As directors of a company in business rescue, there is often seemingly a tug-of-war for control over the business, with directors under the reasonable belief that they are obliged to continue to manage the business in accordance with their fiduciary obligations, while the appointed BRP, as an officer of the court, is expected to act in accordance with the provisions as set out in Chapter 6 of the Companies Act 71 of 2008 (Companies Act).

As a starting point, section 137(2) of the Companies Act stipulates that, during business rescue proceedings, directors are still required to continue to exercise their functions. The exercising of their duties is, however, subject to the authority and instructions of the BRP.

The recent matter of Firm-O-Seal CC v Wynand Prinsloo & Van Eeden Inc and Another [2022] (4) SA 205 (Ml) dealt with the effect of business rescue proceedings on directors.

Facts

On 5 June 2019 Firm-O-Seal CC (Firm-O-Seal) was placed under business rescue and Mr Mahier Tayob was appointed as the BRP. During this tenure, the directors of Firm-O-Seal resolved to issue a summons commencing the present action on the instructions of its directors without the approval of the duly appointed BRP.

Initially, the BRP had indicated his intention to withdraw the action. However, the BRP subsequently signed a power of attorney in an attempt to authorise the continuance of the action and ratify any steps already taken in the proceedings.

On consideration of section 137(2), the court found that the action taken by the directors in instructing Firm-O-Seal’s attorneys to issue a summons was void for not having been approved by the BRP and that their decision was incapable of being ratified retrospectively.

Firm-O-Seal, as the plaintiff, issued a summons in which numerous claims were sought against the defendants. The defendants raised several special pleas relating to prescription and a special plea of locus standi due to the institution of proceedings without the consent of the BRP.

The special plea focusing on locus standi is the focus of this alert.

Understanding section 137(2)

As previously mentioned, the directors of Firm-O-Seal decided to issue proceedings against the defendants without obtaining the prior consent of the BRP. At the time that the proceedings were instituted, the BRP was not even aware of the summons that was issued. Once the BRP became aware, he instructed his legal representative to forward a letter to Firm-O-Seal’s attorneys instructing them to withdraw the action.

In a turn of events, the BRP concluded a power of attorney ratifying the institution of proceedings. This ratification was to address the authority that was lacking at the time of instituting proceedings, however, the court had to consider whether the belated approval was compliant with the Companies Act. 

The court affirmed that it is well-settled law that there can be no ratification of an agreement which a statutory prohibition has rendered ab initio void in the sense that it is to be regarded as never having been concluded.

The court found it necessary consider the intention of the Legislature from the wording of the statute. Section 137(2) of the Companies Act provides that a company director must continue to exercise the functions of director, subject to the authority of the BRP. In addition, a director has a duty to the company to exercise any management function within the company in accordance with the express instructions or direction of the BRP, to the extent that it is reasonable to do so.

Although section 137(4) states that, “if, during a company’s business rescue proceedings, the board, or one or more directors of the company, purports to take any action on behalf of the company that requires the approval of the practitioner, that action is void unless approved by the practitioner”, the court concluded that it could not have been the intention to allow a director to run a company in business rescue proceedings without a BRP’s knowledge, participation or approval, in the hope that the BRP would retrospectively ratify their decisions. Further, the court agreed with the approach adopted in Neugarten and Others v Standard Bank of South Africa Ltd [1989] (1) SA 797 (A), that an act that is void is incapable of being ratified, as it is regarded as having not taken place.

Ultimately the court found that Firm-O-Seal did not have the approval of the BRP when issuing the summons against the defendants. Further, the court found that the action by the directors of Firm-O-Seal in instructing their attorneys to issue summons was void for not having been approved by the BRP, and that their decision was incapable of being ratified retrospectively.

Conclusion

It is imperative that directors of a company have a good understanding of the duties and obligations expected of them in circumstances where a company is in business rescue. It is equally imperative to ensure that a symbiotic relationship exists between the directors of the company and the BRP. This can only be achieved through the understanding of each’s obligations and duties in the circumstances.

To interpret the requirement for the approval by the BRP as allowing approval retrospectively negates the prima facie purpose of the legislation in respect of the powers granted to a BRP. Allowing retrospective approval would also undermine the BRP and has the potential to defeat the whole purpose of business rescue proceedings. Although directors must at all times conduct themselves in a manner that is in the best interest of the company and in line with their fiduciary duties, these duties are subject to the approval of the BRP when the company is placed into business rescue.