The Limitation of Directors’ Powers During Business Rescue

Ordinarily, the business and affairs of a company must be managed by or under the direction of its board of directors, and the board has the authority to exercise all of the powers and perform any of the functions of the company. That is unless the company is in Business Rescue. In this article, we look at the recent judgment of Ragavan and Others v Optimum Coal Terminal and Others (52832/2021) [2022] ZAGPJHC 22 (18 January 2022) and dissect the limitation on directors’ powers when the company is in business rescue and under the control of the Business Rescue Practitioners (“BRPs”).

Background

In Ragavan, the High Court was tasked with determining whether the Directors of Tegeta Exploration and Resources (Pty) Ltd (“Tegeta”) could vote in a Section 151 (1) meeting convened by Optimum Coal Terminal (Pty) Ltd (“OCT”). Both Tegeta and OCT are in business rescue. Tegeta is a major creditor of OCT and is the holding company that owns 100% of the shares in OCT. The Tegeta Directors sought to vote on behalf of Tegeta at a Section 151 (1) meeting of OCT. However, the BRPs of Tegeta contended that the Directors were not entitled to vote on behalf of Tegeta, because that power rested with the BRPs.

The issues required an interpretative exercise of the Companies Act relating to the powers and duties of the Board and the full management role of the BRPs.

Section 66 of the Companies Act (“the Act”) confers on a director the power to manage the business and affairs of a company and empowers the board to exercise all of the powers and perform all of the functions of the company, except to the extent that the Act limits those powers. The proviso is important and shows that a director's powers are not absolute and can be limited by other sections of the Act.

Key points

Section 66 also distinguishes between ‘the business’ and ‘the affairs’ of a company. These are two different concepts. According to the sources cited in Ragavan, ‘the affairs’ of a company are distinct from ‘the business’ of the company; ‘the affairs’ of a company is a much wider concept. Accordingly, ‘the business’ refers to dealings between the company and outsiders and ‘the affairs’ refers to both the internal relations of the company and its existence. The concept of internal and external structures and functions is a helpful tool in analysing the distinction between the powers of directors and BRPs.

The answer to the legal question of who is entitled to vote requires a logical application of the provisions of Chapter Six of the Act (dealing with Business Rescue Proceedings). The Court pointed out that, throughout the Act, limitations are placed on the powers of directors, and the authority for that limitation stems from the proviso to Section 66. Upon consideration of Chapter Six, it was glaringly obvious that the powers of the directors during business rescue proceedings are heavily curtailed and that there is a legal transfer of the directors’ power to the BRPs. Section 140 of the Act, for example, empowers the BRPs with full management control of the company in substitution for its board and empowers the BRPs to implement any business rescue plan adopted in accordance with Chapter Six. A clear curtailment of the directors’ powers and in effect a transfer of power to the BRPs.

Considerations

On a proper interpretation of the rights and duties of the BRPs, Chapter Six introduced significant limitations on the rights and duties of directors. Instead, the BRPs are given full management control of the company. The distinction of internal and external functions of a company facilitates the proper interpretation of the different functions directors and BRPs have when a company is in business rescue. Governance functions (i.e. internal functions) remain for the directors but it is a neutral function far removed from full management control. Nothing of significance can be done by the directors during business rescue proceedings without authorisation by the BRPs together with the other powers they have. These distinct functions and powers of the BRPs then draw a bright line between the functions of the BRP and directors.

The judgment offers a reminder to directors that their powers are limited by business rescue. Directors must be aware that their full ordinary management powers do not subsist, and their ‘external’ functions effectively transfer to the BRPs. Equally, BRPs need to be aware that the limitations on directors, in turn, place several duties on the BRPs regarding the external affairs of the company. With these duties come risks that the BRPs ought to understand and protect against.  

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