The careful business rescue practitioner: a search for the proper yardstick

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Abstract

When the Companies Act 71 of 2008 came into effect on 1 May 2011 it brought about a new era of corporate rescue for South African companies. Chapter 6 of the act provides for a new corporate rescue scheme known as business rescue. Business rescue replaces the previous South African rescue model, judicial management, contained in the Companies Act 61 of 1973.

The key role player in the rescue scheme is the business rescue practitioner. The practitioner is afforded extensive powers and rights. He takes control of the management of the company and the duty to rescue the company rests on his shoulders. It is, however, possible for the purposes of chapter 6 to protect the interests of all stakeholders to be frustrated through the incompetence and carelessness of the practitioner.

Section 140(3)(b) of the act states that the practitioner has the responsibilities, duties and liabilities of a director of the company for the duration of the rescue proceedings. The responsibilities, duties and liabilities of directors are set out in sections 75, 76 and 77. These sections contain the quasi-codified fiduciary duties of directors as well as the duty of care, skill and diligence and therefore make them applicable to the practitioner.

The purpose of this article is to investigate the principles that underpin the test for negligence and the applicability thereof to the practitioner. The conclusion is that the practitioner’s conduct should be measured against that of a reasonable practitioner. This implies that it should be established whether he acted with the same degree of care, skill and diligence that may reasonably be expected of a reasonable practitioner in the same circumstances, having regard also to his personal attributes and qualifications and considering whether this necessitates an even higher standard to be met.

At common law it is accepted that a director of a company needs no specific qualifications or even special business acumen to be appointed as such. The degree of care, skill and diligence expected of a director has therefore been determined by applying the notional reasonable person test. The director of a company is, however, held to a somewhat higher standard than the average person due to the fact that he is a fiduciary of the company and is responsible for another’s interests and property. Contrary to this, a business rescue practitioner will be appointed because of his knowledge and experience in the field of business and turnaround management. The notional reasonable person test can therefore not be utilised to evaluate negligent conduct by the practitioner. An argument can, however, be made for the application of the reasonable expert test, and even for the development of a new reasonable practitioner yardstick.

The article focuses on an in-depth exploration of the objective and subjective elements of such a reasonable practitioner test and considers all the relevant facts and circumstances that will be of importance during business rescue proceedings.

The influence of the business judgment rule as a means to review the fulfilment of the duty of care and the application thereof to the practitioner in the financial distress circumstances will also be investigated. Since the practitioner’s training will influence the consideration of whether he acted with the necessary degree of care, his qualifications, skills and experience will be considered and analysed. The Companies Act of 2008 and the regulations pursuant thereto provide for extensive qualification requirements to be met by a prospective practitioner. Furthermore, practitioners will be appointed as either junior, experienced or senior practitioners, depending on their levels of experience.

This article also addresses the disparity between the liability provisions contained in sections 76 and 77 and those contained in chapter 6 of the act – the first requiring ordinary negligence and the latter gross negligence. This is of extreme importance since both provisions apply to the practitioner, but the standard thereof differs. The conclusion is that the yardstick for the practitioner’s liability should be ordinary negligence, that is what could be expected of a reasonable practitioner with the same qualifications and experience.

Keywords: business rescue; business rescue practitioner; care; companies; diligence; directors; liability; qualifications; reasonable expert; reasonable person; skill

Lees die volledige artikel in Afrikaans: Die sorgsame ondernemingsreddingspraktisyn: ’n ondersoek na die gepaste maatstaf

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