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
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.
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...