This blog was co-authored with Aqeelah Petersen, Candidate Attorney.
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 a reasonable prospect of rescuing the company.
If the board concludes that a company is financially distressed, it is obliged to act by either commencing business rescue or engaging with affected persons (which include shareholders, creditors and employees of the company). Failure to act may result in personal liability for the directors. Boards who find themselves facing the question of financial distress are urged to give careful consideration to the risks and pitfalls of non-compliance with section 129 of the Companies Act and obtain advice and support at the earliest possible opportunity.
In terms of the Companies Act of 2008, 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 become due and payable within the immediately ensuing six months; or
- it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
The Companies Act goes on to provide in section 129(7) that, if the board of a company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution to voluntarily begin business rescue proceedings, the board must deliver a written notice to each affected person explaining why it has not adopted such a resolution.
The delivery of such a notice to affected persons – including shareholders, creditors and employees of the company – may very well result in the exact consequences that the company is seeking to avoid.
The obligation imposed on the board of a company that is financially distressed to deliver a notice to affected persons, should it elect not to commence business rescue proceedings, is one that boards grapple with, especially since the section does not provide a time period within which written notice must be delivered to affected persons.
It is exacerbated by the right of the affected persons to apply to court at any time for an order placing the company under business rescue proceedings, if the board of a company has resolved not to do so.
Unless it appears to the board that there is no reasonable prospect of rescuing the company (or liquidation proceedings have already been initiated by or against the company), there will be very limited circumstances which may justify a board’s decision not to commence business rescue proceedings and the decision not to do so may result in further losses suffered by affected persons (for which, ultimately, directors may become personally liable).