Reck­less trad­ing to be pun­ished

Pro­vi­sions of act places onus on di­rec­tors to en­sure their com­pany is not trad­ing reck­lessly, or they can be held li­able

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ERIC LEVEN­STEIN

IN TERMS of cer­tain pro­vi­sions of the new Com­pa­nies Act, 2008, the govern­ment has pro­hib­ited any form of reck­less trad­ing by a com­pany. Un­der the new act a com­pany must not carry on its busi­ness reck­lessly with gross neg­li­gence, with in­tent to de­fraud any per­son or for any fraud­u­lent pur­pose or trade in in­sol­vent cir­cum­stances.

Di­rec­tors who al­low their com­pa­nies to trade un­der such cir­cum­stances may be held li­able for any loss or dam­ages sus­tained by the com­pany as a con­se­quence of al­low­ing the com­pany to con­tinue to trade in a po­si­tion of fi­nan­cial dis­tress or when the en­tity is clearly in­sol­vent on its bal­ance sheet or al­ter­na­tively in a po­si­tion where it can­not pay its debts as and when they fall due.

The leg­is­la­tor has made it clear that it is un­ac­cept­able for a di­rec­tor to ac­qui­esce in the car­ry­ing on of the com­pany's busi­ness when he knows that it was be­ing con­ducted in a man­ner prej­u­di­cial to cred­i­tors, and where the con­tin­ued con­duct of the com­pany in in­sol­vent cir­cum­stances was calcu- lated to de­fraud a cred­i­tor, em­ployee or share­holder of the com­pany.

Cred­i­tors will be en­ti­tled to sue the com­pany for dam­ages, in­clud­ing the di­rec­tor per­son­ally, for any loss sus­tained by such cred­i­tor in pro­vid­ing credit to a com­pany in a sit­u­a­tion where the di­rec­tors were fully aware that such ad­vance of credit would not be re­paid in the fu­ture.

What is even more con­cern­ing is that the Com­pa­nies and In­tel­lec­tual Prop­er­ties Com­mis­sion (which now re­places the old Com­pa­nies Of­fice) will de­ter­mine whether or not a com­pany is trad­ing in a reck­less sit­u­a­tion and, if so, is en­ti­tled, in terms of the pro­vi­sions of the new act, to shut down the com­pany to pre­vent it from con­tin­u­ing to trade in such a man­ner. The com­mis­sion may is­sue a no­tice to the com­pany to show cause why the com­pany should not be per­mit­ted to con­tinue car­ry­ing on its busi­ness or to trade reck­lessly. If the com­pany to whom the no­tice has been is­sued fails, within 20 busi­ness days, to sat­isfy the com­mis­sion that it is not en­gag­ing in reck­less trad­ing, the com­mis­sion may is­sue a com­pli­ance no­tice to the com­pany re­quir­ing it to cease car­ry­ing on its busi­ness or trad­ing.

There is no doubt that di­rec­tors of com­pa­nies will have to take very care­ful cog­ni­sance of the man­ner in which com­pa­nies are trad­ing and whether there is any re­al­is­tic hope of such or­gan­i­sa­tion trad­ing from a po­si­tion of fi­nan­cial dis­tress into a sit­u­a­tion where it be­comes sol­vent and is in a po­si­tion to pay its cred­i­tors. If di­rec­tors fail in this duty they can be sued per­son­ally for loss or dam­ages.

Fur­ther­more, the pro­vi­sions of the new act al­low di­rec­tors to be de­clared delin­quent if a di­rec­tor grossly abuses the po­si­tion of a di­rec­tor or in­ten­tion­ally or by gross neg­li­gence in­flicts harm upon the com­pany or a sub­sidiary of the com­pany con­trary to the pro­vi­sions of the leg­is­la­tion or acts in any man­ner that amounts to gross neg­li­gence, wil­ful mis­con­duct or breach of trust in re­la­tion to the per­for­mance of such di­rec­tor’s du­ties.

This raises the bar in re­spect of the ex­pected level of di­rec­tor’s du­ties to com­pa­nies in SA and in turn to the com­pany’s cred­i­tors.

Cou­pled with the pro­vi­sions of the King 3 re­port on cor­po­rate gov­er­nance, di­rec­tors will have to con­duct proper fi­nan­cial risk as­sess­ments to es­tab­lish whether their com­pa­nies are trad­ing in in­sol­vent cir­cum­stances, whether they can be saved un­der the busi­ness res­cue pro­vi­sions of the new act, or whether they should be placed in liq­ui­da­tion. Fail­ing to ad­here to these du­ties could re­sult po­ten­tially in lit­i­ga­tion against the di­rec­tors for fail­ure of their du­ties.

Pic­ture: MORGUEFILE

The Com­pa­nies and In­tel­lec­tual Prop­er­ties Com­mis­sion will de­ter­mine whether or not a com­pany is trad­ing in a reck­less sit­u­a­tion It, is en­ti­tled, in terms of the pro­vi­sions of the new act, to shut down the com­pany to pre­vent it from con­tin­u­ing to trade...

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