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Directors beware, watch out, be warned

January 7, 2017

In the unstable economic state which exists in the world today, it is without a doubt necessary for all directors of companies to be aware of the risks involved in the event that a company proceed to do business even though the company is in financial distress or trading in insolvent circumstances.

A director of a company can be held personally liable for the company’s debts in the event that a director knew (or ‘ought reasonably to have concluded’) that there was no reasonable prospect of avoiding the company’s liquidation, but did not take every step to minimize the potential loss to the company’s creditors.

Therefore it is important for directors to take immediate action, the moment they realise that the company is under financial distress.

This however does not mean that a company must be liquidated or closed down. The new companies act has implemented a Business Rescue process as an alternative to liquidation which gives the company a lifeline and in the process also assists in saving jobs.

Chapter 6 of the new Companies Act deals specifically with Business Rescue. This chapter allows South African companies in “financial distress” or trading in insolvent circumstances to file for business rescue and, with the assistance of a business rescue practitioner, reorganise and restructure the business with the aim of returning it to a more stable and profitable entity.

The moment that it appears reasonably unlikely that the company will not be able to pay all of its debts as they become due and payable for the upcoming six months or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months it is seen that the company is under financial distress and may the directors resolve that the company voluntarily commences with business rescue proceedings.

It is therefore vital for directors of a company to take immediate action once they realize the company is in financial distress, in order for the company to have the best chance of being saved and allowing it to continue trading as an economically contributing entity and not wait until the company is insolvent before they take action to save the company.

Disclaimer: The contents and information provided above are generalised and must not be acted upon as legal advice