Corona and the Companies Act

/ / 2020, COVID-19, News

  1. We have been placed, legitimately and necessarily, into a state of disaster in response to the international pandemic that is Covid-19. It is obviously so that we must unite as fellow human beings to take care of one another, mitigating the harms that could influence the health, and lives, of the vulnerable in our society.

  1. However, there is another side to this coin. Business in our country will, indisputably, take a serious knock. Our economy will decline. Times will get very tough for us all. As part of mitigating the overall harms that we will suffer, we need to (continue to) be open, honest and accommodating in our business dealings with one another, whilst we see ourselves through to the other side of this all.

  1. What ought you to do if your business starts suffering, as it likely will? What happens if cashflows are reduced to a trickle and creditors start knocking at your door, as they likely will, with their cashflows running similarly thin? Your foundational answer to these questions is found at section 129 of the Companies Act 71 of 2008 (“the Act”). If you are a director of your company, the following is what you need to know, in layman summary: –

    • You have the ability to place your company into business rescue through a resolution by the board of directors, properly constituted. This is in instances where you believe that:
      • the company is “financially distressed” (e. it is questionable that the company will be able to meet its financial obligations in the next 6 months, or it appears that the company may be insolvent in the next 6 months); and
      • there is a reasonable prospect of rescuing the company (through the formulation and implementation of a business rescue plan, by a business rescue practitioner).

    • Your intentions in this regard must be brought formally to the attention of “every affected person” (e. the company’s shareholders, creditors, trade unions representing employees, and unpresented employees).

    • If you believe that the company is financially distressed and, yet, elect not to adopt a resolution to go under business rescue, then you are required to inform every affected person of why you have made this election, whilst advising them of the criteria in terms of which you consider the company financially distressed.
      • This is so that every affected person may consider their rights in respect of your company’s position and make an informed decision on how to proceed against it, if at all.
      • There are, arguably, criminal penalties attached to not following this step, in terms of section 214 of the Act.

  1. These considerations find their place outside of states of disaster. They are even more important during times of disaster, so that qualified business rescue practitioners can step into the role of administering a company to ensure that it sees its way through tough times and operates to the greatest benefit of every person affected by the fact that it is suffering through such hard times. This is not the time to lock down on information, to hoard resources, and presume to know how to do it all oneself, as too many lives could be affected if this situation is not thoughtfully and ethically.

  1. Schindlers will be providing regular updates on all aspects of the legal world (including on the procedural elements related to this article) that it believes are touched by this situation. We work with respected business rescue practitioners and they, too, consider their mandate, during these trying times, to be to operate with the bigger picture in mind.

  1. Our attorneys will avail themselves to help and advise both individual and corporate clients to navigate through this time, always with the mitigation of overall harm foremost on our minds.

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