Directors and business rescue practitioners – the Companies Act rewards you for honesty and acting reasonably

Of late there have been some interesting reported decisions of the High Court dealing with duties of business rescue practitioners (“BRPs”) and their liability for breach of such duties. One such interesting decision is of the full bench decision of the Gauteng Local Division of Judges Windell J., Mia J. and Mdalana-Mayisela J. in the reported decision of Van Der Heever N.O. v Van Tonder 2021 JDR 2612 (GJ).

In this appeal Sections 45, 77, 134, 140 and 218 of The Companies Act 71 of 2008 (“the Companies Act”) were of application and considered. Some of the findings in regard to these sections warrant separate comment and discussion (this for another day). This article only then deals with and focuses on defences BRPs (and by implication directors too) have when faced with claims for negligence and contraventions of certain Sections of the Companies Act.

Brief facts

The respondent was the duly appointed business rescue practitioner of a group of companies. Despite holding what he (and in turn what the courts) believed was a genuine belief that he could trade the companies back to solvency, he was unsuccessful in doing so. All of the companies in the group were then placed in liquidation.

The applicants are the duly appointed joint liquidators of the group of companies. They instituted action against the respondent in his personal capacity for alleged losses suffered by one of the companies, “Baobab”, whilst as it was alleged the respondent was carrying out the performance and functions as its business rescue practitioner. The liquidators were unsuccessful in the court a quo and appealed to the full bench. This is the decision of the full bench.

Lombard Assurance (“Lombard”) held as security for its claim a cession of Baobab’s book debt and the business rescue practitioner, contrary to Lombard’s rights, applied the proceeds of the book debt to discharge not only Baobab’s liabilities, but also liabilities of other companies in the group. The liquidators deemed these payments void as contravening Section 45 of the Companies Act, a breach of Lombard’s rights under Section 134 of the Companies Act, a breach by the business rescue practitioner of his fiduciary duties to Baobab and an act of negligence on his part.

In dealing with the appeal the appeal court considered the following sections in the Companies Act:

• the provisions of Section  134;
• Section 76;
• Section 77(3) as read with 77(4) and 77(5);
• Section 77(9)  .
• Section 140(3)(b) and (c); and
• Section 218(2).

Section 77(9) featured prominently and repeatedly. This section applies to both BRPs as it does to directors.  Therefore, what is stated below can be read as equally applying to directors of a company.

Section 77(9)

As stated, Section 77(9) appears to be the successor to Section 248(1) of the (repealed) Companies Act of 1973. Section 248(1) reads as follows:

248.     Relief of directors and others by court in certain cases.

(1)      If in any proceedings for negligence, default, breach of duty or breach of trust against any director, officer or auditor of a company it appears to the Court that the person concerned is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, the Court may relieve him, either wholly or partly, from his liability on such terms as the Court may think fit.

Accordingly, Section 77(9) is not novel. Although not identical in wording to Section 248(1) of the Companies Act, it is substantially similar in wording. In comparing these sections, the court found as follows:

Section 77(9) allows a director (and of course a BRP) to be relieved from liability either because he acted honestly and reasonably or if it would be fair to excuse the director. Section 248(1) of the Companies Act however requires both that the director (and of course BRP) has acted honestly and reasonably and that he ought to be fairly excused having regard to the circumstances.

The court thus observed that these sections differ by the use of the word “or” in Section 77(9) and the word “and” in Section 248(1).

Facts proven

Obviously the proven facts in the matter are relevant to the outcome. The appeal court analysed them and found, inter alia:

[61]    On a conspectus of evidence presented, it cannot be said that the respondent committed wilful misconduct or that he acted in wilful breach of trust. The respondent was reasonable, honest and bona fide in his attempts to rescue the companies, as was his mandate. He could not treat Baobab and the remaining companies as separate entities for the reasons set out above. For one to function, the remaining companies had to function. It would be counter intuitive to the role of the business rescue practitioner to stop trading where he determined that the company/ies could be rescued.

Further interesting findings of the court

For purposes of Section 134 of the Act – does a cession of book debt constitute property?

With regard to the utilisation by the business rescue practitioner of the proceeds of the Baobab debtors (ceded to Lombards) including for the payment of group companies’ expenses and in regard to the liquidators’ allegation that this amounted to a contravention of Section 134 of the Companies Act, the business rescue practitioner testified that he was entitled to use the funds because:

• of the wording of the agreement of cession;
• the impact of the moratorium (created by Section 133); and
• because he was acting on the advice of his attorney, which advice was endorsed by both senior and junior counsel (obviously a reference to the defences set out in Sections 76(4) and 76(5) of the Act).
• In support of the submission that Section 134 had no application to the cession of book debts the business rescue practitioner contended that:

• such cession did not constitute “property” as contemplated in this Section;
• the use of the funds by him did not represent a “disposal” as such of such “property”;
• the cession of the book debt, more particularly a cession in securitatem debiti is irreconcilable with the use of the words “disposal” and “sale proceeds” as these terms are utilised in Section 134(3)(a) and (b) of the Companies Act. In this regard he argued that the words “sale proceeds attributable to that property” can only imply two things:
• the first is that the “disposal” is used in the context of a “property” that is sold;
• it is not used in the context of defraying operating expenses or even advancing a loan, for there are no proceeds of a loan that may be given to the security holder.
• the legislature refers to “the company” in Section 134(1)(a) and (b) of the Companies Act whereas in Section 134(1)(c) of the Companies Act, the legislature speaks separately of the “practitioner”.

Because Section 134(1)(c) contemplates the “company” first securing the written permission of the practitioner in respect of the “company” wishing to dispose of property, it is arguable that Section 134 as a whole is intended to regulate the circumstances where the “company” as opposed to the “practitioner” wants to effect a disposal of the company’s assets.

Novel contentions indeed.

In dealing with these contentions the courts proceed to interpret Section 134. In doing so they referred to Section 134(1)(a)(ii) and advised that in these circumstances “property” disposed of “bona fide” in a “transaction at arms’ length” must be approved in advance and in writing by the practitioner. Therefore, so the court concluded “reference to the practitioner in this sub-section clearly contemplates a situation where the directors are still involved in the company and have either been given a management function by the practitioner or where they are exercising the “functions” of directors.

The court then considered certain authorities  and after agreeing with the reasoning and conclusions in those matters, followed them and concluded “I am of the view that the cession of book debts constitutes property for the purposes of Section 134 of the Act.” It reasoned as follows:

Firstly, the legislature did not state that it must be the “company’s property” that is disposed of in Section 134, but any property over which another person has a type of interest or security. If a sensible meaning is given to the words “any property”, it would therefore cover the current scenario and include the cession of book debts. Any other interpretation will leave a creditor in a similar position without any protection. The respondent [i.e the business rescue practitioner] contends that to make cession of book debts subject to Section 134 would not make business sense, because most companies in financial distress have cession of book debts, and the possibility of creditors agreeing to the use of book debts is slim, which will ultimately result in the failure of the business rescue. It is, unfortunately, not that simple.

Secondly as far as the “disposal” is concerned, it is not only the actual, physical disposal of property that is covered by this section. If the legislature intended to only cater for the “selling of property”, it would have said so. The legislature in my view, purposefully used the words “disposed” which, according to Collins Dictionary means “to deal with or settle” or, “to give”, “sell” or “transfer to another”. On a proper reading of Section 134 it is clear that the word “dispose” is not limited to the selling of property.

For these reasons, inter alia, the court concluded that the business rescue practitioner breached the provisions of Section 134 by disposing of the book debts without obtaining the prior consent of Lombard.

The liquidators’ allegations that the BRPs contravened Section 45 of the Act

The BRPs denied that Section 45 applies to the companies in rescue because a company in rescue:

• could not satisfy the solvency or liquidity test (a requirement of this section);
• could not pass a special resolution (also a requirement of Section 45); and accordingly,
• and then Section 45 thus could not apply to business rescue and if it did, it was limited to the provisions of financial assistance to a director (which was not an issue in this matter).
• The court did not agree and found that Section 45 “is not excluded by Chapter 6 [a reference to companies in business rescue] and when such a situation arises there has to be compliance with the requirements set out in Section 45”. However, the court also concluded that “paying the expenses of other companies is not “financial assistance” as contemplated in Section 45 but even if it was, …. that the respondent should be excused in terms of Section 77(9) as he acted honestly and reasonably, alternatively, it would be fair to do so”.

All of the above underlining is the writers.

Thus, notwithstanding the breaches by the business rescue practitioner of Sections 45 and 134 of the Companies Act, the Section 77(9) defence featured prominently and was effectively applied to clear the BRP of any liability that should ordinarily flow from such breaches.

Section 77(9) appears now to be one of the defences (directors and) a business rescue practitioner can successfully raise to claims founded for breach of duty, negligence, breach of fiduciary duties and the like.

The requirements for a Section 77(9) defence

To successfully raise this defence the business rescue practitioner (or director) must:

• not be found guilty of unlawful misconduct or unlawful breach of trust (i.e fraud and/or reckless and/or gross negligence); and
• have acted honestly and reasonably. With regard to reasonableness and honesty the court found that that:
• “reasonableness” is an objective factual enquiry; and
• the question of “honesty” is a subjective test; or
• (there is thus a two stage test); or
• acted in a manner which it appears to a court having regard to the circumstances of a case, it would be fair to excuse the business rescue practitioner from liability.

In the result and applying Section 77(9) of the Act the court found:

[71]    I am in agreement with the court a quo’s finding, as alluded to above, the respondent generally held the belief that he could trade the companies out of business rescue. It took reasonably diligent steps to become informed about the cession and had a rational basis for believing that the funds should be used to pay for the debts of the group. He had a bona fide belief that it was in the best interests of the company. Had he not utilised the amounts received from Baobab’s debtors to pay group expenses, including those of Baobab, Baobab would not have been able to trade and satisfy its obligations under the Kudumane contract and thus generate further revenue. The group including Baobab would have perished and as the business rescue practitioner, his aim was to save them from such peril. In the circumstances, he was not reckless nor was he negligent. He acted reasonably, in good faith and in the best interests of the company …… The respondent is excused from any liability in terms of Section 77(9) of the Act.

Take-outs from this judgment

This judgment must from a business rescue practitioner’s (and directors) perspective be most welcome, certainly where they have acted honestly and reasonably. Where it is proven they have, the courts can and more than likely will excuse them from any liability even liabilities arising from negligence and various contraventions of Sections of the Companies Act.

If they don’t satisfy the honesty and reasonableness test and in the courts view, having regard to all the circumstances and facts, it would be fair to excuse them, the courts are then free in the exercise of their discretion to do so.

It certainly now appears that until this judgment is overturned on appeal (if ever), that Section 77(9) is a full and absolute defence which a BRP (and a director) can raise to claims brought against them excluding claims based on fraud, recklessness or gross negligence. We say so as these exceptions cannot amount to acts or omissions made in good faith in the course of the exercise of the powers and performance of the functions of the practitioner and could amount to “wilful misconduct” and/or “wilful breach of trust”.

The effect of this judgment is both reassuring and as it appears to create some type of salvage and/or create a reward for BRPs and directors who have acted reasonably and honestly. It certainly assists those BRPs and directors who made business or other decisions which in retrospect were found to be wanting or bad decisions, but did so honestly and reasonably. Those who comply with the requirements of 77(9) are ensured that they will not be punished or rendered personally liable for acting on such decisions. This judgment is also comfort for directors and BRPs who regularly have to make decisions to try and save a company, do so honestly and reasonably yet at the same time act negligently and/or in breach of certain provisions of the Companies Act.

There is much in this judgment which one can write upon. As stated, this for another time.

[1] “77(9) In any proceedings against a director, other than for willful misconduct or willful breach of trust, the court may relieve the director, either wholly or partly, from any liability set out in this section, on any terms the court considers just if it appears to the court that: (a) the director is or may be liable, but has acted honestly and reasonably; or (b) having regard to the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.”

[2] BP Southern Africa (Pty) Ltd v Intertrans Oil SA (Pty) Ltd 2016 JDR 2258 (GJ) and Kritzinger & Another v Standard Bank of South Africa [2013] ZAFSHC

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