Ethics to the Rescue: Discharge your duties with care (Part 2)

As discussed in the first article on Ethics to the Rescue, the ethical duties and responsibilities are further unpacked in this article.

We continue to explore at a very high level 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.  We specifically refer to the business rescue practitioner’s obligation to investigate the affairs of the company, balancing the rights of affected parties, amendment of adopted business rescue plans and the sanctioning of business rescue practitioners.

Investigation into the affairs of the company
In terms of Sections 141(1) and (2) of the Companies Act:

“…

(1)    As soon as practicable after being appointed, a practitioner must investigate the company’s affairs, business, property, and financial situation, and after having done so, consider whether there is any reasonable prospect of the company being rescued.

(2)    If, at any time during business rescue proceedings, the practitioner concludes that –

(a)    there is no reasonable prospect for the company

            to be rescued, the practitioner must –

(i)    so inform the court, the company, and all affected persons in the prescribed manner; and

(ii)    apply to the court for an order discontinuing the business rescue proceedings and placing the company into liquidation…”

In discharging this obligation, business rescue practitioners must at all times remain independent and are obliged to investigate and report the results of such investigation, invariably in circumstances where business rescue practitioners will often be investigating the very board that appointed them and the team they are working with to rescue the company.  The relationships that form during the pre-rescue investigations and during the process cannot be allowed to influence judgement or create bias in this investigation.

If the business rescue practitioner discovers that the entity cannot be rescued, in terms of sections 141(2)(a)(i) and (ii) of the Companies Act, he or she must inform all creditors accordingly and then apply for an order discontinuing the rescue and placing the entity in liquidation.  This can create another ethical test for business rescue practitioners who must put their personal interests to one side, assess the situation and apply to the court for conversion of the proceedings into liquidation.

Balancing rights of all affected persons
Section 7(k) of the Companies Act states the following:

“…

The purposes of this Act are to –

… provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interest of all relevant stakeholders…”

Whilst the wording of this obligation is clear, in practice it can become quite difficult to achieve this novel endeavour.  An example of a difficult situation that often arises is where the sponsor to a rescue dictates the terms of the funding that is to be provided or the terms of the business rescue.  These terms might favour the sponsor over employees and other creditors but without such funding, the entity may not be saved and many employees’ jobs lost as result.

One can also imagine how difficult it would become at times to balance the interests of shareholders with those of employees and creditors.

Amendment of adopted business rescue plans
Section 152(1)(d)(ii) of the Companies Act only affords business rescue practitioners the right to amend a business rescue plan before it has been adopted by creditors.  Despite this provision, it has become common practice for business rescue practitioners to unilaterally amend approved business rescue plans after adoption. The justification for this amendment emanates from wording included in the approved business rescue plan to allow for this form of amendment.

The Supreme Court of Appeal in Kransfontein Beleggings (Pty) Ltd v Corlink Twenty Five (Pty) Ltd 2017 JDR 1577 (SCA) held that not even a court can alter an approved business rescue plan and “foist on creditors a plan which they have not discussed and voted on” and that “the only plan which practitioners can implement is one adopted by creditors in accordance with section 152 of the Companies Act.”

In addition, the court in Booysen v Jonkheer Boerewynmakery (Pty) Ltd and Another [2017 (4) SA 51 (WCC) in dealing with the question of whether or not business rescue practitioners may reserve for themselves the right to amend a business rescue plan unilaterally after it had been adopted by creditors, held that there is no room for a business rescue practitioner to do so.

Effecting such amendments in these circumstances is accordingly unlawful and unethical.

Sanctioning of business rescue practitioners
It is clear from recent case law that the courts are taking a dim view of business rescue practitioners that do not act with integrity or do not properly comply with the requirements of the Companies Act.

In the unreported case of EBM Project (Proprietary) Limited (In Business Rescue), the business rescue practitioner of EBM brought an application for liquidation and attempted to circumvent the requirement to notify affected persons of the legal process. 

Judge Opperman found that any conduct that has the effect of preventing participation of affected persons in litigation is unlawful. This is because any such conduct defeats the statutory rights afforded to affected persons.

When deciding on costs, Opperman J ordered that costs be awarded de bonis propriis as against the business rescue practitioner (i.e. to be paid personally by the business rescue practitioner himself/herself) given the true nature of the ex parte application (without service on affected parties), namely to attain a provisional order of liquidation without affected persons being afforded the opportunity to place their version before the court.  The business rescue practitioners in this matter were found have flouted the provisions of the Companies Act and to have deliberately failed to notify affected persons.

In the matter of Montic Dairy (Pty) Ltd (in liquidation) and Others v Mazars Recovery & Restructuring (Pty) Ltd and Others 2021 (3) SA 527 (WC) the court confirmed that any payment of fees or disbursements to a business rescue practitioner will be voidable and capable of being set aside in terms of section 341(2) of the Old Companies Act (61 of 1973) (“the Old Companies Act”) if made after the commencement of liquidation.  What was interesting in this case is that the courts applied Section 348 of the Old Companies Act i.e. that the date of liquidation was the date that the liquidation application papers were issued by the High Court.  In effect, when the provisional liquidation order was granted, it was done so retrospectively to that date.  It was during this period, i.e. from date of issue of the liquidation application and until a provisional order was granted, that the business rescue practitioners paid themselves substantial fees which the courts then set aside.

This highlights the dilemma faced by business rescue practitioners if their investigations indicate that the company is no longer capable of being rescued, in as much as they are obliged to apply to place the entity in liquidation if they discover that it is not capable of being rescued, whilst being fully aware that this course of action may result in them having to pay out of their own pockets to launch the application for liquidation (including all of the costs associated therewith i.e. attorney’s costs, counsel’s costs and administrative costs).

Business rescue practitioners who find themselves in this intolerable position would then again test their ethics as they could not properly but legally apply other sections of this chapter to avoid them having to pay such costs.  By example, they could propose a business rescue plan which they know will be rejected by creditors and then on such rejection if affected parties do nothing further, file a notice taking the company out of rescue.  Effectively they would then circumvent their obligation to apply to court at a substantial cost to themselves to place the company in liquidation.  This conduct although legal will be frowned upon from a strictly ethical and moral perspective.

Conclusion
As concluded in Part 1, it is 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.

With this in mind, business rescue practitioners should stick to the letter of the law when carrying out their duties. When the law is unclear, they should adopt the mantra set out in section 7(k) of the Companies Act and attempt to balance the rights of all affected parties, as difficult a task as this may turn out to be. When it is difficult to apply section 7(k), a business rescue practitioner should then take the decision which is morally and ethically correct.

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

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