Obligations, and Potential Liability, for Directors of Companies that are financially distressed

Gary Warne | Manager : Legal Services

The current state of the South African economy coupled with recent events such as loadshedding, natural disasters and civil unrest have had a serious impact on businesses leading to many companies being financially distressed.

A company is financially distressed if-

  • It appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing 6 months; or
  • It appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months.

In such instances the directors of the company must take note of the provisions of the Companies Act 71 of 2008.

SECTION 129 OF THE COMPANIES ACT

Section 129 deals specifically with the subject of business rescue, more particularly the resolution by a company to commence with business rescue proceedings.

In this regard section 129(1) states that :

‘the board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that -

  • The company is financially distressed; and
  • There appears to be reasonable prospects of rescuing the company.’

Section 129(7) goes further and imposes obligations upon the directors of companies that are financially distressed by requiring, where a resolution has not been adopted to commence with business rescue proceedings, that the board of the company:

  • Deliver a written notice to each affected person (containing the criteria set out in the Act);
  • Together with the board’s reasons for not adopting a resolution placing the company under business rescue.

Therefore if the board of a company believes that it is financially distressed it has to either –

  • adopt a resolution placing it under business rescue; or
  • if it has not adopted such resolution,  then it must deliver a written notice to each affected person setting out, inter alia, the reasons why it has not adopted a resolution placing the company under business rescue.

FAILURE TO COMPLY

Failure by a board to comply with the requirements set out in section 129 means that the provisions of section 218 of the Companies Act can be invoked.

Section 218(2) states that:

‘ Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.’

SECTION 22 OF THE COMPANIES ACT

The liability of directors is further emphasized in section 22 which unequivocally states that the directors of a company may be held personally liable if such company, inter alia, carried on business recklessly, with gross negligence or traded under insolvent circumstances.

WHAT DOES THIS MEAN FOR DIRECTORS ?

You, as a director of a company, can be held personally liable to third parties should the company contravene any of the provisions of the Companies Act.

This includes not only instances where the directors carried on the business of the company recklessly, with gross negligence or traded under insolvent circumstances but also includes the company’s failure to comply with section 129 of the Companies Act which requires adopting a resolution to place the company under business rescue where it is financially distressed or failure by its board to deliver notice to all affected persons where it decides not to adopt such resolution.