WHERE TO DRAW THE LINE - Duties of a Business Rescue Practitioner

Author :   Keith Braatvedt BROOKS & BRAATVEDT INC.

"WHERE TO DRAW THE LINE” Duties of a Business Rescue Practitioner

A business rescue practitioner (“BRP”) must investigate the company’s affairs, business, property and financial situations shortly after he has been appointed.  The BRP gets the company with the financial situation that exists at the time of business rescue, namely that the BRP “takes the financial situation of the company as he finds it”.  The next task of the BRP is to evaluate whether there is a reasonable prospect of rescuing the company.

In order to prepare for the Section 147 meeting, the documents and information that the BRP has to rely on are, inter alia, interviews with directors and management, financial statements of the company (whether audited or unaudited), management accounts all other documentation evidencing the affairs, business and property of the company.  The BRP, after having received these documents and information, cannot be expected to fully appreciate all the financial nuances of the company and the performance of the company.  He cannot be expected to have any form of insight as to who is who and what role certain outsiders play.
Two questions arise, firstly whether the BRP should discuss the company’s financial position with the investors, shareholders or with any and all interested parties. Secondly whether the BRP should try and understand the employees’ position by entering into discussions with the unions, in many cases there are competing union agendas.

If the BRP finds that there are extraordinary items in the financial statements or if the previous or latest audit was qualified, the question arises whether the BRP has a duty to research these factors.

If the answer to these questions is that the BRP has to ‘go behind’ the facts underlying the financial position of the company then I think two consequences will arise.  Firstly the BRP will inevitably be obliged to question the reliability or integrity of the underlying information and if found to be questionable the BRP might then be reluctant to express an immediate view on the prospect of rescue.  Secondly the BRP cannot and will not confidently be able to develop and publish a business rescue plan until such time as his concerns have been addressed.  A plan full of conditions, uncertainties and ‘may be’s’ is not a good plan and will certainly not be capable of implementation. It is however conceivable that the BRP might, once he concludes his investigations, publish a business rescue plan that excludes participation of former management and directors but rescues the core business and save the jobs of employees.

I raise these questions because a serious concern arises as to where the line must be drawn in respect of the duties of a BRP.  A BRP can only work with the financial information he gets.  He certainly does not have the luxury of time to go behind the information that he has received.
If the proverbial house of cards comes tumbling down after the adopted business rescue plan has failed the normal reaction is to search for somebody to blame.

It is my view that the BRP cannot be expected to ‘finese’ the hidden information nor can the BRP be expected to wave a magic wand and undo or uncover hidden game changing financial issues concealed by the pre-business rescue directorate or management.

The BRP, in terms of Section 140(3)(b), has the responsibilities, duties and liabilities of a director of a company.  A director is part of the controlling mind of the company and has himself developed and moulded the corporate brain and footprint.  Section 140(3)(b) of the Act needs to be analysed because the fundamental issue is the applicability of Sections 75 to 77 of the Act to BRPs who have a managerial role but who are not directors in any sense of the word.

Duties of directors are derived from the common law and from Act 71 of 2008.  The two sources of directors’ duties, namely the common law and Act 71 of 2008 apply in parallel.  When applying Sections 75 to 77 of the Act to a BRP the message is clear, namely that the BRP must exercise the powers of a BRP and perform the powers of a BRP in good faith and for a proper purpose.  I emphasise that a BRP is not a director of a company in business rescue.  Importantly I want to emphasise that the Act does not state that a BRP must carry out the duties of a director nor does the Act does not state that a BRP must do the day-to-day work of a director.

The Act simply states that the BRP has full management control of the company.  Therefore the BRP can only be expected to manage what the existing board and management do after the business rescue.
A BRP must understand that in the process of ‘managing’ he could be sued if he fails to comply with the responsibilities, duties and liabilities of a director as set out in Sections 75 to 77 of the Act.  It is therefore necessary to establish essentially what these duties are.

Section 75 refers to the requirement that a director must declare his personal financial interest in respect of the matter to be considered at a meeting of the board of directors.  Section 77 of Act 71 of 2008 is the section dealing with the liability of directors and prescribed officers.

At common law, directors have a fiduciary duty of good faith, honesty and loyalty.  Directors also have the duty to exercise reasonable care and skill.  This is not a fiduciary duty.  Under the provisions of Act 71 of 2008 (Section 76), directors have a mandatory duty to comply with Section 76.  They are not entitled to contract out or avoid complying with these duties.

The essence of Section 76 of Act 71 of 2008 is that a director, when acting in the capacity as a director, must exercise the powers and perform the functions of a director in the best interests of the company.  It is my view that great confusion and difficulty has been caused by equating the fiduciary duties of a director, when acting as a director with the fiduciary duties of a BRP, when a BRP acts in the capacity as a BRP.

A director has full and complete access to all the financial information of a company and has developed the company’s direction and strategy over all the years he has been a director.  Simply put, the director and his fellow directors are the architects and developers of where the company has come from and where the company finds itself.
Section 140(3) of Act 71 of 2008 states that during business rescue proceedings, the BRP has the responsibilities, duties and liabilities of a director as set out in Sections 75 to 77.  The only correct way to interpret this section is that during business rescue proceedings the BRP has a mandatory duty to comply with the standards of conduct set out for a director when the BRP acts in his capacity as a BRP.

My question therefore is in what capacity does a BRP act?  By no stretch of the imagination can it be said that a BRP must act as a director and it cannot be said that a BRP, in any way, assumes the powers and duties of a director.  The Act speaks for itself, namely that Section 140(1)(a) states that a BRP has “full management control”.  The Act does not state that a BRP is a director.

In my view the task of the BRP is to have a broad oversight of every operation function and detail of the company.  Disaster will strike if the BRP personally tries to deal with every situation, event and happening in the company after it is put into business rescue.  Catches have been dropped and will be dropped in the process if this happens.  I know of situations where a company has gone into rescue and the existing board of directors and management lose complete interest and pass everything to the BRP.

I hold a view that a BRP must not take an assignment unless he gets the upfront categorical commitment and support from the existing directors and management of the company.  A practical example is if a BRP does not identify that PAYE is being withheld and not being paid over to SARS after business rescue.  Does this mean that the BRP has breached his fiduciary duties as a manager, being a person in full management control of the company in substitution for its board and pre-existing management?  My answer is that a BRP can never be held liable.

If the issue of non-payment to SARS was specifically brought to the attention of the BRP who was alerted to the fact then clearly he has to deal with it in his capacity as manager, failing which he can be held liable.  The issue however is where to draw the line.  The BRP can never be expected to deal with each and every issue in the operation of the company in respect of which he has no knowledge, no involvement and has received no documentation whatsoever on the issue. I do however not think that it was ever the intention of the legislature and this is also not what it is about in other jurisdictions where rescue regimes emanate from.

I think there is a clear line in this matter, namely that the BRP can only work with the information that he is given and he can only be expected to manage and exercise his functions based on the information as he receives it.  My question is what happens if the integrity of the information is open to serious doubt and if the financial information given to the BRP is false and misleading.  In such a case, the BRP can safely rely on the fact that he will not “inherit the sins of the past”.  If, during the period of his  investigations, the BRP realises that there are serious irregularities, possible fraudulent and misleading information, the BRP is obliged to raise it with the directors and management.  If proper and sufficient answers are not received or if the explanations are unacceptable, then what should the BRP do?

In my view it is critical and essential that the BRP records the position, his doubts and his observations clearly in the business rescue plan.  He may still make out a case for the core business to be rescued but need to deal with the conduct of past directors and management. Once his business rescue plan has been adopted the BRP has a duty to implement the plan and he can only do this within the context of the information he has received and on the basis that he qualified it in terms of his business rescue plan.
If the BRP choses to ignore the fact that the information given is misleading and possibly fraudulent and if the BRP proceeds with the business rescue plan without highlighting his concerns, then the BRP is associating himself with the sins of the past.

The line that has to be drawn is that the BRP has fiduciary duties, but these fiduciary duties only extend to the BRP in his capacity as BRP, which is one of purely managing and working towards the adoption and implementation of a business rescue plan.

ARTICLE BY KEITH BRAATVEDT
BROOKS & BRAATVEDT INC.

 

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