Many businesses will become financially distressed over the lockdown period.
Under Section 22 of the Companies Act, the CIPC can place a company into liquidation or business rescue where it becomes aware that the business has become temporarily insolvent or financially distressed. The CIPC has waived its right to intervene through Section 22 until 60 days after the country comes out of lockdown under the Disaster Management Act, provided the commissioner is satisfied that the temporary insolvency was caused by the national lockdown and was not an existing state prior to lockdown.
The Companies Act is however still in effect, and it places a requirement on the directors of the company to perform their role:
- “in good faith
- in the best interests of the company
- with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director; and
- having the general knowledge, skill and experience of that director.”
“Good faith”, “best interests” and “care, skill and diligence” are onerous terms. For a director to be protected against falling foul of these provisions that director needs to show that he or she took diligent steps to be informed of the issue and made a rational decision in the best interests of the company. This is known as the Business Judgement Rule and courts look to this when considering a director’s personal liability.
Although onerous, the above regulations are not as clear cut as one may think. A director could successfully demonstrate that he or she has acted in the best interests of the company by not placing a financially distressed company in business rescue, liquidation or notifying it’s creditors of the company’s financial distress. A case in point may be where a historically profitable company finds itself financially distressed due to abnormal circumstances such as the national lockdown. Furthermore, it may be detrimental to the company should certain creditors be made formally aware of the company’s position, which could cause them to act in a destructive way towards the business. In this case, acting in the best interests of the company may be to remain silent and continue to trade.
There is no one size fits all approach and one needs to fully consider all aspects of the business and the regulations that govern it.
Growbridge has a wealth of experience and can assist you in navigating these difficult times.