Directors’ Duties when considering Business Rescue

Companies are regulated in terms of the Companies Act 71 of 2008 “the Act”. This article focuses on the personal liability of directors of companies when considering placing the company into business rescue.

According to section 77(3)(b), of the Act, a director of a company is liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director, having acquiesced in the carrying on of the company’s business despite knowing that such business was conducted in a manner prohibited by section 22(1). 

In simple terms this means that a director of a company may be liable for any loss, damages or costs that are sustained by the company when the company is trading under insolvent circumstances or when doing business in a reckless or negligent way.

Where a business is deemed to be financially distressed and it has a reasonable prospect of recovery, there is a duty on the board of directors to act in the company’s best interest. This directors’ duty may also include placing the company into business rescue.

Section 129 addresses the company resolution to begin business rescue proceedings and this paragraph is designed to protect creditors and affected persons, as defined.

Where the board of directors of a financially distressed business fails to adopt a resolution to commence business rescue proceedings, and such proceedings are considered necessary, there is an obligation on them to deliver a written notice to all affected persons. The notice must set out the test for financial distress in relation to the company, as well as the reasons for not electing to pass a resolution to initiate business rescue proceedings.

What is prohibited by the Act? 

Section 22(1)(a) of the Act states that: A company must not:

  1. carry on its business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose; or 
  2. trade under insolvent circumstances.  

Should directors neglect their duties towards their company and stakeholders by continuing to operate under insolvent circumstances or without having proper consideration for its weakening financial position, they leave themselves vulnerable to creditors and may very well be held personally liable for the losses and damages that are incurred by the company itself and the affected persons.

Business rescue may indeed be a valuable tool for an ailing business. If your business is currently experiencing financial difficulties or experiencing financial distress, contact us for a free consultation to further discuss the directors’ duties when considering business rescue.

Boutique Advisory is a firm of licensed business rescue practitioners and business turnaround specialists.

Disclaimer
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).