Mind the gap: addressing legislative loopholes

Jonathan Faurie
Founder Turnaround Talk

On 11 October, Turnaround Talk hosted a Round Table which focused on the current legislative framework that is governing the business rescue industry as well as some of the future developments we can look forward to.

A lot of ground was covered during the discussion. It is clear that a lot of thought needs to be put into the business rescue of State-Owned Enterprises (SOEs) as there are inherent conflicts between the Companies Act and the Public Finance Management Act. This causes a problem as it may lead to delays which is never a beneficial development in any business rescue.

We also saw that there will be a lot more public participation in the form of labour unions who want to protect the interests of workers and will require BRPs to publish a formalised plan that will address the retrenchment issue (if there is one). The danger of this is that certain BRPs may be tempted to publish very generic (vanilla) plans in order to get the business rescue plan approved. The problem with this is that when it comes time for retrenchments, Unions will argue that the BRP never acted in good faith, and the process will be subjected to legal challenges.

Due to time constraints, there were some issues that weren’t covered in the discussion. Turnaround Talk caught up with Jessica Osmond to ask her to cover three additional areas of concern.

Turnaround Talk: In your presentation, you mentioned that the courts are clamping down on the duties and obligations expected of BRPs. You also make mention of more onerous expectations when it comes to good faith on the part of BRPs. What has changed? Has this changed because of previous instances of gross misconduct? Please discuss both points. 

Jessica Osmond: Over the years we have seen much critism and complaints of Business Rescue Practitioners and questions surrounding their conduct during a rescue process. This was predominantly owing to the fact that initially we often had inexperienced practitioners, taking on the task of rehabilitation and turnaround of a business in what is already less than ideal circumstances, with the significant and wide-ranging management powers afforded to BRPs during the course of business rescue proceedings, by virtue of the provisions in Chapter 6.

As was once quoted in a famous Marvel movie: “With great power, comes great responsibility”, and with this in mind, this expectation of a high standard of conduct is no different or less in the context of business rescue proceedings with the powers afforded to BRPs.

Moreover, who may be held personally liable in instances where they fail to act with the required degree of care and skill.

As recently as April this year we saw an appeal to the full bench of the High Court in the case of Van Den Heever N.O and Others v Van Tonder, where the court had to determine the scope for a BRPs liability in his personal capacity on the grounds of misconduct whilst carrying out his duties as a BRP.

Whilst the court a quo and the full bench did not find fault or misconduct on the part of the BRP, the judgment once again highlighted that notwithstanding the wide-ranging powers afforded to BRPs the scope for BRP liability could not be overlooked.

Jessica Osmond
Associate: Dispute Resolution Cliffe Dekker Hofmeyer

Turnaround Talk: You made mention that there are some grey areas in Chapter 6 that the courts need to pay attention to/address. What are these grey areas and how are BRPs taking advantage of them.

Jessica Osmond: As mentioned during my discussion, we recently saw the Labour Court and Labour Appeal Court take a stance in the interpretation of section 136(1)(b), insofar as the contemplation of retrenchment is concerned.

Going forward I think we will still see some further discussion around section 136(1)(a)(ii) regarding a BRPs entitlement to agree on different terms and conditions of employment with an employee. It will be interesting to see whether the courts determine how far is too far in this regard, and what would be reasonable to expect an employee to agree to in the circumstances. This was touched on in the Airline Pilots v SAA case, however, I do believe that further clarity may be sought in this regard.

And lastly, I think the recent directives as released by CIPC providing for the filing of a voluntary business rescue on their new eServices platform may require further court clarification as the directives are seemingly not in line with the Companies Act Regulations insofar as filing is concerned.

This discrepancy is critical as it has the potential to impact the date of the actual filing.

Turnaround Talk: Your associate, Kylene Weyers, made mention that there are instances where the business rescue process is abused. Do you feel that this is a prevalent practice? What are the challenges associated with this abuse?

Jessica Osmond: Filing for business rescue has been as easy as passing a board resolution placing the company in rescue in the circumstances where there are grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rehabilitating the company. With the filing of a rescue, there are many protection mechanisms afforded to businesses that are in rescue, these having been put in place in order to provide breathing room for the financially distressed entity to rehabilitate. However, the risk of abuse often arises as a result of the procedural and financial barriers to entry being very low; shareholders’ approval is not required, nor prior notice to unsuspecting creditors, and it is not necessary to apply to court.

Due to the ease of initiating business rescue proceedings, there has been the risk of applicants commencing with the business rescue process even when they are well aware that there is  in fact no viable business to rescue and that a better return for creditors will not be obtained.

In many instances, it seems as though resolutions passed for business rescue in these instances are nothing more than attempts to delay the ultimate demise of companies that could clearly not pay their debts, and to buy more time from creditors who are threatening liquidation.

One of the more pertinent protection mechanisms provided for in the Act upon the commencement of business rescue proceedings is that of the implementation of the moratorium of creditors’ claims against the company in terms of section 131 of the Act. This moratorium lasts for the duration of the business rescue proceedings and extends to both the prevention of legal proceedings and/or enforcement actions being brought against the company in business rescue.

Another area where there is room for abuse is in the instance where an opportunistic debtor elects to respond to a liquidation application with a counter business rescue application, merely for the purpose of delaying or suspending the impending liquidation proceedings, and in the instance where there is no real prospect of rehabilitation of the company.

A permanent regulator needs to be appointed for the business rescue industry
Photo By: Infinitum Compliance

Formalisation please
Two things became apparent during the round table discussion.

The first thing that became apparent was that there is significant value in the business rescue process and that it will become a major economic driver in the years to come. Particularly if the economic challenges of the Covid-19 Pandemic will persists beyond 2024 and if the current challenges when it comes to the management of SOEs continues.

The second issue that became apparent in the discussion is the fact that there are legislative loopholes that exist, and while government addresses these loopholes, there needs to be a formalised process to establish a regulator that will keep BRPs in check. The Companies and Intellectual Property Commission currently plays the role of regulator on a De Facto basis. While the industry supports this, and will support this in the future, the promises and assurances made by the Department of Public Enterprises regarding the formalisation of a regulator needs to come to fruition.  The industry is to important to have glaring loopholes/grey areas and the industry needs to prosper as it adds significant economic value.