Unless companies have sufficient cash reserves or the ability to source shortfall funding from their shareholders, banks or other financiers, they could well be faced with an inability to pay their debts which inability, strictly speaking, constitutes a ground for liquidation.
Prudent directors should take steps to become fully informed about the financial aspects of the crisis, i.e. is it only a liquidity crisis, is it temporary, is it permanent and what steps, remedies or relief are available to the company to help it through the crisis?
The Companies Act allows directors to rely on third parties by delegating to them formally or informally the authority or duty to perform one or more of such of the board’s functions as are delegable under law and to secure information, opinions, recommendations, reports or statements including financial statements and other financial data prepared or presented by employees, legal counsel, accountants or other professional persons retained by the company, the board or a committee; provided of course the person dealing herewith has the necessary skills or expertise and the directors reasonably believe that these are matters within that person’s professional competence. These persons include attorneys, accountants, auditors and any other persons possessing the necessary skills and expertise.
Under the new Companies Act, a director’s primary duty is to act in the best interests of the company, not those of its shareholders. Any decision taken by a director should only be taken if the director had a rational basis for believing and did believe that the decision was in the best interests of the company. If in arriving at that belief, the director first sought and obtained expert advice, this would be regarded as commendable.
The Companies Act further provides that wherever a director acted otherwise than with “wilful misconduct or wilful breach of trust” (i.e. recklessly or with fraudulent intent or purpose), a court “may relieve the director either wholly or partly from any liability on any terms the court considers just if it appears to the court that:
A viable alternative to the unfortunate closure and liquidation of otherwise sound companies and businesses because of the coronavirus is business rescue. By definition, it is a statutory proceeding to facilitate the rehabilitation of a company that has become financially distressed and provides for the:
By definition, the term “financially distressed” means that a company is unable to pay its debts within the next six months (known as commercial insolvency) or that its liabilities will in the next six months exceed its assets (known as factual or balance sheet insolvency).
Given the prevailing lockdown of our courts, the scope for compulsory business rescue is reduced.
Directors of companies in or facing financial distress should urgently secure expert advice as to whether or not the companies concerned should be placed in business rescue or liquidation or whether alternative steps should be taken such as approaching creditors and seeking indulgences from them, for example, time to pay debts, forgiveness of debts partially or entirely, and the like.
Accordingly, directors who act prudently and diligently, seek advice in order to become informed, and who act honestly and reasonably, and thereafter make decisions after being so informed, should not attract personal liability for any decisions they made, even where the decision appeared in retrospect not to be a good business decision.
Colin Strime, Director Fluxmans Attorneys
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