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Business rescue and the practitioners tasked with managing it

Article provided by CIPC

Business rescue was created by the drafters of the Companies Act, 2008, largely in substitution of the concept of “judicial management” that was created in the 1926 Companies Act, as a means of assisting financially ailing companies.

Business rescue or corporate rescue refers to the restructuring or reorganization of a corporate entity. It is aimed at moving away from the culture of liquidation, and rather focusing on getting “financially distressed” entities back on their feet. 

Since the inception of the Companies Act, 71 of 2008 on 1 May 2011, many companies and close corporations were faced with financial distress and made the decision to opt for business rescue as a mechanism of remaining part of the economy successfully. Others, however, were hopelessly insolvent and could not be saved. The ideal of business rescue seems to be making a positive impact on the South African economy.

This article focuses more on the practitioners tasked with tending to the process of turnaround of a corporate entity, with a positive result, rather than the business rescue process itself. Although every provision was made by the legislature to ensure that appointed business rescue practitioners are appropriately qualified to make the right decisions for all affected persons in the business rescue journey, certain questions about the functions, powers and duties of a business rescue practitioner have arisen in recent years.

One such question relates to the power of an appointed business rescue practitioner (BRP) to appoint a further practitioner to the rescue of the same company. The varying opinions and interpretations herein has been tested from the court a quo to the Constitutional Court, providing us with a valuable starting point when it comes to implementation. The interpretation of Section 139(3) of the Companies Act 2008 (hereinafter referred to as the Act) is of particular importance in ascertaining the powers and authorities of BRP’s in the light of further appointments. The relevant section read as follows:

“139(3) The company, or the creditor who nominated the practitioner, as the case may be, must appoint a new practitioner if a practitioner dies, resigns or is removed from office, subject to the right of an affected person to bring a fresh application in terms of section 130 (1) (b) to set aside that new appointment.”

 In the extract from the SCA Judgment infra it is clear that the respondents in this matter stepped down from their contention, and in the opinion of the Commission rightly so, that the existing business rescue practitioners had any power or authority to appoint another practitioner.  

“In the result, the merits turn on the source of the power to appoint a substitute in the event of the death, resignation or removal from office of a practitioner. The respondents correctly accepted that the Act does not confer any power on a practitioner to appoint another practitioner.

As indicated earlier in this article, it is necessary to highlight the reasons inferred by the Constitutional Court for their decision, in order to adequately provide the reader with a clear picture of the CIPC’s interpretation of the various sections of the Act.  

The Constitutional Court (CC) judgment (under case number CCT 305/20) was handed down in November 2021, in terms of a business rescue matter where the authority of a company (or existing BRPs) to appoint further business rescue practitioners came into question as well as the authority of the Companies and Intellectual Property Commission (CIPC) to accept or refuse such appointments (albeit to a lesser extent).

The clarity provided in the unanimous judgment (full bench – Constitutional Court) is of the utmost importance in cementing the correct application of the business rescue legislation and the role that the CIPC must play in such circumstances.

The CC highlighted the below in its finding:

“Business rescue practitioners play a vital role in the success of business rescue proceedings.  It is desirable that there should be clarity about the interpretation of the statutory provisions governing their appointment.” (Extract from the Constitutional Court of South Africa Judgment (CCT 305/20))

“Who then has the power of appointment in terms of section 139(3)?  The answer must be the company, since otherwise there would be a lacuna, and, as I have said, statutes must as far as reasonably possible be interpreted to avoid a lacuna.”

“In the case of voluntary business rescue, there is a balancing of the rights and interests of stakeholders: the company retains its right of appointment, while section 139(3) expressly preserves the right of creditors to launch a fresh challenge in terms of section 130(1)(b), if grounds for such challenge exist”

The Constitutional Court (CC) found ultimately that the company retains the power of appointment in terms of section 139(3) of the Companies Act, 2008.

The comments made on the authority and powers of a business rescue practitioner, by the highest court in the land, is illustrative of the position that the Commission took in terms of the interpretation of the applicable legislation.

In the event that a business rescue practitioner resigns, dies or is removed from office (by a court of law), the company must appoint a new practitioner. This right of appointment remains subject to the right of an affected person to bring a new application in terms of section 130(1)(b), to set aside that new appointment.

The clarity provided by the courts on the interpretation of section 139(3) of the Companies Act, 2008 is of immense value. This precedent provides a much needed “baseline”, so to speak, in regulating the appointment of business rescue practitioners, both initially at the start of business rescue proceedings, as well as subsequently, should section 139(3) become applicable.

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