Errant directors face delinquency orders
30 May 2011
This article was first published by the Business Day, Companies and Markets.
Directors of South African companies will have to take careful note of the way they conduct the affairs of their companies, particularly whether or not creditors are paid following liquidation, warn experts in company law.
The new Companies Act, which came into effect at the beginning of this month, provides for the punishment of directors who fail to pay their company's creditors, says Eric Levenstein, a director at Werksmans Attorneys. “These directors also stand to be declared delinquent,” Mr Levenstein says.
Trade and Industry Minister Rob Davies said earlier this month the business rescue process was one of the major innovations in the new act. Instead of companies being placed under judicial management, (which is almost invariably a route to an eventual bankruptcy), a rescue business process will be initiated, he says.
Judicial management is known for being an expensive and lengthy process. It was often criticised by company law experts because it was viewed as a precursor for liquidation. Analysts also said no other parties would want to deal with such entities because of the financial stigma attached.
Under the business rescue proceedings, a resolution will have to be filed with the Companies and Intellectual Property Commission. The new act penalises directors who vote for a business rescue when this is not justified.
Mr Davies says creditors will be held at bay, while stakeholders work to rescue the company. This is an important innovation.
Mr Levenstein says the business rescue provisions raise the bar in respect of the expected level of directors' duties to companies.
“Directors will have to understand the provisions of the new act, particularly whether or not they are adhering to their duties or alternatively they could be facing an order of delinquency.”
He says directors will have to take cognisance of how they carry out the affairs of their companies, especially whether or not their creditors are paid subsequent to liquidation.
The act states that “if any person is a director of more than one company (irrespective of whether concurrently, sequentially or at unrelated times) and where two or more of those companies each failed to fully pay all of its creditors or meet all of its obligations ... (it) will result in such director being subject to a declaration of delinquency”. The sole exception is where a business rescue plan has resulted from a board resolution or compromise with creditors.
Mr Levenstein says the word “delinquency” carries criminal connotations. One definition is a “per-son guilty of serious antisocial or criminal conduct”.
He says a delinquency declaration remains in place for the life-time of the person who has been declared delinquent.
A court may also place an errant director under probation. Such an order, which is similar to a suspended sentence, will be made with certain conditions and may be in place for up to five years.
Such conditions include attending a designated programme of remedial education, community service or paying compensation to any person who has been adversely affected by the director's conduct. “Ultimately, directors will be obliged to ensure that they are not trading their companies into a position of financial distress which may push the company to a situation where it becomes insolvent and cannot pay its creditors.”
Once a company is placed under business rescue, a qualified business rescue practitioner will have full management control over the organisation.
Riza Moosa, a director at Deneys Reitz, says amendments to the business rescue provisions have also eased concerns raised about certain contracts.
A business rescue practitioner may suspend or cancel agreements in certain instances. However, court permission is required should the practitioner wish to do so, Mr Moosa says.
The request for cancellation by the business rescue practitioner will be judged according to the standards of reason and fairness, taking into account all the facts.
He says a practitioner may suspend partially or conditionally any contractual obligation of the company which would otherwise become due in the business rescue proceedings.