Obligations in terms of the Companies Act No. 71 of 2008 when “financially distressed”

The Companies Act No. 71 of 2008 (“Act”) entails fewer criminal offences, but there is a greater risk of personal liability arising from actions which contravene the Memorandum of Incorporation (MOI) of a company or the provisions of the Act.

The Act further states that a company must not carry on its business recklessly, with gross negligence, or with intent to defraud anyone.

If a company trades in “insolvent circumstances” the Commission may require the company to cease carrying on business if it came to the Commissions knowledge or if a complaint is laid with the Commission.

It is unclear in the Act exactly what will be defined as “trading under insolvent circumstances” but it is accepted to mean that a company does not meet the “solvency and liquidity test” criteria.

There are many trading companies which are liquid, meaning they can pay their debts as they become due, but not necessarily solvent as defined in the solvency and liquidity test.

In terms of Section 4 of the Act there is a solvency and liquidity test. Solvency relates to the assets of the company, fairly valued, being equal or exceeding the liabilities of the company. Liquidity relates to the company being able to pay its debt as they become due in the ordinary course of business for a period of 12 months.

There is an obligations on the board if a company is “financially distressed” to place the company under “business rescue”; alternatively the directors must notify all “affected persons” giving reasons for not placing the company under “business rescue”.

financially distressed” means that:

  • It appears 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 (six) months; OR
  • It appears to be reasonably likely that the company will become insolvent within the immediate ensuing 6 (six) months.

‘‘business rescue’’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

  • the temporary supervision of the company, and of the management of its affairs, business and property;
  • a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
  • the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

16 May 2011