Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others

• Jurisdiction: South Africa

Ragavan and Others v Optimum Coal Terminal (Pty) Ltd and Others
2022 (3) SA 512 (GJ)

2022 (3) SA p512

Citation	2022 (3) SA 512 (GJ)
Case No	52832/2021
Court	Gauteng Local Division, Johannesburg
Judge	Victor J
Heard	January 18, 2022
Judgment	January 18, 2022
Counsel	P Louw SC (with L van Gass) for the applicants.; G Wickins SC (with L van Tonder) for the respondents.; P Stais SC (with J Brewer) for Liberty Energy (Pty) Ltd.

Flynote : Sleutelwoorde

Company — Business rescue — Business rescue practitioner — Powers — Ambit of — Right of business practitioner of company A to vote in s 151(1) meeting of another company in business rescue in respect of which company A creditor — Companies Act 71 of 2008, ss 137(2), 140(1) and 151(1).

Company — Business rescue — Business rescue proceedings — Directors — Powers — Ambit of — Right of director of company A to vote in s 151(1) meeting of another company in business rescue, in respect of which company A creditor — Companies Act 71 of 2008, ss 137(2), 140(1) and 151(1).

Company — Business rescue — Business rescue proceedings — Difference in powers of, on one hand, directors, and, on other, business rescue practitioners — Significant limitation of powers of directors — Distinction between external and internal functions of company — Companies Act 71 of 2008, ss 137(2), 140(1).

Headnote : Kopnota

The applicants were directors of the company in business rescue, Tegeta Exploration and Resources (Pty) Ltd (Tegeta). Tegeta was a major creditor of another company, also in business rescue, Optimum Coal Terminal (Pty) Ltd (OCT), in which it held a 100% shareholding. In the present application in the Johannesburg High Court, the applicants sought an order for a declarator to the effect that, inter alia, they, in their capacity as directors of Tegeta, should vote at any meeting of creditors in terms of s 151(1) of the Companies Act 71 of 2008 in respect of OCT, to consider the latter's proposed rescue plan. The respondents, which included amongst their number the business rescue practitioners of both Tegeta (sixth and seventh respondents) and OCT (second and third respondents), opposed the relief sought. They argued that it was rightfully Tegeta's business rescue practitioners who should vote at such meeting. The issue, the High Court held, called for an interpretation of the relevant sections of ch 6 of the Companies Act to determine the ambit of the powers of directors and those of business rescue practitioners while a company was in business rescue.

In considering the relevant legal framework, the court noted that, generally, the directors of a company had, in terms of s 66 of the Companies Act, the powers to manage the 'business' and 'affairs of a company' and were authorised to exercise all of the powers and perform any of the functions of the company. Importantly, the court stressed, these powers, however, were subject to the proviso, 'except to the extent that this Act . . . provides otherwise'. (See [22] – [23].) This, the court held, was particularly relevant in considering the ch 6 rights, powers and duties of directors and business rescue practitioners in the context of business rescue (see [23]). In terms of s 140 of the Companies Act, during a company's business rescue proceedings the business rescue practitioner had full management control of the company in substitution for its board and pre-existing management. (See [31] – [32].) In terms of s 137(2), during a company's business rescue

2022 (3) SA p513

proceedings, each director of the company had to perform the functions of director, subject to the authority of the practitioner, and had a duty to the company to perform any management function within the company in accordance with the express instructions or direction of the practitioner. (See [35] – [39].)

The court held that, based on a proper construction of ch 6, during business rescue proceedings, the directors' powers were significantly limited (see [30], [40] and [47]). Full management control of the company was transferred to the business rescue practitioners (see [32], [41], [47]). To the extent that directors continued to fulfil certain functions (see [41] and [47]), the court asserted, these were restricted to governance-related tasks, such as the presentation of annual financial statements, issuing of shares, scheduling of shareholders' meetings, proposing resolutions and holding of board meetings; neutral functions, the court described them, far removed from full management control (see [43] and [47]). The task at hand — voting in the s 151(1) meeting of another company in business rescue — the court held, fell within the management powers of the business rescue practitioners (see [41], [43] and [47]). (In reaching this conclusion, the court held that, in order to facilitate the interpretation of the functions of directors and business rescue practitioners during rescue proceedings, a distinction could be drawn between the internal functions of a company — these, the court held, the directors continued to carry out — and the external functions of a company — these fell under the management control of business rescue practitioners. The internal functions of a company would be those related to governance; the external functions would be those calling for interaction with the outside world, and would include debt-collecting and voting at meetings convened in terms of s 151(1). (See [27] – [28], [41], [43] and [47].)

The court accordingly dismissed the application [*] (See [51].)

Cases cited

Ex parte Russlyn Construction (Pty) Ltd 1987 (1) SA 33 (D): referred to

FirstRand Bank Ltd v KJ Foods CC 2017 (5) SA 40 (SCA) ([2017] 3 All SA 1; [2017] ZASCA 50): referred to

Kaimowitz v Delahunt and Others 2017 (3) SA 201 (WCC): discussed

Knoop NO and Another v Gupta and Another 2021 (3) SA 88 (SCA): followed

Shiva Uranium (Pty) Ltd (in Business Rescue) and Another v Tayob and Others 2022 (3) SA 432 (CC) ([2021] ZACC 40): distinguished.

Legislation cited

The Companies Act 71 of 2008, ss 137(2), 140(1) and 151(1): see Juta's Statutes of South Africa 2020/21 vol 2 at 1-422, 1-423 and 1-427.

Case Information

P Louw SC (with L van Gass) for the applicants.

G Wickins SC (with L van Tonder) for the respondents.

P Stais SC (with J Brewer) for Liberty Energy (Pty) Ltd.

An application for a declarator to the effect that the applicant directors of Tegeta Exploration and Resources (Pty) Ltd should vote at any

2022 (3) SA p514

meeting of creditors in terms of s 151(1) of the Companies Act 71 of 2008, in respect of debtor Optimum Coal Terminal (Pty) Ltd (OCT), to consider latter's proposed business rescue plan.

Order

1.

Part B of the application is dismissed with costs on the attorney and client scale, including the costs of two counsel.

2.

The applicants are ordered to pay the costs of part A on the party and party scale, including the costs of two counsel.

3.

The applicants are ordered to pay the costs of Liberty Energy (Pty) Ltd in respect of part B on an attorney and client scale, including the costs of two counsel.

Judgment

Victor J:

Introduction

[1] There are few things more important for the business rescue industry than certainty and clarity. Where the Companies Act [1] does not draw a bright line between powers of the directors sitting on the company board and the powers and ambit of business rescue practitioners (BRPs), it is left to the courts to develop the jurisprudence and lend greater clarity and certainty if necessary.

[2] A fundamental element of the business rescue process is that independent professionals become involved, and it is a far more nuanced process than liquidation, where the only interests are essentially those of the creditors. In business rescue a more holistic approach is adopted to assess not only the demands of creditors, but also an assessment of whether the company can be saved, and with that goes the issue of job losses and other important elements.

[3] This case is illustrative of what at first glance may seem like a grey area in the Companies Act, where clarity is needed to resolve the tension between directors who still want to be in control and view matters subjectively, and the BRPs who have a more holistic view of what is good for the company in business rescue and want to do things their way, and are armed with statutory powers. [2] This is where the perceived uncertainty in the Companies Act needs to be addressed. The applicants assert

2022 (3) SA p515

Victor J

that there is tension between the proper interpretation of ss 137 and 140. The BRPs take over full management control of the company in business rescue, in substitution of its board of directors and pre-existing management. The BRP is tasked with developing and then implementing a business rescue plan which is in the best interests of all affected parties, which includes creditors, employees, trade unions and shareholders. All the while the board of directors retains obligations in terms of the Companies Act while the BRPs take full control.

[4] The role of governance versus management requires analysis in the business rescue process. In essence, outside of the business rescue context, governance by the board involves the strategic aspects of the company, while management attends to the running of the company. The duties and responsibilities of management are quite different from those of the directors. Where ch 6 of the Companies Act applies, those duties and responsibilities of the directors have to be interpreted within the overarching purpose of ch 6. Whilst ch 6 does not spell out in minute detail the different roles of directors and BRPs, there is sufficient certainty in the provisions of ch 6 to enable an interpretation within the business rescue context that suggests that directors must yield to the BRPs. In...