Imagine the following scenario: Your business is in trouble and it reaches a point
where it appears to be unlikely that the company will be able to pay all of its debts
and, as a director of that company, you need to take the decision to either apply for
business rescue or not. But before taking such a decision, directors need to first
consider the implications carefully to avoid personal liability for any losses suffered.
Sarah Love of Private Client Holdings advises that when the directors of that
company believe that their company is in financial distress, but they do not want to
start business rescue proceedings, they are required to inform all the stakeholders
(shareholders, creditors and employees), in writing.
However, Dirk Kotze, of Dirk Kotze Attorneys, states in an article which he wrote
that appeared in De Rebus, that giving notice that your business is experiencing
financial difficulties is perceived to be equal to commercial suicide by a company, as
its creditors may no longer be willing to supply goods or services on favourable credit
terms and banks or financial institutions will, in all likelihood, withdraw all credit
facilities or at least substantially reduce such facilities.
"It is because of this threatened "commercial suicide' that many directors may
choose to not to give the required notice,' says Love, who cautions that this may
open the door to personal liability.
"Once the liquidation process has been started, the creditors of a company may hold
an insolvency enquiry, during which the directors may be faced with questions such
as why the board did not inform stakeholders that the company was facing financial
difficulties; or why the board did not place the company under business rescue?"
According to Love, in terms of section 129(7) of the Companies Act, if the board of a
company believes that the company is in financial distress, but decides to not begin
business rescue proceedings then it must deliver a written notice to the affected
parties, explaining why they have not started business rescue proceeding.
So what happens when the directors do not comply with this duty and creditors
suffer losses as a result?
Love advises that the Companies Act makes it clear that any person who does
not comply with the Act will be liable to any other person for the loss or damage
"Failure to comply may lead to the conclusion that the Directors of the company
acted recklessly, negligently and/or fraudulently and then the shareholders and
creditors may choose to claim their losses directly from the Directors of that
Directors can be held personally liable for the debts of a company if they are
perceived to have traded recklessly and choosing not to start business rescue
proceedings could be considered evidence of this recklessness.
So is it a damned if you do and damned if you dont kind of situation? Love
concludes that Directors should consider all the risks involved and note that a failure
to notify that stakeholders of the financial distress of your business and the reasons
why you have chosen not to start business rescue proceedings for fear of the
threatened "commercial suicide' before declaring liquidation may lead to personal
liability for the debts of the company