Costs of business rescue
Business rescue practitioners often experience difficulties in deciding what costs can be paid by the company in business rescue and in respect of what services. In many cases the practitioner inherits a financial disaster, where proper records have not been kept. Pre-existing management has often resigned or is not co-operative or is unavailable. In short, practitioners are, commonly faced with a company with either no or dysfunctional management and unreliable or incomplete information.
What does the practitioner do in cases like this? In terms of section 140(l)(c)(ii) of the Companies Act 71 of 2008 he can appoint a person to act as part of the management of the company. Section 140(2) refers to the appointment of such a person or an adviser to the company. Therefore, the practitioner has the power to, and in fact can and must, appoint an adviser to assist him to find a proper solution.
Of course the Act in section 140(l)(b) says that a practitioner may delegate any power or function of the practitioner to any person who was part of the board or pre-existing management. The problem with this is that the practitioner must not delegate what is, in fact, a financial (or technical) disaster to the person who caused the disaster in the first place.
In a liquidation the answer to the question of incurring costs and expenses is easier, namely the costs can be taxed and approved by the Master of the High Court. Claassen J, in the Oakdene Square case, emphasised that there is no independent control over costs in the case of business rescue and this will be a matter for the legislature to consider. Henochsberg on the Companies Act (Volume 1 at page 499) agrees with this and emphasises the need for an independent scrutiny to prevent practitioners from claiming excessive fees.
The problematical issue is not what the practitioner is entitled to charge on an hourly basis; this is adequately set out in the Act and the Regulations. The real issue, however, lies in the practitioner's decision to employ one or more highly qualified experts to unravel, analyse and deal with the disaster, whatever it may be.
It is not only the financial situation that can be in a mess. Often figures and statistics of a highly important technical nature are given to the practitioner. Before he can make any decision he has to verify the accuracy of this information; all decisions, whatever they are, whether to capitalise or sell the enterprise are entirely dependent upon the practitioner being satisfied with the correctness of the information.
In the example of a mining operation in business rescue, results of tests, yields, samples and the like have to be scientifically and properly verified. Regulation 128 of the Act says the practitioner is entitled to be reimbursed for the actual cost of any disbursements made by him to the extent reasonably necessary to carry out his functions and facilitate the conduct of the company's business rescue proceedings. Even though the Regulation is self-explanatory, the difficult task faced by the practitioner is to what extent he can employ an expert to deal with the information and the situation he faces. A similar conundrum arises in the context of claims lodged by creditors. Meskin in Insolvency Law (18.14.6) observes that it is unwise not to make provision for the amounts claimed to be scrutinised by an independent party.
It is the writer's firm view that the business rescue plan should contain full and complete details of the difficulties the practitioner immediately faced when conducting the investigation of the affairs of the company in terms of section 141 - If he finds that a disastrous situation exists with regard to essential data, figures and information of whatsoever nature, he must explicitly set this out in the business rescue plan.
Section 150(2)(a) refers to a PART A in the business rescue plan as being BACKGROUND. It is the writer's view that the inadequacy of the information, the inconsistencies and the need to get clarity and certainty on the information should be set out in the background section to the business rescue plan. The reason for this is that section 150(2)(c) refers to PART C - ASSUMPTIONS AND CONDITIONS, which in section 150(2)(c)(iv) refers to a projected balance sheet of the company and a projected statement of income and expenses for the ensuing three years. These projected balance sheets are absolutely essential for obtaining post commencement finance and projections and can only be made if the information given has been empirically tested, checked and verified. If, after the checking process, the information is patently incorrect then the restructured balance sheet can obviously only be prepared on the strength of restructured or corrected information.
A further benefit of the practitioner doing this is to make his position and that of the company transparent and upfront to the affected persons. It would also he sensible to state in the business rescue plan that interim reports on how the additional expenditure is being allocated should be circulated to affected parties. There are the normal participatory mechanisms in the Act but the writer believes that incurring expenses in respect of experts required to determine the actual situation is so fundamentally important that all affected parties must be kept abreast of what is happening.
As is the case in the emerging business rescue jurisprudence, practitioners and all those involved have to look to court decisions to get direction.
In the matter of Trevor John Murgatroyd (applicant) v Theodore Wilhelm van den Heever NO (first respondent) and seven other respondents, case number 20456/2014 (South Gauteng Local Division) Justice Meyer considered this question. In that case the business rescue of Sanyati Construction failed and the company was liquidated. The liquidator challenged the practitioner's entitlement to reimbursement of legal fees and expenses.
The practitioner in particular sought reimbursement for disbursements and expenses in the following amounts:
- ZAR1 219 000,00 - amount owed to Nimble Risk Services
- ZAR428 414,00 - amount owed to forensic auditors, Accountants@Law
- ZAR272 523,00 - legal fees owed to attorneys Rudolph & Bernstein
The company in question was Sanyati Civil Engineering & Construction (Pty) Ltd (Sanyati). Murgatroyd was appointed practitioner of Sanyati on 6 June 2012 and on 4 July concluded that there was no reasonable prospect that the company could be rescued. The application to liquidate Sanyati was lodged on 9 July 2012. Theo van den Heever NO and four others were appointed as joint liquidators.
There was no dispute in relation to the amount of Murgatroyd's claim for remuneration nor was there any dispute about his claim for expenses incurred in relation to Rudolph Bernstein.
Murgatroyd did not prove the practitioner's claim for expenses incurred in relation to Nimble Risk Services and Accountants@Law because the liquidators raised issues of principle against the practitioner's claim. Accordingly the practitioner approached the court for declaratory relief. Judgment was handed down on 29 July 2014.
Meyer J pointed out in paragraph 11 of the judgment that the liquidators argued that a practitioner must himself perform his functions and has no authority to delegate them to "other outside professionals". They argued further that a practitioner may only delegate any power or function to a person who was part of the board or pre-existing management.
The effect of the liquidator's argument is that because there is a failure in the legislation specifically to provide for delegation to outside professionals, that the legislature did not intend that there should be delegation to anyone other than persons who were part of the board or pre-existing management. In essence, the complaint by the liquidators is not that Murgatroyd abdicated or delegated his powers to Nimble Risk Services or Accountants@Law but rather he delegated some of his functions to them, contrary to the provisions of the Act.
Murgatroyd responded by raising the extremely important point that he was "confronted with an effective breakdown of the management of Sanyati and an overall incapacity in effectively assisting him through the business rescue process". Murgatroyd further argued that the services rendered by Nimble Risk Services and Accountants@Law were essential to the performance of his function as practitioner and facilitated the conduct of Sanyati's business rescue proceedings.
The liquidators in their answering affidavit said there was no reason why the directors and management of Sanyati could not have assisted Murgatroyd in performing these functions.
Meyer J (paragraph 14 of the judgment) stated that the liquidators were factually incorrect in saying Murgatroyd did not state why he could not get internal assistance. Murgatroyd explained the complexities he encountered and emphasised his explanation that management was dysfunctional and could not be relied on. The Judge also emphasised Murgatroyd's statement that the financial information in the possession of and under the control of the directors was limited, its accuracy and currency was highly suspect and required consolidation, critique and analysis.
The critical part of the judgment is in paragraph 16 where Meyer J said that after Murgatroyd's appointment as practitioner, his powers and functions were set out in section 140 in addition to any other powers and duties set out in Chapter 6. The Judge stated that there might be some doubt about whether the “pre-existing” management retains any powers and the powers of the practitioner in this respect because of the provisions of section 140(l)(a).
Meyer J observed that Murgatroyd could have removed existing management and reappointed new managers but that he could not delegate his powers unless expressly authorised to do so. He concluded that to remove any uncertainty, ex abundaría cautela, section 140(l)(b) provided for delegation to the old management. Accordingly the finding was that the words of section 140(l)(b) do not have a bearing on delegation generally or on the meaning of the other provisions of Chapter 6.
In paragraph 17 the Judge was at pains to point out that there is no indication in Chapter 6 that all the functions of a practitioner are required to be undertaken and discharged by the practitioner personally. He also said that a practitioner, by necessary implication, has the power to appoint advisers. The declaratory was therefore granted. It is the writer's view that this judgment is, with respect, extremely well-reasoned and is correct.
The fundamental question of the practitioner's entitlement to reimbursement for expenses and disbursements is a factual one. It must be assessed on the facts and circumstances of each case with specific reference to the accuracy and currency of the financial and accounting data, the complexities involved and the scope of work required to be undertaken by the practitioner. The decision of Meyer J in this matter is to be welcomed by practitioners as giving guidance to a complex and difficult issue in business rescue.
The writer has been advised that the liquidators are taking steps to appeal the decision.