rescue relates to the fees of the business rescue practitioner.  The Companies Act sets out the statutory fees applicable to the business rescue practitioner.  These fees are relatively low when compared to the hourly rates of similarly qualified professionals.  Whether by design or because the statutory rate has not been updated since the Companies Act was promulgated, it has become common practice for business rescue practitioners to negotiate a higher hourly fee and an additional success fee. This arrangement must in terms of the Companies Act be payable upon the attainment of a particular result, such as the publishing of a business rescue plan and/or the approval and/or implementation of the business rescue plan.  The success fee itself is often a lump sum or a percentage of the amount realised for or paid to the employees, creditors and shareholders of the company.

This form of arrangement is perfectly acceptable provided that a simple majority of the creditors endorse any additional fees in terms of section 143(3) of the Companies Act or the business rescue plan which includes the additional fees is adopted.  The above process is ethically sound given that creditors and shareholders are afforded an opportunity to vote against the proposal.

Business rescue practitioners must however be careful to structure their success fees in such a way as to eliminate a conflict between their own personal interests and those of the affected persons (creditors, employees and shareholders).  When business rescue practitioners are incentivised to benefit from higher values being achieved or certain targets being achieved, this could satisfactorily address these potential conflicts.

An inherent personal conflict may arise in this context however as the business rescue practitioner’s fee is often tied to the success of the rescue and he or she may be reticent to end the rescue proceedings and place the entity into liquidation given the personal financial implications that will inevitably flow from such action.

A further ethical conflict will arise when a business rescue practitioner as part of his or her remuneration would become entitled to equity in the company, that is, the business he or she is rescuing.  By way of example, a business rescue practitioner would endeavour to compromise all creditors to ensure that when the company comes out of rescue, it has no liabilities and only assets. From an ethical and conflict perspective, a mandate which entitles business rescue practitioners to earn and own equity in a company post rescue can and usually will create an ethical dilemma and conflict for a business rescue practitioner.  In this scenario, it is in the business rescue practitioner’s interest to compromise and eliminate liabilities and preserve value and assets. This would assign value to the equity he is entitled to. However, this would also act counter to the interests of other affected persons.  We recommend that business rescue practitioners should avoid this type of conflict as it will, on regular occasions, test their ethics.

Conclusion
It is abundantly clear from the applicable jurisprudence that our courts are uncompromising in their endorsement of the high ethical standard required of business rescue practitioners, albeit that their duties may not necessarily be equated to those of an officer of the court or a director of a company.

Whilst Wallis has shown that these sections may not be particularly helpful in working out the extent of a business rescue practitioner’s responsibilities during rescue, what is certain is that business rescue practitioners:

• Should not be held liable for any acts or omissions made by them in good faith and in the course of the exercise of their powers and performance of their functions as business rescue practitioners;
• Will be liable for any acts or omissions amounting to gross negligence in the exercise of powers and performance of the functions of practitioners;
• Must act with honesty and integrity in their dealings with affected persons.
• Accordingly, what is dealt with in this article must be considered as the high water mark of what a business rescue practitioner should consider ethically rather than a granular analysis of every ethical responsibility a business rescue practitioner may have. 

In next month’s issue, we will explore how a business rescue practitioner’s ethics will be challenged when fulfilling their obligations to investigate the affairs of the company and to balance the interests of all affected persons during the business rescue proceedings.  We will also highlight the risk of sanction by the courts faced by business rescue practitioners who do not meet the high standards expected of them in discharging their duties.

Colin Strime is the Joint CEO of Fluxmans & Director: Business Rescue & Insolvency, Litigation

Ryszard Lisinski is a Director: Business Rescue & Insolvency, Litigation